us-irs-notices-irb-2014-41-pdf•Internal Revenue Bulletin 2014-41 (PDF rendition): IRS Notices
Internal Revenue Bulletin 2014-41 (PDF rendition): IRS Notices
us-irs-notices-irb-2014-41-pdfInternal Revenue Bulletin 2014-41 (PDF rendition): IRS NoticesGuidance
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.
# Internal Revenue bulletin
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## 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.
## INCOME TAX
REG-105739-11, page 704.
Removal of Allocation Rule for Disbursements from Designated
Roth Accounts to Multiple Destinations
Rev. Rul. 2014-26, page 663.
Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate. For purposes of
sections 382, 642, 1274, 1288, and other sections of the
Code, tables set forth the rates for October 2014.
Rev. Proc. 2014-54, page 675.
This revenue procedure provides the procedures by which a
taxpayer may obtain the automatic consent of the Commis-
sioner of Internal Revenue to change to the methods of ac-
counting provided in §§ 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8
of the Income Tax Regulations. This revenue procedure also
allows a late partial disposition election under § 1.168(i)-8 to
be treated as a change in method of accounting for a limited
period of time. Finally, this revenue procedure also modifies
section 10.11 of the APPENDIX of Rev. Proc. 2011-14 regard-
ing a change to the method of accounting described in Rev.
Proc. 2014-16, 2014-9 I.R.B. 606, for amounts paid to
acquire, produce, or improve tangible property. Rev. Proc.
2014-54 modifies the procedures in Rev. Proc. 2011-14,
2011-4 I.R.B. 330, and Rev. Proc. 2014-17, 2014-12 I.R.B.
661, regarding certain changes in method of accounting for
dispositions of tangible depreciable property.
Notice 2014-55, page 672.
Notice 2014-55 expands the application of the permitted
change rules for health coverage under a § 125 cafeteria plan
and addresses two specific situations in which a § 125 cafe-
teria plan participant is permitted to revoke his or her election
under a § 125 cafeteria plan during a period of coverage.
Finding Lists begin on page ii.
Index for July through October begins on page iv.
Department of the Treasury
Internal Revenue Service
### T.D. 9694, page 626.
These final regulations provide guidance on the application of
§ 162(m)(6). Section 162(m)(6) limits the allowable deduction
for remuneration for services provided by individuals to certain
health insurance providers. Section 162(m)(6) was enacted as
part of the Patient Protection and Affordable Care Act (Public
Law 111-148, 124 Stat. 119, 868 (2010)).
## EMPLOYEE PLANS
Notice 2014-54, page 670.
This notice provides rules for allocating pretax and after-tax
amounts among disbursements that are made to multiple des-
tinations from a qualified plan described in § 401(a) of the
Internal Revenue Code. These rules also apply to disburse-
ments from a § 403(b) plan or a § 457(b) plan maintained by
a governmental employer described in § 457(e)(1)(A) (a “gov-
ernmental § 457(b) plan"). Section VI of this notice provides
transition rules.
Notice 2014-55, page 672.
Notice 2014-55 expands the application of the permitted
change rules for health coverage under a § 125 cafeteria plan
and addresses two specific situations in which a § 125 cafe-
teria plan participant is permitted to revoke his or her election
under a § 125 cafeteria plan during a period of coverage.
(Continued on the next page)
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### T.D. 9693, page 596.
Final regulations (TD 9505) concerning hybrid defined benefit
plans under Code sections 411(a)(13) and 411(b)(5) were
published in 2010. These final regulations, which finalize pro-
posed regulations that were also published in 2010, provide
additional guidance concerning hybrid defined benefit plans
under Code sections 411(a)(13) and 411(b)(5), as well as
section 411(b)(1). In particular, these final regulations provide
guidance as to the scope of relief under section 411(a)(13)(A),
contain a special rule regarding the application of the 133 1/3
percent rule under section 411(b)(1)(B) to hybrid defined ben-
efit plans, provide additional rules regarding the market rate of
return limitation under section 411(b)(5)(B)(i), and provide guid-
ance with respect to the plan termination rules of section
411(b)(5)(B)(vi).
### T.D. 9694, page 626.
These final regulations provide guidance on the application of
§ 162(m)(6). Section 162(m)(6) limits the allowable deduction
for remuneration for services provided by individuals to certain
health insurance providers. Section 162(m)(6) was enacted as
part of the Patient Protection and Affordable Care Act (Public
Law 111-148, 124 Stat. 119, 868 (2010).
## EXCISE TAX
### Notice 2014-49, page 665.
Notice 2014-49 describes a proposed approach to the appli-
cation of the look-back measurement method, which may be
used to determine if an employee is a full-time employee for
purposes of § 4980H of the Internal Revenue Code, in situa-
tions in which the measurement period applicable to an em-
ployee changes. This notice is intended to address the topics
for which guidance was anticipated in section VII.G of the
preamble to the final § 4980H regulations (79 FR 8544, 8563
(Feb. 12, 2014).
### Notice 2014-56, page 674.
Notice 2014-56 provides the applicable dollar amount that
applies for determining the fee imposed by §§ 4375 and 4376
for policy years and plan years ending on or after October 1,
2014 and Before September 30, 2015.
## ADMINISTRATIVE
### Notice 2014-56, page 674.
Notice 2014-56 provides the applicable dollar amount that
applies for determining the fee imposed by §§ 4375 and 4376
for policy years and plan years ending on or after October 1,
2014 and Before September 30, 2015.
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## The IRS Mission
Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
## Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all
substantive 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 internal
management are not published; however, statements of inter-
nal 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, identify-
ing 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 published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions 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 Other Related Items, and Subpart B, Legisla-
tion 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 Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).
### Part IV .- Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
### Section 42 .- Low-Income Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
### Section 280G .- Golden Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of October 2014. See
Rev. Rul. 2014-26, page 663.
### Section 382 .- Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of October 2014. See Rev.
Rul. 2014-26, page 663.
## Section 411 .- Minimum Vesting Standards
26 CFR 1.411(a)(13)-1: Statutory hybrid plans.
TD 9693
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
## Additional Rules Regarding Hybrid Retirement Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations providing guidance relat-
ing to applicable defined benefit plans.
Applicable defined benefit plans are de-
fined benefit plans that use a lump sum-
based benefit formula, including cash bal-
ance plans and pension equity plans, as
well as other hybrid retirement plans that
have a similar effect. These regulations
provide guidance relating to certain pro-
visions that apply to applicable defined
benefit plans that were added to the Inter-
nal Revenue Code (Code) by the Pension
Protection Act of 2006, as amended by the
Worker, Retiree, and Employer Recovery
Act of 2008. These regulations affect
sponsors, administrators, participants, and
beneficiaries of these plans.
DATES: Effective Date: These regula-
tions are effective on September 19, 2014.
Applicability Date: These regulations
generally apply to plan years that begin on
or after January 1, 2016. However, see the
"Effective/Applicability Dates" section in
this preamble for additional information
regarding the applicability of these regu-
lations.
FOR FURTHER INFORMATION
CONTACT: Neil S. Sandhu or Linda S. F.
Marshall at (202) 317-6700 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
### Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under sections 411(a)(13),
411(b)(1), and 411(b)(5) of the Code.
Generally, a defined benefit pension plan
must satisfy the minimum vesting stan-
dards of section 411(a) and the accrual
requirements of section 411(b) in order to
be qualified under section 401(a) of the
Code. Sections 411(a)(13) and 411(b)(5),
which modify the minimum vesting stan-
dards of section 411(a) and the accrual
requirements of section 411(b), were
added to the Code by section 701(b) of the
Pension Protection Act of 2006, Public
Law 109-280 (120 Stat. 780 (2006))
(PPA '06). Sections 411(a)(13) and
411(b)(5), as well as certain effective date
provisions related to these sections, were
subsequently amended by the Worker, Re-
tiree, and Employer Recovery Act of
2008, Public Law 110-458 (122 Stat.
5092 (2008)) (WRERA '08).
Section 411(a)(13)(A) provides that an
applicable defined benefit plan (which is
defined in section 411(a)(13)(C)) is not
treated as failing to meet either (i) the
requirements of section 411(a)(2) (subject
to a special vesting rule in section
411(a)(13)(B) with respect to benefits de-
rived from employer contributions) or (ii)
the requirements of section 411(a)(11),
411(c), or 417(e), with respect to accrued
benefits derived from employer contribu-
tions, merely because the present value of
the accrued benefit (or any portion
thereof) of any participant is, under the
terms of the plan, equal to the amount
expressed as the balance of a hypothetical
account or as an accumulated percentage
of the participant's final average compen-
sation. Section 411(a)(13)(B) requires an
applicable defined benefit plan to provide
that an employee who has completed at
least 3 years of service has a nonforfeit-
able right to 100 percent of the employ-
ee's accrued benefit derived from em-
ployer contributions.
Under section 411(a)(13)(C)(i), an ap-
plicable defined benefit plan is defined as
a defined benefit plan under which the
accrued benefit (or any portion thereof) of
a participant is calculated as the balance of a
hypothetical account maintained for the par-
ticipant or as an accumulated percentage of
the participant's final average compensa-
tion. Under section 411(a)(13)(C)(ii), the
Secretary of the Treasury is to issue regula-
tions which include in the definition of an
applicable defined benefit plan any defined
benefit plan (or portion of such a plan)
which has an effect similar to a plan de-
scribed in section 411(a)(13)(C)(i).
Section 411(a) requires that a defined
benefit plan satisfy the requirements of
section 411(b)(1). Section 411(b)(1) pro-
vides that a defined benefit plan must sat-
isfy one of the three accrual rules of sec-
tion 411(b)(1)(A), (B) and (C) with
respect to benefits accruing under the
plan. The three accrual rules are the 3
percent method of section 411(b)(1)(A),
the 1331/3 percent rule of section
411(b)(1)(B), and the fractional rule of
section 411(b)(1)(C).
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Section 411(b)(1)(B) provides that a
defined benefit plan satisfies the require-
ments of the 1331/3 percent rule for a par-
ticular plan year if, under the plan, the
accrued benefit payable at the normal re-
tirement age is equal to the normal retire-
ment benefit, and the annual rate at which
any individual who is or could be a par-
ticipant can accrue the retirement benefits
payable at normal retirement age under
the plan for any later plan year is not more
than 1331/3 percent of the annual rate at
which the individual can accrue benefits
for any plan year beginning on or after
such particular plan year and before such
later plan year.
For purposes of applying the 1331/3
percent rule, section 411(b)(1)(B)(i) pro-
vides that any amendment to the plan
which is in effect for the current year is
treated as in effect for all other plan years.
Section 411(b)(1)(B)(ii) provides that any
change in an accrual rate which does not
apply to any individual who is or could
be a participant in the current plan year
is disregarded. Section 411(b)(1)(B)(iii)
provides that the fact that benefits under
the plan may be payable to certain partic-
ipants before normal retirement age is dis-
regarded. Section 411(b)(1)(B)(iv) pro-
vides that Social Security benefits and all
other relevant factors used to compute
benefits are treated as remaining constant
as of the current plan year for all years
after the current year.
Section 411(b)(1)(G) provides that a
defined benefit plan fails to comply with
section 411(b) if the participant's accrued
benefit is reduced on account of any in-
crease in the participant's age or service.
Section 411(b)(1)(G) contains a limited
exception to this requirement for any so-
cial security supplement.
Section 411(b)(1)(H)(i) provides that a
defined benefit plan fails to comply with
section 411(b) if, under the plan, an em-
ployee's benefit accrual is ceased, or the
rate of an employee's benefit accrual is
reduced, because of the attainment of any
age. Section 411(b)(5), which was added to
the Code by section 701(b)(1) of PPA '06,
provides additional rules related to section
411(b)(1)(H)(i). Section 411(b)(5)(A) gen-
erally provides that a plan is not treated as
failing to meet the requirements of section
411(b)(1)(H)(i) if a participant's accrued
benefit, as determined as of any date under
the terms of the plan, would be equal to or
greater than that of any similarly situated,
younger individual who is or could be a
participant. For this purpose, section
411(b)(5)(A)(iv) provides that the accrued
benefit may, under the terms of the plan, be
expressed as an annuity payable at normal
retirement age, the balance of a hypothetical
account, or the current value of the accumu-
lated percentage of the employee's final av-
erage compensation. Section 411(b)(5)(G)
provides that, for purposes of section
411(b)(5), any reference to the accrued ben-
efit of a participant refers to the participant's
benefit accrued to date.
Section 411(b)(5)(B) imposes certain re-
quirements on an applicable defined benefit
plan in order for the plan to satisfy section
411(b)(1)(H). Section 411(b)(5)(B)(i) pro-
vides that such a plan is treated as failing
to meet the requirements of section
411(b)(1)(H) if the terms of the plan pro-
vide for an interest credit (or an equivalent
amount) for any plan year at a rate that is
greater than a market rate of return. Under
section 411(b)(5)(B)(i)(I), a plan is not
treated as having an above-market rate
merely because the plan provides for a
reasonable minimum guaranteed rate of
return or for a rate of return that is equal to
the greater of a fixed or variable rate of
return. Section 411(b)(5)(B)(i)(II) pro-
vides that an applicable defined benefit plan
is treated as failing to meet the requirements
of section 411(b)(1)(H) unless the plan pro-
vides that an interest credit (or an equivalent
amount) of less than zero can in no event
result in the account balance or similar
amount being less than the aggregate
amount of contributions credited to the
account. Section 411(b)(5)(B)(i)(III) autho-
rizes the Secretary of the Treasury to pro-
vide by regulation for rules governing the
calculation of a market rate of return for
purposes of section 411(b)(5)(B)(i)(I) and
for permissible methods of crediting interest
to the account (including fixed or variable
interest rates) resulting in effective rates of
return meeting the requirements of section
411(b)(5)(B)(i)(I).
Sections 411(b)(5)(B)(ii), 411(b)(5)(B)(iii)
and 411(b)(5)(B)(iv) contain additional
requirements that apply if, after June 29,
2005, an applicable plan amendment is
adopted. Section 411(b)(5)(B)(v)(I) de-
fines an applicable plan amendment as an
amendment to a defined benefit plan
which has the effect of converting the plan
to an applicable defined benefit plan. Un-
der section 411(b)(5)(B)(ii), if, after June
29, 2005, an applicable plan amendment
is adopted, the plan is treated as failing
to meet the requirements of section
411(b)(1)(H) unless the requirements of
section 411(b)(5)(B)(iii) are met with re-
spect to each individual who was a partic-
ipant in the plan immediately before the
adoption of the amendment. Section
411(b)(5)(B)(iii) specifies that, subject to
section 411(b)(5)(B)(iv), the requirements
of section 411(b)(5)(B)(iii) are met with
respect to any participant if the accrued
benefit of the participant under the terms of
the plan as in effect after the amendment is
not less than the sum of: (I) the participant's
accrued benefit for years of service before
the effective date of the amendment, deter-
mined under the terms of the plan as in
effect before the amendment; plus (II) the
participant's accrued benefit for years of
service after the effective date of the amend-
ment, determined under the terms of the
plan as in effect after the amendment. Sec-
tion 411(b)(5)(B)(iv) provides that, for pur-
poses of section 411(b)(5)(B)(iii)(I), the
plan must credit the participant's account or
similar amount with the amount of any early
retirement benefit or retirement-type sub-
sidy for the plan year in which the partici-
pant retires if, as of such time, the partici-
pant has met the age, years of service, and
other requirements under the plan for enti-
tlement to such benefit or subsidy.
Section 411(b)(5)(B)(v) sets forth cer-
tain provisions related to an applicable plan
amendment. Section 411(b)(5)(B)(v)(II)
provides that if the benefits under two or
more defined benefit plans of an employer
are coordinated in such a manner as to have
the effect of adoption of an applicable plan
amendment, the plan sponsor is treated as
having adopted an applicable plan amend-
ment as of the date the coordination begins.
Section 411(b)(5)(B)(v)(III) directs the Sec-
retary of the Treasury to issue regulations
to prevent the avoidance of the purposes
of section 411(b)(5)(B) through the use of
two or more plan amendments rather than
a single amendment.
Section 411(b)(5)(B)(vi) provides spe-
cial rules for determining benefits upon
termination of an applicable defined ben-
efit plan. Under section 411(b)(5)(B)(vi)(I),
an applicable defined benefit plan is not
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treated as satisfying the requirements of sec-
tion 411(b)(5)(B)(i) (regarding permissible
interest crediting rates) unless the plan pro-
vides that, upon plan termination, if the in-
terest crediting rate under the plan is a vari-
able rate, the rate of interest used to
determine accrued benefits under the plan is
equal to the average of the rates of interest
used under the plan during the 5-year period
ending on the termination date. In addition,
under section 411(b)(5)(B)(vi)(II), the plan
must provide that, upon plan termination,
the interest rate and mortality table used to
determine the amount of any benefit under
the plan payable in the form of an annuity
payable at normal retirement age is the rate
and table specified under the plan for this
purpose as of the termination date, except
that if the interest rate is a variable rate, the
rate used is the average of the rates used
under the plan during the 5-year period end-
ing on the termination date.
Section 411(b)(5)(C) provides that a
plan is not treated as failing to meet the
requirements of section 411(b)(1)(H)(i)
solely because the plan provides offsets
against benefits under the plan to the ex-
tent the offsets are otherwise allowable in
applying the requirements of section
401(a). Section 411(b)(5)(D) provides
that a plan is not treated as failing to meet
the requirements of section 411(b)(1)(H)
solely because the plan provides a dispar-
ity in contributions or benefits with re-
spect to which the requirements of section
401(l) (relating to permitted disparity for
Social Security benefits and related mat-
ters) are met.
Section 411(b)(5)(E) provides that a
plan is not treated as failing to meet the
requirements of section 411(b)(1)(H)
solely because the plan provides for in-
dexing of accrued benefits under the plan.
Under section 411(b)(5)(E)(iii), indexing
means the periodic adjustment of the ac-
crued benefit by means of the application
of a recognized investment index or meth-
odology. Section 411(b)(5)(E)(ii) requires
that, except in the case of a variable an-
nuity, the indexing not result in a smaller
benefit than the accrued benefit deter-
mined without regard to the indexing.
Except to the extent permitted under
section 411(d)(6) (or under another statu-
tory provision, including section 1107 of
PPA '06), section 411(d)(6) prohibits a
plan amendment that decreases a partici-
pant's accrued benefits or that has the
effect of eliminating or reducing an early
retirement benefit or retirement-type sub-
sidy, or eliminating an optional form of
benefit, with respect to benefits attribut-
able to service before the amendment.
However, an amendment that eliminates
or decreases benefits that have not yet
accrued does not violate section
411(d)(6), provided that the amendment is
adopted and effective before the benefits
accrue.
Section 701(a) of PPA '06 added pro-
visions to the Employee Retirement In-
come Security Act of 1974, Public Law
93-406 (88 Stat. 829 (1974)), as amended
(ERISA), that are parallel to sections
411(a)(13) and 411(b)(5) of the Code. The
guidance provided in these regulations
with respect to sections 411(a)(13) and
411(b)(5) of the Code also apply for pur-
poses of the parallel amendments to
ERISA made by section 701(a) of PPA
'06, and the guidance provided in these
regulations with respect to section
411(b)(1) of the Code also apply for pur-
poses of section 204(b)(1) of ERISA.1
Section 701(c) of PPA '06 added pro-
visions to the Age Discrimination in Em-
ployment Act of 1967, Public Law 90-
202 (81 Stat. 602 (1967)), that are parallel
to section 411(b)(5) of the Code. Execu-
tive Order 12067 requires all Federal de-
partments and agencies to advise and offer
to consult with the Equal Employment
Opportunity Commission (EEOC) during
the development of any proposed rules,
regulations, policies, procedures, or orders
concerning equal employment opportu-
nity. The Treasury Department and the
IRS have consulted with the EEOC prior
to the issuance of these regulations.
Section 701(d) of PPA '06 provides
that nothing in the amendments made by
section 701 should be construed to create
an inference concerning the treatment of
applicable defined benefit plans or conver-
sions of plans into applicable defined ben-
efit plans under section 411(b)(1)(H), or
concerning the determination of whether
an applicable defined benefit plan fails to
meet the requirements of section
411(a)(2), 411(c) or 417(e), as in effect
before such amendments, solely because
the present value of the accrued benefit (or
any portion thereof) of any participant is,
under the terms of the plan, equal to the
amount expressed as the balance of a hy-
pothetical account or as an accumulated
percentage of the participant's final aver-
age compensation.
Section 701(e) of PPA '06 sets forth
the effective date provisions with respect
to amendments made by section 701 of
PPA '06. Section 701(e)(1) specifies that
the amendments made by section 701 gen-
erally apply to periods beginning on or
after June 29, 2005. Thus, the age discrim-
ination safe harbors under section
411(b)(5)(A) and section 411(b)(5)(E) are
effective for periods beginning on or after
June 29, 2005. Section 701(e)(2) provides
that the special present value rules of sec-
tion 411(a)(13)(A) are effective for distri-
butions made after August 17, 2006 (the
date PPA '06 was enacted).
Under section 701(e) of PPA '06, the
3-year vesting rule under section
411(a)(13)(B) is generally effective for
years beginning after December 31, 2007,
for a plan in existence on June 29, 2005,
while, pursuant to the amendments made
by section 107(c) of WRERA '08, the rule
is generally effective for plan years end-
ing on or after June 29, 2005, for a plan
not in existence on June 29, 2005. The
market rate of return limitation under sec-
tion 411(b)(5)(B)(i) is generally effective
for years beginning after December 31,
2007, for a plan in existence on June 29,
2005, while the limitation is generally ef-
fective for periods beginning on or after
June 29, 2005, for a plan not in existence
on June 29, 2005. Section 701(e)(4) of
PPA '06 contains special effective date
provisions for collectively bargained
plans that modify these effective dates.
Under section 701(e)(5) of PPA '06,
as amended by WRERA '08, sections
411(b)(5)(B)(ii), (iii) and (iv) apply to a
conversion amendment that is adopted on
or after, and takes effect on or after, June
29, 2005.
Under section 701(e)(6) of PPA '06, as
added by WRERA '08, the 3-year vesting
1Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed by these regulations
for purposes of ERISA, as well as the Code.
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rule under section 411(a)(13)(B) does not
apply to a participant who does not have
an hour of service after the date the
3-year vesting rule would otherwise be
effective.
Section 702 of PPA '06 provides for
regulations to be prescribed by August 16,
2007, addressing the application of rules
set forth in section 701 of PPA '06 in the
case of a conversion of a defined benefit
pension plan to an applicable defined ben-
efit plan that is made with respect to a
group of employees who become employ-
ees by reason of a merger, acquisition, or
similar transaction.
Section 1.411(a)-7(a)(1) of the Income
Tax Regulations provides that, for pur-
poses of section 411 and the regulations
under section 411, the accrued benefit of a
participant under a defined benefit plan is
either (A) the accrued benefit determined
under the plan if the plan provides for an
accrued benefit in the form of an annual
benefit commencing at normal retirement
age, or (B) an annual benefit commencing
at normal retirement age which is the ac-
tuarial equivalent (determined under sec-
tion 411(c)(3) and § 1.411(c)-1)) of the
accrued benefit under the plan if the plan
does not provide for an accrued benefit in
the form of an annual benefit commencing
at normal retirement age.
Section 1.411(b)-1(a)(1) provides that
a defined benefit plan is not a qualified
plan unless the method provided by the
plan for determining accrued benefits sat-
isfies at least one of the alternative meth-
ods in § 1.411(b)-1(b) for determining
accrued benefits with respect to all active
participants under the plan. Section
1.411(b)-1(b)(2)(i) provides that a de-
fined benefit plan satisfies the 1331/3 per-
cent rule of section 411(b)(1)(B) for a
particular plan year if (A) under the plan
the accrued benefit payable at the normal
retirement age (determined under the
plan) is equal to the normal retirement
benefit (determined under the plan), and
(B) the annual rate at which any individ-
ual who is or could be a participant can
accrue the retirement benefits payable at
normal retirement age under the plan for
any later plan year cannot be more than
1331/3 percent of the annual rate at which
the participant can accrue benefits for any
plan year beginning on or after such par-
ticular plan year and before such later plan
year. Section 1.411(b)-1(b)(2)(ii)(A)
through (D) sets forth a series of rules that
correspond to the rules of section
411(b)(1)(B)(i) through (iv). Section
1.411(b)-1(b)(2)(ii)(D) provides that, for
purposes of the 1331/3 percent rule, for any
plan year, social security benefits and all
relevant factors used to compute benefits,
for example, the consumer price index,
are treated as remaining constant as of the
beginning of the current plan year for all
subsequent plan years.
Final regulations (TD 9505) under sec-
tions 411(a)(13) and 411(b)(5) (2010 final
regulations) were published by the Trea-
sury Department and the IRS in the Fed-
eral Register on October 19, 2010 (75 FR
64123).
Proposed regulations (REG-132554-
08) under sections 411(a)(13), 411(b)(1),
and 411(b)(5) (2010 proposed regula-
tions) were also published by the Treasury
Department and the IRS in the Federal
Register on October 19, 2010 (75 FR
64197). The 2010 proposed regulations
address certain issues under sections
411(a)(13) and 411(b)(5) that were not
addressed in the 2010 final regulations.
The 2010 proposed regulations also ad-
dress one issue under the 1331/3 percent
rule of section 411(b)(1)(B) for defined
benefit plans that adjust benefits using a
variable rate that could be negative. The
Treasury Department and the IRS re-
ceived written comments on the 2010 pro-
posed regulations, and a public hearing
was held on January 26, 2011.
Notice 2011-85 (2011-44 IRB 605 (Oc-
tober 31, 2011)), (see § 601.601(d)(2)(ii)(b)
of this chapter), announced delayed effec-
tive/applicability dates with respect to cer-
tain provisions in the hybrid plan regula-
tions. In particular, Notice 2011-85
provided that the provisions to be adopted
under the regulations that finalize the 2010
proposed regulations would apply for plan
years that begin on or after the date specified
in those regulations, which would not be
earlier than January 1, 2013. Notice
2011-85 also provided that the Treasury
Department and the IRS intended to amend
the hybrid plan regulations to postpone the
effective/applicability date of § 1.411(b)(5)-
1(d)(1)(iii), (d)(1)(vi) and (d)(6)(i) (the pro-
visions that provide that the regulations set
forth the list of the interest crediting rates
and combinations of rates that satisfy the
requirements of section 411(b)(5)(B)(i)) to
match the effective/applicability date of the
new provisions in the regulations. Notice
2011-85 further provided that, when the
2010 proposed regulations are finalized, it
was expected that relief from the require-
ments of section 411(d)(6) would be granted
for a plan amendment that eliminates or
reduces a section 411(d)(6) protected bene-
fit, provided that the amendment is adopted
by the last day of the first plan year
preceding the plan year for which the
2010 proposed regulations, once final-
ized, apply to the plan, and the elimina-
tion or reduction is made only to the
extent necessary to enable the plan to
meet the requirements of section
411(b)(5). In addition, Notice 2011-85
extended the deadline for amending
cash balance and other applicable de-
fined benefit plans, within the meaning
of section 411(a)(13)(C), to meet the
requirements of section 411(a)(13)
(other than section 411(a)(13)(A)) and
section 411(b)(5), relating to vesting
and other special rules applicable to
these plans. Under Notice 2011-85, the
deadline for these amendments was the
last day of the first plan year preceding
the plan year for which the 2010 pro-
posed regulations, once finalized, apply
to the plan.
Notice 2012-61 (2012-42 IRB 479 (Oc-
tober 15, 2012)), (see § 601.601(d)(2)(ii)(b)
of this chapter), announced that the regula-
tions described in Notice 2011-85 would
not be effective for plan years beginning
before January 1, 2014.
After consideration of the comments
received, the provisions in the 2010 pro-
posed regulations are adopted by this
Treasury decision, subject to a number of
changes that are summarized in this pre-
amble. In addition, the Treasury Depart-
ment and the IRS are issuing proposed
regulations that would permit a plan with
a noncompliant interest crediting rate to
be amended so that its interest crediting
rate complies with the market rate of re-
turn rules without violating the section
411(d)(6) prohibition on a plan amend-
ment reducing a participant's accrued
benefit. These proposed regulations are
being issued at the same time as these
final regulations.
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## Explanation of Provisions
### Overview
In general, these regulations provide
guidance with respect to certain issues
under sections 411(a)(13) and 411(b)(5)
that are not addressed in the 2010 final
regulations and make certain other
changes to the final regulations under sec-
tions 411(a)(13) and 411(b)(5). In addi-
tion, these regulations provide guidance
with respect to one issue under the 1331/3
percent rule of section 411(b)(1)(B) for
defined benefit plans that adjust benefits
using a variable rate that could be neg-
ative.
### I. Section 411(a)(13): Scope of relief of section 411(a)(13)(A)
A. Formulas to which relief applies
Pursuant to the relief of section
411(a)(13)(A), the 2010 final regulations
provide that certain rules otherwise appli-
cable to benefits under a defined benefit
plan are not violated solely because cer-
tain benefits determined under a lump
sum-based benefit formula are based on
the current lump sum amount under that
formula. The 2010 final regulations define
a lump sum-based benefit formula as a
benefit formula used to determine all or
any part of a participant's accumulated
benefit under which the accumulated ben-
efit provided under the formula is ex-
pressed as the current balance of a hypo-
thetical account maintained for the
participant ("cash balance" formula) or as
the current value of an accumulated per-
centage of the participant's final average
compensation ("pension equity plan" or
"PEP" formula).
For plan years that begin on or after
January 1, 2016 (or an earlier date as
elected by the taxpayer), these regulations
expand the definition of PEP formula to
include a benefit formula that is expressed
as a current single-sum dollar amount
equal to a percentage of the participant's
highest average compensation (with a per-
mitted lookback period for determining
highest average compensation, such as
highest 5 out of the last 10 years).
In addition, for plan years that begin on
or after January 1, 2016, these regulations
provide that a benefit formula does not
constitute a lump sum-based benefit for-
mula unless a distribution of the benefits
under that formula in the form of a single-
sum payment equals the accumulated ben-
efit under that formula (except to the ex-
tent the single-sum payment is greater to
satisfy the requirements of section
411(d)(6)).
B. Protections with respect to current
account balance or current value.
The relief of section 411(a)(13)(A)
generally permits a plan to treat the accu-
mulated benefit under a cash balance for-
mula ("cash balance account") or the ac-
cumulated benefit under a PEP formula
("PEP accumulation") as the present value
of the portion of the accrued benefit de-
termined under the cash balance or PEP
formula. The 2010 proposed regulations
contained three requirements that applied
to the cash balance account or PEP accu-
mulation. These requirements were struc-
tured as conditions on the availability of
the relief of section 411(a)(13)(A). A
number of commenters objected to treat-
ing these requirements as conditions for
this relief. In response to those comments,
the structure of the regulations under sec-
tion 411(a)(13)(A) has been revised to
clarify that two of the requirements are
only intended to provide the same types of
protections to the accumulated benefit un-
der a cash balance formula and under a
PEP formula as are afforded to the ac-
crued benefit.
For example, these final regulations
provide that the relief of section
411(a)(13) does not override the require-
ment for a plan that, with respect to a
participant with an annuity starting date
after normal retirement age, the plan ei-
ther provide an actuarial increase after
normal retirement age or satisfy the re-
quirements for suspension of benefits un-
der section 411(a)(3)(B). Accordingly,
with respect to such a participant, a plan
with a cash balance or PEP formula vio-
lates the requirements of section 411(a) if
the cash balance account or PEP accumu-
lation is not increased sufficiently to sat-
isfy the requirements of section 411(a)(2)
for distributions commencing after normal
retirement age, unless the plan suspends
benefits in accordance with section
411(a)(3)(B).
Like the 2010 proposed regulations,
these final regulations provide that the
cash balance account or PEP accumula-
tion can only be reduced for certain lim-
ited reasons, which generally correspond
to the limited reasons for which the ac-
crued benefit can be reduced. Several
commenters on the 2010 proposed regu-
lations suggested that it was unclear
whether the restrictions on reductions as
applied to PEP formulas were intended to
cover only reductions that reduced the ac-
cumulated percentage that applies to the
participant's final average compensation
or whether the restrictions were also in-
tended to disallow reductions that were a
result of decreases in the participant's fi-
nal average compensation. In response to
those comments, the regulations clarify
that a reduction in the PEP accumulation
is permitted to the extent that it results
from a decrease in the participant's final
average compensation or from an increase
in the integration level (in the case of a
formula that is integrated with Social Se-
curity). The regulations also contain a pro-
vision allowing the Commissioner to add
to the list of permitted reductions through
guidance of general applicability.
Under the 2010 proposed regulations, a
cash balance formula or PEP formula
would have had to provide that the portion
of the participant's accrued benefit that is
determined under that formula must be
actuarially equivalent (using reasonable
actuarial assumptions) to the cash balance
account or PEP accumulation upon attain-
ment of normal retirement age in order to
apply the relief of section 411(a)(13)(A).
Under these final regulations, a cash bal-
ance formula or PEP formula is treated as
a lump sum-based benefit formula to
which the relief of section 411(a)(13)(A)
applies if the portion of the participant's
accrued benefit that is determined under
that formula is actuarially equivalent (us-
ing reasonable actuarial assumptions) to
the cash balance account or PEP accumu-
lation either upon attainment of normal
retirement age or at the annuity starting
date for a distribution with respect to that
portion.
If a formula is not a lump sum-based
benefit formula, the plan must satisfy the
rules that otherwise apply for purposes of
determining benefits under a defined ben-
efit plan, such as applying the minimum
present value requirements of section
417(e) to the portion of the accrued ben-
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efit determined under that formula in or-
der to determine the amount of a single-
sum distribution option.
C. Subsidies and benefits that are less
than the actuarial equivalent of the cash
balance account or PEP accumulation
The 2010 proposed regulations pro-
vided that the relief of section
411(a)(13)(A) applies to an optional form
of benefit that is determined as of the
annuity starting date as the actuarial
equivalent, using reasonable actuarial as-
sumptions, of the cash balance account or
PEP accumulation. In response to com-
ments that subsidized benefits should be
permissible, the rules in the regulations
under section 411(a)(13) have been re-
vised to clarify that the relief of section
411(a)(13)(A) also applies to a subsidized
optional form of benefit under a lump
sum-based benefit formula, including an
early retirement subsidy or a subsidized
survivor portion of a qualified joint and
survivor annuity. In particular, these final
regulations provide that, with respect to
benefits under a lump sum-based benefit
formula, if an optional form of benefit is
payable in an amount that is greater than
the actuarial equivalent, determined using
reasonable actuarial assumptions, of the
cash balance account or PEP accumula-
tion, then the plan satisfies the require-
ments of section 411(a)(2), 411(a)(11),
411(c) and 417(e) with respect to the
amount of that optional form of benefit.2
By contrast, section 411(a)(13)(A)
does not provide relief with respect to an
optional form of benefit that is less than
the actuarial equivalent of the cash bal-
ance account or PEP accumulation. Thus,
the final regulations provide that if an
optional form of benefit is not at least the
actuarial equivalent, using reasonable ac-
tuarial assumptions, of the cash balance
account or PEP accumulation, then the
relief under section 411(a)(13)(A) does
not apply in determining whether the op-
tional form of benefit is the actuarial
equivalent of the portion of the accrued
benefit determined under the cash balance
or PEP formula. As a result, payment of
that optional form of benefit must satisfy
the rules applicable to payment of the
accrued benefit generally under a defined
benefit plan (without regard to the special
rules of section 411(a)(13)(A) and the reg-
ulations), including the requirements of
section 411(a)(2) and, for optional forms
subject to the minimum present value re-
quirements of section 417(e)(3), those
minimum present value requirements.
D. Clarifications relating to statutory
hybrid formulas with an effect similar to a
lump sum-based benefit formula
Under the 2010 final regulations, a for-
mula that is not a lump sum-based benefit
formula that has an effect similar to a
lump sum-based benefit formula is never-
theless a statutory hybrid benefit formula.
As a result, such a formula is subject to
the 3-year vesting rule of section
411(a)(13)(B) and the rules of section
411(b)(5), including the market rate of
return and conversion protection require-
ments. However, because it is not a lump
sum-based benefit formula, such a for-
mula is not eligible for the relief of section
411(a)(13)(A). In general, a defined ben-
efit formula that is not a lump sum-based
benefit formula has an effect similar to a
lump sum-based benefit formula if the for-
mula provides that a participant's accu-
mulated benefit is expressed as a benefit
that includes the right to adjustments for a
future period and the total dollar amount
of those adjustments is reasonably ex-
pected to be smaller for the participant
than for a similarly situated, younger in-
dividual who is or could be a participant
in the plan.
These regulations clarify certain of the
rules with respect to the determination as
to whether a formula constitutes a formula
with an effect similar to a lump sum-based
benefit formula. In particular, these regu-
lations clarify that the right to adjustments
for a future period is broadly defined to
mean the right to any change in the dollar
amount of benefits over time, regardless
of whether those adjustments are denom-
inated as interest credits. Thus, for exam-
ple, an increase in the dollar amount of
benefits over time (such as an actuarial
increase or the unwinding of an actuarial
reduction for early retirement) is treated
as an adjustment.
However, this broad definition does not
cause a defined benefit formula to be
treated as having an effect similar to a
lump sum-based benefit formula with re-
spect to a participant merely because the
formula provides for a reduction in the
benefit payable at early retirement due to
early commencement (with the result that
the benefit payable at normal retirement
age is greater than the benefit payable at
early retirement), provided that the benefit
payable at normal retirement age to the
participant cannot be less than the benefit
payable at normal retirement age to any
similarly situated, younger individual who
is or could be a participant in the plan.
This exception has the effect of excluding
traditional defined benefit formulas (and
other formulas that provide for mere ac-
tuarial reduction for early commence-
ment) from treatment as a formula with an
effect similar to a lump sum-based benefit
formula, notwithstanding the treatment of
actuarial increases in benefits over time as
adjustments.
Under the 2010 final regulations, a
variable annuity benefit formula was de-
fined as any benefit formula under a de-
fined benefit plan which provides that the
amount payable is periodically adjusted
by reference to the difference between the
rate of return on plan assets (or specified
market indices) and a specified assumed
interest rate. In addition, the 2010 final
regulations contained a special rule that
provided an exception from treatment as a
formula with an effect similar to a lump
sum-based benefit formula for a variable
annuity benefit formula with an assumed
interest rate of 5 percent or higher.
In order to clarify this exception, both
the definition and the exception have been
revised under these regulations. In partic-
ular, the definition of variable annuity
benefit formula has been broadened. Thus,
these regulations provide that a variable
annuity benefit formula means any benefit
formula under a defined benefit plan
which provides that the amount payable is
periodically adjusted by reference to the
difference between a rate of return (not
limited to the rate of return on plan assets
or specified market indices) and a speci-
2 As set forth later in this preamble, the regulations under section 411(b)(5) provide rules under the age discrimination safe harbor that limit the amount of the subsidized early retirement
benefit so that it does not exceed the benefit available to a similarly situated, older participant with the same cash balance account or PEP accumulation who is currently at normal retirement
age.
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fied assumed interest rate. The exception
has been revised so that it is available in
the case of any variable annuity benefit
formula that adjusts the amounts payable
by reference to any rate of return that is
permissible as an interest crediting rate
under the regulations, including the rate of
return on plan assets (or a subset of plan
assets), as described in section III.C.2 of
this preamble, or the rate of return on an
annuity contract for an employee issued
by an insurance company licensed under
the laws of a State. The rule in the regu-
lations that provides that this exception is
only available if the specified assumed
interest rate is 5 percent or higher has
been retained.
A variable annuity benefit formula that
does not fall within the exception must be
tested to determine whether it has an ef-
fect similar to a lump sum-based benefit
formula. Such a formula is not a statutory
hybrid benefit formula if the specified as-
sumed interest rate is high enough in re-
lation to the reasonable expectation of the
rate of return to which it is compared,
such that the adjustments under the for-
mula are not reasonably expected to be
positive. However, if the specified as-
sumed interest rate is too high in relation
to the reasonable expectation of the rate of
return to which it is compared, a variable
annuity benefit formula risks violating
section 411(b)(1)(G).
E. Formulas that express the accumu-
lated benefit as a single-sum dollar amount
at normal retirement age
As discussed earlier in this preamble,
the 2010 final regulations define a lump
sum-based benefit formula as a benefit
formula used to determine all or any part
of a participant's accumulated benefit un-
der which the accumulated benefit pro-
vided under the formula is expressed as
the current balance of a hypothetical ac-
count maintained for the participant or as
the current value of an accumulated per-
centage of the participant's final average
compensation. Under this rule, a benefit
formula is a lump sum-based benefit for-
mula if it expresses the accumulated ben-
efit as a current single-sum dollar amount,
regardless of whether interest credits are
provided.
With respect to a plan that does not
provide interest credits, there may be a
question as to whether the accumulated
benefit is a current single-sum dollar
amount or is a single-sum dollar amount
at normal retirement age. Accordingly, the
2010 proposed regulations included a
comment request with respect to whether
a defined benefit plan that expresses the
participant's accumulated benefit as a cur-
rent single-sum dollar amount and that
does not provide for interest credits
should be excluded from the definition of
a statutory hybrid plan. Commenters sug-
gested that a benefit formula that ex-
presses the participant's benefit as a cur-
rent single-sum dollar amount (for
example, a PEP formula) should be
treated as a statutory hybrid benefit for-
mula, regardless of whether interest cred-
its are provided. Because the statutory lan-
guage with respect to a cash balance
formula and a PEP formula does not spec-
ify that interest credits must be provided,
the Treasury Department and the IRS
agree with this recommendation. As a re-
sult, the definition of lump sum-based
benefit formula continues not to require
that interest credits be provided.
Commenters also recommended that
plans that express the accumulated benefit
as a single-sum dollar amount at normal
retirement age, rather than as a current
single-sum dollar amount, should not be
treated as statutory hybrid plans. The
Treasury Department and the IRS gener-
ally agree with this recommendation. Ac-
cordingly, the definition of lump sum-
based benefit formula continues to require
that the benefit be expressed as a current
single-sum dollar amount. Thus, a benefit
formula that expresses the accumulated
benefit as a single-sum dollar amount at
normal retirement age is not a statutory
hybrid benefit formula unless the formula
includes the right to adjustments such that
the formula has an effect similar to a lump
sum-based benefit formula pursuant to
§ 1.411(a)(13)-1(d)(4)(ii) (see section I.D
of this preamble).
The Treasury Department and the IRS
believe that this treatment under the reg-
ulations is consistent with the intent of
Congress to treat as statutory hybrid plans
generally only those defined benefit plans
that either express the accumulated benefit
as a current single-sum dollar amount or
that provide for adjustments such that the
participant's benefit at normal retirement
age is less than that of a similarly situated,
younger individual who is or could be a
participant. This is because a defined ben-
efit plan that expresses the accumulated
benefit as a single-sum dollar amount at
normal retirement age (and that does not
provide a larger benefit to the participant
than to a similarly situated, older partici-
pant) is identical to a traditional defined
benefit plan for age discrimination pur-
poses, and differs in substance from a
traditional defined benefit plan only be-
cause the benefit at normal retirement age
is expressed as a single-sum dollar
amount rather than as an annuity.
Under these rules, a defined benefit
plan that expresses the accumulated ben-
efit as a single-sum dollar amount can be
designed to express that accumulated ben-
efit as either a current single-sum dollar
amount or a single-sum dollar amount at
normal retirement age. In the former case,
the formula would be a lump sum-based
benefit formula, and therefore would
be eligible for the relief of section
411(a)(13)(A) (and subject to the rules of
sections 411(a)(13)(B) and 411(b)(5)(B)).
In the latter case, the formula would not
be a lump sum-based benefit formula, and
therefore would not be eligible for the
relief of section 411(a)(13)(A).
Because a formula that expresses the ac-
cumulated benefit as a single-sum dollar
amount at normal retirement age is not eli-
gible for the relief of section 411(a)(13)(A),
the accrued benefit under such a formula is
often determined under the terms of the plan
by applying section 417(e) factors to the
single-sum dollar amount. The rules of sec-
tions 411(a)(13)(B) and 411(b)(5)(B) would
generally not apply to such a formula (un-
less it is treated under the regulations as
having an effect similar to a lump sum-
based benefit formula). Instead, all of the
rules that apply to defined benefit formu-
las that are not statutory hybrid benefit
formulas would apply to such a formula.
For example, if a defined benefit plan is
amended to change the benefit formula
under the plan to a formula that expresses
the accumulated benefit as a single-sum
dollar amount at normal retirement age
(and the formula does not fall within the
definition of a benefit formula with an
effect similar to a lump sum-based benefit
formula), the amendment is not subject
to the rules that apply with respect to a
conversion amendment under section
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411(b)(5)(B)(ii). Furthermore, the mere
existence of an early retirement subsidy
that meets applicable rules would not af-
fect this determination.
### II. Section 411(b)(1): Special rules with respect to variable interest crediting rates
The 2010 proposed regulations contain
a special rule regarding the application
of the 1331/3 percent rule of section
411(b)(1)(B)3 to a statutory hybrid plan
that adjusts benefits using a variable inter-
est crediting rate that can potentially be
negative in any given year. Under this
rule, for plan years that begin on or after
January 1, 2012, a plan that determines
any portion of the participant's accrued
benefit pursuant to a statutory hybrid ben-
efit formula (as defined in § 1.411(a)(13)-
1(d)(4)) with a variable interest crediting
rate that was negative for the prior plan
year would not be treated as failing to
satisfy the requirements of the 1331/3 per-
cent rule for the current plan year merely
because the section 411(b)(1)(B) back-
loading calculation is performed assuming
that the variable rate is zero for the current
plan year and all future plan years.
One commenter on the 2010 proposed
regulations suggested that a special rule
under the 1331/3 percent rule of section
411(b)(1)(B) should not be provided for
variable interest crediting rates that can
potentially be negative. Other comment-
ers suggested that the interest crediting
rate to be used for purposes of the 1331/3
percent rule in the case of a variable in-
terest crediting rate that can potentially be
negative should be assumed to be a rea-
sonable rate of return (such as, for exam-
ple a long-term average of the rate of
return), regardless of the actual rate of
return provided as of the current year.
However, this would be inconsistent with
section 411(b)(1)(B)(iv), which provides
that for purposes of the 1331/3 percent rule
all "relevant factors used to compute ben-
efits shall be treated as remaining constant
as of the current year for all years after the
current year."
The special rule in the 2010 proposed
regulations provides for the use of an as-
sumed interest crediting rate other than
the interest crediting rate used to compute
benefits as of the current year only to the
extent necessary to permit a statutory hy-
brid plan to use an interest crediting rate
that can potentially be negative. Without
such a rule, a statutory hybrid plan that
uses a variable interest crediting rate
would not satisfy the 1331/3 percent rule of
section 411(b)(1)(B) if the variable inter-
est crediting rate as of the current year is
negative, even if the plan does not provide
for principal credits (sometimes referred
to as pay credits) that are an increasing
percentage of pay with increasing years or
service. The preservation of capital rule of
section 411(b)(5)(B)(i)(II) provides that
interest crediting rates under a statutory
hybrid plan cannot result in the benefit
provided being less than the sum of prin-
cipal credits. Thus, Congress contem-
plated a statutory hybrid plan's use of a
variable interest crediting rate that can
potentially be negative. Accordingly, the
special rule is finalized as proposed, ex-
cept that the rule has been modified to
permit a taxpayer to elect to apply it at an
earlier date (so that the rule is applicable
for plan years that begin on or after Jan-
uary 1, 2012, or an earlier date as elected
by the taxpayer).
III. Section 411(b)(5): Special age
discrimination rules, including rules
with respect to the market rate of return
limitation
A. Section 411(b)(5) age discrimina-
tion safe harbor
Pursuant to section 411(b)(5)(A), the
2010 final regulations provide that a plan
is not treated as failing to meet the age
discrimination requirements of section
411(b)(1)(H)(i) with respect to an individ-
ual who is or could be a participant if, as
of any date, the accumulated benefit of the
individual would not be less than the ac-
cumulated benefit of any similarly situ-
ated, younger individual who is or could
be a participant. In general, this safe har-
bor is available only if the accumulated
benefits being compared are expressed un-
der only one type of formula (that is, cash
balance formulas, PEP formulas, or annu-
ities payable at normal retirement age).
These regulations clarify that the age dis-
crimination safe harbor for cash balance
formulas and PEP formulas under section
411(b)(5) applies only for formulas that
are lump sum-based benefit formulas.4
Under the 2010 final regulations, the
safe harbor is available with respect to a
participant in the case of a plan that de-
termines some or all participants' benefits
as the sum-of, greater-of, or choice-of two
or more types of formulas only if the
participant's benefit under the plan is not
less valuable than the benefit of a simi-
larly situated, younger individual who is
or could be a participant in the plan. In
order to clarify that certain limitations on
benefits (such as those that are required in
order to comply with section 415) would
not necessarily preclude a plan from sat-
isfying the age discrimination safe harbor,
these regulations extend the application of
the safe harbor so that the safe harbor is
also available to a plan that expresses a
participant's accumulated benefit as the
lesser of benefits under two or more for-
mulas. In addition, the regulations under
section 411(a)(13) have been revised to
clarify that, in the case of lesser-of formu-
las, the relief of section 411(a)(13)(A) ap-
plies only to benefits determined under a
cash balance or PEP formula, and to pro-
vide for a special rule with respect to the
application of the limitation on benefits
under section 415(b) to a lump sum-based
benefit formula.
Section 411(b)(5)(A)(iii) provides for a
disregard of the subsidized portion of an
early retirement benefit for purposes of
the section 411(b)(5) age discrimination
safe harbor. This is similar to the disre-
gard of the subsidized portion of an early
retirement benefit that applies under sec-
tion 411(b)(1)(H)(iv) for purposes of the
general age discrimination test of section
411(b)(1)(H). The 2010 final regulations
provided certain guidance as to what con-
stitutes the subsidized portion of an early
retirement benefit for purposes of the sec-
tion 411(b)(5) age discrimination safe har-
bor. These final regulations revise and
clarify such guidance. In particular, in or-
3The 133 1/3 percent rule is the accrual rule most commonly used by statutory hybrid plans to satisfy the accrual rules of section 411(b)(1).
4Because the definition of lump sum-based benefit formula requires the benefit to be expressed under the terms of the plan as a cash balance formula or PEP formula, the existing language
in these safe harbors that the benefit be expressed under the terms of the plan as a cash balance formula or PEP formula has been eliminated as redundant.
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der to facilitate phased retirement, these
final regulations remove the requirement
that a subsidized portion of an early re-
tirement benefit must be contingent on a
participant's severance from employment.
In addition, these final regulations pro-
vide that an early retirement benefit in-
cludes a subsidized portion only if it
provides a higher actuarial present value
on account of commencement before
normal retirement age. These final reg-
ulations also provide for a disregard of
the subsidized portion of an early retire-
ment benefit for purposes of the special
age discrimination test under section
411(b)(5)(E) that applies for indexed
benefits.
However, these final regulations pro-
vide that, for plan years that begin on or
after January 1, 2016, if the annual benefit
payable before normal retirement age is
greater for a participant than the annual
benefit under the corresponding form of
benefit for any similarly situated, older
individual who is or could be a participant
and who is currently at or before normal
retirement age, then that excess is not part
of the subsidized portion of an early re-
tirement benefit and, accordingly, is not
disregarded for age discrimination pur-
poses. Thus, if more than a subsidized
portion of an early retirement benefit is
provided to a participant, that additional
benefit is not disregarded for purposes of
the section 411(b)(5) age discrimination
safe harbor (and, as a result, the safe har-
bor typically would not be satisfied). For
purposes of determining whether the an-
nual benefit payable before normal retire-
ment age is greater for a participant than
the annual benefit under the correspond-
ing form of benefit for any similarly
situated, older individual who is or
could be a participant, social security
leveling options and social security sup-
plements are disregarded. In addition, a
plan is not treated as providing a greater
annual benefit to a participant than to a
similarly situated, older individual who
is or could be a participant merely be-
cause the reduction (based on actuarial
equivalence, using reasonable actuarial
assumptions) in the amount of an annu-
ity to reflect a survivor benefit is smaller
for the participant than for a similarly
situated, older individual who is or
could be a participant.
B. Conversion amendments
The 2010 final regulations provide that
a participant in a defined benefit plan
whose benefits are affected by an amend-
ment that converts the benefit formula un-
der the plan from a formula that is not a
statutory hybrid benefit formula to a stat-
utory hybrid benefit formula (conversion
amendment) generally must be provided
with a benefit after the conversion that, in
accordance with the requirements of sec-
tion 411(b)(5)(B)(ii), is at least equal to
the sum of benefits accrued through the
date of conversion and benefits earned
after the conversion, with no permitted
interaction between the two portions. The
2010 final regulations provide for an al-
ternative method of satisfying the conver-
sion protection requirements that applies
if an opening hypothetical account bal-
ance or opening accumulated percentage
of the participant's final average compen-
sation is established at the time of the
conversion and the plan provides for sep-
arate calculation of (1) the benefit attrib-
utable to the opening hypothetical account
balance (including interest credits attrib-
utable thereto) or attributable to the open-
ing accumulated percentage of the partic-
ipant's final average compensation and (2)
the benefit attributable to post-conversion
service under the post-conversion benefit
formula. Under this alternative, the plan
must provide that, when a participant
commences benefits, the participant's
benefit will be increased if the benefit
attributable to the opening hypothetical
account or opening accumulated percent-
age that is payable in the particular op-
tional form of benefit selected is less than
the benefit accrued under the plan prior to
the date of conversion and that was pay-
able in the same generalized optional form
of benefit (within the meaning of
§ 1.411(d)-3(g)(8)) at the same annuity
starting date.
Several commenters requested that the
regulations illustrate the application of the
conversion rules for a plan that uses this
alternative method of satisfying the conver-
sion protection requirements, with respect to
a participant who selects a single-sum dis-
tribution option of the participant's entire
benefit under the plan after a conversion
amendment. In order to respond to this re-
quest, a new example has been added to the
regulations to illustrate that the participant
must be provided with the benefit attrib-
utable to post-conversion service, plus the
greater of the benefit attributable to the
opening hypothetical account balance or
the section 417(e) present value at the
annuity starting date of the participant's
pre-conversion benefit.
The 2010 proposed regulations in-
cluded a proposed rule whereby certain
plans could satisfy the conversion protec-
tion requirements by establishing an open-
ing hypothetical account balance without
a subsequent comparison of benefits at the
annuity starting date. The proposed rule
included a number of requirements in-
tended to make it reasonably likely that
the hypothetical account balance used to
replicate the pre-conversion benefit (the
opening hypothetical account balance and
interest credits on that account balance)
would in most, but not necessarily all,
cases provide a benefit at least as large as
the pre-conversion benefit for all periods
after the conversion amendment.
Several commenters found the pro-
posed rule overly burdensome, due to the
many restrictions and requirements. One
commenter strongly opposed any conver-
sion alternative that could result in any
participant receiving less than the sum of
the benefit under the pre-conversion for-
mula plus the benefit under the hybrid
formula at the annuity starting date. The
Treasury Department and the IRS agree
that the proposed rule was complex and
that it is not feasible to create a simple rule
while also ensuring that participants cannot
receive less than is required under sec-
tions 411(b)(5)(B)(ii), 411(b)(5)(B)(iii)
and 411(b)(5)(B)(iv). As a result, the final
regulations only permit the conversion al-
ternative that was included in the 2010
final regulations, where an opening hypo-
thetical account balance or opening accu-
mulated percentage of the participant's fi-
nal average compensation is established
and benefits are compared at the annuity
starting date. Consequently, if in reliance
on the 2010 proposed regulations, a plan
sponsor used the proposed rule to satisfy
the conversion protection requirements
for plan years that begin on or after Jan-
uary 1, 2012, then the plan must be
amended so that distributions with an an-
nuity starting date in a plan year that be-
gins on or after January 1, 2016 satisfy the
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rules in the final regulations with respect
to conversion amendments.
C. Market rate of return
1\. General rules with respect to cred-
iting interest
Pursuant to section 411(b)(5)(B), the
2010 final regulations provide that a stat-
utory hybrid plan satisfies the require-
ments of section 411(b)(1)(H) prohibiting
age discrimination only if the plan does
not credit interest at a rate that is greater
than a market rate of return. Section
411(b)(5)(B)(i)(III) gives the Secretary
the authority to provide by regulation for
rules governing the calculation of a mar-
ket rate of return and for permissible
methods of crediting interest resulting in
effective rates of return that are not
greater than a market rate of return.
The 2010 final regulations set forth
certain requirements that apply to a statu-
tory hybrid plan that provides for interest
credits. Under these requirements, such a
plan must credit interest at least annually,
and the plan terms must specify how in-
terest credits are determined, including the
timing of the crediting of interest credits.
In addition, the 2010 final regulations con-
tain a list of rates that satisfy the require-
ment that the plan not credit interest at an
effective rate that is greater than a market
rate of return, while not permitting other
rates.
In evaluating whether a particular rate
(or combination of rates) provides an ef-
fective rate of return that is not greater
than a market rate of return for purposes
of inclusion on the list of permitted rates
under the 2010 final and proposed regula-
tions, the Treasury Department and the
IRS considered all fixed and variable
components (taking into account any min-
imum rate of return and the cumulative
zero floor provided by the statutory pres-
ervation of capital rule). This approach
was taken because of the age discrimina-
tion concerns with statutory hybrid plans
that credit interest such that the effective
rate of return is greater than a market rate
of return (as occurs when, for example,
the combination of a variable rate of re-
turn and a fixed minimum rate provides an
effective rate of return that is greater than
a market rate of return). In such a case, a
younger participant is able to benefit from
the above-market rate for a longer period
\- and therefore receive a more valuable
benefit - than a similarly situated, older
participant.
A number of commenters objected to
the provision under the 2010 final regula-
tions under which a plan that credits in-
terest using an interest crediting rate not
on the list of rates in the regulations does
not satisfy the requirement that the inter-
est crediting rate not be greater than a
market rate of return. These commenters
asked that the regulations provide a list of
safe harbor interest crediting rates deemed
to be not greater than a market rate of
return for purposes of the requirements of
section 411(b)(5)(B) and also permit the
use of other interest crediting rates that do
not exceed a market rate of return. How-
ever, this approach would require the IRS
to evaluate the characteristics of an unre-
stricted set of interest crediting rates to
determine whether the particular interest
crediting rate under each plan exceeds a
market rate of return. For example, a par-
ticular investment-based interest crediting
rate available in the market might be so
volatile that the combination of the rate
and the statutory cumulative zero floor
provides an effective rate of return that is
greater than a market rate of return. As
another example, an interest crediting rate
based on an index determined with refer-
ence to current yields on bonds that are
lower in quality than the bonds used to
determine the third segment rate might
provide a rate of return that is greater than
a market rate of return because that rate of
return is not adjusted downward to reflect
the occurrence of defaults in those lower
quality bonds. It is theoretically possible
to adjust an otherwise above-market rate
downward (for example, through the use
of a maximum or the application of a
percentage or basis points reduction ap-
plied to the variable rate of return) so that
the resulting adjusted rate does not exceed
a market rate of return. However, it would
not be administratively feasible for the
IRS to evaluate each combination of a
particular variable rate of return and a
minimum rate, a maximum rate, or some
other type of adjustment, to determine
whether the combination provides an ef-
fective rate of return that exceeds a market
rate of return. Accordingly, pursuant to
the authority provided under section
411(b)(5)(B)(i)(III), the regulations con-
tinue to specify which interest crediting
rates (including fixed rates, variable rates,
and combinations of rates) satisfy the
market rate of return requirements of sec-
tion 411(b)(5)(B), while not permitting
other rates.5
Although these final regulations con-
tinue to specify which interest crediting
rates satisfy the market rate of return re-
quirement, the list of rates has been ex-
panded to include certain additional rates
not permitted under the 2010 final and
proposed regulations. In order to allow for
the list of permitted rates to be further
expanded in the future, these final regula-
tions include a provision that permits the
Commissioner, in guidance published in
the Internal Revenue Bulletin, to increase
the specific interest crediting rates set
forth in the regulations (such as by in-
creasing the maximum permitted margin
that can be added to one or more of the
safe harbor rates, increasing the maximum
permitted fixed rate, or increasing a max-
imum permitted annual floor). In addition,
these final regulations include a provision
that permits the Commissioner, in guid-
ance published in the Internal Revenue
Bulletin, to provide for additional interest
crediting rates that satisfy the requirement
that they not exceed a market rate of re-
turn for purposes of section 411(b)(5)(B).
Thus, for example, the Commissioner
could in the future, in guidance published
in the Internal Revenue Bulletin, permit a
plan to use an annual floor in conjunction
with an investment-based rate that is re-
duced so that the effective rate of return
does not exceed a market rate of return.
Such an annual floor would allow plans
using plan assets or other investment-
based market rates that may be negative in
some periods to assure positive annual
interest credits that could be used in de-
termining benefits and in projecting them
for purposes of section 411(b)(1)(B).
2\. Use of adjusted segment rates as
interest crediting rates
The 2010 final regulations provide that
each of the three segment rates described
in section 430(h)(2)(C)(i), (ii) and (iii)
(which are generally used for purposes of
5 As set forth in the "Effective/Applicability Date" section of this preamble, these provisions of the regulations apply for plan years that begin on or after January 1, 2016.
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applying the minimum funding require-
ments for single-employer defined benefit
plans) is a permissible interest crediting
rate under a statutory hybrid plan. Section
40211(a) of the Moving Ahead for Prog-
ress in the 21st Century Act, Public Law
112-141 (126 Stat. 405 (2012)) (MAP-
21), added section 430(h)(2)(C)(iv) to the
Code, generally effective for plan years
beginning on or after January 1, 2012.
Section 430(h)(2)(C)(iv) provides that
each of the three segment rates for a plan
year is adjusted as necessary to fall within
a specified range that is determined based
on an average of the corresponding seg-
ment rates for the 25-year period ending
on September 30 of the calendar year pre-
ceding the first day of that plan year. Section
2003 of the Highway and Transportation
Funding Act of 2014, Public Law 113-159
(128 Stat. 1839 (2014)) (HATFA), modi-
fied the ranges set forth in section
430(h)(2)(C)(iv).
These final regulations provide that a
statutory hybrid plan is permitted to credit
interest using one of the unadjusted seg-
ment rates (without regard to section
430(h)(2)(C)(iv)) or one of the adjusted
segment rates (as adjusted by application
of section 430(h)(2)(C)(iv)), as specified
under the terms of the plan. If future in-
terest credits with respect to principal
credits that have already accrued are de-
termined using either an adjusted or an
unadjusted segment rate, then any subse-
quent amendment to change to another
interest crediting rate with respect to those
principal credits (including a change from
the adjusted rate to an unadjusted segment
rate, or vice versa) must satisfy the re-
quirements of section 411(d)(6).
3\. Rate of return on plan assets or a
subset of plan assets
The 2010 final regulations include a
market rate of return rule that permits
indexed benefits (such as those provided
under a variable annuity benefit formula)
to be adjusted using the actual rate of
return on the aggregate assets of the plan,
if plan assets are diversified so as to min-
imize the volatility of returns. Similar to
the 2010 proposed regulations, these final
regulations extend this rule to statutory
hybrid plans generally, so that a plan may
credit interest under a cash balance for-
mula using an interest crediting rate equal
to the actual rate of return on the aggre-
gate assets of the plan, if plan assets are
diversified to minimize the volatility of
returns.
One commenter suggested that it
should be permissible to adjust a partici-
pant's benefit under a statutory hybrid
benefit formula based on the rate of return
on a subset of plan assets. There may be a
number of reasons why a plan sponsor
may find it useful to design a plan so that
a participant's benefit is adjusted based on
a subset of plan assets. For example, a
plan sponsor may wish to credit interest
based on a rate of return that differs for
different groups of participants (such as
using a more conservative, or less volatile,
subset of plan assets for long service em-
ployees). Similarly, a plan sponsor may
wish to credit interest based on a rate of
return that excludes certain subsets of plan
assets (for example, excluding assets as-
sociated with traditional defined benefit
plan liabilities after a conversion amend-
ment or otherwise excluding a residual
subset of assets associated with liabilities
for those participants whose benefits are
not adjusted under the statutory hybrid
benefit formula).
In order to permit these plan designs,
these final regulations expand the list of
permissible interest crediting rates by per-
mitting a variable annuity benefit formula
to provide adjustments (and a cash bal-
ance formula to credit interest) using the
rate of return on a subset of plan assets, if
certain requirements are satisfied. Specif-
ically, these final regulations provide that
an interest crediting rate equal to the ac-
tual rate of return on the assets within a
specified subset of plan assets, including
both positive and negative returns, is not
in excess of a market rate of return if: (1)
the subset of plan assets is diversified so
as to minimize the volatility of returns
(this requirement is satisfied if the subset
of plan assets is diversified such that it
would meet the diversification require-
ment that must be met in order for aggre-
gate plan assets to be used as an interest
crediting rate), (2) the aggregate fair mar-
ket value of qualifying employer securi-
ties and qualifying employer real property
(within the meaning of section 407 of
ERISA) held in the subset of plan assets
does not exceed 10 percent of the fair
market value of the aggregate assets in the
subset;6 and (3) the fair market value of
the assets within the subset of plan assets
approximates the liabilities for benefits
that are adjusted by reference to the rate of
return on the assets within the subset, de-
termined using reasonable actuarial as-
sumptions. Under this rule, there can be a
residual subset of plan assets for liabilities
that are not adjusted by reference to a
subset (such as a subset consisting of a
dedicated bond portfolio designed to sat-
isfy liabilities with respect to retirees). In
addition, if other applicable requirements
are satisfied, this rule would permit a plan
to base adjustments on the rate of return
on different subsets for different groups of
participants. The regulations include ex-
amples that illustrate the use of the rate of
return on a subset of plan assets as a
permitted interest crediting rate.
4\. Rate of return on a RIC or other
collective investments
Like the 2010 proposed regulations,
these final regulations also permit a stat-
utory hybrid plan to credit interest using
the rate of return on a regulated invest-
ment company (RIC) that meets certain
standards. Specifically, these final regula-
tions provide that an interest crediting rate
is not in excess of a market rate of return
if it is equal to the rate of return on a RIC,
as defined in section 851, that is reason-
ably expected to be not significantly more
volatile than the broad United States eq-
uities market or a similarly broad interna-
tional equities market. For example, a RIC
that has most of its assets invested in
securities of issuers (including other
RICs) concentrated in an industry sector
or a country other than the United States
generally would not meet this require-
ment. Likewise, a RIC that uses leverage,
or that has significant investment in deriv-
ative financial products, for the purpose of
achieving returns that amplify the returns
of an unleveraged investment, generally
would not meet this requirement. Thus, a
RIC that has most of its investments con-
centrated in the semiconductor industry or
that uses leverage in order to provide a
rate of return that is twice the rate of
return on the Standard & Poor's 500 index
6The 10 percent limitation is similar to the limitation that applies with respect to aggregate plan assets under section 407 of ERISA.
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(S&P 500) would not meet this require-
ment. On the other hand, a RIC that has
investments that track the rate of return on
the S&P 500, a broad-based "small-cap"
index (such as the Russell 2000 index), or
a broad-based international equities index
would meet this requirement. The require-
ment that the RIC's investments not be
concentrated in an industry sector or a
specific foreign country is intended to
limit the volatility of the returns, as well
as the risk inherent in non-diversified in-
vestments. Similarly, the requirement that
the RIC not provide leveraged returns is
intended to limit the volatility of the re-
turns provided. Subject to these require-
ments, the rule is intended to provide
plan sponsors with greater flexibility in
choosing a permissible rate of return
than would be provided if the regula-
tions were to list particular RICs or in-
dices that satisfy the market rate of re-
turn requirement.
Several commenters suggested that it
should be permissible for a statutory hy-
brid plan to credit interest using the rate of
return on any investment available in the
plan sponsor's defined contribution plan.
Because the combination of a rate of re-
turn on an investment available in the plan
sponsor's defined contribution plan and
the statutory cumulative zero floor may
provide an effective rate of return that is
greater than a market rate of return, these
final regulations do not provide that the
rate of return on an investment is a per-
missible interest crediting rate merely be-
cause the investment is available in the
plan sponsor's defined contribution plan.
However, a subset of plan assets of a
statutory hybrid plan could be comprised
of investments that are options under the
plan sponsor's defined contribution plan
(which could be owned through a collec-
tive investment vehicle). In such a case, if
the requirements set forth earlier are sat-
isfied with respect to that subset, the rate
of return on that subset would be a per-
missible interest crediting rate. In addi-
tion, if an investment available in the plan
sponsor's defined contribution plan is a
RIC that meets the requirements of the
preceding paragraph, the rate of return on
that RIC would also be a permissible in-
terest crediting rate.
### 5. Permitted fixed rate
Section 411(b)(5)(B)(i)(III) authorizes
the Treasury Department to issue regula-
tions permitting a fixed rate of interest
under the rules relating to a market rate of
return. However, reconciling a plan's abil-
ity to provide a fixed interest crediting rate
with the requirement under section
411(b)(5)(B)(i)(I) that an interest credit-
ing rate "for any plan year shall be at a
rate which is not greater than a market rate
of return" [emphasis added] presents
unique challenges because, by definition,
fixed rates do not adjust with the market.
As a result, the use of any fixed rate will
result in an interest crediting rate that is
above a then-current market rate of inter-
est during any period in which the current
market rate falls below the fixed rate.
In light of this fact, the Treasury De-
partment and the IRS believe that, in order
to satisfy the market rate of return require-
ment, any fixed interest crediting rate al-
lowed under the rules must not be ex-
pected to exceed future market rates of
interest, except infrequently, by small
amounts, and for limited durations. Prior
to the publication of the 2010 proposed
regulations, the Treasury Department and
the IRS modeled the difference between
account balances credited with interest
credits determined using various fixed in-
terest rates and account balances credited
with interest credits determined using
long-term investment grade corporate
bond yields, based on a stochastic distri-
bution of those yields that reflects the his-
torical distribution of those yields. Based
on that modeling, a maximum fixed inter-
est crediting rate of 5% per year was in-
cluded in the proposed regulations.
This analysis was undertaken again
prior to the publication of these regula-
tions, using additional historical data.
Based on the additional historical data, the
Treasury Department and the IRS have
determined that a fixed interest crediting
rate of up to 6 percent satisfies these cri-
teria and that any higher fixed rate would
result in an effective rate of return that is
in excess of a market rate of return. In
addition to satisfying the market rate of
return requirements, a fixed 6 percent rate
of interest is deemed to be not in excess of
the third segment rate described in section
417(e)(3)(D) or 430(h)(2)(C)(iii) (and,
therefore, a plan that uses such a rate is
permitted to use the special rule described
in section III.E of this preamble to switch
to the third segment rate without provid-
ing section 411(d)(6) protection).
### 6. Permitted annual and cumulative floors
As part of the historical modeling of
rates done prior to the publication of the
2010 proposed regulations, the Treasury
Department and the IRS modeled the his-
torical distribution of rates of interest on
long-term investment grade corporate
bonds to determine the additional value
added by various fixed floors used in con-
junction with these rates. Based on this
modeling, the 2010 proposed regulations
would have provided that a fixed floor up
to 4 percent was permissible in connection
with any of the permissible bond-based
interest crediting rates. Several comment-
ers requested that the fixed floor used in
conjunction with the bond-based rates be
increased by at least 100 basis points.
Prior to the publication of these regula-
tions, the Treasury Department and the
IRS undertook the same analysis as was
undertaken prior to the publication of the
2010 proposed regulations, using addi-
tional historical data. In addition, the
Treasury Department and the IRS mod-
eled the historical distribution of the 30-
year Treasury rate with fixed floors of
various values compared to the historical
distribution of rates of interest on long-
term investment grade corporate bonds.
The rates permitted under Notice 96-8
("Notice 96-8 rates"), including the gov-
ernment bond-based rates such as the 30-
year Treasury rate, are generally expected
to be lower than the rate of interest on
long-term investment grade corporate
bonds. As a result, the annual floor used in
conjunction with the Notice 96-8 rates
can be increased to some extent without
adding so much additional value that the
effective rate of return is greater than a
market rate of return. Accordingly, the
final regulations provide that it is permis-
sible for a plan to utilize an annual floor of
up to 5 percent in conjunction with any of
the Notice 96-8 rates.7 Like the 2010
proposed regulations, these regulations
continue to provide that a plan can utilize
7These regulations conform the names of the government bond-based rates that are permitted to be used pursuant to this rule to the names of the rates set forth in Notice 96-8.
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an annual floor of up to 4 percent in con-
junction with the third segment rate (the
rate of interest on long-term investment
grade corporate bonds), or in conjunction
with the first or second segment rates.
In contrast, because of the volatility of
a rate of return that reflects changes in the
price level of underlying investments
("investment-based rate"), adding an an-
nual floor to an investment-based rate of-
ten provides an effective rate of return on
a cumulative basis that far exceeds the
rate of return provided by the investment-
based rate without such a floor. Also,
commenters on both the 2007 proposed
regulations and the 2010 proposed regu-
lations generally did not request that such
an annual floor be permitted. Accordingly,
the final regulations do not allow the use
of an annual floor in conjunction with any
of the permissible investment-based rates
(i.e., the rate of return on plan assets, a
subset of plan assets, or a RIC).
On the other hand, if, instead of apply-
ing a floor on each year's rate of return, a
cumulative floor is applied to an
investment-based rate, the effective rate of
return is not necessarily substantially
greater than the rate of return provided
without the floor. Specifically, the Trea-
sury Department and the IRS have deter-
mined that, based on the modeling of
long-term historical returns, a 3 percent
floor that applies cumulatively (in the ag-
gregate from the date of each principal
credit until the annuity starting date, with-
out a floor on the rate of return provided in
any interim period) could be combined
with a permissible investment-based rate
(or any other permissible rate), without
increasing the effective rate of return to
such an extent that the effective rate of
return would be in excess of a market rate
of return. As a result, like the 2010 pro-
posed regulations, the regulations provide
that a plan that determines interest credits
using any particular interest crediting rate
that satisfies the market rate of return lim-
itation does not provide an effective inter-
est crediting rate in excess of a market rate
of return merely because the plan provides
that the participant's benefit, as of the
participant's annuity starting date, is equal
to the greater of the benefit determined
using the interest crediting rate and the
benefit determined as if the plan had used
a fixed annual interest crediting rate equal
to 3 percent (or a lower rate) for all prin-
cipal credits that are made during the
guarantee period. For this purpose, the
guarantee period is the prospective period
that begins on the date the cumulative
floor begins to apply to the participant's
benefit and that ends on the date on which
that cumulative floor ceases to apply to
the participant's benefit.
These regulations provide that the de-
termination of the amount payable pursu-
ant to the guarantee provided by any cu-
mulative floor with respect to the
participant's benefit is made only as of an
annuity starting date on which a distribu-
tion of the participant's entire benefit as of
that date under the plan's statutory hybrid
benefit formula commences. These final
regulations provide special rules in the
case of a participant who has multiple
annuity starting dates, in order to ensure
that prior annuity starting dates are taken
into account in determining the guarantee
provided by a cumulative floor. These
special rules in the case of a participant
who has multiple annuity starting dates
are largely substantively unchanged from
rules in the 2010 proposed regulations,
except that language has been clarified to
provide that the comparison involves a
comparison of the accumulated benefit to
which the guarantee applies to the sum of
principal credits to which the guarantee
applies (and to conform to similar changes
made to the rules with respect to the ap-
plication of the preservation of capital re-
quirement to a participant who has multi-
ple annuity starting dates, as described
later in section II.C.8 of this preamble,
except that the new special rule for par-
ticipants with 5 or more 1-year breaks in
service applies only to the preservation of
capital requirement).
## Variable Rate
Notice 96-8 rate (for example, the yield on 30-year Treasury Constant Maturities)
1st, 2nd, or 3rd segment rate
Investment-based rate (for example, the rate of return on aggregate plan assets)
Maximum Permitted Floor
5 percent annual
4 percent annual
3 percent cumulative
### 7. Permitted margins on government bond-based rates
A number of commenters suggested
that the permitted margins used in con-
junction with the permitted government
bond-based interest crediting rates be in-
creased to make these rates more equiva-
lent to the third segment rate. As clarified
in these regulations, the permitted govern-
ment bond-based rates and margins are
the same as those that were permitted un-
der Notice 96-8. These rates and margins
have largely been maintained for the con-
venience of plan sponsors, so that a plan
that has been using a Notice 96-8 rate can
continue to do so.
The Treasury Department and the IRS
understand that very few plans with gov-
ernment bond-based rates have margins in
excess of those provided under Notice
96-8. Moreover, there are several meth-
ods by which a plan can credit interest
based on a bond-based rate that is ex-
pected to be greater than a Notice 96-8
rate. For example, a plan that is using a
Notice 96-8 rate can be amended to
switch to the third segment rate for pur-
poses of determining all future interest
credits without the need to preserve the
Notice 96-8 rate with respect to benefits
accrued before the applicable amendment
date if, on the effective date of the
amendment, the third segment rate is not
lower than the Notice 96-8 rate that
would have applied in the absence of the
amendment (and the other requirements
of § 1.411(b)(5)-1(e)(3)(ii), which are
described in section III.E of this pream-
ble, are satisfied). In addition, because a
plan can provide for a rate of return that
is the lesser of a permitted rate and any
other rate, a plan could adopt an interest
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crediting rate with respect to future pay
credits that is the lesser of the third
segment rate and a government bond-
based rate described in Notice 96-8
with a margin, even if that margin ex-
ceeds the margin permitted under these
final regulations.
8\. Other rules with respect to crediting
interest
Like the 2010 proposed regulations,
these final regulations include a rule that
provides that a plan is not treated as fail-
ing to meet the interest crediting require-
ments merely because the plan does not
provide for interest credits on amounts
distributed prior to the end of the interest
crediting period. Thus, if a plan credits
interest at annual or more frequent period
intervals, the plan is not required to credit
interest on amounts that were distributed
between the dates on which interest under
the plan is credited to the account balance.
Also, the rule in the 2010 proposed regu-
lations that allows plans to credit interest
taking into account increases or decreases
to the participant's accumulated benefit
that occur during the period has been fi-
nalized as proposed.
The 2010 final regulations provide that
a statutory hybrid plan does not provide
an effective interest crediting rate that is
in excess of a market rate of return merely
because the plan determines an interest
credit by applying different rates to differ-
ent predetermined portions of the accumu-
lated benefit, provided each rate would be
a permissible rate if the rate applied to the
entire accumulated benefit. With respect
to this provision, some commenters sug-
gested that the regulations should be ex-
plicit that a single rate that is a specified
blend of multiple rates that applies to the
entire cash balance account is permissible,
as is applying different rates to different
specified subaccounts of the cash balance
account. The Treasury Department and
the IRS believe that the current rule ac-
commodates such a blended rate, since the
predetermined portion to which a rate ap-
plies can either be a specified percentage
of the cash balance account or a specified
subaccount. As a result, the rule with re-
spect to blended rates remains unchanged
in the regulations.
These final regulations make some
clarifying changes to the preservation of
capital requirement that was included in
the 2010 final regulations. In particular,
these final regulations clarify that the
preservation of capital requirement in-
volves a comparison of the accumulated
benefit to the sum of all principal credits
and that the requirement is applied only as
of an annuity starting date with respect to
which a distribution of the participant's
entire vested benefit under the plan's stat-
utory hybrid benefit formula as of that
date commences.
Like the 2010 proposed regulations,
these final regulations provide special
rules in the case of a participant who has
multiple annuity starting dates, in order to
ensure that prior annuity starting dates are
taken into account in determining the
amount of the guarantee provided under
the preservation of capital requirement.
Although the preservation of capital re-
quirement applies only as of an annuity
starting date with respect to which a dis-
tribution of the participant's entire vested
benefit under the plan's statutory hybrid
benefit formula as of that date com-
mences, all prior annuity starting dates
(including annuity starting dates with re-
spect to partial distributions) are taken
into account when applying the preserva-
tion of capital requirement as of that an-
nuity starting date.
The special rules with respect to the
preservation of capital requirement for a
participant who has multiple annuity start-
ing dates remain largely unchanged from
the rules in the 2010 proposed regulations,
except that these rules have been revised
to reflect corresponding changes in the
regulations that explicitly permit certain
subsidies under statutory hybrid plans.
One commenter requested that the spe-
cial rules with respect to the preservation
of capital requirement for a participant
who has multiple annuity starting dates
not apply in the case of a participant who
has experienced a break in service. In
response to this comment, a new rule has
been added to the regulations. Under this
new rule of administrative convenience, a
plan is permitted to provide that, in the
case of a participant who receives a dis-
tribution of the entire vested benefit under
the plan and thereafter completes 5 con-
secutive 1-year breaks in service, the pres-
ervation of capital requirement is applied
without regard to the prior period of ser-
vice. Thus, in the case of such a partici-
pant, the plan is permitted to provide that
the preservation of capital requirement is
applied disregarding the principal credits
and distributions that occurred before the
breaks in service. Application of this rule
could result in a participant receiving a
greater benefit (but never less) than would
otherwise be provided without such a rule.
Because section 411(a)(13)(A) does
not override the requirement that a defined
benefit plan either provide an actuarial
increase after normal retirement age or
satisfy the requirements for suspension of
benefits, a statutory hybrid plan that does
not suspend benefits in accordance with
section 411(a)(3)(B) will have to provide
for adjustments in excess of the benefits
determined using the plan's interest cred-
iting rate if the interest crediting rate is
insufficient to provide the required actu-
arial increases. However, without a spe-
cial rule, that greater benefit could cause
the market rate of return requirements to
be violated. Thus, like the 2010 proposed
regulations, these final regulations pro-
vide for a special rule that allows for any
required adjustments after normal retire-
ment age to be provided as interest credits
without violating the market rate of return
requirements.
### D. Plan termination
Like the 2010 proposed regulations,
the regulations provide special rules that
apply for purposes of determining interest
crediting rates and certain other plan fac-
tors under a statutory hybrid benefit for-
mula after the plan termination date of a
statutory hybrid plan, including guidance
with respect to 5-year averaging of rates
under section 411(b)(5)(B)(vi). The terms
of a statutory hybrid plan must reflect
these rules.
The regulations provide guidance as to
the interest crediting rate used to deter-
mine benefits after the plan termination
date. Several commenters on the 2010
proposed regulations suggested that addi-
tional guidance is needed as to the rules
that apply with respect to the annuity con-
version interest rates and factors that ap-
ply after the plan termination date, as well
as the mortality table that is used after the
plan termination date. In response to these
comments, these regulations provide ad-
ditional guidance as to annuity conversion
rates, factors, and mortality tables.
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Similar to the 2010 proposed regula-
tions, the regulations provide that a plan
satisfies the plan termination requirements
only if the interest crediting rate used to
determine a participant's accumulated
benefit for interest crediting periods that
end after the plan termination date is equal
to the average of the interest rates used
under the plan during the 5-year period
ending on the plan termination date. Pur-
suant to section 411(d)(5)(B)(vi), the ac-
tual interest crediting rate (taking into ac-
count minimums, maximums, and other
adjustments) used under the plan for the
interest crediting period generally is used
for purposes of determining the average of
the interest rates. However, section
411(b)(5)(B)(vi) does not provide a rule
for periods in which an investment-based
rate of return, rather than a variable inter-
est rate, is used under the plan to deter-
mine interest credits. In addition, the trail-
ing 5-year average of an investment-based
rate of return may be unreasonably high or
unreasonably low and, unlike the trailing
5-year average of an interest rate, will
have little, if any, correlation to the actual
future investment-based rate of return. As
a result, the Treasury Department and the
IRS do not believe it is appropriate for the
trailing 5-year average of an investment-
based rate of return to be used to deter-
mine benefits after plan termination.
The 2010 proposed regulations would
have substituted the third segment rate
generally for interest crediting rates that
are not based on interest rates. A number
of commenters suggested that the substi-
tution of the third segment rate would
make plan termination unduly costly for
plans that used investment-based interest
crediting rates. While the future return of
an investment that includes an equity
component may be expected to be higher
than the third segment rate, the Treasury
Department and the IRS note that the third
segment rate is normally higher than the
rate used under defined benefit plans for
other purposes, including funding, and
agree that the third segment rate is inap-
propriately high for purposes of substitut-
ing a fixed rate of return for periods after
the plan's termination date. Consistent
with the statutory language of section
411(b)(5)(B)(vi)(I), the Treasury Depart-
ment and the IRS continue to believe it is
appropriate to substitute a rate of interest
used under the plan for those periods in
which an investment-based rate of return
was used to determine interest credits.
However, in lieu of the third segment
rate, the final regulations provide that the
second segment rate under section
430(h)(2)(C)(ii) (determined without re-
gard to section 430(h)(2)(C)(iv)) for the
last calendar month ending before the be-
ginning of the interest crediting period,
generally must be substituted for an
investment-based rate of return that ap-
plied for that interest crediting period. For
many plans, the second segment rate is
close to the effective interest rate that is
used for funding purposes, and thus the
substitute interest rate frequently will ap-
proximate the plan's funding discount rate
(without being affected by the specific
plan demographics).
The regulations contain certain rules of
application with respect to these plan ter-
mination rules, including rules with re-
spect to section 411(d)(6) protected bene-
fits. The regulations also include examples
to illustrate the application of these plan
termination rules. In response to a com-
menter's request, the regulations include
an example illustrating the application of
these plan termination rules in the case
where the plan uses the section 417(e)
segment rates for annuity conversion.
E. Rules relating to section 411(d)(6)
and interest crediting rates
The 2010 final regulations provided
that the right to interest credits in the
future that are not conditioned on future
service constitutes a section 411(d)(6)
protected benefit. One commenter ex-
pressed concern that this rule was over-
broad. In response to this comment, these
final regulations clarify that the right to
future interest credits determined in the
manner specified under the plan and not
conditioned on future service is a factor
that is used to determine the participant's
accrued benefit for purposes of section
411(d)(6). Thus, if a plan is amended so
that it could potentially provide smaller
future interest credits on the then-current
accumulated benefit than would have been
provided prior to the amendment, the plan
must otherwise provide for increased ben-
efits such that the potentially smaller in-
terest credits cannot result in a smaller
accrued benefit (or a smaller payment un-
der any optional form of benefit) as of any
future date than the accrued benefit (or
payment under the optional form of ben-
efit) as of the applicable amendment date.
See section I.B of this preamble for a
discussion of the additional rule under the
regulations pursuant to which the relief of
section 411(a)(13) does not permit the ac-
cumulated benefit under a lump sum-
based benefit formula to be reduced in a
manner that would be prohibited if that
reduction were applied to the accrued
benefit.
The 2010 final regulations contain a
rule under which a plan is not treated as
providing for smaller interest credits in
the future in violation of section 411(d)(6)
merely because of an amendment that
changes the plan's interest crediting rate
from one of the Notice 96-8 rates (or the
first or second segment rates) to the third
segment rate, if three requirements are
satisfied. Specifically, the rule is only
available if the change applies to interest
credits to be credited after the effective
date of the amendment, the effective date
of the amendment is at least 30 days after
adoption and, on the effective date of the
amendment, the new interest crediting rate
is not lower than the interest crediting rate
that would have applied in the absence of
the amendment. The 2010 final regula-
tions do not specify how a plan with a
fixed annual floor used in connection with
the pre-amendment rate should account
for the floor when changing to the third
segment rate. These final regulations add a
fourth requirement to this rule, which pro-
vides that, for plan years that begin on or
after January 1, 2016, any fixed annual
floor that was used in connection with the
pre-amendment rate must be retained after
the amendment to the maximum extent
permissible under the market rate of re-
turn requirement in the final regulations.
Thus, for example, if prior to the amend-
ment a plan was using a fixed annual floor
of 4.5 percent in connection with the yield
on 30-year Treasury Constant Maturities,
then, if the plan is amended to change the
rate to the third segment rate it must pro-
vide a fixed annual floor of 4 percent.
Because section 411(d)(6) requires that
a plan amendment not result in a reduction
to the accrued benefit, changes in interest
crediting rates would be difficult to imple-
ment without special market rate of return
rules. Thus, like the 2010 proposed regu-
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lations, the regulations contain a special
market rate of return rule that applies in
the case of an amendment to change the
plan's interest crediting rate. This rule
provides that the market rate of return rule
is not violated merely because the plan
provides that the benefit of active partici-
pants after the interest crediting rate
change can never be less than the benefit
under the old rate (without future princi-
pal credits), subject to an anti-abuse rule.
This rule does not extend to participants
who are not active participants as of the
date of amendment because such an ex-
tension would cause those participants ef-
fectively to receive a rate of return on
their entire account balance that is the
greater of the old and the new rate, which
would be an impermissible above-market
interest crediting rate under the regula-
tions (unless the resulting greater-of rate
is otherwise permitted under the regula-
tions). These final regulations also contain
a special rule that provides both section
411(d)(6) relief and relief under the mar-
ket rate of return rules for changing the
lookback month or stability period used to
determine interest credits (for a plan using
a bond-based interest crediting rate), sub-
ject to an anti-abuse rule.
A comment request that was included
in the preamble to the 2010 proposed reg-
ulations asked how section 411(d)(6) ap-
plies in the case of a plan that credits
interest using an interest crediting rate
equal to the rate of return on a RIC if the
RIC ceases to exist. Commenters gener-
ally suggested that section 411(d)(6)
should be treated as satisfied in such a
case if the plan sponsor replaces the RIC
that ceases to exist with a RIC with sim-
ilar characteristics (such as risk and ex-
pected return). The Treasury Department
and the IRS generally agree with these
comments. As a result, these final regula-
tions provide for a special rule that applies
in the case of a statutory hybrid plan that
credits interest using an interest crediting
rate equal to the rate of return on a RIC
that ceases to exist, whether as a result of
a name change, liquidation, or otherwise.
In such a case, the plan is not treated as
violating section 411(d)(6) provided that
the rate of return on the successor RIC is
substituted for the rate of return on the
RIC that no longer exists, for purposes of
crediting interest for periods after the date
the RIC ceased to exist. In the case of a
name change or merger of RICs, the suc-
cessor RIC means the RIC that results
from the name change or merger involv-
ing the RIC that no longer exists. In all
other cases, the successor RIC is a RIC
selected by the plan sponsor that has rea-
sonably similar characteristics, including
characteristics related to risk and rate of
return, as the RIC that no longer exists.
Prior to the first day of the first plan
year that begins on or after January 1,
2016, a statutory hybrid plan that uses an
interest crediting rate that is not permitted
under the final regulations must be
amended to change to an interest crediting
rate that is on the list of permitted interest
crediting rates under the regulations. This
is because, after that date, the final regu-
lations set forth the list of interest credit-
ing rates that satisfy the requirement of
section 411(b)(5)(B)(i) that the plan not
provide an effective rate of return that is
greater than a market rate of return. How-
ever, an amendment that reduces the in-
terest crediting rate with respect to bene-
fits that have already accrued would
ordinarily be impermissible under section
411(d)(6). A comment request that was
included in the preamble to the 2010 pro-
posed regulations solicited comments
with respect to guidance needed to resolve
this conflict between the market rate of
return rules of section 411(b)(1)(B)(i) and
the anti-cutback rules of section 411(d)(6)
in order to permit a plan to change its
interest crediting rate to comply with the
final regulations. After consideration of
the comments received, proposed regula-
tions that would permit a plan with a
noncompliant interest crediting rate to be
amended so that its interest crediting rate
complies with the market rate of return
rules are being issued concurrently with
these final regulations.
F. Requests to introduce "self-directed
investment" into statutory hybrid plans
In response to stakeholder suggestions,
the preamble of the 2010 proposed regu-
lations requested comments as to whether
a statutory hybrid plan should be able to
offer participants the opportunity to
choose from a menu of hypothetical in-
vestment options. If such an approach
were adopted, it could introduce into de-
fined benefit pension plans that constitute
statutory hybrid plans a form of partici-
pant involvement in the selection of inter-
est crediting rates that would be somewhat
analogous to the self-directed investment
practices that are typical of section 401(k)
retirement savings plans. Under such an
approach, participants could choose from
among hypothetical investment options
that would determine the interest crediting
rate. The menu of hypothetical investment
options might include various equity or
fixed income investment alternatives, po-
tentially including options similar to bal-
anced or target date funds.8 The 2010
preamble also requested comments on the
plan qualification issues that might arise
under such a plan design, such as the
treatment of forfeitures, the application of
the anti-cutback rules under section
411(d)(6), compliance with the market
rate of return requirement, and other sec-
tion 411(b)(5) issues. In addition, com-
ments were specifically requested as to
whether events such as the following
would raise issues: (1) a participant elects
to switch from one investment option to
another; (2) a RIC underlying one of the
investment options ceases to exist; (3) the
plan is amended to eliminate an invest-
ment option; (4) a participant elects to
switch from an investment option with a
cumulative minimum to an investment op-
tion without a cumulative minimum (or
vice versa); or (5) the plan is terminated
and, pursuant to the special rules that ap-
ply upon plan termination, the interest
crediting rate that applies to determine a
participant's benefit after plan termination
must be fixed.
Several commenters expressed serious
concerns about the possibility of giving
statutory hybrid plan participants the abil-
ity to choose from a menu of hypothetical
investment options. These comments re-
flect a general concern that adding partic-
ipant choice of investment options to a
statutory hybrid plan would constitute a
further departure of these plans from the
fundamental nature of defined benefit pen-
8 A target date investment option under a statutory hybrid plan would transition participants incrementally at certain ages from a blended rate that is more heavily equity-weighted to a rate
that is more heavily weighted in fixed income.
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sion plans. Underlying this general con-
cern appears to be a view that participant
choice of investment options is a practice
that has developed uniquely in the context
of certain types of defined contribution
retirement savings vehicles (such as sec-
tion 401(k) and section 403(b) plans) and
is not readily reconcilable with the statu-
tory and regulatory regime applicable to
defined benefit pension plans. For exam-
ple, commenters questioned the advisabil-
ity of shifting retirement security risks to
participants in defined benefit pension
plans in a manner similar to self-directed
investing in section 401(k) plans. In this
regard, commenters have raised questions
as to whether participants in general have
the knowledge, experience, and discipline to
deal as effectively as plan fiduciaries and
other investment professionals with the dif-
ferent risk and return characteristics of var-
ious investment options and to formulate
and adhere systematically to methodical in-
vestment practices and strategies (such as
appropriate risk diversification and regular
rebalancing).
Commenters also raised concerns re-
garding potential hazards for trustees and
plan sponsors of statutory hybrid plans
that provide investment choices to partic-
ipants. Commenters suggested that if plan
assets were invested to track participant
elections of equity-heavy interest credit-
ing options or frequent participant-
directed investment changes that might
not be prudent, section 404(c) of ERISA
might not be available to limit plan fidu-
ciary liability and help protect partici-
pants. In the alternative, concerns have
been expressed that, if plan assets were
invested according to a traditional defined
benefit plan investment strategy not cor-
related with participants' elections, a well-
funded plan might quickly become under-
funded in a period when equity-heavy
interest crediting options perform well
(which could lead to additional exposure
for the PBGC and put participants at risk
for shortfalls in anticipated benefits).
In addition, because the interest credit-
ing rate is part of a participant's accrued
benefit and all related future interest cred-
its are accrued at the time a participant
accrues a pay credit, some commenters
suggested that a change in the interest
crediting rate might be treated as a plan
amendment for section 411(d)(6) anti-
cutback purposes (similar to rules pre-
venting participants from waiving all or
any part of their accrued benefit). This
section 411(d)(6) interpretation would re-
quire preserving the prior interest credit-
ing rate with respect to benefits previously
accrued. Under this interpretation, partic-
ipants would be encouraged to select one
rate and subsequently change to another
rate with different characteristics to
achieve the greater of the two interest
crediting rates. In addition, the resulting
greater-of rate that is required under this
section 411(d)(6) interpretation raises is-
sues under the section 411(b)(5) rules that
provide that an interest crediting rate can-
not exceed a market rate of return.
Other commenters suggested that the
regulations should permit statutory hybrid
plans to provide for participant choice
among hypothetical investment options.
For example, they noted that if statutory
hybrid plans were permitted to allow
participant-directed investments, this plan
design might be more popular among par-
ticipants and employer sponsors, in an era
in which adoption and retention of defined
benefit plans generally have been waning.
The commenters also argued that permit-
ting investment-based rates of return in
statutory hybrid plans suggests that partic-
ipants should be permitted to direct the
investment of their hypothetical accounts
on the theory that participants should have
the option to elect a less volatile invest-
ment, particularly as they near retirement,
as in the case of a target date fund or
managed account.
These commenters argued that a choice
among investment options is dissimilar,
for purposes of applying the anti-cutback
rule of section 411(d)(6), to a waiver of
accrued benefits (because, at the time of a
change, the value of an investment dollar
in any market-based investment option is
the same as the value of an investment
dollar in any other market-based invest-
ment option). They contended that the
anti-cutback rule may protect a partici-
pant's right to choose among interest
crediting measures, but would not protect
the accrued benefit determined under a
participant's particular choice among in-
terest crediting measures.
Some commenters that advocated that
the regulations permit a statutory hybrid
plan to provide for participant choice
among investment options also requested
transition relief in the event that regula-
tions do not permit this type of plan de-
sign. For example, they suggested that
participant choice be permitted during the
interim period between the statutory and
regulatory effective dates. They also sug-
gested that, even after the regulatory ef-
fective date, a participant in a plan that
previously provided for participant choice
be permitted to continue to direct the in-
vestment of the account balance credited
to that participant as of the regulatory
effective date and/or that anti-cutback re-
lief be provided so that plan sponsors can
move to a different method of matching
investment risk to individual participant
circumstances (such as basing interest
crediting rates on the performance of tar-
get date funds or managed accounts, with-
out participant choice).
Because of the significant concerns re-
lating to the use of statutory hybrid plan
designs that would permit participants to
choose among a menu of investment op-
tions specified in the plan document, the
Treasury Department and the IRS con-
tinue to study these issues. It is possible
that the Treasury Department and the IRS
will conclude that such plan designs are
not permitted. In that event, it is antici-
pated that any statutory hybrid plans that
permitted participant choice among a
menu of investment options on September
18, 2014 pursuant to plan provisions that
were adopted by September 18, 2014
would receive anti-cutback relief that
would permit any such plans to be
amended to provide for one or more ap-
propriate alternative replacement interest
crediting measures.
Some commenters raised concerns re-
garding whether it would be consistent
with the fiduciary, disclosure, and other
requirements of Title I of ERISA if a
statutory hybrid plan were to permit par-
ticipant choice among a menu of invest-
ment options. Concerns raised by these
plan designs under Title I of ERISA are
within the jurisdiction of the Secretary of
Labor. See Reorganization Plan No. 4 of
1978, 5 U.S.C. App. at 672 (2006).
## Effective/Applicability Dates
Except as otherwise provided, the new
rules under these final regulations apply to
plan years that begin on or after January 1,
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2016\. (The rules in these final regulations
that merely clarify provisions that were
included in the 2010 final regulations ap-
ply to plan years that begin on or after
January 1, 2011, in accordance with the
general effective/applicability date of the
2010 final regulations). In addition, these
regulations amend § 1.411(b)(5)-1 to pro-
vide that § 1.411(b)(5)-1(d)(1)(iii),
(d)(1)(vi) and (d)(6)(i) (which provide
that the regulations set forth the list of
interest crediting rates and combinations
of interest crediting rates that satisfy the
market rate of return requirement under
section 411(b)(5)) apply to plan years that
begin on or after January 1, 2016.9
The final regulations reflect the statu-
tory effective dates set forth in section
701(e) of PPA '06. Pursuant to section
701(e)(1) of PPA '06, the amendments
made by section 701 of PPA '06 are gen-
erally effective for periods beginning on
or after June 29, 2005. However, sections
701(e)(2) through 701(e)(6) of PPA '06,
as amended by WRERA '08, set forth a
number of special effective/applicability
date rules that are described earlier in the
Background section of the preamble of
these regulations.
For periods after the statutory effective
date and before the regulatory effective
date, the relief of sections 411(a)(13) and
411(b)(5) applies and the requirements of
sections 411(a)(13) and 411(b)(5) must be
satisfied. As provided in the 2010 final
regulations, a plan is permitted to rely on
the provisions of the final regulations for
purposes of applying the relief and satis-
fying the requirements of sections
411(a)(13) and 411(b)(5) for periods after
the statutory effective date and before the
regulatory effective date. For such peri-
ods, a plan is also permitted to rely on the
provisions of the 2010 proposed regula-
tions, the 2007 proposed regulations and
Notice 2007-6 for purposes of applying
the relief and satisfying the requirements
of sections 411(a)(13) and 411(b)(5).
The regulations should not be con-
strued to create any inference concerning
the applicable law prior to the effective
dates of sections 411(a)(13) and 411(b)(5).
See also section 701(d) of PPA '06. In
addition, the regulations should not be
construed to create any inference concern-
ing the proper interpretation of sections
411(a)(13) and 411(b)(5) prior to the ef-
fective date of the regulations. Thus, for
example, if prior to the effective date of
these final regulations a plan provided an
interest crediting rate that is not provided
for under the final regulations, the plan's
interest crediting rate for that period could
nonetheless satisfy the statutory require-
ment that an applicable defined benefit
plan not provide for interest credits (or
equivalent amounts) for any plan year at
an effective rate that is greater than a
market rate of return.
## Special Analyses
It has been determined that these reg-
ulations are not a significant regulatory
action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because the regulation does not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the proposed
regulations preceding these final regula-
tions were submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
## Drafting Information
The principal authors of these regula-
tions are Neil S. Sandhu and Linda S. F.
Marshall, Office of Division Counsel/As-
sociate Chief Counsel (Tax Exempt and
Government Entities). However, other
personnel from the IRS and the Treasury
Department participated in the develop-
ment of these regulations.
* * * * *
## 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.411(a)(13)-1 is
amended by:
1\. Revising paragraphs (b)(2), (b)(3),
(b)(4), (d)(3)(i), (d)(4)(ii)(A), (d)(4)(ii)(C),
(d)(6), and (e)(2)(ii).
2\. Adding paragraph (d)(4)(ii)(E).
The revisions and addition read as fol-
lows:
§ 1.411(a)(13)-1 Statutory hybrid plans.
* * * * *
(b) * * *
(2) General rules with respect to cur-
rent account balance or current value-
(i) Benefit after normal retirement age.
The relief of section 411(a)(13) does not
override the requirement for a plan that,
with respect to a participant with an an-
nuity starting date after normal retirement
age, the plan either provide an actuarial
increase after normal retirement age or
satisfy the requirements for suspension of
benefits under section 411(a)(3)(B). Ac-
cordingly, with respect to such a partici-
pant, a plan with a lump sum based benefit
formula violates the requirements of sec-
tion 411(a) if the balance of the hypothet-
ical account or the value of the accumu-
lated percentage of the participant's
final average compensation is not in-
creased sufficiently to satisfy the re-
quirements of section 411(a)(2) for dis-
tributions commencing after normal
retirement age, unless the plan suspends
benefits in accordance with section
411(a)(3)(B).
(ii) Reductions limited. The relief of
section 411(a)(13) does not permit the ac-
cumulated benefit under a lump sum-
based benefit formula to be reduced in a
manner that would be prohibited if that
reduction were applied to the accrued
benefit. Accordingly, the only reduc-
tions that can apply to the balance of the
hypothetical account or accumulated
percentage of the participant's final av-
erage compensation are reductions as a
result of-
9The 2010 final regulations provide that these particular provisions apply to plan years that begin on or after January 1, 2012. The intention to delay the effective/applicability date of these
provisions was announced in Notice 2011-85 and Notice 2012-61. Notice 2012-61 announced that these provisions would not be effective for plan years beginning before January 1, 2014.
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(A) Benefit payments;
(B) Qualified domestic relations orders
under section 414(p);
(C) Forfeitures that are permitted under
section 411(a) (such as charges for pro-
viding a qualified preretirement survivor
annuity);
(D) Amendments that would reduce
the accrued benefit but that are permitted
under section 411(d)(6);
(E) Adjustments resulting in a decrease
in the balance of the hypothetical account
due to the application of interest credits (as
defined in § 1.411(b)(5)-1(d)(1)(ii)(A)) that
are negative for an interest crediting period;
(F) In the case of a formula that ex-
presses the accumulated benefit as an
accumulated percentage of the partici-
pant's final average compensation, ad-
justments resulting in a decrease in the
dollar amount of the accumulated per-
centage of the participant's final average
compensation-
(1) Due to a decrease in the dollar
amount of the participant's final average
compensation; or
(2) Due to an increase in the integration
level, under a formula that is integrated
with Social Security (for example, as a
result of an increase in the Social Security
taxable wage base or in Social Security
covered compensation); or
(G) Other reductions to the extent pro-
vided by the Commissioner in revenue
rulings, notices, or other guidance pub-
lished in the Internal Revenue Bulletin
(see § 601.601(d)(2)(ii)(b)).
(3) Payment of benefits based on cur-
rent account balance or current value-
(i) Optional forms that are actuarially
equivalent. With respect to the benefits
under a lump sum-based benefit formula,
the relief of paragraph (b)(1) of this sec-
tion applies to an optional form of benefit
that is determined as of the annuity start-
ing date as the actuarial equivalent, using
reasonable actuarial assumptions, of the
then-current balance of a hypothetical ac-
count maintained for the participant or the
then-current value of an accumulated per-
centage of the participant's final average
compensation.
(ii) Optional forms that are subsidized.
With respect to the benefits under a lump
sum-based benefit formula, if an optional
form of benefit is payable in an amount
that is greater than the actuarial equiva-
lent, determined using reasonable actuar-
ial assumptions, of the then-current bal-
ance of a hypothetical account maintained
for the participant or the then-current
value of an accumulated percentage of the
participant's final average compensation,
then the plan satisfies the requirements of
sections 411(a)(2), 411(a)(11), 411(c) and
417(e) with respect to the amount of that
optional form of benefit. However, see
§ 1.411(b)(5)-1(b)(1)(iii) for rules relat-
ing to early retirement subsidies.
(iii) Optional forms that are less valu-
able. Except as otherwise provided in
paragraph (b)(4)(i) of this section, if an
optional form of benefit is not at least the
actuarial equivalent, using reasonable ac-
tuarial assumptions, of the then-current
balance of a hypothetical account main-
tained for the participant or the then-
current value of an accumulated percent-
age of the participant's final average
compensation, then the relief under sec-
tion 411(a)(13) (permitting a plan to treat
the account balance or accumulated per-
centage as the actuarial equivalent of the
portion of the accrued benefit determined
under the lump sum-based benefit for-
mula) does not apply in determining
whether the optional form of benefit is the
actuarial equivalent of the portion of the
accrued benefit determined under the
lump sum-based benefit formula. As a re-
sult, payment of that optional form of
benefit must satisfy the rules applicable to
payment of the accrued benefit generally
under a defined benefit plan (without re-
gard to the special rules of section
411(a)(13)(A) and paragraph (b)(1) of this
section), including the requirements of
section 411(a)(2) and, for optional forms
subject to the minimum present value re-
quirements of section 417(e)(3), those
minimum present value requirements.
(4) Rules of application-(i) Relief ap-
plies on proportionate basis with respect
to payment of only a portion of the benefit
under a lump sum-based benefit formula.
The relief of paragraph (b)(1) of this sec-
tion applies on a proportionate basis to a
payment of a portion of the benefit under
a lump sum-based benefit formula, such as
a payment of a specified dollar amount or
percentage of the then-current balance of
a hypothetical account maintained for the
participant or then-current value of an ac-
cumulated percentage of the participant's
final average compensation. Thus, for ex-
ample, if a plan that expresses the partic-
ipant's entire accumulated benefit as the
balance of a hypothetical account distrib-
utes 40 percent of the participant's then-
current hypothetical account balance in a
single payment, the plan is treated as sat-
isfying the requirements of section 411(a)
and the minimum present value rules of
section 417(e) with respect to 40 percent
of the participant's then-current accrued
benefit.
(ii) Relief applies only to portion of
benefit determined under lump sum-based
benefit formula. The relief of paragraph
(b)(1) of this section generally applies
only to the portion of the participant's
benefit that is determined under a lump
sum-based benefit formula and generally
does not apply to any portion of the par-
ticipant's benefit that is determined under
a formula that is not a lump sum-based
benefit formula. The following rules apply
for purposes of satisfying section 417(e):
(A) "Greater-of" formulas. If the par-
ticipant's accrued benefit equals the
greater of the accrued benefit under a
lump sum-based benefit formula and the
accrued benefit under another formula that
is not a lump-sum based benefit formula, a
single-sum payment of the participant's
entire benefit must be no less than the
greater of the then-current accumulated
benefit under the lump sum-based benefit
formula and the present value, determined
in accordance with section 417(e), of the
benefit under the other formula. For ex-
ample, assume that the accrued benefit
under a plan is determined as the greater
of the accrued benefit attributable to the
balance of a hypothetical account and the
accrued benefit equal to a pro rata portion
of a normal retirement benefit determined
by projecting the hypothetical account
balance (including future principal and in-
terest credits) to normal retirement age. In
such a case, a single-sum payment of the
participant's entire benefit must be no less
than the greater of the then-current bal-
ance of the hypothetical account and the
present value, determined in accordance
with section 417(e), of the pro rata benefit
determined by projecting the hypothetical
account balance to normal retirement age.
(B) "Sum-of" formulas. If the partici-
pant's accrued benefit equals the sum of
the accrued benefit under a lump sum-
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based benefit formula and the accrued
benefit under another formula that is not a
lump-sum based benefit formula, a single-
sum payment of the participant's entire
benefit must be no less than the sum of the
then-current accumulated benefit under
the lump sum-based benefit formula and
the present value, determined in accor-
dance with section 417(e), of the benefit
under the other formula. For example, as-
sume that the accrued benefit under a plan
is determined as the sum of the accrued
benefit attributable to the balance of a
hypothetical account and the accrued ben-
efit equal to the excess of the benefit under
another formula over the benefit under the
hypothetical account formula. In such a
case, a single-sum payment of the partic-
ipant's entire benefit must be no less than
the sum of the then-current balance of the
hypothetical account and the present
value, determined in accordance with sec-
tion 417(e), of the excess of the benefit
under the other formula over the benefit
under the hypothetical account formula.
(C) "Lesser-of" formulas. If the partic-
ipant's accrued benefit equals the lesser of
the accrued benefit under a lump sum-
based benefit formula and the accrued
benefit under another formula that is not a
lump-sum based benefit formula, a single-
sum payment of the participant's entire
benefit must be no less than the lesser of
the then-current accumulated benefit un-
der the lump sum-based benefit formula
and the present value, determined in ac-
cordance with section 417(e), of the ben-
efit under the other formula. For example,
assume that the accrued benefit under a
plan is determined as the accrued benefit
attributable to the balance of a hypotheti-
cal account, but no greater than an accrued
benefit payable at normal retirement age
in the form of a straight life annuity of
$100,000 per year. In such a case, a
single-sum payment of the participant's
entire benefit must be no less than the
lesser of the then-current balance of the
hypothetical account and the present
value, determined in accordance with sec-
tion 417(e), of a benefit payable at normal
retirement age in the form of a straight life
annuity of $100,000 per year. If the for-
mula that is not a lump sum-based benefit
formula is the maximum annual benefit
described in section 415(b), then the
single-sum payment of the participant's
entire benefit must not exceed the then-
current accumulated benefit under the
lump sum-based benefit formula.
* * * * *
(d) * * *
(3) Lump sum-based benefit formula-
(i) In general. A lump sum-based benefit
formula means a benefit formula used to
determine all or any part of a participant's
accumulated benefit under a defined ben-
efit plan under which the accumulated
benefit provided under the formula is ex-
pressed as the current balance of a hypo-
thetical account maintained for the partic-
ipant or as the current value of an
accumulated percentage of the partici-
pant's final average compensation. A ben-
efit formula is expressed as the current
balance of a hypothetical account main-
tained for the participant if it is expressed
as a current single-sum dollar amount
equal to that balance. A benefit formula is
expressed as the current value of an accu-
mulated percentage of the participant's fi-
nal average compensation if it is ex-
pressed as a current single-sum dollar
amount equal to a percentage of the par-
ticipant's final average compensation or,
for plan years that begin on or after Jan-
uary 1, 2016 (or any earlier date as elected
by the taxpayer), a percentage of the par-
ticipant's highest average compensation
(regardless of whether the plan applies a
limitation on the past period for which
compensation is taken into account in de-
termining highest average compensation).
Whether a benefit formula is a lump sum-
based benefit formula is determined based
on how the accumulated benefit of a par-
ticipant is expressed under the terms of
the plan, and does not depend on whether
the plan provides an optional form of ben-
efit in the form of a single-sum payment.
However, for plan years that begin on or
after January 1, 2016, a benefit formula
does not constitute a lump sum-based ben-
efit formula unless a distribution of the
benefits under that formula in the form of
a single-sum payment equals the accumu-
lated benefit under that formula (except to
the extent the single-sum payment is
greater to satisfy the requirements of sec-
tion 411(d)(6)). In addition, for plan years
that begin on or after January 1, 2016, a
benefit formula does not constitute a lump
sum-based benefit formula unless the por-
tion of the participant's accrued benefit
that is determined under that formula and
the then-current balance of the hypotheti-
cal account or the then-current value of
the accumulated percentage of the partic-
ipant's final average compensation are ac-
tuarially equivalent (determined using
reasonable actuarial assumptions) ei-
ther-
(A) Upon attainment of normal retire-
ment age; or
(B) At the annuity starting date for a
distribution with respect to that portion.
* * * * *
(4) * * *
(ii) Effect similar to a lump sum-based
benefit formula-(A) In general. Except
as provided in paragraphs (d)(4)(ii)(B)
through (E) of this section, a benefit for-
mula under a defined benefit plan that is
not a lump sum-based benefit formula has
an effect similar to a lump sum-based
benefit formula if the formula provides
that a participant's accumulated benefit is
expressed as a benefit that includes the
right to adjustments (including a formula
that provides for indexed benefits under
§ 1.411(b)(5)-1(b)(2)) for a future period
and the total dollar amount of those ad-
justments is reasonably expected to be
smaller for the participant than for any
similarly situated, younger individual
(within the meaning of § 1.411(b)(5)-
1(b)(5)) who is or could be a participant in
the plan. For this purpose, the right to
adjustments for a future period means, for
plan years that begin on or after January 1,
2016, the right to any changes in the dollar
amount of benefits over time, regardless
of whether those adjustments are denom-
inated as interest credits. A benefit for-
mula that does not include adjustments for
any future period is treated as a formula
with an effect similar to a lump sum-based
benefit formula if the formula would be
described in this paragraph (d)(4)(ii)(A)
except for the fact that the adjustments are
provided pursuant to a pattern of repeated
plan amendments. See § 1.411(d)-4,
A-1(c)(1).
* * * * *
(C) Exception for certain variable an-
nuity benefit formulas. If a variable annu-
ity benefit formula adjusts benefits by ref-
erence to the difference between a rate of
return on plan assets (or specified market
indices) and a specified assumed interest
rate of 5 percent or higher, then the vari-
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able annuity benefit formula is not treated
as being reasonably expected to provide a
smaller total dollar amount of future ad-
justments for the participant than for any
similarly situated, younger individual who
is or could be a participant in the plan, and
thus such a variable annuity benefit for-
mula does not have an effect similar to a
lump sum-based benefit formula. For plan
years that begin on or after January 1,
2016 (or any earlier date as elected by the
taxpayer), the rate of return on plan assets
(or specified market index) by reference to
which the benefit formula adjusts must be
a rate of return described in § 1.411(b)(5)-
1(d)(5) (which includes, in the case of a
benefit formula determined with reference
to an annuity contract for an employee
issued by an insurance company licensed
under the laws of a State, the rate of return
on the market index specified under that
contract).
* * * * *
(E) Exception for certain actuarial re-
ductions for early commencement under
traditional formula. A defined benefit for-
mula is not treated as having an effect
similar to a lump sum-based benefit for-
mula with respect to a participant merely
because the formula provides for a reduc-
tion in the benefit payable at early retire-
ment due to early commencement (with
the result that the benefit payable at nor-
mal retirement age is greater than the ben-
efit payable at early retirement), provided
that the benefit payable at normal retire-
ment age to the participant cannot be less
than the benefit payable at normal retire-
ment age to any similarly situated,
younger individual who is or could be a
participant in the plan. Thus, for example,
a plan that provides a benefit equal to 1
percent of final average pay per year of
service, payable as a life annuity at normal
retirement age, is not treated as having an
effect similar to a lump sum-based benefit
formula by reason of an actuarial reduc-
tion in the benefit payable under the plan
for early commencement.
* * * * *
(6) Variable annuity benefit formula. A
variable annuity benefit formula means
any benefit formula under a defined ben-
efit plan which provides that the amount
payable is periodically adjusted by refer-
ence to the difference between a rate of
return and a specified assumed interest
rate.
* * * * *
(e) * * *
(2) * * *
(ii) Special effective date. Paragraphs
(b)(2), (b)(3) and (b)(4) of this section
apply to plan years that begin on or after
January 1, 2016.
* * * * *
Par. 3. Section 1.411(b)-1 is amended
by adding paragraph (b)(2)(ii)(G) and add-
ing and reserving paragraph (b)(2)(ii)(H) to
read as follows:
§ 1.411(b)-1 Accrued benefit
requirements.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(G) Variable interest crediting rate un-
der a statutory hybrid benefit formula. For
plan years that begin on or after January 1,
2012 (or an earlier date as elected by the
taxpayer), a plan that determines any por-
tion of the participant's accrued benefit
pursuant to a statutory hybrid benefit for-
mula (as defined in § 1.411(a)(13)-
1(d)(4)) that utilizes an interest crediting
rate described in § 1.411(b)(5)-1(d) that is
a variable rate that was less than zero for
the prior plan year is not treated as failing
to satisfy the requirements of paragraph
(b)(2) of this section for the current plan
year merely because the plan assumes for
purposes of paragraph (b)(2) of this sec-
tion that the variable rate is zero for the
current plan year and all future plan years.
(H) Special rule for multiple formulas.
[Reserved]
* * * * *
Par. 4. Section 1.411(b)(5)-1 is
amended by:
1\. Revising paragraphs (b)(1)(i)(B),
(b)(1)(i)(C),(b)(1)(ii),(b)(1)(iii), and (b)(2)(i).
2\. Revising paragraph (c)(3)(i).
3\. Removing paragraph (c)(3)(iii).
4\. Adding Example 8 to paragraph
(c)(5).
5\. Revising paragraphs (d)(1)(iv)(D),
(d)(2)(i), (d)(2)(ii), (d)(3), (d)(4)(ii),
(d)(4)(iv), (d)(5)(ii), (d)(5)(iv), (d)(6)(ii),
(d)(6)(iii), (e)(2), (e)(3)(ii)(B), (e)(3)(ii)(C),
(e)(3)(iii), (e)(4), and (f)(2)(i)(B).
6\. Adding paragraphs (d)(1)(viii),
(d)(4)(v), (e)(3)(ii)(D), (e)(3)(iv), (e)(3)(v),
and (e)(5).
7\. Revising the last sentence of para-
graph (d)(1)(v).
8\. Revising the first and fourth sen-
tences of paragraph (e)(3)(i).
The revisions and additions read as fol-
lows:
§ 1.411(b)(5)-1 Reduction in rate of
benefit accrual under a defined benefit
plan.
* * * * *
(b) * * *
(1) * * *
(i) * * *
(B) The current balance of a hypothet-
ical account maintained for the participant
if the accumulated benefit of the partici-
pant is the current balance of a hypothet-
ical account.
(C) The current value of an accumu-
lated percentage of the participant's final
average compensation if the accumulated
benefit of the participant is the current
value of an accumulated percentage of the
participant's final average compensation.
(ii) Benefit formulas for comparison-
(A) In general. Except as provided in
paragraphs (b)(1)(ii)(B), (C), (D) and (E)
of this section, the safe harbor provided by
section 411(b)(5)(A) and paragraph
(b)(1)(i) of this section is available only
with respect to a participant if the partic-
ipant's accumulated benefit under the plan
is expressed in terms of only one safe-
harbor formula measure and no similarly
situated, younger individual who is or
could be a participant has an accumulated
benefit that is expressed in terms of any
measure other than that same safe-harbor
formula measure. Thus, for example, if a
plan provides that the accumulated benefit
of participants who are age 55 or older is
expressed under the terms of the plan as a
life annuity payable at normal retirement
age (or current age if later) as described in
paragraph (b)(1)(i)(A) of this section and
the plan provides that the accumulated
benefit of participants who are younger
than age 55 is expressed as the current
balance of a hypothetical account as de-
scribed in paragraph (b)(1)(i)(B) of this
section, then the safe harbor described in
section 411(b)(5)(A) and paragraph
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(b)(1)(i) of this section does not apply to
individuals who are or could be partici-
pants and who are age 55 or older.
(B) Sum-of benefit formulas. If a plan
provides that a participant's accumulated
benefit is expressed as the sum of benefits
determined in terms of two or more ben-
efit formulas, each of which is expressed
in terms of a different safe-harbor formula
measure, then the plan is deemed to sat-
isfy paragraph (b)(1)(i) of this section
with respect to the participant, provided
that the plan satisfies the comparison de-
scribed in paragraph (b)(1)(i) of this sec-
tion separately for benefits determined in
terms of each safe-harbor formula mea-
sure and no accumulated benefit of a sim-
ilarly situated, younger individual who is
or could be a participant is expressed
other than as-
(1) The sum of benefits under two or
more benefit formulas, each of which is
expressed in terms of one of those same
safe-harbor formula measures as is used
for the participant's "sum-of" benefit;
(2) The greater of benefits under two or
more benefit formulas, each of which is
expressed in terms of any one of those
same safe-harbor formula measures;
(3) The choice of benefits under two or
more benefit formulas, each of which is
expressed in terms of any one of those
same safe-harbor formula measures;
(4) A benefit that is determined in
terms of only one of those same safe-
harbor formula measures; or
(5) The lesser of benefits under two or
more benefit formulas, at least one of
which is expressed in terms of one of
those same safe-harbor formula measures.
(C) Greater-of benefit formulas. If a
plan provides that a participant's accumu-
lated benefit is expressed as the greater of
benefits under two or more benefit formu-
las, each of which is determined in terms
of a different safe-harbor formula mea-
sure, then the plan is deemed to satisfy
paragraph (b)(1)(i) of this section with
respect to the participant, provided that
the plan satisfies the comparison de-
scribed in paragraph (b)(1)(i) of this sec-
tion separately for benefits determined in
terms of each safe-harbor formula mea-
sure and no accumulated benefit of a sim-
ilarly situated, younger individual who is
or could be a participant is expressed
other than as-
(1) The greater of benefits determined
under two or more benefit formulas, each of
which is expressed in terms of one of those
same safe-harbor formula measures as is
used for the participant's "greater-of' benefit;
(2) The choice of benefits determined
under two or more benefit formulas, each
of which is expressed in terms of one of
those same safe-harbor formula measures;
(3) A benefit that is determined in
terms of only one of those same safe-
harbor formula measures; or
(4) The lesser of benefits under two or
more benefit formulas, at least one of
which is expressed in terms of one of
those same safe-harbor formula measures.
(D) Choice-of benefit formulas. If a
plan provides that a participant's accumu-
lated benefit is determined pursuant to a
choice by the participant between benefits
determined in terms of two or more dif-
ferent safe-harbor formula measures, then
the plan is deemed to satisfy paragraph
(b)(1)(i) of this section with respect to the
participant, provided that the plan satisfies
the comparison described in paragraph
(b)(1)(i) of this section separately for ben-
efits determined in terms of each safe-
harbor formula measure and no accumu-
lated benefit of a similarly situated,
younger individual who is or could be a
participant is expressed other than as-
(1) The choice of benefits determined
under two or more benefit formulas, each of
which is expressed in terms of one of those
same safe-harbor formula measures as is used
for the participant's "choice-of' benefit;
(2) A benefit that is determined in
terms of only one of those same safe-
harbor formula measures; or
(3) The lesser of benefits under two or
more benefit formulas, at least one of
which is expressed in terms of one of
those same safe-harbor formula measures.
(E) Lesser-of benefit formulas. If a plan
provides that a participant's accumulated
benefit is expressed as a single safe-harbor
formula measure and no accumulated ben-
efit of a similarly situated, younger indi-
vidual who is or could be a participant is
expressed other than as a benefit that is
determined under the same safe-harbor
formula measure or as the lesser of bene-
fits under two or more benefit formulas, at
least one of which is expressed in terms of
the same safe-harbor formula measure,
then the plan is deemed to satisfy para-
graph (b)(1)(i) of this section with respect
to the participant only if the plan satisfies
the comparison described in paragraph
(b)(1)(i) of this section for benefits deter-
mined in terms of the same safe-harbor
formula measure. Similarly, if a plan pro-
vides that a participant's accumulated
benefit is expressed as the lesser of bene-
fits under two or more benefit formulas,
each of which is determined in terms of a
different safe-harbor formula measure,
then the plan is deemed to satisfy para-
graph (b)(1)(i) of this section with respect
to the participant only if the plan satisfies
the comparison described in paragraph
(b)(1)(i) of this section separately for ben-
efits determined in terms of each safe-
harbor formula measure and no accumu-
lated benefit of a similarly situated,
younger individual who is or could be a
participant is expressed other than as the
lesser of benefits under two or more benefit
formulas, expressed in terms of all of those
same safe-harbor formula measures (and
any other additional formula measures).
(F) Limitations on plan formulas that
provide for hypothetical accounts or ac-
cumulated percentages of final average
compensation. For plan years that begin
on or after January 1, 2016, a benefit
measure is a safe harbor formula measure
described in paragraph (b)(1)(i)(B) or (C)
of this section only if the formula under
which the balance of a hypothetical ac-
count or the accumulated percentage of
final average compensation is determined
is a lump-sum based benefit formula.
(iii) Disregard of certain subsidized
benefits. For purposes of paragraph
(b)(1)(i) of this section, any subsidized
portion of an early retirement benefit that
is included in a participant's accumulated
benefit is disregarded. For this purpose, an
early retirement benefit includes a subsi-
dized portion only if it provides a higher
actuarial present value on account of com-
mencement before normal retirement age.
However, for plan years that begin on or
after January 1, 2016, if the annual benefit
payable before normal retirement age is
greater for a participant than the annual
benefit under the corresponding form of
benefit for any similarly situated, older
individual who is or could be a participant
and who is currently at or before normal
retirement age, then that excess is not part
of the subsidized portion of an early retire-
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ment benefit and, accordingly, is not disre-
garded under this paragraph (b)(1)(iii). For
purposes of determining whether the an-
nual benefit payable before normal retire-
ment age is greater for a participant than
the annual benefit under the corresponding
form of benefit for any similarly situated,
older individual who is or could be a partic-
ipant, social security leveling options and
social security supplements are disregarded.
In addition, a plan is not treated as providing
a greater annual benefit to a participant than
to a similarly situated, older individual who
is or could be a participant merely because
the reduction (based on actuarial equiva-
lence, using reasonable actuarial assump-
tions) in the amount of an annuity to reflect
a survivor benefit is smaller for the partici-
pant than for a similarly situated, older in-
dividual who is or could be a participant.
* * * * *
(2) Indexed benefits-(i) In general.
Except as provided in paragraph (b)(2)(iii)
of this section, pursuant to section
411(b)(5)(E) and this paragraph (b)(2)(i),
a defined benefit plan is not treated as
failing to meet the requirements of section
411(b)(1)(H) with respect to a participant
solely because a benefit formula (other
than a lump sum-based benefit formula)
under the plan provides for the periodic
adjustment of the participant's accrued
benefit under the plan by means of the
application of a recognized index or meth-
odology. An indexing rate that does not
exceed a market rate of return, as defined
in paragraph (d) of this section, is deemed
to be a recognized index or methodology
for purposes of the preceding sentence. In
addition, for plan years that begin on or after
January 1, 2016 (or an earlier date as elected
by the taxpayer), any subsidized portion of
any early retirement benefit under such a
plan that meets the requirements of para-
graph (b)(1)(iii) is disregarded in determin-
ing whether the plan meets the requirements
of section 411(b)(1)(H). However, such a
plan must satisfy the qualification require-
ments otherwise applicable to statutory hy-
brid plans, including the requirements of
§ 1.411(a)(13)-1(c) (relating to minimum
vesting standards) and paragraph (c) of this
section (relating to plan conversion amend-
ments) if the plan has an effect similar to a
lump sum-based benefit formula, pursuant
to the rules of § 1.411(a)(13)-1(d)(4)(ii).
* * * * *
(c) * * *
(3) * * * (i) * * * Provided that the
requirements of paragraph (c)(3)(ii) of
this section are satisfied, a statutory hybrid
plan under which an opening hypothetical
account balance or opening accumulated
percentage of the participant's final aver-
age compensation is established as of the
effective date of the conversion amend-
ment does not fail to satisfy the require-
ments of paragraph (c)(2) of this section
merely because benefits attributable to
that opening hypothetical account balance
or opening accumulated percentage (that
is, benefits that are not described in para-
graph (c)(2)(i)(B) of this section) are sub-
stituted for benefits described in para-
graph (c)(2)(i)(A) of this section.
* * * * *
(5) * * *
Example 8. (i) Facts involving establishment of
opening hypothetical account balance. A defined
benefit plan provides an accrued benefit expressed as
a straight life annuity commencing at the plan's
normal retirement age (age 65), based on a percent-
age of average annual compensation multiplied by
the participant's years of service. On January 1,
2009, a conversion amendment is adopted that con-
verts the plan to a statutory hybrid plan. Participant
A, age 55, had an accrued benefit under the pre-
conversion formula of $1,500 per month payable at
normal retirement age. In conjunction with this con-
version, the plan provides each participant with an
opening hypothetical account balance equal to the
present value, determined in accordance with section
417(e)(3) of the participant's pre-conversion benefit.
Participant A's opening hypothetical account bal-
ance was calculated as $121,146. The opening ac-
count balance (along with any subsequent amounts
credited to the hypothetical account) is credited an-
nually with interest credits at the rate of 5.0 percent
up to the annuity starting date of each participant.
(ii) Facts relating to changes between establish-
ment of opening hypothetical account balance and
age 65. Upon attainment of age 65, Participant A
elects to receive Participant A's entire benefit under
the plan as a single sum distribution. At the annuity
starting date, Participant A's hypothetical account
balance attributable to Participant A's opening ac-
count balance has increased to $197,334. However,
under the terms of the plan and in accordance with
section 417(e)(3), the present value at the annuity
starting date of Participant A's pre-conversion ben-
efit of $1,500 per month is $221,383.
(iii) Conclusion. Pursuant to paragraph
(c)(3)(ii)(A) of this section, Participant A must re-
ceive the benefit attributable to post-conversion ser-
vice, plus the greater of the benefit attributable to the
opening hypothetical account balance and the pre-
conversion benefit (with the determination as to which
is greater made at the annuity starting date). Accord-
ingly the single-sum distribution must equal the benefit
attributable to post-conversion service plus $221,383.
* * * * *
(d) * * *
(1) * * *
(iv) * * *
(D) Debits and credits during the in-
terest crediting period. A plan is not
treated as failing to meet the requirements
of this paragraph (d) merely because the
plan does not provide for interest credits
on amounts distributed prior to the end of
the interest crediting period. Furthermore,
a plan is not treated as failing to meet the
requirements of this paragraph (d) merely
because the plan calculates increases or
decreases to the participant's accumulated
benefit by applying a rate of interest or
rate of return (including a rate of increase
or decrease under an index) to the partic-
ipant's adjusted accumulated benefit (or
portion thereof) for the period. For this
purpose, the participant's adjusted accu-
mulated benefit equals the participant's
accumulated benefit as of the beginning of
the period, adjusted for debits and credits
(other than interest credits) made to the
accumulated benefit prior to the end of the
interest crediting period, with appropriate
weighting for those debits and credits
based on their timing within the period.
For plans that calculate increases or de-
creases to the participant's accumulated
benefit by applying a rate of interest or
rate of return to the participant's adjusted
accumulated benefit (or portion thereof)
for the period, interest credits include
these increases and decreases, to the ex-
tent provided under the terms of the plan
at the beginning of the period and to the
extent not conditioned on current service
and not made on account of imputed ser-
vice (as defined in § 1.401(a)(4)-
11(d)(3)(ii)(B)), and the interest crediting
rate with respect to a participant equals
the total amount of interest credits for the
period divided by the participant's ad-
justed accumulated benefit for the period.
* ** * *
(v) * * * Similarly, an interest crediting
rate that always equals the lesser of the
yield on 30-year Treasury Constant Ma-
turities and a fixed 7 percent interest rate
is not in excess of a market rate of return
because it can never be in excess of the
yield on 30-year Treasury Constant
Maturities.
* * * * *
(viii) Increases to existing rates and
addition of other rates-(A) Increases to
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existing rates. The Commissioner may, in
guidance published in the Internal Reve-
nue Bulletin, see § 601.601(d)(2)(ii)(b) of
this chapter, increase an interest crediting
rate set forth in this paragraph (d), so that
the increased rate is treated as satisfying
the requirement that the rate not exceed a
market rate of return for purposes of this
paragraph (d) and section 411(b)(5)(B).
For this purpose, these increases can in-
clude increases to the maximum permitted
margin that can be added to one or more of
the safe harbor rates set forth in paragraph
(d)(4) of this section, increases to the max-
imum permitted fixed rate set forth in para-
graph (d)(4)(v) of this section, or increases
to a maximum permitted annual floor set
forth in paragraph (d)(6) of this section.
(B) Additional rates. The Commissioner
may, in guidance published in the Internal
Revenue Bulletin, see § 601.601(d)(2)(ii)(b) of
this chapter, provide for additional interest
crediting rates that satisfy the requirement
that they not exceed a market rate of re-
turn for purposes of this paragraph (d) and
section 411(b)(5)(B) (including providing
for additional combinations of rates, such
as annual minimums in conjunction with
rates that are based on rates described in
paragraph (d)(5) of this section but that
are reduced in order to ensure that the
effective rate of return does not exceed a
market rate of return).
* * * * *
(2) Preservation of capital require-
ment-(i) General rule. A statutory hy-
brid plan satisfies the requirements of sec-
tion 411(b)(1)(H) only if the plan provides
that the participant's benefit under the
statutory hybrid benefit formula deter-
mined as of the participant's annuity start-
ing date is no less than the benefit deter-
mined as if the accumulated benefit were
equal to the sum of all principal credits (as
described in paragraph (d)(1)(ii)(D) of
this section) credited under the plan to the
participant as of that date (including prin-
cipal credits that were credited before the
applicable statutory effective date of para-
graph (f)(1) of this section). This para-
graph (d)(2) applies only as of an annuity
starting date, within the meaning of
§ 1.401(a)-20, A-10(b), with respect to
which a distribution of the participant's en-
tire vested benefit under the plan's statutory
hybrid benefit formula as of that date com-
mences. For a participant who has more
than one annuity starting date, paragraph
(d)(2)(ii) of this section provides rules to
account for prior annuity starting dates
when applying this paragraph (d)(2)(i).
(ii) Application to multiple annuity
starting dates-(A) In general. If the
comparison under paragraph (d)(2)(ii)(B)
of this section results in the sum of all
principal credits credited to the participant
(as of the current annuity starting date)
exceeding the sum of the amounts de-
scribed in paragraphs (d)(2)(ii)(B)(1)
through (d)(2)(ii)(B)(3) of this section,
then the participant's benefit to be distrib-
uted at the current annuity starting date
must be no less than would be provided if
that excess were included in the current
accumulated benefit.
(B) Comparison to reflect prior distri-
butions. For a participant who has more
than one annuity starting date, the sum of all
principal credits credited to the participant
under the plan, as of the current annuity
starting date, is compared to the sum of-
(1) The remaining balance of the par-
ticipant's accumulated benefit as of the
current annuity starting date;
(2) The amount of the reduction to the
participant's accumulated benefit under
the statutory hybrid benefit formula that is
attributable to any prior distribution of the
participant's benefit under that formula; and
(3) Any amount that was treated as
included in the accumulated benefit under
the rules of this paragraph (d)(2) as of any
prior annuity starting date.
(C) Special rule for participants with 5
or more breaks in service. A plan is per-
mitted to provide that, in the case of a
participant who receives a distribution of
the entire vested benefit under the plan
and thereafter completes 5 consecutive
1-year breaks in service, as defined in
section 411(a)(6)(A), the rules of this
paragraph (d)(2) are applied without re-
gard to the prior period of service. Thus,
in the case of such a participant, the plan
is permitted to provide that the rules of
this paragraph (d)(2) are applied disre-
garding the principal credits and distribu-
tions that occurred before the breaks in
service.
* * * * *
(3) Long-term investment grade corpo-
rate bonds. For purposes of this paragraph
(d), the rate of interest on long-term in-
vestment grade corporate bonds means the
third segment rate described in section
417(e)(3)(D) or 430(h)(2)(C)(iii) (deter-
mined with or without regard to section
430(h)(2)(C)(iv) and with or without re-
gard to the transition rules of section
417(e)(3)(D)(ii) or 430(h)(2)(G)). How-
ever, for plan years beginning prior to
January 1, 2008, the rate of interest on
long-term investment grade corporate
bonds means the rate described in section
412(b)(5)(B)(ii)(II) prior to amendment
by the Pension Protection Act of 2006,
Public Law 109-280 (120 Stat. 780
(2006)) (PPA '06).
(4) * * *
(ii) Rates based on government bonds
with margins. An interest crediting rate is
deemed to be not in excess of the interest
rate described in paragraph (d)(3) of this
section if the rate is equal to the sum of
any of the following rates of interest for
bonds and the associated margin for that
interest rate:
Interest Rate Bond Index
Associated Margin
The discount rate on 3-month Treasury Bills
175 basis points
The discount rate on 12-month or shorter Treasury Bills
150 basis points
The yield on 1-year Treasury Constant Maturities
100 basis points
The yield on 3-year or shorter Treasury Constant Maturities
50 basis points
The yield on 7-year or shorter Treasury Constant Maturities
25 basis points
The yield on 30-year or shorter Treasury Constant Maturities
0 basis points
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* * * * *
(iv) Short and mid-term investment
grade corporate bonds. An interest cred-
iting rate equal to the first segment rate is
deemed to be not in excess of the interest
rate described in paragraph (d)(3) of this
section. Similarly, an interest crediting
rate equal to the second segment rate is
deemed to be not in excess of the interest
rate described in paragraph (d)(3) of this
section. For this purpose, the first and
second segment rates mean the first and
second segment rates described in section
417(e)(3)(D) or 430(h)(2)(C), determined
with or without regard to section
430(h)(2)(C)(iv) and with or without re-
gard to the transition rules of section
417(e)(3)(D)(ii) or 430(h)(2)(G).
(v) Fixed rate of interest. An annual
interest crediting rate equal to a fixed 6
percent is deemed to be not in excess of
the interest rate described in paragraph
(d)(3) of this section.
(5) * * *
(ii) Actual rate of return on plan as-
sets-(A) In general. An interest crediting
rate equal to the actual rate of return on
the aggregate assets of the plan, including
both positive returns and negative returns,
is not in excess of a market rate of return
if the plan's assets are diversified so as to
minimize the volatility of returns. This re-
quirement that plan assets be diversified so
as to minimize the volatility of returns does
not require greater diversification than is
required under section 404(a)(1)(C) of Title
I of the Employee Retirement Income Se-
curity Act of 1974, Public Law 93-406
(88 Stat. 829 (1974)), as amended
(ERISA), with respect to defined benefit
pension plans.
(B) Subset of plan assets. An interest
crediting rate equal to the actual rate of
return on the assets within a specified sub-
set of plan assets, including both positive
and negative returns, is not in excess of a
market rate of return if-
(1) The subset of plan assets is diver-
sified so as to minimize the volatility of
returns, within the meaning of paragraph
(d)(5)(ii)(A) of this section (thus, this re-
quirement is satisfied if the subset of plan
assets is diversified such that it would
meet the requirements of paragraph
(d)(5)(ii)(A) of this section if the subset
were aggregate plan assets);
(2) The aggregate fair market value of
qualifying employer securities and quali-
fying employer real property (within the
meaning of section 407 of ERISA) held in
the subset of plan assets does not exceed
10 percent of the fair market value of the
aggregate assets in the subset; and
(3) The fair market value of the assets
within the subset of plan assets approxi-
mates the liabilities for benefits that are
adjusted by reference to the rate of return
on the assets within the subset, determined
using reasonable actuarial assumptions.
(C) Examples. The following examples
illustrate the application of paragraph
(d)(5)(ii)(B) of this section:
Example 1. (i) Facts. (a) Employer A sponsors a
defined benefit plan under which benefit accruals are
determined under a formula that is not a statutory
hybrid benefit formula. Effective January 1, 2015,
the plan is amended to cease future accruals under
the existing formula and to provide future benefit
accruals under a statutory hybrid benefit formula that
uses hypothetical accounts. For service on or after
January 1, 2015, the terms of the plan provide that
each participant's hypothetical account balance is
credited monthly with a pay credit equal to a spec-
ified percentage of the participant's compensation
during the month. The plan also provides that hypo-
thetical account balance is increased or decreased by
an interest credit, which is calculated as the product
of the account balance at the beginning of the period
and the net rate of return on the assets within a
specified subset of plan assets during that period.
Under the terms of the plan, the net rate of return is
equal to the actual rate of return adjusted to reflect a
reduction for specified plan expenses. The plan does
not provide for interest credits on amounts that are
distributed prior to the end of an interest crediting
period.
(b) As of the effective date of the amendment,
there are no assets in the specified subset of plan
assets. Under the terms of the plan, an amount is
added to the specified subset at the time each sub-
sequent contribution for any plan year starting on or
after the effective date of the amendment is made to
the plan. The amount added (the formula contribu-
tion) is the amount deemed necessary to fund benefit
accruals under the statutory hybrid benefit formula.
Investment of the specified subset is diversified so as
to minimize the volatility of returns, within the
meaning of paragraph (d)(5)(ii)(A) of this section,
and no qualifying employer securities or qualifying
employer real property (within the meaning of sec-
tion 407 of ERISA) are held in the subset. Benefits
accrued under the statutory hybrid benefit formula
are paid from the specified subset. However, if assets
of the specified subset are insufficient to pay benefits
accrued under the statutory hybrid benefit formula,
the plan provides that assets of the residual legacy
subset of plan assets (from which benefits accrued
before January 1, 2015 are paid) are available to pay
those benefits in accordance with the requirement
that all assets of the plan be available to pay all plan
benefits. Except as described in this paragraph, no
other amounts are added to or subtracted from the
specified subset of plan assets.
(c) The formula contribution for each plan year
that is added to the specified subset of plan assets is
an amount equal to the sum of the target normal cost
of the statutory hybrid benefit formula for the plan
year plus an additional amount intended to reflect
gains or losses. This additional amount is equal to
the annual amount necessary to amortize the differ-
ence between the funding target attributable to the
statutory hybrid benefit formula portion of the plan
for the plan year over the value of plan assets in-
cluded in the specified subset of plan assets for the
plan year in level annual installments over a 7-year
period. For this purpose, target normal cost and
funding target are determined under the rules of
§ 1.430(d)-1 as if the statutory hybrid benefit for-
mula portion of the plan were the entire plan and
without regard to special rules that are applicable to
a plan in at-risk status, even if the plan is in at-risk
status for a plan year. If the formula contribution for
a plan year exceeds the amount of the actual contri-
bution to the plan for a year (such as could be the
case if all or a portion of the contribution is offset by
all or a portion of the plan's prefunding balance),
then an amount equal to the excess of the formula
contribution over the actual contribution is trans-
ferred from the residual legacy subset of plan assets
to the specified subset of plan assets on the plan's
due date for the minimum required contribution for
the year.
(ii) Conclusion. The specified subset is diversi-
fied so as to minimize the volatility of returns (within
the meaning of paragraph (d)(5)(ii)(A) of this sec-
tion). The aggregate fair market value of qualifying
employer securities and qualifying employer real
property (within the meaning of section 407 of
ERISA) held in the specified subset do not exceed 10
percent of the fair market value of the aggregate
assets in the subset. The fair market value of the
assets within the specified subset of plan assets ap-
proximates the liabilities for benefits that are ad-
justed by reference to the rate of return on the assets
within the subset, determined using reasonable actu-
arial assumptions, within the meaning of paragraph
(d)(5)(ii)(B)(3) of this section. Therefore, the interest
crediting rate under the statutory hybrid benefit for-
mula portion of Employer A's defined benefit plan is
not in excess of a market rate of return.
Example 2. (i) Facts. (a) Pursuant to a collective
bargaining agreement, Employer X, Employer Y and
Employer Z maintain and contribute to a multiem-
ployer plan (as defined in section 414(f)) that is
established as of January 1, 2015 under which ben-
efit accruals are determined under a variable annuity
benefit formula. The plan provides that, on an annual
basis, the benefit of each participant who has not yet
retired is adjusted by reference to the difference
between the actual return on the assets within a
specified subset of plan assets and 4 percent. A
participant's benefits are fixed at retirement and
thereafter are not adjusted.
(b) As of the effective date of the plan, there are
no assets in the specified subset. Under the terms of
the plan, any amount contributed to the plan by a
contributing employer is added to the specified sub-
set at the time of the contribution. Investment of the
specified subset is diversified so as to minimize the
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volatility of returns, within the meaning of paragraph
(d)(5)(ii)(A) of this section, and no qualifying em-
ployer securities or qualifying employer real prop-
erty (within the meaning of section 407 of ERISA)
are held in the subset. The plan provides that, at the
time of a participant's retirement, an amount equal to
the present value of the liability for benefits payable
to that participant is transferred to a separate subset
of plan assets (the retiree pool). The retiree pool is
invested in high-quality bonds in an attempt to
achieve cash-flow matching of the retiree liabilities.
Benefits are paid from the retiree pool. However, if
assets of the retiree pool are insufficient to pay
benefits, the plan provides that assets of the specified
subset are available to pay benefits in accordance
with the requirement that all assets of the plan be
available to pay all plan benefits. Except as described
in this paragraph, no other amounts are added to or
subtracted from the specified subset of plan assets.
(ii) Conclusion. The specified subset is diversi-
fied so as to minimize the volatility of returns (within
the meaning of paragraph (d)(5)(ii)(A) of this sec-
tion). The aggregate fair market value of qualifying
employer securities and qualifying employer real
property (within the meaning of section 407 of
ERISA) held in the specified subset do not exceed 10
percent of the fair market value of the aggregate
assets in the subset. The fair market value of the
assets within the specified subset of plan assets ap-
proximates the liabilities for benefits that are ad-
justed by reference to the rate of return on the assets
within the subset, determined using reasonable actu-
arial assumptions, within the meaning of paragraph
(d)(5)(ii)(B)(3) of this section. Therefore, the meth-
odology used to adjust participant benefits under
the plan's variable annuity benefit formula, which
is a statutory hybrid benefit formula under
§ 1.411(a)(13)-1(d)(4), is not in excess of a mar-
ket rate of return.
* * * * *
(iv) Rate of return on certain RICs. An
interest crediting rate is not in excess of a
market rate of return if it is equal to the
rate of return on a regulated investment
company (RIC), as defined in section 851,
that is reasonably expected to be not sig-
nificantly more volatile than the broad
United States equities market or a simi-
larly broad international equities market.
For example, a RIC that has most of its
assets invested in securities of issuers (in-
cluding other RICs) concentrated in an
industry sector or a country other than the
United States generally would not meet
this requirement. Likewise a RIC that uses
leverage, or that has significant invest-
ment in derivative financial products, for
the purpose of achieving returns that am-
plify the returns of an unleveraged invest-
ment, generally would not meet this re-
quirement. Thus, a RIC that has most of
its investments concentrated in the semi-
conductor industry or that uses leverage in
order to provide a rate of return that is
twice the rate of return on the Standard &
Poor's 500 index (S&P 500) would not
meet this requirement. On the other hand,
a RIC with investments that track the rate
of return on the S&P 500, a broad-based
"small-cap" index (such as the Russell
2000 index), or a broad-based interna-
tional equities index would meet this re-
quirement.
### (6) * * *
(ii) Annual or more frequent floor-
(A) Application to segment rates. An in-
terest crediting rate under a plan does not
fail to be described in paragraph (d)(3) or
(d)(4)(iv) of this section for an interest
crediting period merely because the plan
provides that the interest crediting rate for
that interest crediting period equals the
greater of-
(1) An interest crediting rate described
in paragraph (d)(3) or (d)(4)(iv) of this
section; and
(2) An annual interest rate of 4 percent
or less (or a pro rata portion of an annual
interest rate of 4 percent or less for plans
that provide interest credits more fre-
quently than annually).
(B) Application to other bond-based
rates. An interest crediting rate under a
plan does not fail to be described in para-
graph (d)(4) of this section for an interest
crediting period merely because the plan
provides that the interest crediting rate for
that interest crediting period equals the
greater of-
(1) An interest crediting rate described
in paragraph (d)(4)(ii) or (d)(4)(iii) of this
section; and
(2) An annual interest rate of 5 percent
or less (or a pro rata portion of an annual
interest rate of 5 percent or less for plans
that provide interest credits more fre-
quently than annually).
(iii) Cumulative floor applied to
investment-based or bond-based rates-
(A) In general. A plan that determines
interest credits under a statutory hybrid
benefit formula using a particular interest
crediting rate described in paragraph
(d)(3), (d)(4), or (d)(5) of this section (or
an interest crediting rate that can never be
in excess of a particular interest crediting
rate described in paragraph (d)(3), (d)(4)
or (d)(5) of this section) does not provide
an effective interest crediting rate in ex-
cess of a market rate of return merely
because the plan provides that the partic-
ipant's benefit under the statutory hybrid
benefit formula determined as of the par-
ticipant's annuity starting date is equal to
the benefit determined as if the accumu-
lated benefit were equal to the greater
of-
(1) The accumulated benefit deter-
mined using the interest crediting rate;
and
(2) The accumulated benefit deter-
mined as if the plan had used a fixed
annual interest crediting rate equal to 3
percent (or a lower rate) for all principal
credits that are credited under the plan to
the participant during the guarantee period
(minimum guarantee amount).
(B) Guarantee period defined. The
guarantee period is the prospective period
that begins on the date the cumulative
floor described in this paragraph (d)(6)(iii)
begins to apply to the participant's benefit
and that ends on the date on which that
cumulative floor ceases to apply to the
participant's benefit.
(C) Application to multiple annuity
starting dates. The determination under
this paragraph (d)(6)(iii) is made only as
of an annuity starting date, within the
meaning of § 1.401(a)-20, A-10(b), with
respect to which a distribution of the par-
ticipant's entire vested benefit under the
plan's statutory hybrid benefit formula as
of that date commences. For a participant
who has more than one annuity starting
date, paragraph (d)(6)(iii)(D) of this sec-
tion provides rules to account for prior
annuity starting dates when applying para-
graph (d)(6)(iii)(A) of this section. If the
comparison under paragraph (d)(6)(iii)(D)
of this section results in the minimum
guarantee amount exceeding the sum of
the amounts described in paragraphs
(d)(6)(iii)(D)(1) through (d)(6)(iii)(D)(3)
of this section, then the participant's ben-
efit to be distributed at the current annuity
starting date must be no less than would
be provided if that excess were included
in the current accumulated benefit.
(D) Comparison to reflect prior distri-
butions. For a participant who has more
than one annuity starting date, the mini-
mum guarantee amount (described in
paragraph (d)(6)(iii)(A)(2) of this sec-
tion), as of the current annuity starting
date, is compared to the sum of-
(1) The remaining balance of the par-
ticipant's accumulated benefit, as of the
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current annuity starting date, to which a
minimum guaranteed rate described in
paragraph (d)(6)(iii)(A)(2) of this section
applies;
(2) The amount of the reduction to the
participant's accumulated benefit under
the statutory hybrid benefit formula that is
attributable to any prior distribution of the
participant's benefit under that formula
and to which a minimum guaranteed rate
described in paragraph (d)(6)(iii)(A)(2) of
this section applied, together with interest
at that minimum guaranteed rate annually
from the prior annuity starting date to the
current annuity starting date; and
(3) Any amount that was treated as
included in the accumulated benefit under
the rules of this paragraph (d)(6)(iii) as of
any prior annuity starting date, together
with interest annually at the minimum
guaranteed rate that applied to the prior
distribution from the prior annuity starting
date to the current annuity starting date.
(E) Application to portion of partici-
pant's benefit. A cumulative floor de-
scribed in this paragraph (d)(6)(iii) may
be applied to a portion of a participant's
benefit, provided the requirements of this
paragraph (d)(6)(iii) are satisfied with re-
spect to that portion of the benefit. If a
cumulative floor described in this para-
graph (d)(6)(iii) applies to a portion of a
participant's benefit, only the principal cred-
its that are attributable to that portion of the
participant's benefit are taken into account
in determining the amount of the guarantee
described in paragraph (d)(6)(iii)(A)(2) of
this section.
(e) * * *
(2) Plan termination-(i) In general.
This paragraph (e)(2) provides special
rules that apply for purposes of determin-
ing certain plan factors under a statutory
hybrid benefit formula after the plan ter-
mination date of a statutory hybrid plan.
The terms of a statutory hybrid plan must
reflect the requirements of this paragraph
(e)(2). Paragraph (e)(2)(ii) of this section
sets forth rules relating to the interest
crediting rate for interest crediting periods
that end after the plan termination date.
Paragraph (e)(2)(iii) of this section sets
forth rules for converting a participant's
accumulated benefit to an annuity after the
plan termination date. Paragraph (e)(2)(iv)
of this section sets forth rules of applica-
tion. Paragraph (e)(2)(v) of this section
contains examples. The Commissioner
may, in revenue rulings, notices, or other
guidance published in the Internal Reve-
nue Bulletin, provide for additional rules
that apply for purposes of this paragraph
(e)(2) and the plan termination provi-
sions of section 411(b)(5)(B)(vi). See
§ 601.601(d)(2)(ii)(b) of this chapter. See
also regulations of the Pension Benefit
Guaranty Corporation for additional rules
that apply when a pension plan subject to
Title IV of ERISA is terminated.
(ii) Interest crediting rates used to de-
termine accumulated benefits-(A) Gen-
eral rule. The interest crediting rate used
under the plan to determine a participant's
accumulated benefit for interest crediting
periods that end after the plan termination
date must be equal to the average of the
interest rates used under the plan during
the 5-year period ending on the plan ter-
mination date. Except as otherwise pro-
vided in this paragraph (e)(2)(ii), the ac-
tual annual interest rate (taking into
account minimums, maximums, and other
adjustments) used to determine interest
credits under the plan for each of the
interest crediting periods is used for pur-
poses of determining the average of the
interest rates.
(B) Special rule for variable interest
crediting rates that are other rates of re-
turn-(1) Application to interest crediting
periods. This paragraph (e)(2)(ii)(B) ap-
plies for an interest crediting period if the
interest crediting rate that was used for
that interest crediting period was a rate of
return described in paragraph (d)(5) of
this section. This paragraph (e)(2)(ii)(B)
also applies for an interest crediting pe-
riod that begins before the first plan year
that begins on or after January 1, 2016, if
the interest crediting rate that was used for
that interest crediting period had the po-
tential to be negative. For this purpose, a
rate is not treated as having the potential
to be negative if it is a rate described in
paragraph (d)(3) or (d)(4) of this section
or is any other rate that is based solely on
current bond yields.
(2) Use of substitution rate. For any
interest crediting period to which this
paragraph (e)(2)(ii)(B) applies, for pur-
poses of determining the average of the
interest rates under this paragraph
(e)(2)(ii), the interest rate used under the
plan for the interest crediting period is
deemed to be equal to the substitution rate
(as described in paragraph (e)(2)(ii)(C) of
this section) for the period.
(C) Definition of substitution rate. The
substitution rate for any interest crediting
period equals the second segment rate under
section 430(h)(2)(C)(ii) (determined with-
out regard to section 430(h)(2)(C)(iv)) for
the last calendar month ending before the
beginning of the interest crediting period,
as adjusted to account for any minimums
or maximums that applied in the period
(other than cumulative floors under para-
graph (d)(6)(iii) of this section), but with-
out regard to other reductions that applied
in the period. Thus, for example, if the
actual interest crediting rate in an interest
crediting period is equal to the rate of
return on plan assets, but not greater than
5 percent, then the substitution rate for
that interest crediting period is equal to
the lesser of the applicable second seg-
ment rate for the period and 5 percent.
However, if the actual interest crediting
rate for an interest crediting period is
equal to the rate of return on plan assets
minus 200 basis points, then the substitu-
tion rate for that interest crediting period
is equal to the applicable second segment
rate for the period.
(D) Cumulative floors. Cumulative
floors under paragraph (d)(6)(iii) of this
section that applied during the 5-year pe-
riod ending on the plan termination date
are not taken into account for purposes of
determining the average of the interest
rates under this paragraph (e)(2)(ii). How-
ever, the rules of paragraph (d)(6)(iii) of
this section continue to apply to determine
benefits as of annuity starting dates on or
after the plan termination date. Thus, if, as
of an annuity starting date on or after the
plan termination date, the benefit provided
by applying an applicable cumulative min-
imum rate under paragraph (d)(6)(iii)(A)(2)
of this section exceeds the benefit deter-
mined by applying interest credits to the
participant's accumulated benefit (with in-
terest credits for interest crediting periods
that end after the plan termination date
determined under this paragraph (e)(2)),
then that cumulative minimum rate is used
to determine benefits as of that annuity
starting date.
(iii) Annuity conversion rates and fac-
tors-(A) Conversion factors where a
separate mortality table was used prior to
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plan termination-(1) Use of a separate
mortality table. This paragraph (e)(2)(iii)(A)
applies for purposes of converting a par-
ticipant's accumulated benefit to an annu-
ity after the plan termination date if, for
the entire 5-year period ending on the plan
termination date, the plan provides for a
mortality table in conjunction with an in-
terest rate to be used to convert a partici-
pant's accumulated benefit (or a portion
thereof) to an annuity. If this paragraph
(e)(2)(iii)(A) applies, then the plan is
treated as meeting the requirements of
section 411(b)(5)(B)(i) and paragraph
(d)(1) of this section only if, for purposes
of converting a participant's accumulated
benefit (or portion thereof) to an annuity
for annuity starting dates after the plan
termination date, the mortality table used
is the table described in paragraph
(e)(2)(iii)(A)(2) of this section and the
interest rate is the rate described in para-
graph (e)(2)(iii)(A)(3) of this section.
(2) Specific mortality table. The mor-
tality table used is the mortality table
specified under the plan for purposes of
converting a participant's accumulated
benefit to an annuity as of the termination
date. This mortality table is used regard-
less of whether it was used during the
entire 5-year period ending on the plan
termination date. For purposes of applying
this paragraph (e)(2)(iii)(A)(2), if the mor-
tality table specified in the plan, as of the
plan termination date, is a mortality table
that is updated to reflect expected im-
provements in mortality experience (such
as occurs with the applicable mortality
table under section 417(e)(3)), then the
table used for an annuity starting date
after the plan termination date takes into
account updates through the annuity start-
ing date.
(3) Specific interest rate. The interest
rate used is the interest rate specified un-
der the plan for purposes of converting a
participant's accumulated benefit to an an-
nuity for annuity starting dates after the
plan termination date. However, if the in-
terest rate used under the plan for pur-
poses of converting a participant's accu-
mulated benefit to an annuity has not been
the same fixed rate during the 5-year pe-
riod ending on the plan termination date,
then the interest rate used for purposes of
converting a participant's accumulated
benefit to an annuity for annuity starting
dates after the plan termination date is the
average interest rate that applied for this
purpose during the 5-year period ending
on the plan termination date.
(B) Tabular factors. If, as of the plan
termination date, a tabular annuity conver-
sion factor (i.e., a single conversion factor
that combines the effect of interest and
mortality) is used to convert a partici-
pant's accumulated benefit (or a portion
thereof) to an annuity and that same fixed
tabular annuity conversion factor has been
used during the entire 5-year period end-
ing on the plan termination date, then the
plan satisfies the requirements of this
paragraph (e)(2)(iii) only if that same tab-
ular annuity conversion factor continues
to apply after the plan termination date.
However, if the tabular annuity conver-
sion factor used to convert a participant's
accumulated benefit (or a portion thereof)
to an annuity is not described in the pre-
ceding sentence (including any case in
which the tabular annuity conversion fac-
tor was a fixed conversion factor that
changed during the 5-year period ending
on the plan termination date), then the
plan satisfies the requirements of this
paragraph (e)(2)(iii) only if the tabular
annuity conversion factor used to convert
a participant's accumulated benefit (or a
portion thereof) to an annuity for annuity
starting dates after the plan termination
date is equal to the average of the tabular
annuity conversion factors used under the
plan for that purpose during the 5-year
period ending on the plan termination
date.
(C) Factor applicable where a sepa-
rate mortality table was not used for en-
tire 5-year period prior to plan termina-
tion. If paragraph (e)(2)(iii)(A) of this
section does not apply (including any case
in which a separate mortality table was
used in conjunction with a separate inter-
est rate to convert a participant's accumu-
lated benefit (or a portion thereof) to an
annuity for only a portion of the 5-year
period ending on the plan termination
date), then the plan is treated as having
used a tabular annuity conversion factor to
convert a participant's accumulated bene-
fit (or a portion thereof) to an annuity for
the entire 5-year period ending on the plan
termination date. As a result, the rules of
paragraph (e)(2)(iii)(B) of this section ap-
ply to determine the annuity conversion
factor used for purposes of converting a
participant's accumulated benefit (or por-
tion thereof) to an annuity for annuity
starting dates after the plan termination
date. For this purpose, if a separate mor-
tality table and separate interest rate ap-
plied for a portion of the 5-year period,
that mortality table and interest rate are
used to calculate an annuity conversion
factor and that factor is treated as having
been the tabular annuity conversion factor
that applied for that portion of the 5-year
period for purposes of this paragraph
(e)(2)(iii).
(D) Separate application with respect
to optional forms. This paragraph
(e)(2)(iii) applies separately with respect
to each optional form of benefit on the
date of plan termination. For this purpose,
the term optional form of benefit has the
meaning given that term in § 1.411(d)-
3(g)(6)(ii), except that a change in the
annuity conversion factor used to deter-
mine a particular benefit is disregarded in
determining whether different optional
forms exist. Thus, for example, if, for the
entire 5-year period ending on the plan
termination date, the plan provides for a
mortality table in conjunction with an in-
terest rate to be used to determine annui-
ties other than qualified joint and survivor
annuities, but for specified tabular factors
to apply to determine annuities that are
qualified joint and survivor annuities, then
paragraph (e)(2)(iii)(A) of this section ap-
plies for purposes of annuities other than
qualified joint and survivor annuities and
paragraph (e)(2)(iii)(B) of this section ap-
plies for purposes of annuities that are
qualified joint and survivor annuities. In
addition, if the annuity conversion factor
used to determine a particular qualified
joint and survivor annuity has changed in
the 5-year period ending on the plan ter-
mination date, the different factors are
averaged for purposes of determining the
annuity conversion factor that applies af-
ter plan termination for that particular
qualified joint and survivor annuity.
(iv) Rules of application-(A) Average
of interest rates for crediting interest-(1)
In general. For purposes of determining
the average of the interest rates under
paragraph (e)(2)(ii) of this section, an in-
terest crediting period is taken into ac-
count if the interest crediting date for the
interest crediting period is within the
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5-year period ending on the plan termina-
tion date. The average of the interest rates
is determined as the arithmetic average of
the annual interest rates used for those
interest crediting periods. If the interest
crediting periods taken into account are
not all the same length, then each rate is
weighted to reflect the length of the inter-
est crediting period in which it applied. If
the plan provides for the crediting of in-
terest more frequently than annually, then
interest credits after the plan termination
date must be prorated in accordance with
the rules of paragraph (d)(1)(iv)(C) of this
section.
(2) Section 411(d)(6) protected accu-
mulated benefit. In general, the interest
rate that was used for each interest cred-
iting period is the ongoing interest credit-
ing rate that was specified under the plan
for that period, without regard to any in-
terest rate that was used prior to an
amendment changing the interest credit-
ing rate with respect to a section 411(d)(6)
protected benefit. However, if, as of the
end of the last interest crediting period
that ends on or before the plan termination
date, the participant's accumulated benefit
is based on a section 411(d)(6) protected
benefit that results from a prior amend-
ment to change the rate of interest credit-
ing applicable under the plan, then the
pre-amendment interest rate is treated as
having been used for each interest credit-
ing period after the date of the interest
crediting rate change (so that the amend-
ment is disregarded).
(B) Average annuity conversion rates
and factors-(1) In general. For purposes
of determining average annuity conver-
sion interest rates and average tabular an-
nuity conversion factors under paragraph
(e)(2)(iii) of this section, an interest rate or
tabular annuity conversion factor is taken
into account if the rate or conversion fac-
tor applied under the terms of the plan to
convert a participant's accumulated bene-
fit (or a portion thereof) to a benefit pay-
able in the form of an annuity during the
5-year period ending on the plan termina-
tion date. The average is determined as the
arithmetic average of the interest rates or
tabular factors used during that period. If
the periods in which the rates or factors
that are averaged are not all the same
length, then each rate or factor is weighted
to reflect the length of the period in which
it applied.
(2) Section 411(d)(6) protected annuity
conversion factors. In general, the annuity
conversion interest rate or tabular annuity
conversion factor that was used for each
period is the ongoing interest rate or tab-
ular factor that was specified under the
plan for that period, without regard to any
rate or factor that was used under the plan
prior to an amendment changing the rate
or factor with respect to a section
411(d)(6) protected benefit. However, if,
as of the plan termination date, the partic-
ipant's annuity benefit for an annuity
commencing at that date would be based
on a section 411(d)(6) protected benefit
that results from a prior amendment to
change the rate or factor under the plan,
then the pre-amendment rate or factor is
treated as having been used after the date
of the amendment (so that the amendment
is disregarded).
(C) Blended rates. If, as of the plan
termination date, the plan determines in-
terest credits by applying different rates to
two or more different predetermined por-
tions of the accumulated benefit, then the
interest crediting rate that applies after the
plan termination date is determined sepa-
rately with respect to each portion under
the rules of paragraph (e)(2)(ii) of this
section.
(D) Participants with less than 5 years
of interest credits upon plan termination.
If the plan provided for interest credits for
any interest crediting period in which,
pursuant to the terms of the plan, an indi-
vidual was not eligible to receive interest
credits (including because the individual
was not a participant or beneficiary in the
relevant interest crediting period), then,
for purposes of determining the individu-
al's average interest crediting rate under
paragraph (e)(2)(ii) of this section, the
individual is treated as though the individ-
ual received interest credits in that period
using the interest crediting rate that ap-
plied in that period under the terms of the
plan to a similarly situated participant or
beneficiary who was eligible to receive
interest credits.
(E) Plan termination date-(1) Plans
subject to Title IV of ERISA. In the case of
a plan that is subject to Title IV of ERISA,
the plan termination date for purposes of
this paragraph (e)(2) means the plan's ter-
mination date established under section
4048(a) of ERISA.
(2) Other plans. In the case of a plan
that is not subject to Title IV of ERISA,
the plan termination date for purposes of
this paragraph (e)(2) means the plan's ter-
mination date established by the plan ad-
ministrator, provided that the plan termi-
nation date may be no earlier than the date
on which the actions necessary to effect
the plan termination - other than the
distribution of plan benefits - are taken.
However, a plan is not treated as termi-
nated on the plan's termination date if
the assets are not distributed as soon as
administratively feasible after that date.
See Rev. Rul. 89-87 (1989-2 CB 2), (see
§ 601.601(d)(2)(ii)(b) of this chapter).
(v) Examples. The following examples
illustrate the rules of this paragraph (e)(2).
In each case, it is assumed that the plan is
terminated in a standard termination.
Example 1. (i) Facts. (A) Plan A is a defined
benefit plan with a calendar plan year that expresses
each participant's accumulated benefit in the form of
a hypothetical account balance to which principal
credits are made at the end of each calendar quarter
and to which interest is credited at the end of each
calendar quarter based on the balance at the begin-
ning of the quarter. Interest credits under Plan A are
based on a rate of interest fixed at the beginning of
each plan year equal to the third segment rate for the
preceding December, except that the plan used the
rate of interest on 30-year Treasury bonds (instead of
the third segment rate) for plan years before 2013.
The plan is terminated on March 3, 2017.
(B) The third segment rate credited under Plan A
from January 1, 2013, through December 31, 2016,
is assumed to be: 6 percent annually for each of the
four quarters in 2016; 6.5 percent annually for each
of the four quarters in 2015; 6 percent annually for
each of the four quarters in 2014; and 5.5 percent
annually for each of the four quarters in 2013. The
rate of interest on 30-year Treasury bonds credited
under Plan A for each of the four quarters in 2012 is
assumed to be 4.4 percent annually.
(ii) Conclusion. Pursuant to paragraph (e)(2)(ii)
of this section, the interest crediting rate used to
determine accrued benefits under the plan on and
after the date of plan termination is an annual rate of
5.68 percent (which is the arithmetic average of 6
percent, 6.5 percent, 6 percent, 5.5 percent, and 4.4
percent). In accordance with the rules of paragraph
(d)(1)(iv)(C) of this section, the quarterly interest
crediting rate after the plan termination date is 1.42
percent (5.68 divided by 4).
Example 2. (i) Facts. The facts are the same as
Example 1. Participant S, who terminated employ-
ment before January 1, 2017, has a hypothetical
account balance of $100,000 when the plan is termi-
nated on March 3, 2017. Participant S commences
distribution in the form of a straight life annuity
commencing on January 1, 2020. For the entire
5-year period ending on the plan termination date,
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the plan has provided that the applicable section
417(e) rates for the preceding August are applied on
the annuity starting date in order to convert the
hypothetical account balance to an annuity. Based on
the 5-year averages of the first segment rates, the
second segment rates, and the third segment rates as
of the plan termination date, and the applicable mor-
tality table for the year 2020, the resulting conver-
sion rate at the January 1, 2020 annuity starting date
is 166.67 for a monthly straight life annuity payable
to a participant whose age is the age of Participant S
on January 1, 2020.
(ii) Conclusion. In accordance with the conclu-
sion in Example 1, the interest crediting rate after the
plan termination date is 1.42 percent for each of the
12 quarterly interest crediting dates in the period
from March 3, 2017, through December 31, 2019, so
that Participant S's account balance is $118,436 on
December 31, 2019. As a result, using the annuity
conversion rate of 166.67, the amount payable to
Participant S commencing on January 1, 2020 is
$711 per month.
Example 3. (i) Facts. The facts are the same as
Example 1. In addition, Participant T commenced
participation in Plan A on April 17, 2014.
(ii) Conclusion. In accordance with the conclu-
sion in Example 1 and the rule of paragraph
(e)(2)(iv)(D) of this section, the quarterly interest
crediting rate used to determine Participant T's ac-
crued benefits under Plan A on and after the date of
plan termination is 1.42 percent, which is the same
rate that applies to all participants and beneficiaries
in Plan A after the termination date (and that would
have applied to Participant T if Participant T had
participated in the plan during the 5-year period
preceding the date of plan termination).
Example 4. (i) Facts. (A) Plan B is a defined
benefit plan with a calendar plan year that expresses
each participant's accumulated benefit in the form of
a hypothetical account balance to which principal
credits are made at the end of each calendar year and
to which interest is credited at the end of each
calendar year based on the balance at the end of the
preceding year. The plan is terminated on January
27, 2018.
(B) The plan's interest crediting rate for each
calendar year during the entire 5-year period ending
on the plan termination date is equal to (A) 50
percent of the greater of the rate of interest on
3-month Treasury Bills for the preceding Decem-
ber and an annual rate of 4 percent, plus (B) 50
percent of the rate of return on plan assets. The
rate of interest on 3-month Treasury Bills credited
under Plan B is assumed to be: 3.4 percent for
2017; 4 percent for 2016; 4.5 percent for 2015; 3.5
percent for 2014; and 4.2 percent for 2013. Each
of these rates applied under Plan B for purposes of
determining the interest credits described in clause
(A) of this paragraph (i), except that the 4 percent
minimum rate applied for 2017 and 2014. The
second segment rate is assumed to be: 6 percent
for December 2016; 6 percent for December 2015;
6.5 percent for December 2014; 6 percent for
December 2013; and 5.5 percent for December
2012.
(ii) Conclusion. Pursuant to paragraph (e)(2)(ii)
of this section, the interest crediting rate used to
determine accrued benefits under the plan on and
after the date of plan termination is 5.07 percent.
This number is equal to the sum of 50 percent of 4.14
percent (which is the sum of 4 percent, 4 percent, 4.5
percent, 4 percent, and 4.2 percent, divided by 5),
and 50 percent of 6 percent (which is the average
second segment rate applicable for the 5 interest
crediting periods ending within the 5-year period,
as applied pursuant to the substitution rule de-
scribed in paragraphs (e)(2)(ii)(B) and (C) of this
section).
Example 5. (i) Facts. The facts are the same as in
Example 4, except that the plan had credited interest
before January 1, 2016, using the rate of return on a
specified RIC and had been amended effective Jan-
uary 1, 2016, to base interest credits for all plan
years after 2015 on the interest rate formula de-
scribed in paragraph (i) of Example 4. In order to
comply with section 411(d)(6), the plan provides
that, for each participant or beneficiary who was a
participant on December 31, 2015, benefits at any
date are based on either the ongoing hypothetical
account balance on that date (which is based on
the December 31, 2015 balance, with interest cred-
ited thereafter at the rate described in the first
sentence of paragraph (i) of Example 4 and taking
principal credits after 2015 into account) or a
special hypothetical account balance (the pre-2016
balance) on that date, whichever balance is
greater. For each participant, the pre-2016 balance
is a hypothetical account balance equal to the
participant's December 31, 2015 balance, with
interest credited thereafter at the RIC rate of re-
turn, but with no principal credits after 2015.
There are 10 participants for whom the pre-2016
balance exceeds the ongoing hypothetical account
balance at the end of 2017 (which is the end of the
last interest crediting period that ends on or before
the January 27, 2018, plan termination date).
(ii) Conclusion. Because Plan B credited interest
prior to 2016 using the rate of return on a RIC (a rate
described in paragraph (d)(5) of this section), for
purposes of determining the average interest credit-
ing rate upon plan termination, the interest crediting
rate used to determine accrued benefits under Plan
B for all participants during those periods (for the
calendar years 2013, 2014, and 2015) is equal to
the second segment rate for December of the cal-
endar year preceding each interest crediting pe-
riod. In addition, because the pre-2016 balances
exceeded the ongoing hypothetical account bal-
ance for 10 participants in the last interest credit-
ing period prior to plan termination, for purposes
of determining the average interest crediting rate
upon plan termination, the interest crediting rate
used to determine accrued benefits under Plan B
for 2016 and 2017 for those participants is equal to
the second segment rate for December 2015 and
December 2016, respectively. For all other partic-
ipants, for purposes of determining the average
interest crediting rate upon plan termination, the
interest crediting rate used to determine accrued
benefits under Plan B for 2016 and 2017 is based
on the ongoing interest crediting rate (as described
in Example 4).
(3) * * * (i) * * * The right to future
interest credits determined in the manner
specified under the plan and not condi-
tioned on future service is a factor that is
used to determine the participant's ac-
crued benefit, for purposes of section
411(d)(6). * * * Paragraphs (e)(3)(ii)
through (e)(3)(vi) of this section set forth
special rules that apply regarding the in-
teraction of section 411(d)(6) and changes
to a plan's interest crediting rate. * * *
(ii) * * *
(B) The effective date of the amend-
ment is at least 30 days after adoption of
the amendment;
(C) On the effective date of the amend-
ment, the new interest crediting rate is not
lower than the interest crediting rate that
would have applied in the absence of the
amendment; and
(D) For plan years that begin on or
after January 1, 2016, if prior to the
amendment the plan used a fixed annual
floor in connection with a rate described
in paragraph (d)(4)(ii), (iii) or (iv) of this
section (as permitted under paragraph
(d)(6)(ii) of this section), the floor is re-
tained after the amendment to the maxi-
mum extent permissible under paragraph
(d)(6)(ii)(A) of this section.
(iii) Coordination of section 411(d)(6)
and market rate of return limitation-(A)
In general. An amendment to a statutory
hybrid plan that preserves a section
411(d)(6) protected benefit is subject to
the rules under paragraph (d) of this sec-
tion relating to market rate of return.
However, in the case of an amendment to
change a plan's interest crediting rate for
periods after the applicable amendment
date from one interest crediting rate (the
old rate) that satisfies the requirements of
paragraph (d) of this section to another
interest crediting rate (the new rate) that
satisfies the requirements of paragraph
(d) of this section, the plan's effective
interest crediting rate is not in excess of
a market rate of return for purposes of
paragraph (d) of this section merely be-
cause the plan provides for the benefit of
any participant who is benefiting under
the plan (within the meaning of
§ 1.410(b)-3(a)) on the applicable
amendment date to never be less than
what it would be if the old rate had
continued but without taking into ac-
count any principal credits (as defined in
paragraph (d)(1)(ii)(D) of this section)
after the applicable amendment date.
(B) Multiple amendments. A pattern of
repeated plan amendments each of which
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provides for a prospective change in the
plan's interest crediting rate with respect
to the benefit as of the applicable amend-
ment date will be treated as resulting in
the ongoing plan terms providing for an
effective interest crediting rate that is in
excess of a market rate of return. See
§ 1.411(d)-4, A-1(c)(1).
(iv) Change in lookback month or sta-
bility period used to determine interest
credits-(A) Section 411(d)(6) anti-
cutback relief. With respect to a plan us-
ing an interest crediting rate described in
paragraph (d)(3) or (d)(4) of this section,
notwithstanding the general rule of para-
graph (e)(3)(i) of this section, if a plan
amendment changes the lookback month
or stability period used to determine inter-
est credits, the amendment is not treated
as reducing accrued benefits in violation
of section 411(d)(6) merely on account of
this change if the conditions of this para-
graph (e)(3)(iv)(A) are satisfied. If the
plan amendment is effective on or after
the adoption date, any interest credits
credited for the one-year period com-
mencing on the date the amendment is
effective must be determined using the
lookback month and stability period pro-
vided under the plan before the amend-
ment or the lookback month and stability
period after the amendment, whichever
results in the larger interest credits. If the
plan amendment is adopted retroactively
(that is, the amendment is effective prior
to the adoption date), the plan must use
the lookback month and stability period
resulting in the larger interest credits for
the period beginning with the effective
date and ending one year after the adop-
tion date.
(B) Section 411(b)(5)(B)(i)(I) market
rate of return relief. The plan's effective
interest crediting rate is not in excess of a
market rate of return for purposes of para-
graph (d) of this section merely because a
plan amendment complies with the re-
quirements of paragraph (e)(3)(iv)(A) of
this section. However, a pattern of re-
peated plan amendments each of which
provides for a change in the lookback
month or stability period used to deter-
mine interest credits will be treated as
resulting in the ongoing plan terms pro-
viding for an effective interest crediting
rate that is in excess of a market rate of
return. See § 1.411(d)-4, A-1(c)(1).
(v) RIC ceasing to exist. This para-
graph (e)(3)(v) applies in the case of a
statutory hybrid plan that credits interest
using an interest crediting rate equal to the
rate of return on a RIC (pursuant to para-
graph (d)(5)(iv) of this section) that ceases
to exist, whether as a result of a name
change, liquidation, or otherwise. In such
a case, the plan is not treated as violating
section 411(d)(6) provided that the rate of
return on the successor RIC is substituted
for the rate of return on the RIC that no
longer exists, for purposes of crediting
interest for periods after the date the RIC
ceased to exist. In the case of a name
change or merger of RICs, the successor
RIC means the RIC that results from the
name change or merger involving the RIC
that no longer exists. In all other cases, the
successor RIC is a RIC selected by the
plan sponsor that has reasonably similar
characteristics, including characteristics
related to risk and rate of return, as the
RIC that no longer exists.
(4) Actuarial increases after normal
retirement age. A statutory hybrid plan is
not treated as providing an effective inter-
est crediting rate that is in excess of a
market rate of return for purposes of para-
graph (d) of this section merely because
the plan provides that the participant's
benefit, as of each annuity starting date
after normal retirement age, is equal to the
greater of-
(i) The benefit based on the accumu-
lated benefit determined using an interest
crediting rate that is not in excess of a
market rate of return under paragraph (d)
of this section; and
(ii) The benefit that satisfies the re-
quirements of section 411(a)(2).
(5) Plans that permit participant direc-
tion of interest crediting rates. [Reserved]
* * * * *
(f) * * *
(2) * * *
(i) * * *
(B) Special effective date. Paragraphs
(d)(1)(iii), (d)(1)(iv)(D), (d)(1)(vi), (d)(2)(ii),
(d)(4)(v), (d)(5)(ii)(B), (d)(5)(iv), (d)(6),
(e)(2), (e)(3)(iii), (e)(3)(iv), (e)(3)(v) and
(e)(4) of this section apply to plan years
that begin on or after January 1, 2016 (or
an earlier date as elected by the taxpayer).
* * * * *
John Dalrymple
Deputy Commissioner for
Services and Enforcement.
Approved September 15, 2014.
Mark J. Mazur
Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on September
18, 2014, 8:45 a.m., and published in the issue of the Federal
Register for September 19, 2014, 79 F.R. 56442)
## Section 162 .- Trade or Business Expense
26 CFR 1.162-31: Allowable deduction for remu-
neration attributable to services performed by appli-
cable individuals to certain health insurance provid-
ers that receive premiums from providing health
insurance coverage
## T.D. 9694
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
The $500,000 deduction
limitation for remuneration
provided by certain health
insurance providers.
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations on the application of the
$500,000 deduction limitation for remu-
neration provided by certain health insur-
ance providers under section 162(m)(6) of
the Internal Revenue Code (Code). These
regulations affect certain health insurance
providers providing remuneration that ex-
ceeds the deduction limitation.
DATES: Effective Date: These regula-
tions are effective on September 23, 2014.
Applicability Date: For dates of appli-
cability, see § 1.162-31(j).
FOR FUTHER INFORMATION
CONTACT: Ilya Enkishev at (202) 317-
5600 (not a toll-free number).
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## SUPPLEMENTARY INFORMATION
### Background
This document contains final amend-
ments to the Income Tax Regulations (26
CFR part 1) under section 162(m)(6) of
the Code. Section 162(m)(6) limits the
allowable deduction for remuneration at-
tributable to services performed by appli-
cable individuals to certain health insur-
ance providers that receive premiums
from providing health insurance coverage.
Section 162(m)(6) was added to the Code
by section 9014 of the Patient Protection
and Affordable Care Act (ACA) (Public
Law 111-148, 124 Stat. 119, 868 (2010)).
In general, section 162(m)(6) limits to
$500,000 the allowable deduction for re-
muneration attributable to services per-
formed by an applicable individual for a
covered health insurance provider in a
taxable year beginning after December 31,
2012, that, but for section 162(m)(6), is
otherwise deductible under chapter 1 of
the Code (referred to in this preamble and
the final regulations as remuneration that
is otherwise deductible). Remuneration
attributable to services performed for a
covered health insurance provider in a dis-
qualified taxable year beginning after De-
cember 31, 2009, and before January 1,
2013, that becomes otherwise deductible
in a taxable year beginning after Decem-
ber 31, 2012, is also subject to the
$500,000 deduction limitation, deter-
mined as if the deduction limitation ap-
plied to disqualified taxable years begin-
ning after December 31, 2009. If
remuneration that is attributable to ser-
vices performed by an applicable individ-
ual for a covered health insurance pro-
vider in a disqualified taxable year
exceeds $500,000, the amount of the re-
muneration that exceeds $500,000 is not
allowable as a deduction in any taxable
year.
On December 23, 2010, the Depart-
ment of the Treasury (Treasury Depart-
ment) and the IRS released Notice 2011-2
(2011-1 IRB 260), which provides guid-
ance on certain issues under section
162(m)(6). A notice of proposed rulemak-
ing (REG-106796-12) was published in
the Federal Register (78 FR 19950) on
April 2, 2013 (the proposed regulations).
The Treasury Department and the IRS re-
ceived written comments in response to
the notice and the proposed regulations.
After consideration of these comments,
the Treasury Department adopts the pro-
posed regulations as final regulations,
with the modifications set forth in this
Treasury decision.
### Summary of Comments and Explanation of Modifications
#### I. Definition of Covered Health Insurance Provider
##### A. In General
Section 162(m)(6)(C) provides that a
covered health insurance provider is any
health insurance issuer described in sec-
tion 162(m)(6)(C)(i) and certain persons
that are treated as a single employer with
that health insurance issuer, as described
in section 162(m)(6)(C)(ii). A person may
be a covered health insurance provider for
one taxable year, but not be a covered
health insurance provider for another tax-
able year, depending on whether that per-
son meets the requirements to be a cov-
ered health insurance provider under
section 162(m)(6)(C) for a particular tax-
able year. These final regulations gener-
ally adopt the rules described in the pro-
posed regulations for determining whether
a health insurance issuer or any other per-
son is a covered health insurance provider
for any taxable year, except as described
herein.
##### B. Health Insurance Issuers
For taxable years beginning after Decem-
ber 31, 2012, section 162(m)(6)(C)(i)(II) pro-
vides that a health insurance issuer (as
defined in section 9832(b)(2)) is a covered
health insurance provider for a taxable
year if not less than 25 percent of the
gross premiums that it receives from pro-
viding health insurance coverage (as de-
fined in section 9832(b)(1)) during the
taxable year are from minimum essential
coverage (as defined in section 5000A(f)).
For taxable years beginning after Decem-
ber 31, 2009 and before January 1, 2013,
section 162(m)(6)(C)(i)(I) provides that a
health insurance issuer (as defined in sec-
tion 9832(b)(2)) is a covered health insur-
ance provider for a taxable year if it re-
ceives premiums from providing health
insurance coverage (as defined in section
9832(b)(1)) during the taxable year.
C. Persons Treated as a Single Em-
ployer with a Health Insurance Provider
Section 162(m)(6)(C)(ii) provides that
two or more persons that are treated as a
single employer under sections 414(b),
(c), (m), or (o) are treated as a single
employer for purposes of determining
whether a person is a covered health in-
surance provider, except that in applying
section 1563(a) for purposes of these sub-
sections, sections 1563(a)(2) and (3) (de-
scribing brother-sister controlled groups
and combined groups) are disregarded.
The final regulations, like the proposed
regulations, generally provide that each
member of an aggregated group that in-
cludes a covered health insurance pro-
vider described in section 162(m)(6)(C)(i)
at any time during a taxable year is also a
covered health insurance provider for pur-
poses of section 162(m)(6), even if the
member is not a health insurance issuer
and does not provide health insurance
coverage. For this purpose, the final reg-
ulations, like the proposed regulations, de-
fine the term aggregated group as a health
insurance issuer (as defined in section
9832(b)(2)) and all persons that are treated
as a single employer with the health insur-
ance issuer under sections 414(b), (c), (m)
or (o), disregarding sections 1563(a)(2) and
(3) (with respect to controlled groups of
corporations) and § 1.414(c) (2)(c) and (d)
(with respect to trades or businesses under
common control).
The proposed regulations include rules
for determining whether a member of an
aggregated group that is not a health in-
surance issuer is a covered health insur-
ance provider for a particular taxable year.
Under these rules, the parent entity of an
aggregated group is generally a covered
health insurance provider for its taxable
year with which, or in which, ends the
taxable year of any health insurance issuer
that is a covered health insurance provider
in an aggregated group with the parent
entity. Each other member of the parent
entity's aggregated group is a covered
health insurance provider for its taxable
year that ends with, or within, the taxable
year of the parent entity during which the
parent entity is a covered health insurance
provider. The final regulations generally
adopt these rules.
The final regulations, like the proposed
regulations, provide that, in an aggregated
group that is a parent-subsidiary con-
trolled group of corporations (within the
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meaning of section 414(b)) or a parent-
subsidiary group of trades or businesses
under common control (within the mean-
ing of section 414(c)), the parent entity is
the common parent of the aggregated
group.
With respect to an aggregated group
that is an affiliated service group within
the meaning of section 414(m) or a group
described in section 414(o), the final reg-
ulations adopt the rules described in the
proposed regulations and provide that the
parent entity is the health insurance issuer
in the aggregated group. If, however, two
or more health insurance issuers are mem-
bers of an aggregated group that is an
affiliated service group (within the mean-
ing of section 414(m)) or a group de-
scribed in section 414(o), then any health
insurance issuer in the aggregated group
that is designated in writing by the other
members of the aggregated group is the
parent entity for purposes of section
162(m)(6). If the members of an aggre-
gated group that includes two or more
health insurance issuers that is an affili-
ated service group or group described in
section 414(o) fail to designate a parent
entity in writing, the members of the
group are deemed for all taxable years to
have a parent entity with a taxable year
that is the calendar year.
In the preamble to the proposed regu-
lations, the Treasury Department and the
IRS requested comments on the circum-
stances under which a new parent entity
could be designated, such as when a
health insurance issuer that has been des-
ignated as the parent entity of an aggre-
gated group ceases to be a member of the
aggregated group as a result of a corporate
transaction, and any transition rules that
may be necessary in such situation. One
commenter suggested that the final regu-
lations should provide that when a parent
entity (a predecessor parent entity) ceases
to be a member of an aggregated group
under section 414(m) and another health
insurance issuer that has the same taxable
year as the predecessor parent entity re-
mains in the aggregated group, the re-
maining members of the aggregated group
must designate that health insurance is-
suer as the new parent entity (the succes-
sor parent entity). The commenter also
suggested that if no health insurance
issuer remaining in the aggregated
group has the same taxable year as the
predecessor parent entity, then the group
should be permitted to designate any
health insurance issuer in the aggregated
group as the successor parent entity. The
final regulations generally adopt these
suggestions.
The final regulations also provide tran-
sition rules for determining when a mem-
ber of an aggregated group is a covered
health insurance provider if, as a result of
a change in the identity of the parent en-
tity or for any other reason, the taxable
year of the parent entity is less than 12
consecutive months. The final regulations
provide that if the taxable year of the
parent entity is less than 12 months, then,
solely for purposes of determining
whether it is a covered health insurance
provider for its short taxable year and for
purposes of determining whether each
other member of the parent entity's aggre-
gated group is a covered health insurance
provider for its taxable year ending with
or within the taxable year of the parent
entity, the taxable year of the parent entity
is treated as the 12-month period ending
on the last day of its short taxable year.
The purpose of this rule is to ensure con-
sistency and continuity in the treatment of
members of an aggregated group as cov-
ered health insurance providers. Without
this rule, certain members of an aggre-
gated group that are generally treated as
covered health insurance providers may
not be treated as covered health insurance
providers for one taxable year because
they do not have a taxable year ending
with or within the short taxable year of the
parent entity.
One commenter suggested that an en-
tity should not be a covered health insur-
ance provider if all of the services per-
formed by its employees and independent
contractors are unrelated to the direct or
indirect generation of health insurance
premiums and if the entity is geographi-
cally separate from any entity within the
aggregated group that receives premiums
from providing health insurance. These
final regulations do not adopt this sugges-
tion. Such a rule would be inconsistent
with section 162(m)(6)(C)(ii), which pro-
vides that all members of an aggregated
group that includes a health insurance is-
suer described in section 162(m)(6)(C)(i)
are covered health insurance providers.
D. United States Possessions
One commenter suggested that health
insurance providers located in Puerto Rico
should not be considered health insurance
issuers under section 9832(b)(1) and,
therefore, should not be covered health
insurance providers under section
162(m)(6)(C)(i). The commenter also
suggested that health insurance companies
(and similar health insurance providers)
located in Puerto Rico should not be con-
sidered covered health insurance provid-
ers under section 162(m)(6)(C) because
the benefits of the ACA do not inure to
Puerto Rican insurance companies and be-
cause American taxpayers do not subsi-
dize compensation paid by health insur-
ance providers in Puerto Rico through tax
deductions. These final regulations do not
adopt this suggestion. In regulations is-
sued under section 9010 of the ACA (TD
9643, 78 FR 71476, November 29, 2013),
the Treasury Department and the IRS con-
cluded that a health insurance company,
health insurance service, or insurance or-
ganization may be a health insurance is-
suer under section 9832(b)(2) even if it is
located in Puerto Rico. Accordingly, a
health insurance issuer that is otherwise a
covered health insurance provider under
section 162(m)(6) will not fail to be a
covered health insurance provider solely
because it is located in Puerto Rico.
##### E. Self-insurers
These final regulations, like the pro-
posed regulations, provide that an em-
ployer is not a covered health insurance
provider solely because it maintains a
self-insured medical reimbursement plan.
For this purpose, the term self-insured
medical reimbursement plan means a sep-
arate written plan for the benefit of em-
ployees (which may include former em-
ployees) that provides for reimbursement
of employee medical expenses referred to
in section 105(b) and that does not pro-
vide for reimbursement under an individ-
ual or group policy of accident or health
insurance issued by a licensed insurance
company or under an arrangement in the
nature of a prepaid health care plan that is
regulated under federal or state law in a
manner similar to the regulation of insur-
ance companies, and may include a plan
maintained by an employee organization
described in section 501(c)(9).
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One commenter noted that, in addition
to providing a self-insured medical reim-
bursement plan, some employers provide
coverage for other health care costs
through an insurance policy (for example,
through separate insured coverage for pre-
scription drugs). The commenter re-
quested clarification that an employer that
maintains a self-insured medical reim-
bursement plan will not be a covered
health insurance provider solely because
the employer provides additional cover-
age through an insurance policy. The
Treasury Department and the IRS agree
that this is correct.
##### F. De Minimis Exception
The final regulations retain the de mi-
nimis exception described in the proposed
regulations with certain clarifications. The
final regulations provide that a person
that would otherwise be a covered
health insurance provider under section
162(m)(6)(C)(i)(II) for any taxable year
beginning after December 31, 2012, is not
a covered health insurance provider for
that taxable year if the premiums received
by that person and all other members of its
aggregated group from providing health
insurance coverage that is minimum es-
sential coverage are less than two percent
of the gross revenue of that person and all
other members of its aggregated group for
that taxable year. For taxable years begin-
ning after December 31, 2009, and before
January 1, 2013, a person that would oth-
erwise be a covered health insurance pro-
vider under section 162(m)(6)(C)(I) is not
a covered health insurance provider for
that taxable year if the premiums received
by that person and all other members of its
aggregated group from providing health
insurance coverage are less than two per-
cent of the gross revenue of that person
and all other members of its aggregated
group for that taxable year.
Commenters suggested that the two-
percent threshold for the de minimis ex-
ception should be increased to a level as
high as five percent. In response to Notice
2011-2, which requested comments on
the de minimis exception, some comment-
ers requested that the threshold not be
increased because a higher threshold
would allow health insurance issuers that
sell significant amounts of health cover-
age to be exempt from the deduction limit
under section 162(m)(6) and thereby pro-
vide them with a competitive advantage.
After careful consideration of all com-
ments on the de minimis exception, the
Treasury Department and the IRS have
concluded that the two-percent threshold
strikes the appropriate balance between
exempting persons that receive health in-
surance premiums that are insignificant in
relation to their overall activities and en-
suring that persons that sell a significant
amount of health insurance are not ex-
empted from the deduction limitation. Ac-
cordingly, the final regulations do not
adopt the suggestion to increase the de
minimis threshold.
###### II. Premiums
##### A. In General
Section 162(m)(6)(C)(i) provides that a
health insurance issuer is a covered health
insurance provider for a taxable year only
if it receives premiums from providing
health insurance coverage (as defined in
section 9832(b)(1)). The proposed regula-
tions provide that amounts received under
an indemnity reinsurance contract and
amounts that are direct service payments
are not treated as premiums from provid-
ing health insurance coverage for pur-
poses of section 162(m)(6)(C)(i). The fi-
nal regulations generally adopt the rules
set forth in the proposed regulations.
#### B. Direct Service Payments
A health insurance issuer or other per-
son that receives premiums from provid-
ing health insurance coverage may enter
into an arrangement with a third party to
provide, manage, or arrange for the pro-
vision of services by physicians, hospitals,
or other healthcare providers. In connec-
tion with this arrangement, the health in-
surance issuer or other person that re-
ceives premiums from providing health
insurance coverage may pay compensa-
tion to the third party in the form of capi-
tated, prepaid, periodic, or other pay-
ments, and the third party may bear some
or all of the risk that the compensation is
insufficient to pay the full cost of provid-
ing, managing, or arranging for the provi-
sion of services by physicians, hospitals,
or other healthcare providers as required
under the arrangement. In addition, the
third party may be subject to healthcare
provider, health insurance, licensing, fi-
nancial solvency, or other regulation un-
der state insurance law.
The final regulations follow the pro-
posed regulations, and provide that capi-
tated, prepaid, periodic, or other payments
(referred to as direct service payments)
made by a health insurance issuer or other
person that receives premiums from pro-
viding health insurance coverage to a third
party as compensation for providing, man-
aging, or arranging for the provision of
healthcare services by physicians, hospi-
tals, or other healthcare providers are not
treated as premiums from providing
health insurance coverage for purposes of
section 162(m)(6), regardless of whether
the third party is subject to healthcare
provider, health insurance, licensing, fi-
nancial solvency, or other similar regula-
tory requirements under state law. In the
preamble to the proposed regulations, the
Treasury Department and the IRS re-
quested comments on whether capitated,
prepaid, or periodic payments made by a
government entity to a third party to pro-
vide, manage, or arrange for the provision
of services by physicians, hospitals, or
other healthcare providers should be
treated as premiums from providing
health insurance coverage for purposes of
section 162(m)(6).
One commenter suggested that pay-
ments from a government entity to certain
medical care providers that accept risk-
based payments in exchange for providing
medical care (referred to in this preamble
as clinical risk-bearing entities) should not
be treated as premiums from providing
health insurance coverage. The com-
menter observed that the term health in-
surance coverage is defined in section
9832(b)(1) as "benefits consisting of med-
ical care (provided directly, through insur-
ance or reimbursement, or otherwise) un-
der any hospital or medical service policy
or certificate, hospital or medical service
plan contract, or health maintenance orga-
nization contract offered by a health in-
surance issuer." The commenter asserted
that clinical risk-bearing entities do not
provide health insurance coverage under
section 9832(b)(1) because they do not
issue policies, certificates, or contracts of
insurance to the individuals to whom they
provide medical care. Specifically, the
commenter suggested that capitated pay-
ments under the Medicare Shared Savings
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program or the Medicare Pioneer ACO
Program to a clinical risk-bearing entity
should not be treated as premiums from
providing health insurance coverage for
this reason.
The commenter further noted that the
definition of the term health insurance
coverage was added to the Code in 1996
as part of the market reforms under the
Health Insurance Portability and Account-
ability Act (HIPAA) and that virtually
identical definitions of the term health in-
surance coverage were added to the Public
Health Service Act (PHSA) and the Em-
ployee Retirement Income Security Act
(ERISA) at that time. The commenter
pointed out that the Secretaries of the
Treasury Department, Health and Human
Services (HHS), and the Department of
Labor (DOL) are required to administer
the definitions of the term health insur-
ance coverage consistently in all three
statutes pursuant to section 104 of
HIPAA.
The commenter also noted that the
Centers for Medicare and Medicaid Ser-
vices (CMS) have published guidance in-
dicating that payments made by a health
insurance issuer to a clinical risk-bearing
entity may qualify as incurred claims for
purposes of determining the issuer's Med-
ical Loss Ratio under certain circum-
stances. See CMS, CCIIO Technical
Guidance (CCIIO 2012-001): Questions
and Answers Regarding the Medical Loss
Ratio Interim Final Rule (February 10,
2012). According to the commenter, the
treatment of payments to a clinical risk-
bearing entity as incurred claims suggests
that such payments are not premiums
from providing health insurance coverage.
The commenter urged the Treasury De-
partment and the IRS to clarify that clin-
ical risk-bearing entities are not covered
health insurance providers subject to the
deduction limitation under section
162(m)(6) unless they offer policies, cer-
tificates, or contracts of insurance to en-
rollees.
Another commenter asserted that Med-
icaid managed care organizations (MCOs)
and providers of Medicare Advantage and
Medicare Part D prescription drug plans
should not be considered health insurance
issuers that provide health insurance cov-
erage for purposes of sections 9832(b)(1)
and (2) and 162(m)(6). Like the other
commenter, this commenter also pointed
to guidance issued by CMS to support its
position. See CMS, CCIIO Technical
Guidance (CCIIO 2012-002): Questions
and Answers Regarding the Medical Loss
Ratio Regulation (April 20, 2012). The
commenter urged the Treasury Depart-
ment and the IRS to treat fees paid to
companies with healthcare business under
governmental healthcare programs, in-
cluding Medicare and Medicaid, as direct
service payments, and not as premiums
for purposes of determining whether a
person is a health insurance issuer that
provides health insurance coverage for
purposes of Code section 162(m)(6).
The Treasury Department and the IRS
agree with the commenters that a person
cannot be a covered health insurance pro-
vider under section 162(m)(6) unless it is
a health insurance issuer within the mean-
ing of section 9832(b)(2) that receives
premiums from providing health insur-
ance coverage within the meaning of sec-
tion 9832(b)(1). The Treasury Department
and the IRS also acknowledge that section
104 of HIPAA generally requires the
Treasury Department, HHS, and DOL to
interpret consistently the terms health in-
surance issuer and health insurance cov-
erage, as used in the Code, the PHSA, and
ERISA.
The Treasury Department and the IRS,
however, do not adopt the suggestion to
provide in the final regulations that clini-
cal risk bearing entities, Medicare and
Medicaid providers, and other recipients
of payments from government entities in
connection with providing benefits under
government sponsored health care pro-
grams are not covered health insurance
providers or that the amounts received by
these organizations are not premiums
from providing health insurance coverage.
The commenters correctly observe that
to be a covered health insurance provider
under section 162(m)(6), a person must be
a health insurance issuer (as defined in
section 9832(b)(2)) that provides health
insurance coverage (as defined in section
9832(b)(1)) and meets certain other re-
quirements. If the person is not a health
insurance issuer or does not receive pre-
miums from providing health insurance
coverage, the person is not a covered
health insurance provider.
The definitions of the terms health in-
surance coverage and health insurance
issuer have significant importance in
many sections of the Code, the PHSA, and
ERISA. The Treasury Department and the
IRS have concluded that it would be in-
appropriate to provide broad guidance on
the interpretation of sections 9832(b)(1)
and 9832(b)(2) because it would require
full consideration of the possible effects
of that guidance on other statutory provi-
sions. The consideration of these wide-
ranging implications is outside of the
scope of these regulations under section
162(m)(6). However, additional guidance
on the meaning of the terms health insur-
ance issuer and health insurance cover-
age may be provided in future regulations,
notices, revenue rulings, or other guidance
of general applicability published in the
Internal Revenue Bulletin.
#### C. Stop-Loss Coverage
Stop-loss coverage allows an employer
to self-insure for a set amount of claims
costs, with the stop-loss coverage cover-
ing all or most of the claims costs that
exceed the set amount. Several comment-
ers requested that the final regulations
clarify the treatment of stop-loss cover-
age. Specifically, commenters suggested
that payments for stop-loss coverage not
be treated as premiums from providing
health insurance coverage because stop-
loss coverage does not provide insurance
coverage for the health risk of an individ-
ual or for medical care for an individual.
Other commenters suggested that the final
regulations adopt the model standards of
the National Association of Insurance
Commissioners for determining whether
payments for stop-loss insurance coverage
qualify as premiums from providing
health coverage.
The DOL, HHS, and the Treasury De-
partment have expressed concern that em-
ployers in small group markets with
healthier employees may pursue nomi-
nally self-insured arrangements with stop-
loss coverage at low attachment points as
functionally equivalent alternatives to in-
sured group health plans. The three agen-
cies issued a request for information re-
garding such practices, with a focus on the
prevalence and consequences of stop-loss
coverage at low attachment points. 77 FR
25788 (May 1, 2012). Because the scope
of stop-loss coverage that may constitute
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health insurance, if any, has not been de-
termined, premiums under a stop-loss
contract will not be considered premiums
from providing health insurance coverage
for purposes of section 162(m)(6) until
such time and to the extent that future
guidance addresses the issue of whether
and, if so, under what circumstances, stop-
loss coverage constitutes health insurance.
#### D. Captive Insurance Companies
Under the final regulations, as under
the proposed regulations, a captive insur-
ance company is a covered health insur-
ance provider if it is a health insurance
issuer that is otherwise described in sec-
tion 162(m)(6)(C). One commenter rec-
ommended that premiums received by a
captive insurance company or other health
insurance issuer that are attributable to
coverage provided for current and former
employees of members of an aggregated
group that includes the captive insurance
company or other health insurance issuer
should be excluded from the definition of
premiums. The commenter also suggested
that premiums received by a health insur-
ance issuer for providing health insurance
coverage to current and former employees
of other related businesses outside of the
health insurance issuer's aggregated
group should be excluded from the defi-
nition of premiums under certain circum-
stances. The final regulations do not adopt
these suggestions.
Section 406 of ERISA generally pro-
hibits transactions between an employee
benefit plan and a party in interest, and,
under Section 3(14)(C) of ERISA, em-
ployers are generally parties in interest
with respect to the plans that they sponsor.
In addition, Section 3(14)(G) of ERISA
provides that entities that are more than 50
percent owned by employers are also par-
ties in interest. Accordingly, captive in-
surance companies that are more than 50
percent owned by the sponsor of an em-
ployee benefit plan are generally parties in
interest, and the payment of premiums to
such a captive insurance company to pro-
vide insurance to an employee benefit
plan maintained by the owner of a captive
insurance company would generally be a
prohibited transaction and be subject to an
excise tax under section 4975.
The DOL, however, has granted a pro-
hibited transaction class exemption and
numerous individual prohibited transac-
tion exemptions that apply to captive in-
surance arrangements in certain circum-
stances. Under the class exemption, a
captive insurance company can directly
insure the employee benefit plan risks of a
related employer if the captive insurance
company and the arrangement meet cer-
tain requirements, one of which is that at
least 50 percent of the captive insurer's
business is unrelated to the employer
sponsor of the plan.
The individual exemptions apply to
circumstances in which a captive insur-
ance company provides reinsurance to an
unrelated insurance company that directly
insures the health risks of a plan sponsor's
employees. Under this type of arrange-
ment, an employer purchases health insur-
ance for its employees through an unre-
lated insurance company and pays
premiums for that coverage to the unre-
lated insurance company. The unrelated
insurance company then reinsures these
health risks through the employer's cap-
tive insurance company under an indem-
nity reinsurance arrangement.
It is the understanding of the Treasury
Department and the IRS that employers
insuring the health risks of their employ-
ees through captive insurance companies
generally use the approach outlined in the
individual exemptions to avoid engaging
in a prohibited transaction and incurring
an excise tax under section 4975. Because
the amounts received by a captive insur-
ance company under this type of arrange-
ment are solely payments for providing
indemnity reinsurance, those payments
are not treated as premiums under existing
provisions of these regulations, and no
special rule is needed for these types of
payments. In the case of captive insurance
arrangements that rely on the class ex-
emption, the Treasury Department and the
IRS have concluded that a special rule for
premiums paid by a plan sponsor or its
related businesses or their employees
would be inappropriate because the cap-
tive insurance company would be required
under the terms of the class exemption to
conduct a significant portion of its insur-
ance business with unrelated third parties.
The commenter acknowledged that
captive insurance companies generally
follow the approach outlined in the DOL's
individual prohibited transaction exemp-
tions but asserted that an exemption for
captive insurance companies is nonethe-
less necessary because the law in this area
may change in the future to permit captive
insurance companies to receive significant
premium payments directly from a related
employer. The Treasury Department and
the IRS have concluded that a special ex-
ception is not necessary at this time for
amounts paid to captive insurance companies.
### III. Disqualified Taxable Year
Consistent with section 162(m)(6)(B)
and the proposed regulations, the final
regulations provide that a disqualified tax-
able year is, with respect to any employer,
any taxable year for which the employer is
a covered health insurance provider.
### IV. Applicable Individual
Section 162(m)(6)(F) provides that,
with respect to a covered health insurance
provider for a disqualified taxable year, an
applicable individual is any individual (i)
who is an officer, director, or employee in
such taxable year, or (ii) who provides
services for, or on behalf of, the covered
health insurance provider during the tax-
able year. The final regulations adopt the
proposed regulations and provide that re-
muneration for services performed by an
independent contractor to a covered health
insurance provider will not be subject to
the deduction limitation under section
162(m)(6) if certain conditions are met.
The conditions that must be met under the
final regulations for the independent con-
tractor exception to apply are the same as
those provided in the proposed regula-
tions.
Section 162(m)(6)(F) defines an appli-
cable individual as an "individual" de-
scribed in that section. Therefore, a cor-
poration, partnership, or other entity that
is not a natural person generally would not
be an applicable individual. The preamble
to the proposed regulations explains that
the Treasury Department and the IRS are
concerned that covered health insurance
providers may attempt to avoid the appli-
cation of the deduction limitation under
section 162(m)(6) by encouraging em-
ployees and independent contractors who
are natural persons to form small or
single-member personal service corpora-
tions or other similar entities to provide
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services that are historically provided by
natural persons. In the preamble to the
proposed regulations, the Treasury De-
partment and the IRS invited comments
regarding how the final regulations might
address this potential abuse.
One commenter suggested that if a cov-
ered health insurance provider reports remu-
neration payments on a Form 1099 or W-2
issued directly to a natural person, then that
person should be the service provider for
purposes of section 162(m)(6). Conversely,
if a covered health insurance provider re-
ports remuneration as having been paid to
an entity other than a natural person, and
that reporting is not found to be incorrect
under section 6041, the entity should be the
recipient of the remuneration for purposes
of section 162(m)(6).
The final regulations do not adopt these
suggestions. In general, section 6041 re-
quires information reporting for payments
to independent contractors and employ-
ees. The purpose of section 6041 is simply
to track payments that may constitute
gross income to the payee. Section 6041
information reporting does not typically
require the payor to look beyond the iden-
tity of the recipient of a payment. Accord-
ingly, it would be inappropriate to rely on
section 6041 information reporting to
identify potentially abusive arrangements.
The Treasury Department and the IRS
remain concerned about employment ar-
rangements that may be structured for the
purpose of avoiding the deduction limita-
tion under section 162(m)(6). Accord-
ingly, while the final regulations recog-
nize that an applicable individual
generally will be a natural person, they
provide that the Treasury Department and
the IRS may issue guidance in the future
identifying situations in which services
performed by an entity will be treated as
services performed by an individual for
purposes of section 162(m)(6).
### V. Applicable Individual Remuneration (AIR)
As required under section 162(m)(6)(D),
the final regulations, like the proposed
regulations, provide that AIR is the aggre-
gate amount that is allowable as a deduc-
tion (determined without regard to section
162(m)) with respect to an applicable in-
dividual for a disqualified taxable year for
remuneration for services performed by
that individual (whether or not during the
taxable year), except that AIR does not
include any amount that is deferred de-
duction remuneration.
### VI. Deferred Deduction Remuneration (DDR)
Section 162(m)(6)(E) and the final reg-
ulations, like the proposed regulations,
provide that DDR is remuneration that
would be AIR for services that an appli-
cable individual performs during a dis-
qualified taxable year but for the fact
that it is not deductible until a later
taxable year (such as generally occurs,
for example, with nonqualified deferred
compensation).
### VII. Attribution of Remuneration to Services Performed in Taxable Years
The $500,000 deduction limitation un-
der section 162(m)(6) applies to the AIR
and DDR that is attributable to services
performed by an applicable individual for
a covered health insurance provider in a
disqualified taxable year. Accordingly, at
the time that an amount of AIR or DDR
for an applicable individual becomes oth-
erwise deductible (and not before that
time), the remuneration must be attributed
to services performed by the applicable
individual during a particular taxable year
or years of a covered health insurance
provider.
#### A. In General
The final regulations, like the proposed
regulations, provide that, except as other-
wise specifically provided in the regula-
tions, remuneration is attributable to ser-
vices performed by an applicable individual
in the taxable year of the covered health
insurance provider in which the applicable
individual obtains a legally binding right to
the remuneration. In addition, the final
regulations, like the proposed regulations,
provide that remuneration is not attribut-
able to a taxable year during which the
applicable individual is not a service pro-
vider. For these purposes, an individual is
a service provider of a covered health
insurance provider for any period during
which the individual is an officer, director,
or employee of, or providing services for,
or on behalf of, the covered health insur-
ance provider or any member of its aggre-
gated group.
In the preamble to the proposed regu-
lations, the Treasury Department and the
IRS requested comments on an appropri-
ate method for attributing increases in an
applicable individual's benefit that accrue
in taxable years of a covered health insur-
ance provider beginning after the applica-
ble individual ceases providing services
(referred to in this preamble as post-
termination remuneration) to taxable
years during which the applicable individ-
ual was a service provider. Comments
were specifically requested on the appropri-
ate methods for attributing increases under
an account balance plan (defined as a plan
described in § 1.409A-1(c)(2)(i)(A) or (B))
and a nonaccount balance plan (defined as a
plan described in § 1.409A-1(c)(2)(i)(C)).
In the context of nonaccount balance plans,
one commenter suggested that each pay-
ment to or on behalf of an applicable indi-
vidual under a nonaccount balance plan
should be attributed to taxable years of a
covered health insurance provider during
which the applicable individual was a ser-
vice provider in proportion to the increase in
the applicable individual's benefit under the
plan during those years. For example, if an
applicable individual is a service provider
for a covered health insurance provider for
two years and participates in a deferred
compensation plan during that time, and the
applicable individual's benefit under the
plan increases by an equal amount in both of
those years, then 50 percent of each pay-
ment under the plan (whenever the payment
is made and even if it includes post-
termination remuneration) would be attrib-
utable to services performed in each of the
two taxable years. According to the com-
menter, this method would provide a rela-
tively simple method for attributing pay-
ments, including payments that include
post-termination remuneration, to services
performed in taxable years of a covered
health insurance provider.
The Treasury Department and the IRS
agree with the commenter that this ap-
proach to the attribution of deferred com-
pensation payments will ease administra-
tion for taxpayers and the IRS and will
result in a consistent and principled attri-
bution of payments to taxable years dur-
ing which an applicable individual is a
service provider. Although the commenter
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proposed this attribution method in the
context of nonaccount balance plans, the
Treasury Department and the IRS have
concluded that this approach is an appro-
priate method for attributing amounts that
become otherwise deductible under ac-
count balance plans as well. Accordingly,
the Treasury Department and the IRS gen-
erally adopt this approach to the attribu-
tion of payments from account balance
plans and nonaccount balance plans.
### B. Account Balance Plans
The proposed regulations provide two
methods for attributing remuneration un-
der an account balance plan to services
performed by an applicable individual in a
taxable year of the covered health insur-
ance provider. The proposed regulations
refer to these methods as the standard
attribution method and the alternative at-
tribution method. Under the standard at-
tribution method, the amount of remuner-
ation attributable to services performed in
a taxable year of a covered health insur-
ance provider is equal to the excess of the
account balance as of the last day of the
taxable year, plus any payments made
from that account during the taxable year,
over the account balance as of the last day
of the immediately preceding taxable
year. To the extent that an amount that
becomes otherwise deductible under an
account balance plan (such as a payment)
could be attributed to services performed
by an applicable individual in two or more
taxable years of a covered health insur-
ance provider, the proposed regulations
provide that the amount must be attributed
first to services performed by the applica-
ble individual in the earliest taxable year
to which the amount could be attributed.
The proposed regulations also provide
that, under the standard attribution method,
any increases or decreases in an account
balance that occur in taxable years of a
covered health insurance provider in
which an applicable individual is not a
service provider must be attributed to tax-
able years during which the applicable
individual is a service provider and has an
account balance under the plan. The pre-
amble to the proposed regulations pro-
vides that for taxable years beginning in
2013, and thereafter until the Treasury
Department and the IRS issue further
guidance prescribing the method for at-
tributing post-termination remuneration to
these taxable years, post-termination re-
muneration may be attributed using any
reasonable method to taxable years of a
covered health insurance provider during
which an applicable individual is a service
provider and has an account balance under
the plan. For this purpose, a method is
reasonable only if it is consistent with a
reasonable, good faith interpretation of
section 162(m)(6) and is applied consis-
tently for all remuneration provided by the
covered health insurance provider under
substantially similar plans or arrangements.
Under the alternative method described
in the proposed regulations, an amount
paid to or on behalf of an applicable indi-
vidual from an account balance plan is
attributable to services performed by the
applicable individual in the taxable year
of a covered health insurance provider in
which the principal addition related to the
amount was credited to the applicable in-
dividual's account under the plan. To the
extent that an amount paid from the plan
includes earnings on a principal addition
(including post-termination remunera-
tion), the amount is attributable to services
performed in the taxable year in which the
principal addition was credited to the ac-
count.
The final regulations also provide that
two methods are available for attributing
remuneration under account balance
plans. One method, which is different
from the methods described in the pro-
posed regulations, is referred to as the
account balance ratio method, and the
other, which is similar to the alternative
method described in the proposed regula-
tions, is referred to as the principal addi-
tions method. The final regulations, like
the proposed regulations, provide that a
covered health insurance provider and
each member of its aggregated group must
use the same method consistently to attri-
bute remuneration under all of its account
balance plans for all taxable years, with
certain limited exceptions.
### 1. Account Balance Ratio Method
The account balance ratio method is
based on the proportional attribution prin-
ciples described previously in section
VII.A of this preamble. However, it is
similar to the standard attribution method
described in the proposed regulations in
that the amount attributed to services per-
formed by an applicable individual in a
particular taxable year of a covered health
insurance provider is based on the in-
crease in the applicable individual's ac-
count balance during that year. Under the
account balance ratio method, remunera-
tion that becomes otherwise deductible
(for example, because it is paid or made
available to or for an applicable individual)
is attributed to services performed by the
applicable individual in each taxable year of
the covered health insurance provider in
which the applicable individual was a ser-
vice provider and for which the account
balance increased. The amount attributed to
each of these taxable years is equal to the
total amount that becomes otherwise de-
ductible for the year multiplied by a frac-
tion. The numerator of the fraction is the
increase in the account balance for that tax-
able year, and the denominator of is the sum
of all increases in the account balance for all
taxable years during which the applicable
individual was a service provider.
For this purpose, an increase in an ac-
count balance occurs for a taxable year
only if the account balance on the last day
of the taxable year is greater than the
highest account balance on the last day of
every prior taxable year. The amount of
the increase for any taxable year is the
excess of the account balance as of the last
day of the taxable year over the highest
account balance as of the last day of any
prior taxable year.
For example, if an applicable individ-
ual's account balance is $10x on the last
day of Year 1, $5x on the last day of Year
2, $7x on the last day of Year 3, and $12x
on the last day of Year 4, with the fluctu-
ations due solely to changes in investment
returns and not due to payments under the
plan, the only year in which an increase
occurs is Year 4, and the increase is equal
to $2x ($12x - $10x (the highest account
balance in a prior year)). For post-
termination payments, the account bal-
ance ratio for each taxable year will gen-
erally remain constant, and the same ratios
will generally apply to all future pay-
ments. The Treasury Department and the
IRS anticipate that this method will be
significantly easier to administer than the
standard attribution method described in
the proposed regulations.
Under the account balance ratio
method, certain adjustments are made to
account balances for in-service payments
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and for the payment of grandfathered
amounts (as described in section XI of this
preamble). For this purpose, an in-service
payment is any payment made in a taxable
year during which an applicable individ-
ual is a service provider, and it includes a
payment made after an applicable individ-
ual permanently ceases to be a service
provider (for example, because the appli-
cable individual retires) if the applicable
individual was a service provider at any
time during the taxable year of the cov-
ered health insurance provider in which
the payment was made. These adjustments
are necessary because an in-service pay-
ment that is made from an account bal-
ance plan during a year when an applica-
ble individual is accumulating benefits
would reduce or eliminate any increase in
the year-end account balance that would
have occurred in the absence of the in-
service payment. The adjustments re-
quired for in-service payments and grand-
fathered amounts are intended to eliminate
this effect.
Under the account balance ratio method,
if an applicable individual obtains a le-
gally binding right in a taxable year dur-
ing which the applicable individual is a
service provider to an additional contribu-
tion under the plan (other than earnings)
that will be made in a taxable year in
which the applicable individual is not a
service provider, the additional contribu-
tion is attributed to services performed in
the first taxable year preceding the taxable
year of the contribution in which the ap-
plicable individual was a service provider.
In response to the request for com-
ments in the proposed regulations on an
appropriate method for attributing post-
termination earnings to taxable years in
which an applicable individual is a service
provider, one commenter suggested that
any increases (or decreases) in an account
balance that occur in taxable years in
which an applicable individual is not a
service provider should be attributed pro
rata beginning with the taxable year in
which the applicable individual begins
participating in the plan and ending with
the taxable year in which the individual
ceases to be a service provider. The final
regulations do not adopt this suggestion
because it could result in an allocation of
earnings largely unrelated to the years in
which amounts were credited under the
plan as remuneration for services per-
formed.
### 2. Principal Additions Method
The alternative method described in
the proposed regulations provides that a
principal addition and earnings (or losses)
thereon (including earnings and losses in
taxable years during which an applicable
individual is not a service provider) are
attributed to the taxable year in which the
related principal addition is made (includ-
ing earnings and losses that occur in tax-
able years during which an applicable in-
dividual is not a service provider). The
final regulations generally adopt the alter-
native method with certain modifications
and refer to it as the principal additions
method.
Under the principal additions method,
earnings on a principal addition (including
post-termination earnings) are attributed
to the taxable year in which an applicable
individual is credited with the principal
addition under the plan. For example, if a
principal addition is credited to the ac-
count balance of an applicable individual
in the 2015 taxable year, earnings on that
principal addition in 2028 are treated as
additional remuneration for the 2015 tax-
able year, and not the 2028 taxable year.
When an amount is paid from an ac-
count balance plan, it is attributed under
the principal additions method to services
performed in the taxable year in which the
principal addition to which the amount
relates was credited under the plan. The
final regulations clarify that the principal
additions method is available only for ac-
count balance plans that separately ac-
count for each principal addition to the
plan and any earnings thereon and that can
trace any amount that becomes otherwise
deductible under the plan, through sepa-
rate accounting, to a principal addition
made in a taxable year of a covered health
insurance provider. The Treasury Depart-
ment and the IRS understand that certain
plans already track contributions of prin-
cipal additions and the earnings thereon
from the time those principal additions are
credited under the plan to the time they
are paid, generally as part of the adminis-
tration of the plan's method of compliance
with section 409A. The ability to trace
payments from the plan to principal addi-
tions made in a particular taxable year is
integral to the purpose of this attribution
method, and the Treasury Department and
the IRS believe it is appropriate to limit
the use of this method to plans that main-
tain the separate accounting necessary to
trace these amounts.
### C. Nonaccount Balance Plans.
The proposed regulations provide that
remuneration under a nonaccount balance
plan is attributable to services performed
by an applicable individual in a taxable
year based on the increase in the present
value of the applicable individual's bene-
fit under the plan during the taxable year.
Under this method, the amount of remu-
neration attributable to services performed
in a taxable year of a covered health in-
surance provider is equal to the increase
(or decrease) in the present value of the
future payment or payments due under the
plan as of the last day of the taxable year
of the covered health insurance provider,
increased by any payments made during
that year, over the present value of the
future payment or payments as of the last
day of the covered health insurance pro-
vider's preceding taxable year. For pur-
poses of determining the increase (or de-
crease) in the present value of a future
payment or payments, the rules of
§ 31.3121(v)(2)-1(c)(2) apply. To the ex-
tent that an amount that becomes other-
wise deductible under a nonaccount bal-
ance plan (such as a payment) could be
attributed to services performed by an ap-
plicable individual in two or more taxable
years of a covered health insurance pro-
vider, the proposed regulations provide
that the amount must be attributed first to
services performed by the applicable indi-
vidual in the earliest taxable year to which
the amount could be attributed.
In response to comments, the final reg-
ulations adopt two different attribution
methods for nonaccount balance plans
based on proportional attribution princi-
ples and provide that a covered health
insurance provider may choose either of
these two methods to attribute remunera-
tion to taxable years under a nonaccount
balance plan. These two methods are re-
ferred to in the final regulations as the
present value ratio method and the for-
mula benefit ratio method. A covered
health insurance provider and each mem-
ber of its aggregated group must use the
same method consistently to attribute re-
muneration under all of their nonaccount
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balance plans consistently for all taxable
years, with certain limited exceptions.
#### 1. Present Value Ratio Method.
Under the present value ratio method,
each time an amount becomes otherwise
deductible, such as when a payment is
made under the plan, the amount is attrib-
uted to services performed in a taxable
year or years of a covered health insur-
ance provider during which an applicable
individual was a service provider and for
which there was an increase in the present
value of payment(s) due under the plan.
The amount attributed to each of these
taxable years is equal to the total amount
that is otherwise deductible multiplied by
a fraction. The numerator of the fraction is
the increase in the present value of the
applicable individual's benefit for the tax-
able year, and the denominator of the frac-
tion is the sum of all such increases in
present value for all taxable years during
which the applicable individual was a ser-
vice provider. In other words, each time
an amount becomes otherwise deductible,
the amount is attributed proportionately to
each taxable year in which the applicable
individual was a service provider based on
the increase in the present value of the
applicable individual's benefit under the
plan during that year.
For purposes of the present value ratio
method, an increase in the present value of
an applicable individual's benefit occurs
for a taxable year only if the present value
of the benefit on the last day of the cov-
ered health insurance provider's taxable
year is greater than the present value of
the benefit on the last day of every prior
taxable year. The amount of the increase
for the taxable year is the excess of the
present value of the benefit on the last day
of the taxable year over the greatest pres-
ent value of the benefit on the last day of
any prior taxable year. If the present value
of the applicable individual's benefit as of
the last day of the taxable year is less than
or equal to the present value of the benefit
on the last day of any prior taxable year,
there is no increase in the present value
for that year for purposes of this calcula-
tion. For purposes of determining the
present value of a future payment or pay-
ments, the rules of § 31.3121(v)(2)-
1(c)(2) apply. Like the rules under the
account balance ratio method, the final
regulations also provide for adjustments
in the present value of an applicable indi-
vidual's benefit to the extent that the pres-
ent value is reduced by in-service pay-
ments or includes grandfathered amounts.
Although the present value ratio
method adopts proportional attribution
principles for purposes of attributing each
payment to services performed by an ap-
plicable individual in taxable years of a
covered health insurance provider, it is
similar to the attribution method for non-
account balance plans described in the
proposed regulations in that amounts paid
from the plan are attributed to taxable
years based on an increase in the present
value of the applicable individual's bene-
fit. The Treasury Department and the IRS
believe that the present value ratio method
will be significantly easier for both tax-
payers and the IRS to administer than the
nonaccount balance attribution method
described in the proposed regulations. For
applicable individuals who begin receiv-
ing benefits under a nonaccount balance
plan after termination of employment, the
present value ratio for each taxable year
will generally remain constant, and the
payments can be attributed to a taxable
year or years simply by multiplying the
amount of the payment by the applicable
fraction or percentage.
#### 2. Formula Benefit Ratio Method.
In response to the request for com-
ments on the attribution method for non-
account balance plans set forth in the
proposed regulations, one commenter
suggested that covered health insurance
providers should not be required to deter-
mine the present value of an applicable
individual's benefit for each taxable year
to determine the taxable years to which an
amount should be attributed. The com-
menter observed that plans do not ordinar-
ily determine the present value of benefits
on an individual basis before amounts are
paid, if ever, and that this calculation
would add significant complexity to pro-
cess for attributing payments to services
performed. The commenter suggested that
the Treasury Department and the IRS pro-
vide an alternative attribution method
based on year-over-year increases in the
final benefit that an applicable individual
is entitled to receive under the plan's
benefit formula, without reducing that
benefit to its present value. These final
regulations generally adopt this sugges-
tion, with minor modifications, and refer
to the method as the formula benefit
ratio method.
Under the formula benefit ratio method,
remuneration provided to an applicable in-
dividual under a nonaccount balance plan is
attributable to each taxable year in which
the applicable individual provided ser-
vices and for which there was an increase
in the formula benefit. For these purposes,
an applicable individual's formula benefit
is the benefit that the applicable individual
has a legally binding right to receive un-
der the plan in the form that the remuner-
ation being attributed has become other-
wise deductible, which will generally be
the form in which the remuneration is
paid. If a portion of an applicable individ-
ual's benefit is paid or becomes otherwise
deductible in one form (for example, a
lump sum) and another portion of the ben-
efit is paid or becomes otherwise deduct-
ible in another form (for example, a life
annuity), the applicable individual has two
separate formula benefits under the plan,
and any increase in the formula benefit is
determined separately for each portion of
the benefit. If an amount becomes other-
wise deductible under a plan but is not
paid (for example, if an individual is in
constructive receipt of an amount but does
not receive payment of that amount), the
form in which the benefit will be paid, if
the actual form of payment is known,
must be used to determine the formula
benefit, and, if the actual form of payment
is unknown, the formula benefit may be
determined using any form of benefit in
which the amount may be paid under the
plan. In that case, the amount would not
be attributed again when it is ultimately
paid because it does not become otherwise
deductible in the year of actual payment.
Similar to the manner in which
amounts are attributed to services pro-
vided in taxable years of a covered
health insurance provider under the ac-
count balance ratio method and the pres-
ent value ratio method, the amounts at-
tributable under the formula benefit
ratio method to each taxable year in
which an applicable individual provides
services and for which there was an
increase in the formula benefit is equal
to the amount that becomes otherwise
deductible multiplied by a fraction. The
numerator of the fraction is the increase
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in the formula benefit for the taxable
year, and the denominator is the sum of
all such increases during which the ap-
plicable individual was a service pro-
vider (which, in most cases, will equal
the amount that has become otherwise
deductible). Thus, each payment is at-
tributed to taxable years based on the
proportion of the increase in the formula
benefit under the plan during the taxable
year to the total formula benefit to which
the applicable individual has a legally
binding right when the payment is made.
The amount of the increase in the for-
mula benefit for a taxable year is equal to
the excess of the formula benefit to which
the individual has a legally binding right
under the plan as of the measurement date
for that taxable year (generally in the ac-
tual form of payment) over the greatest
formula benefit to which the applicable
individual had a legally binding right un-
der the plan as of any measurement date in
any earlier taxable year (in that same
form of payment). Special rules apply
for purposes of determining whether an
increase occurs, and the amount of any
increase, in the taxable year in which a
payment occurs.
#### D. Equity-Based Remuneration
The final regulations generally adopt
the rules described in the proposed regu-
lations for attributing remuneration result-
ing from equity-based compensation,
which includes stock options, stock appre-
ciation rights (SARs), restricted stock, and
restricted stock units (RSUs), with certain
modifications made in response to com-
ments.
The proposed regulations provide that
remuneration resulting from the exercise
of stock options and SARs is attributable
on a daily pro rata basis to services per-
formed by an applicable individual over
the period beginning on the date of grant
of the stock option or SAR and ending on
the date that the stock option or SAR is
exercised, excluding any days on which
the applicable individual is not a service
provider.
Commenters suggested that, for a stock
option or SAR that is subject to a substan-
tial risk of forfeiture, a covered health
insurance provider should be permitted to
attribute remuneration resulting from the
exercise of the stock option or SAR on a
daily pro rata basis over the period begin-
ning on the date the stock option or SAR
is granted and ending on either the date
the stock option or SAR is exercised or
the date the stock option or SAR is no
longer subject to a substantial risk of for-
feiture, in either case excluding any days
the applicable individual is not a service
provider. The commenters explained that
permitting attribution over the vesting pe-
riod would be simpler for some covered
health insurance providers because this
method is commonly used for other finan-
cial accounting and regulatory purposes.
The final regulations adopt this sugges-
tion. However, the final regulations also
provide that the covered health insurance
provider must choose one of the two per-
missible methods and use it consistently
for all stock options or SARs that it issues,
unless certain exceptions apply.
One commenter suggested that, instead
of attributing equity-based remuneration
on a daily pro rata basis over the period
from the grant date to the date of exercise
or the date of vesting, a covered health
insurance provider should be permitted to
attribute equity-based remuneration en-
tirely to the taxable year in which the
equity-based remuneration vests, is exer-
cised, or is otherwise includible in in-
come. Specifically, the commenter sug-
gested that if equity-based remuneration
vests in connection with a corporate trans-
action, a covered health insurance pro-
vider should be permitted to attribute pre-
transaction appreciation entirely to the year
of vesting. The final regulations do not
adopt this suggestion. Attributing equity-
based remuneration with a multiple-year
vesting period to a single taxable year would
not result in a reasonable attribution of
remuneration to the taxable years in which
the services were performed to earn the
remuneration, as required by section
162(m)(6)(A).
The final regulations reserve on attri-
bution rules applicable to grants of equity-
based remuneration in situations in which
the remuneration is determined by refer-
ence to equity in an entity treated as a
partnership for federal tax purposes or by
reference to equity interests in an entity
described in § 1.409A-1(b)(5)(iii) (for ex-
ample a mutual company). However, until
the Treasury Department and the IRS is-
sue further guidance on the attribution of
this type of remuneration, the rules appli-
cable to stock options, SARs, restricted
stock, and RSUs, as described in the final
regulations, may be applied by analogy
(subject to any applicable rule under the
Code (including subchapter K of the
Code) affecting the timing, availability or
amount of any deduction).
##### E. Involuntary Separation Pay
The final regulations, like the proposed
regulations, provide that involuntary sep-
aration pay is attributable to services per-
formed by an applicable individual during
the taxable year of a covered health insur-
ance provider in which the involuntary
separation from service occurs. Alterna-
tively, involuntary separation pay may be
attributable, on a daily pro rata basis, to
services performed by the applicable indi-
vidual beginning on the date that the ap-
plicable individual obtains a legally bind-
ing right to the involuntary separation pay
and ending on the date of the applicable
individual's involuntary separation from
service with the covered health insurance
provider and all members of its aggre-
gated group. For this purpose, involuntary
separation pay is defined as remuneration
to which an applicable individual has a
right to payment solely as a result of an
involuntary separation from service. If in-
voluntary separation pay is attributed to
services performed in multiple taxable
years, each payment of involuntary sepa-
ration pay must be attributed to the same
taxable years in the same proportion that
the total amount of separation pay is at-
tributed to those taxable years.
#### F. Substantial Risk of Forfeiture
The final regulations, like the proposed
regulations, provide a two-step process for
attributing certain remuneration to taxable
years of the covered health insurance pro-
vider if the remuneration is subject to a
substantial risk of forfeiture for more than
one taxable year of a covered health in-
surance provider. This two-step process
applies to amounts that are attributable
under the general rule providing that re-
muneration is attributable to services per-
formed by an applicable individual in the
taxable year in which an applicable indi-
vidual obtains a legally binding right to
the remuneration and under the rules for
account balance and nonaccount balance
plans. Under this two-step process, the re-
muneration that is subject to the substantial
risk of forfeiture is first attributed to the
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taxable year or years of the covered health
insurance provider under the attribution
rules that otherwise apply. Then, that re-
muneration is reattributed on a daily pro
rata basis over the period that it is subject
to a substantial risk of forfeiture (in other
words, reattributed evenly over the vest-
ing period).
One commenter suggested that the fi-
nal regulations make this two-step attribu-
tion method optional, rather than manda-
tory, and permit covered health insurance
providers to choose whether to apply this
two-step method on a plan-by-plan basis.
The final regulations do not adopt this
suggestion. Attributing remuneration evenly
over the vesting period results in a more
accurate matching of remuneration to the
taxable years in which the services were
performed to earn the remuneration and is
consistent with the treatment of equity-
based compensation that is subject to a
substantial risk of forfeiture.
### VII. Application of the $500,000 Deduction Limitation
#### A. In General
The final regulations generally adopt
the rules described in the proposed regu-
lations for applying the $500,000 deduc-
tion limitation of section 162(m)(6). The
deduction limitation applies to the aggre-
gate AIR and DDR attributable to services
performed by an applicable individual for
a covered health insurance provider in a
disqualified taxable year. Accordingly, if
AIR, DDR, or a combination of AIR and
DDR, attributable to services performed
by an applicable individual for a covered
health insurance provider in a disqualified
taxable year exceeds $500,000, the
amount of the remuneration that exceeds
$500,000 is not allowable as a deduction
in any taxable year. When the $500,000
deduction limit is applied to an amount of
AIR attributable to services performed by
an applicable individual in a disqualified
taxable year, the deduction limit with re-
spect to that applicable individual for that
disqualified taxable year is reduced, but
not below zero, by the amount of the AIR
to which the deduction limit is applied. If
the applicable individual also has an
amount of DDR attributable to services
performed in that disqualified taxable year
that becomes otherwise deductible in a
subsequent taxable year, the deduction
limit, as reduced, is applied to that amount
of DDR in the first taxable year in which
that DDR becomes otherwise deductible.
If the amount of the DDR that becomes
otherwise deductible is less than the re-
duced deduction limit, then the full
amount of the DDR is deductible in that
taxable year. To the extent that the amount
of the DDR exceeds the reduced deduc-
tion limit, the covered health insurance
provider's deduction for the DDR is lim-
ited to the amount of the reduced deduc-
tion limit and the amount of the DDR that
exceeds the deduction limit cannot be de-
ducted in any taxable year.
B. Application of Deduction Limitation
to Payments
The final regulations generally adopt
rules described in the proposed regula-
tions for applying the deduction limitation
to payments of remuneration. Any pay-
ment to an applicable individual may in-
clude remuneration that is attributable to
services performed by the applicable indi-
vidual in one or more taxable years of a
covered health insurance provider under
the rules set out in the final regulations.
For example, remuneration resulting from
the vesting of restricted stock that is sub-
ject to a substantial risk of forfeiture for
five full taxable years of a covered health
insurance provider is attributable to ser-
vices performed by the applicable individ-
ual in each of the five years during which
the restricted stock was subject to a sub-
stantial risk of forfeiture. In that case, a
separate deduction limit applies to each
portion of the payment that is attributed to
services performed in a different disqual-
ified taxable year of the covered health
insurance provider. Any portion of the
payment that is attributed to a disqualified
taxable year is deductible only to the ex-
tent that it does not exceed the deduction
limit that applies to the applicable individ-
ual for that disqualified taxable year, as
that deduction limit may have been previ-
ously reduced by the amount of any AIR
or DDR attributable to services performed
in that disqualified taxable year that was
previously deductible. The final regula-
tions contain several examples to illustrate
how these rules apply to services per-
formed and compensation payments made
over multiple taxable years.
### VIII. Corporate Transactions
#### A. In general
A corporation or other person may be-
come a covered health insurance provider
as a result of certain transactions such as a
merger, acquisition or disposition of as-
sets or stock (or other equity interests),
reorganization, consolidation, separation,
or other transaction resulting in a change
in the composition of an aggregated group
(generally referred to in this preamble and
the final regulations as a corporate trans-
action). For example, as a result of the
aggregation rules, members of a con-
trolled group of corporations that does not
include a health insurance issuer may be-
come covered health insurance providers
if a health insurance issuer that is a cov-
ered health insurance provider becomes a
member of the controlled group.
#### B. Transition period relief
The final regulations, like the proposed
regulations, provide a transition period to
ease the administrative burden on a person
that becomes a covered health insurance
provider solely as a result of a corporate
transaction. Specifically, the final regula-
tions provide that if a person that is not
otherwise a covered health insurance pro-
vider would become a covered health in-
surance provider solely as a result of a
corporate transaction, the person generally
is not a covered health insurance provider
for the taxable year in which the transac-
tion occurs (referred to in this preamble
and the final regulations as transition pe-
riod relief). The person, however, is a
covered health insurance provider for any
subsequent taxable year if it is a covered
health insurance provider for the taxable
year under the generally applicable rules
for determining whether a person is a cov-
ered health insurance provider. A person
that is a covered health insurance provider
immediately before a corporate transac-
tion is not eligible for this transition pe-
riod relief because the person does not
become a covered health insurance pro-
vider solely as a result of the corporate
transaction (but may be eligible for certain
transition relief relating to the attribution
method it is permitted to use for the tax-
able year in which the corporate transac-
tion occurs).
One commenter suggested that if a per-
son becomes a covered health insurance
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provider as a result of a corporate trans-
action, the person should not be treated as
a covered health insurance provider until
the first taxable year beginning at least six
months after the transaction. The commenter
asserted that the additional time is necessary to
provide for an adequate transition period. The
final regulations do not adopt this sugges-
tion. Section 162(m)(6)(C)(ii) treats the
members of an aggregated group as a sin-
gle employer. The statute does not specif-
ically provide that a person must be
treated as a covered health insurance pro-
vider for its entire taxable year if it is a
member of an aggregated group that in-
cludes a health insurance issuer for only a
portion of the year. Therefore, the Trea-
sury Department and the IRS have con-
cluded that providing transition relief for
corporate transactions during the taxable
year that the corporate transaction occurs
is consistent with the statute. However,
providing transition relief for a taxable
year in which a person is a member of an
aggregated group that includes a health
insurance issuer for its entire taxable year
would be inconsistent with the statute.
#### C. Certain applicable individuals
The proposed regulations provide that,
in certain circumstances, the deduction
limitation under section 162(m)(6) may
apply to a person that is not treated as a
covered health insurance provider during
the transition period. Specifically, the pro-
posed regulations provide that the transi-
tion period otherwise applicable to certain
members of an aggregated group does not
extend to remuneration provided to appli-
cable individuals of a health insurance
issuer that is a covered health insurance
provider and that is not eligible for the
transition period relief because it does not
become a covered health insurance pro-
vider solely as a result of a corporate
transaction.
The final regulations generally adopt
this rule, but expand it to include applica-
ble individuals of not only health insur-
ance issuers, but also other employers that
would have been covered health insurance
providers in the taxable year that the cor-
porate transaction occurs, without regard
to the corporate transaction. For example,
if a controlled group of corporations that
are not covered health insurance providers
acquires a health insurance issuer and its
non-health insurance issuer subsidiary,
both of which are covered health insur-
ance providers before the corporate trans-
action, the deduction limitation under sec-
tion 162(m)(6) applies to all remuneration
provided to the applicable individuals of
the health insurance issuer and the non-
health insurance issuer subsidiary, even if
the remuneration is provided by a member
of the acquiring controlled group that is
otherwise eligible for transition period re-
lief during the year of the acquisition.
#### D. Consistency rule relief
As explained previously in this pream-
ble, a covered health insurance provider
and all members of its aggregated group
that provide remuneration under an ac-
count balance plan, a nonaccount balance
plan, or through stock options or SARs
generally must use the same attribution
method for each type of plan (that is,
account balance plans, nonaccount bal-
ance plans, and stock options or SARs) for
all taxable years. As a result of a corporate
transaction, however, a covered health in-
surance provider that uses a particular at-
tribution method for one or more of these
types of plans may become a member of
an aggregated group that has a member
that uses a different attribution method.
To maintain consistency within the aggre-
gated group, one or more covered health
insurance providers would need to change
attribution methods.
As noted in the preamble to the pro-
posed regulations, once remuneration pro-
vided to an applicable individual from a
plan has been attributed to a taxable year
under a particular method (for example,
because a payment has been made to the
applicable individual), it would be admin-
istratively difficult to change the attribu-
tion method for amounts that become de-
ductible with respect to that applicable
individual in future years and still provide
a reasonably accurate attribution of remu-
neration from that plan to the taxable
years in which the applicable individual
performed the services to earn the remu-
neration. In addition, the Treasury Depart-
ment and the IRS are concerned that the
ability to change attribution methods may
lead to selective use of methods to maxi-
mize deductions. However, recognizing
that there may be valid business reasons
for changing attribution methods, such as
a merger or acquisition, change in com-
pensation structure, or change in account-
ing method, the Treasury Department and
the IRS requested comments on the stan-
dards that should apply to determine
whether and when an attribution method
may be changed, and how that change
would apply if deductions for amounts
provided under the plan or arrangement
have already been taken.
Commenters generally asked for flexi-
bility in applying the consistency rules
after a corporate transaction. The final
regulations generally adopt this sugges-
tion and provide that, if a covered health
insurance provider that uses an attribution
method for a particular type of plan (that
is, an account balance plan, a nonaccount
balance plan, or a stock option or SAR)
becomes a member of an aggregated
group with one or more covered health
insurance providers that used a different
attribution method for that type of plan
before the corporate transaction, the cov-
ered health insurance provider will not
violate the otherwise applicable consis-
tency rules for the taxable year in which
the corporate transaction takes place if it
continues to use the same attribution
method for that type of plan that it used
before the transaction, even if it is differ-
ent from the attribution method used by
other members of the aggregated group.
Further, the final regulations provide that,
in this situation, a member of the aggre-
gated group may change its attribution
method to be the same as the attribution
method used by other members of its ag-
gregated group, subject to limitations or
modifications that the Treasury Depart-
ment and the IRS may provide in future
guidance published in the Internal Reve-
nue Bulletin.
One commenter suggested that appli-
cation of the consistency rules following a
corporate transaction should not require a
retroactive change in attribution methods.
The commenter noted that changing attri-
bution methods retroactively would be ad-
ministratively difficult. The final regula-
tions generally adopt this suggestion and
provide that, if an attribution method has
been used to attribute remuneration pro-
vided to an applicable individual under an
account balance plan, a nonaccount bal-
ance plan, or a stock option or SAR before
a corporate transaction, that same method
must be used in all future taxable years to
attribute any remuneration provided to the
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applicable individual under the same type
of plan to the extent that the applicable
individual had a legally binding right to
the remuneration as of the date of the
corporate transaction.
Because a covered health insurance
provider does not need to use an attribu-
tion method for amounts that become de-
ductible during a taxable year until it files
its tax return for that taxable year, the
Treasury Department and the IRS have
concluded that the exceptions to the con-
sistency rules described in this section of
the preamble and the final regulations will
provide covered health insurance provid-
ers adequate time to make any adjust-
ments to their attribution methods neces-
sary to comply with the otherwise applicable
consistency rules.
E. Application of the de minimis rule
One commenter suggested that the fi-
nal regulations clarify that if a person
ceases to be a member of an aggregated
group, the de minimis exception is applied
taking into account only the revenues and
premiums of the person for the period
during which it was a member of the
aggregated group. The final regulations
adopt this suggestion.
XI. Grandfathered Amounts Attributable
to Services Performed Before January 1,
2010
The deduction limitation under section
162(m)(6) only applies to AIR attributable
to services performed by an applicable
individual in taxable years beginning after
December 31, 2012 and to DDR attribut-
able to services performed by an applica-
ble individual in taxable years beginning
after December 31, 2009. It does not ap-
ply to remuneration attributable to ser-
vices performed in taxable years begin-
ning before January 1, 2010.
The proposed regulations provide that
for purposes of determining whether re-
muneration provided under an account
balance plan is attributable to services
performed in taxable years beginning be-
fore January 1, 2010, a covered health
insurance provider is required to use the
same attribution method that it otherwise
uses to attribute remuneration to taxable
years, except that any substantial risk of
forfeiture is disregarded.
A commenter suggested that a covered
health insurance provider be permitted to
use any method that is permissible for
purposes of attributing remuneration to
taxable years for purposes of determining
the amount of remuneration that is attrib-
utable to services performed before Janu-
ary 1, 2010, even if the method is different
from the method it otherwise uses to at-
tribute remuneration to taxable years. The
final regulations provide that if a covered
health insurance provider uses a method
for attributing amounts that become de-
ductible under an account balance plan or
a nonaccount balance plan to taxable
years beginning after December 31, 2009,
it must use that same method consistently
for attributing amounts to taxable years
beginning before January 1, 2010, except
that, if it uses the account balance ratio
method to attribute remuneration under an
account balance plan to taxable years be-
ginning after December 31, 2009, it may
use the principal additions method to at-
tribute amounts to taxable years beginning
before January 1, 2010. The final regula-
tions require certain adjustments to ac-
count balances for purposes of applying
the account balance ratio method if this is
done.
For nonaccount balance plans, the pro-
posed regulations provide that the amount
attributable to services provided in taxable
years beginning before January 1, 2010,
equals the present value of the remunera-
tion to which the applicable individual
would have been entitled under the plan if
the applicable individual voluntarily ter-
minated services without cause on the last
day of the first taxable year of the covered
health insurance provider beginning be-
fore January 1, 2010. The proposed regu-
lations further provide that, for any sub-
sequent taxable year of the covered health
insurance provider, this amount may in-
crease to the present value of the benefit
the applicable individual actually be-
comes entitled to receive, in the form and
at the time actually paid, determined un-
der the terms of the plan (including appli-
cable limits under the Code) as in effect
on the last day of the first taxable year
beginning before January 1, 2010, without
regard to any further services required by
the individual after that date or any other
events affecting the amount of, or the en-
titlement to, benefits (other than the appli-
cable individual's election with respect to
the time or form of an available benefit).
The final regulations provide that for
purposes of determining whether remu-
neration provided under a nonaccount bal-
ance plan is attributable to services per-
formed in taxable years beginning before
January 1, 2010, a covered health insur-
ance provider is required to use the attri-
bution method that it otherwise uses to
attribute remuneration to taxable years.
Although the amounts attributable to ser-
vices performed in taxable years begin-
ning before January 1, 2010, are deter-
mined differently under the final regulations,
the amounts attributable to services per-
formed in taxable years beginning before
January 1, 2010, under the formula benefit
ratio method generally will be similar to
the amounts attributable to those years
under the proposed regulations. For
equity-based remuneration, the final regu-
lations generally follow the rules de-
scribed in the proposed regulations and
provide that any remuneration resulting
from equity-based compensation granted
in a taxable year beginning before January
1, 2010, is not subject to the deduction
limitation, regardless of whether the
equity-based remuneration is subject to a
substantial risk of forfeiture during a tax-
able year beginning after December 31,
2009. Earnings on these grandfathered
amounts, including earnings accruing in
taxable years beginning after December
31, 2009, are also generally treated as
remuneration attributable to services per-
formed in taxable years beginning before
January 1, 2010.
One commenter suggested that the fi-
nal regulations should clarify that the
grandfathering rules apply to remunera-
tion provided under all types of arrange-
ments (not only remuneration from ac-
count balance plans, nonaccount balance
plans, and equity-based remuneration)
and that grandfathered amounts be deter-
mined based on the attribution rules gen-
erally applicable to the arrangement under
which remuneration was provided. The
final regulations adopt this suggestion.
#### XII. Transition Rules for Certain DDR
Section 162(m)(6) applies to DDR
attributable to services performed in a
disqualified taxable year beginning after
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December 31, 2009 that is otherwise
deductible in a taxable year beginning
after December 31, 2012. As described
in section I.B of this preamble, for tax-
able years beginning before January 1,
2013, a covered health insurance pro-
vider is any health insurance issuer (as
defined in section 9832(b)(2)) that re-
ceives premiums from providing health
insurance coverage (as defined in sec-
tion 9832(b)(1)) (a pre-2013 covered
health insurance provider). For taxable
years beginning after December 31,
2012, a covered health insurance pro-
vider is any health insurance issuer (as
defined in section 9832(b)(2)) that re-
ceives at least 25 percent of its gross
premiums from providing minimum es-
sential coverage (as defined in section
5000A(f)) (a post-2012 covered health
insurance provider). Thus, the definition
of the term covered health insurance
provider is narrower for taxable years
beginning after December 31, 2012,
than it is for taxable years beginning
before January 1, 2013. The proposed
regulations include transition rules un-
der which the section 162(m)(6) deduc-
tion limitation applies to DDR attribut-
able to services performed in taxable
years beginning after December 31,
2009 and before January 1, 2013 only if
the covered health insurance provider is
a pre-2013 covered health insurance
provider for the taxable year to which
the DDR is attributable and a post-2012
covered health insurance provider for
the taxable year in which that DDR is
otherwise deductible. The final regula-
tions retain this transition rule.
#### XIII. Effective/Applicability Date
The final regulations are effective on
September 23, 2014. The final regulations
apply to taxable years beginning after
September 23, 2014. In addition, taxpay-
ers may rely on these final regulations for
taxable years beginning on or before Sep-
tember 23, 2014.
### Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
### Drafting Information
The principal author of the regulations
is Ilya Enkishev of the Office of the Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and the Treasury Department participated
in their drafting and development.
### List of Subjects
#### 26 CFR Part 1
Income Taxes, Reporting and record-
keeping requirements.
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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.162-31 is added to
read as follows:
§ 1.162-31 The $500,000 deduction
limitation for remuneration provided by
certain health insurance providers.
(a) Scope. This section sets forth rules
regarding the deduction limitation under
section 162(m)(6), which provides that a
covered health insurance provider's de-
duction for applicable individual remuner-
ation (AIR) and deferred deduction remu-
neration (DDR) attributable to services
performed by an applicable individual in a
disqualified taxable year is limited to
$500,000. Paragraph (b) of this section
sets forth definitions of the terms used in
this section. Paragraph (c) of this section
explains the general limitation on deduc-
tions under section 162(m)(6). Paragraph
(d) of this section sets forth the methods
that must be used to attribute AIR and
DDR to services performed in one or
more taxable years of a covered health
insurance provider. Paragraph (e) of this
section sets forth rules on how the deduc-
tion limit applies to AIR and DDR that is
otherwise deductible under chapter 1 of
the Internal Revenue Code (Code) but for
the deduction limitation under section
162(m)(6) (referred to in this section as
remuneration that is otherwise deduct-
ible). Paragraph (f) of this section sets
forth additional rules for persons partici-
pating in certain corporate transactions.
Paragraph (g) of this section explains the
interaction of section 162(m)(6) with sec-
tions 162(m)(1) and 280G. Paragraph (h)
of this section sets forth rules for deter-
mining the amounts of remuneration that
are not subject to the deduction limitation
under section 162(m)(6) due to the statu-
tory effective date (referred to in this sec-
tion as grandfathered amounts). Paragraph
(i) of this section sets forth transition rules
for DDR that is attributable to services
performed in taxable years beginning after
December 31, 2009 and before January 1,
2013. Paragraph (j) of this section sets
forth the effective and applicability dates
of the rules in this section.
(b) Definitions-(1) Health insurance
issuer. For purposes of this section, a
health insurance issuer is a health in-
surance issuer as defined in section
9832(b)(2).
(2) Aggregated group. For purposes of
this section, an aggregated group is a
health insurance issuer and each other per-
son that is treated as a single employer
with the health insurance issuer at any
time during the taxable year of the health
insurance issuer under sections 414(b)
(controlled groups of corporations),
414(c) (partnerships, proprietorships, etc.
under common control), 414(m) (affili-
ated service groups), or 414(o), except
that the rules in section 1563(a)(2) and
(a)(3) (with respect to corporations) and
§ 1.414(c)-2(c) and (d) (with respect to
trades or businesses under common con-
trol) for brother-sister groups and com-
bined groups are disregarded.
(3) Parent entity-(i) In general. For
purposes of this section, a parent entity is
either-
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(A) the common parent of a parent-
subsidiary controlled group of corpora-
tions (within the meaning of section
414(b)) or a parent-subsidiary group of
trades or businesses under common con-
trol (within the meaning of section 414(c))
that includes a health insurance issuer, or
(B) the health insurance issuer in an
aggregated group that is an affiliated ser-
vice group (within the meaning of section
414(m)) or a group described in section
414(o).
(ii) Certain aggregated groups with
multiple health insurance issuers-
(A) In general. If two or more health
insurance issuers are members of an ag-
gregated group that is an affiliated service
group (within the meaning of section
414(m)) or group described in section
414(o), the parent entity is the health in-
surance issuer in the aggregated group
that is designated in writing by the other
members of the aggregated group to act as
the parent entity.
(B) Successor parent entities. If a
health insurance issuer that is the parent
entity of an aggregated group pursuant to
paragraph (b)(3)(ii)(A) of this section (a
predecessor parent entity) ceases to be a
member of the aggregated group (for ex-
ample, as a result of a corporate transac-
tion) and, after the predecessor parent en-
tity ceases to be a member of the
aggregated group, two or more health in-
surance issuers are members of the aggre-
gated group, the new parent entity (the
successor parent entity) is another mem-
ber of the aggregated group designated in
writing by the remaining members of the
aggregated group. The successor parent
entity must be a health insurance issuer in
the aggregated group that has the same
taxable year as the predecessor parent en-
tity; provided, however, that if no health
insurance issuer in the aggregated group
has the same taxable year as the predeces-
sor parent entity, the members of the ag-
gregated group may designate in writing
any other health insurance issuer in the
aggregated group to be the parent entity.
(C) Failure to designate a parent en-
tity. If the members of an aggregated
group that includes two or more health
insurance issuers and that is an affiliated
service group (within the meaning of sec-
tion 414(m)) or a group described in sec-
tion 414(o) fail to designate in writing a
health insurance issuer to act as the parent
entity of the aggregated group, the parent
entity of the aggregated group for all tax-
able years is deemed to be an entity with
a taxable year that is the calendar year
(without regard to whether the aggregated
group includes or has ever included an
entity with a calendar year taxable year)
for all purposes under this section for
which a parent entity's taxable year is
relevant.
(4) Covered health insurance provid-
er-(i) In general. For purposes of this
section and except as otherwise provided
in this paragraph (b)(4), a covered health
insurance provider is-
(A) a health insurance issuer for any of
its taxable years beginning after Decem-
ber 31, 2012 in which at least 25 percent
of the gross premiums it receives from
providing health insurance coverage (as
defined in section 9832(b)(1)) are from
providing minimum essential coverage (as
defined in section 5000A(f)),
(B) a health insurance issuer for any of
its taxable years beginning after Decem-
ber 31, 2009 and before January 1, 2013
in which it receives premiums from pro-
viding health insurance coverage (as de-
fined in section 9832(b)(1)),
(C) the parent entity of an aggregated
group of which one or more health insur-
ance issuers described in paragraphs
(b)(4)(i)(A) or (B) of this section are
members for the taxable year of the parent
entity with which, or in which, ends the
taxable year of any such health insurance
issuer; however, if the parent entity of an
aggregated group is a health insurance
issuer described in paragraphs (b)(4)(i)(A)
or (B) of this section, that health insurance
issuer is a covered health insurance pro-
vider for any taxable year that it is other-
wise a covered health insurance provider,
without regard to whether the taxable year
of any other health insurance issuer de-
scribed in paragraphs (b)(4)(i)(A) or (B)
of this section ends with or within its
taxable year, and
(D) each other member of an aggre-
gated group of which one or more health
insurance issuers described in paragraphs
(b)(4)(i)(A) or (B) of this section are
members for the taxable year of the other
member ending with, or within, the parent
entity's taxable year.
(ii) Parent entities with short taxable
years. If for any reason a parent entity has
a taxable year that is less than 12 months
(for example, because the taxable year of
a predecessor parent entity ends when it
ceases to be a member of an aggregated
group), then, for purposes of determining
whether the parent entity and each other
member of the aggregated group is a cov-
ered health insurance provider with re-
spect to the parent entity's short taxable
year (that is, for purposes of determining
whether the taxable year of a health insur-
ance issuer described in paragraph
(b)(4)(i)(A) or (B) of this section ends
with or within the short taxable year of the
parent entity and for purposes of deter-
mining whether another member of the
aggregated group has a taxable year end-
ing with or within the short taxable year of
the parent entity), the taxable year of the
parent entity is treated as the 12-month
period ending on the last day of the short
taxable year. Accordingly, a parent entity
is a covered health insurance provider for
its short taxable year if it is a health in-
surance issuer described in paragraph
(b)(4)(i)(A) or (B) of this section or if the
taxable year of a health insurance issuer
described in paragraph (b)(4)(i)(A) or (B)
of this section in an aggregated group with
the parent entity ends with or within the
12-month period ending on the last day of
the parent entity's short taxable year. Sim-
ilarly, each other member of the parent
entity's aggregated group is a covered
health insurance provider for its taxable
year ending with or within the 12-month
period ending on the last day of the parent
entity's short taxable year.
(iii) Predecessor and successor parent
entities. If the parent entity of an aggre-
gated group changes, the members of the
aggregated group may be covered health
insurance providers based on their rela-
tionship to either or both parent entities
with respect to the taxable years of the
parent entities in which the change occurs.
(iv) Self-insured plans. For purposes of
this section, a person is not a covered
health insurance provider solely because it
maintains a self-insured medical reim-
bursement plan. For this purpose, a self-
insured medical reimbursement plan is a
separate written plan for the benefit of
employees (including former employees)
that provides for reimbursement of medical
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expenses referred to in section 105(b) and
does not provide for reimbursement under
an individual or group policy of accident
or health insurance issued by a licensed
insurance company or under an arrange-
ment in the nature of a prepaid health care
plan that is regulated under federal or state
law in a manner similar to the regulation
of insurance companies, and may include
a plan maintained by an employee orga-
nization described in section 501(c)(9).
(v) De minimis exception-(A) In gen-
eral. A health insurance issuer and any
member of its aggregated group that
would otherwise be a covered health insur-
ance provider under paragraph (b)(4)(i), (ii),
or (iii) of this section for a taxable year
beginning after December 31, 2012 is not a
covered health insurance provider under this
section for that taxable year if the premiums
received by the health insurance issuer and
any other health insurance issuers in its ag-
gregated group from providing health insur-
ance coverage (as defined in section
9832(b)(1)) that constitutes minimum es-
sential coverage (as defined in section
5000A(f)) are less than two percent of the
gross revenues of the health insurance issuer
and all other members of its aggregated
group for that taxable year. A health insur-
ance issuer and any member of its aggre-
gated group that would otherwise be a cov-
ered health insurance provider under
paragraph (b)(4)(i), (ii), or (iii) of this sec-
tion for a taxable year beginning after De-
cember 31, 2009 and before January 1, 2013
is not a covered health insurance provider
for purposes of this section for that taxable
year if the premiums received by the health
insurance issuer and any other health insur-
ance issuers in its aggregated group from
providing health insurance coverage (as de-
fined in section 9832(b)(1)) are less than
two percent of the gross revenues of the
health insurance issuer and all other mem-
bers of its aggregated group for that taxable
year. In determining whether premiums
constitute less than two percent of gross
revenues, the amount of gross revenues
must be determined in accordance with gen-
erally accepted accounting principles. For
the definition of the term premiums, see
paragraph (b)(5) of this section. A person
that would be a covered health insurance
provider for a taxable year in an aggregated
group with a predecessor parent entity and
that would also be a covered health insur-
ance provider for that taxable year in an
aggregated group with a successor parent
entity is not a covered health insurance pro-
vider under the de minimis exception only if
the aggregated groups of which the person
is a member meet the requirements of the de
minimis exception based on both the taxable
year of the predecessor parent entity and the
taxable year of the successor parent entity.
(B) One-year de minimis exception
transition period. If a health insurance
issuer or a member of an aggregated
group is not a covered health insurance
provider for a taxable year solely by rea-
son of the de minimis exception described
in paragraph (b)(4)(v)(A) of this section,
but fails to meet the requirements of the
de minimis exception described in para-
graph (b)(4)(v)(A) of this section for the
immediately following taxable year, that
health insurance issuer or member of an
aggregated group will not be a covered
health insurance provider for that imme-
diately following taxable year.
(vi) Examples. The following examples
illustrate the principles of this paragraph
(b)(4). For purposes of these examples,
each corporation has a taxable year that is
the calendar year, unless the example pro-
vides otherwise.
Example 1. (i) Corporations Y and Z are mem-
bers of an aggregated group under paragraph (b)(2)
of this section. Y is a health insurance issuer that is
a covered health insurance provider pursuant to para-
graph (b)(4)(i)(A) of this section and receives pre-
miums from providing health insurance coverage
that is minimum essential coverage during its 2015
taxable year in an amount that is less than two
percent of the combined gross revenues of Y and Z
for their 2015 taxable years. Z is not a health insur-
ance issuer.
(ii) Y and Z are not covered health insurance
providers under paragraph (b)(4) of this section for
their 2015 taxable years because they meet the re-
quirements of the de minimis exception under para-
graph (b)(4)(v)(A) of this section.
Example 2. (i) Corporations V, W, and X are
members of an aggregated group under paragraph
(b)(2) of this section. V is a health insurance issuer
that is a covered health insurance provider pursuant
to paragraph (b)(4)(i)(A) of this section, but neither
W nor X is a health insurance issuer. W is the parent
entity of the aggregated group. V's taxable year ends
on December 31, W's taxable year ends on June 30,
and X's taxable year ends on September 30. For its
taxable year ending December 31, 2016, V receives
$3x of premiums from providing minimum essential
coverage and has no other revenue. For its taxable
year ending June 30, 2017, W has $100x in gross
revenue. For its taxable year ending September 30,
2016, X has $60x in gross revenue.
(ii) But for the de minimis exception, V (the
health insurance issuer) would be a covered health
insurance provider for its taxable year ending De-
cember 31, 2016; W (the parent entity) would be a
covered health insurance provider for its taxable year
ending June 30, 2017 (its taxable year with which, or
within which, ends the taxable year of the health
insurance issuer); and X (the other member of the
aggregated group) would be a covered health insur-
ance provider for its taxable year ending on Septem-
ber 30, 2016 (its taxable year ending with, or within,
the taxable year of the parent entity). However, the
premiums received by V (the health insurance is-
suer) from providing minimum essential coverage
during the taxable year that it would otherwise be a
covered health insurance provider under paragraph
(b)(4)(i)(A) of this section are less than two percent
of the combined gross revenues of V, W, and X for
the related taxable years that they would otherwise
be covered health insurance providers under para-
graph (b)(4)(i) of this section ($3x is less than $3.26x
(two percent of $163x)). Therefore, the de minimis
exception of paragraph (b)(4)(v)(A) of this section
applies, and V, W, and X are not covered health
insurance providers for these taxable years.
Example 3. (i) The facts are the same as Example
2, except that V receives $4x of premiums for pro-
viding minimum essential coverage for its taxable
year ending December 31, 2016. In addition, the
members of the VWX aggregated group were not
covered health insurance providers for their taxable
years ending December 31, 2015, June 30, 2016, and
September 30, 2015, respectively (their immediately
preceding taxable years) solely by reason of the de
minimis exception of paragraph (b)(4)(v)(A) of this
section.
(ii) Although the premiums received by the
members of the aggregated group from providing
minimum essential coverage are more than two per-
cent of the gross revenues of the aggregated group
for the taxable years during which the members
would otherwise be treated as covered health insur-
ance providers under paragraph (b)(4)(i) of this sec-
tion ($4x is greater than $3.28x (two percent of
$164x)), they were not covered health insurance
providers for their immediately preceding taxable
years solely because of the de minimis exception of
paragraph (b)(4)(v)(A) of this section. Therefore, V,
W, and X are not covered health insurance providers
for their taxable years ending on December 31, 2016,
June 30, 2017, and September 30, 2016, respec-
tively, because of the one-year transition period un-
der paragraph (b)(4)(v)(B) of this section. However,
the members of the VWX aggregated group will be
covered health insurance providers for their subse-
quent taxable years if they would otherwise be cov-
ered health insurance providers for those taxable
years under paragraph (b)(4) of this section.
Example 4. (i) Corporations W, X, Y, and Z are
members of a controlled group described in section
414(b)) that is an aggregated group under paragraph
(b)(2) of this section. W and X are health insurance
issuers. Y and Z are not health insurance issuers. W
is the parent entity of the aggregated group. W's and
Y's taxable years end on December 31; X's taxable
year ends on March 31; and Z's taxable year ends on
June 30. As a result of a corporate transaction, W is
no longer a member of the WXYZ aggregated group
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as of September 30, 2016, and W's taxable year ends
on that date. Following the corporate transaction, X
becomes the parent entity of the XYZ aggregated
group.
(ii) Because W's taxable year is treated as the
12-month period ending on September 30, 2016, W
is the parent entity for X's taxable year ending
March 31, 2016, Z's taxable year ending June 30,
2016, and Y's taxable year ending December 31,
2015. Because X's taxable year begins on April 1,
2016 and ends on March 31, 2017, for purposes of
paragraph (b)(4) of this section, X is the parent entity
for Z's taxable year ending June 30, 2016, Y's
taxable year ending December 31, 2016, and W's
taxable year ending September 30, 2016.
Example 5. (i) The facts are the same as Example
4. In addition, W receives $4x of premiums for
providing minimum essential coverage and no other
revenue for its taxable year beginning January 1,
2016 and ending September 30, 2016. X receives
$2x of premiums for providing minimum essential
coverage and has no other revenue for its taxable
year ending March 31, 2016. X receives $1x of
premiums for providing minimum essential coverage
and no other revenue for its taxable year ending
March 31, 2017. For its taxable year ending Decem-
ber 31, 2015, Y has $100x in gross revenue. For its
taxable year ending December 31, 2016, Y has
$200x in gross revenue. For its taxable year ending
June 30, 2016, Z has $120x in gross revenue (none
of which constitute premiums for providing health
insurance coverage that constitutes minimum essen-
tial coverage (as defined in section 5000A(f)). W, X,
Y, and Z did not qualify for the de minimis exception
in any prior taxable years.
(ii) For its taxable year ending June 30, 2016, Z
does not meet the requirements for the de minimis
exception described in paragraph (b)(4)(v)(A). Even
though Z meets the requirements for the de minimis
exception with respect to the taxable year of parent
entity X ending March 31, 2017 ($5x is less than two
percent of $325x), Z does not meet the requirements
for the de minimis exception based on the premiums
and gross revenues of the taxable years of its aggre-
gated group members ending with or within the
deemed 12-month taxable year of parent entity W
ending September 30, 2016 ($6x is more than two
percent of $226x). Therefore, Z is a covered health
insurance provider for its June 30, 2016 taxable year.
(iii) For its taxable year ending December 31,
2015, Y does not meet the requirements for the de
minimis exception described in paragraph (b)(4)(v)(A)
($6x is more than two percent of $226x). For its
taxable year ending December 31, 2016, Y meets the
requirements for the de minimis exception described
in paragraph (b)(4)(v)(A) ($5x is less than two per-
cent of $325x). Therefore, Y is a covered health
insurance provider for its December 31, 2015 taxable
year, but is not a covered health insurance provider
for its December 31, 2016 taxable year.
(iv) For its taxable year ending September 30,
2016, W does not meet the requirements for the de
minimis exception described in paragraph (b)(4)(v)(A).
Even though W meets the requirements for the de
minimis exception with respect to X's taxable year
ending March 31, 2017 ($5x is less than two percent
of $325x), W does not meet the requirements for the
de minimis exception with respect its taxable year
ending September 30, 2016 ($6x is more than two
percent of $226x). Therefore, W is a covered health
insurance provider for its September 30, 2016 tax-
able year.
(v) For its taxable year ending March 31, 2016,
X does not meet the requirements for the de minimis
exception ($6x is more than two percent of $226x).
For its taxable year ending March, 31 2017, X meets
the requirements for the de minimis exception ($5x is
less than two percent of $325x). Therefore, X is a
covered health insurance provider for its March 31,
2016 taxable year, but is not a covered health insur-
ance provider for its March 31, 2017 taxable year.
(5) Premiums-(i) For purposes of this
section, the term premiums means premi-
ums written (including premiums written
for assumption reinsurance, but reduced
by assumption reinsurance ceded (as de-
scribed in paragraph (b)(5)(ii) of this sec-
tion), excluding indemnity reinsurance
written (as described in paragraph
(b)(5)(iii) of this section) and direct ser-
vice payments (as described in paragraph
(b)(5)(iv) of this section), but without re-
duction for ceding commissions or medi-
cal loss ratio rebates, determined in a
manner consistent with the requirements
for reporting under the Supplemental
Health Care Exhibit published by the Na-
tional Association of Insurance Commis-
sioners or the MLR Annual Reporting
Form filed with the Center for Medicare &
Medicaid Services' Center for Consumer
Information and Insurance Oversight of
the U.S. Department of Health and Hu-
man Services (or any successor or re-
placement exhibits or forms).
(ii) Assumption reinsurance. For pur-
poses of this paragraph (b)(5), the term
assumption reinsurance means reinsur-
ance for which there is a novation and the
reinsurer takes over the entire risk of loss
pursuant to a new contract.
(iii) Indemnity reinsurance. For pur-
poses of this paragraph (b)(5), the term
indemnity reinsurance means reinsurance
provided pursuant to an agreement be-
tween a health insurance issuer and a re-
insuring company under which the rein-
suring company agrees to indemnify the
health insurance issuer for all or part of
the risk of loss under policies specified in
the agreement, and the health insurance
issuer retains its liability to provide health
insurance coverage (as defined in section
9832(b)(1)) to, and its contractual rela-
tionship with, the insured.
(iv) Direct service payments. For pur-
poses of this paragraph (b)(5), the term
direct service payment means a capitated,
prepaid, periodic, or other payment made
by a health insurance issuer or another
entity that receives premiums from pro-
viding health insurance coverage (as de-
fined in section 9832(b)(1)) to another or-
ganization as compensation for providing,
managing, or arranging for the provision
of healthcare services by physicians, hos-
pitals, or other healthcare providers, re-
gardless of whether the organization that
receives the compensation is subject to
healthcare provider, health insurance,
health plan licensing, financial solvency,
or other similar regulatory requirements
under state insurance law.
(6) Disqualified taxable year. For pur-
poses of this section, the term disqualified
taxable year means, with respect to any
person, any taxable year for which the
person is a covered health insurance pro-
vider.
(7) Applicable individual-(i) In gen-
eral. For purposes of this section, except
as provided in paragraph (b)(7)(ii) of this
section, the term applicable individual
means, with respect to any covered health
insurance provider for any disqualified
taxable year, any individual (or any other
person described in guidance of general
applicability published in the Internal
Revenue Bulletin)-
(A) who is an officer, director, or em-
ployee in that taxable year, or
(B) who provides services for or on
behalf of the covered health insurance
provider during that taxable year.
(ii) Independent contractors-Remu-
neration for services performed by an in-
dependent contractor for a covered health
insurance provider is subject to the deduc-
tion limitation under section 162(m)(6).
However, an independent contractor is not
an applicable individual with respect to a
covered health insurance provider for a
disqualified taxable year if each of the
following requirements is satisfied:
(A) The independent contractor is ac-
tively engaged in the trade or business of
providing services to recipients, other than
as an employee or as a member of the
board of directors of a corporation (or
similar position with respect to an entity
that is not a corporation);
(B) The independent contractor pro-
vides significant services (as defined in
§ 1.409A-1(f)(2)(iii)) to two or more persons
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to which the independent contractor is not
related and that are not related to one
another (as defined in § 1.409A-
1(f)(2)(ii)); and
(C) The independent contractor is not
related to the covered health insurance
provider or any member of its aggregated
group, applying the definition of related
person contained in § 1.409A-1(f)(2)(ii),
subject to the modification that for pur-
poses of applying the references to sec-
tions 267(b) and 707(b)(1), the language
"20 percent" is not used instead of "50
percent" each place "50 percent" appears
in sections 267(b) and 707(b)(1).
(8) Service provider. For purposes of
this section, the term service provider
means, with respect to a covered health
insurance provider for any period, an in-
dividual who is an officer, director, or
employee, or who provides services for,
or on behalf of, the covered health insur-
ance provider or any member of its aggre-
gated group.
(9) Remuneration-(i) In general. For
purposes of this section, except as pro-
vided in paragraph (b)(9)(ii) of this sec-
tion, the term remuneration has the same
meaning as the term applicable employee
remuneration, as defined in section
162(m)(4), but without regard to the ex-
ceptions under section 162(m)(4)(B) (remu-
neration payable on a commission basis),
section 162(m)(4)(C) (performance-based
compensation), and section 162(m)(4)(D)
(existing binding contracts), and the regula-
tions under those sections.
(ii) Exceptions. For purposes of this
section, remuneration does not include-
(A) A payment made to, or for the ben-
efit of, an applicable individual from or to a
trust described in section 401(a) within the
meaning of section 3121(a)(5)(A),
(B) A payment made under an annuity
plan described in section 403(a) within the
meaning of section 3121(a)(5)(B),
(C) A payment made under a simpli-
fied employee pension plan described in
section 408(k)(1) within the meaning of
section 3121(a)(5)(C),
(D) A payment made under an annuity
contract described in section 403(b) within
the meaning of section 3121(a)(5)(D),
(E) Salary reduction contributions de-
scribed in section 3121(v)(1), and
(F) Remuneration consisting of any
benefit provided to, or on behalf of, an
employee if, at the time the benefit is
provided, it is reasonable to believe that
the employee will be able to exclude the
value of the benefit from gross income.
(10) Applicable Individual Remunera-
tion or AIR. For purposes of this section,
the term applicable individual remunera-
tion or AIR means, with respect to any
applicable individual for any disqualified
taxable year, the aggregate amount allow-
able as a deduction under this chapter for
that taxable year (determined without re-
gard to section 162(m)) for remuneration
for services performed by that applicable
individual (whether or not in that taxable
year). AIR does not include any DDR
with respect to services performed during
any taxable year. AIR for a disqualified
taxable year may include remuneration for
services performed in a taxable year be-
fore the taxable year in which the deduc-
tion for the remuneration is allowable. For
example, a discretionary bonus granted
and paid to an applicable individual in a
disqualified taxable year in recognition of
services performed in prior taxable years
is AIR for the disqualified taxable year in
which the bonus is granted and paid. In
addition, a grant of restricted stock in a
disqualified taxable year with respect to
which an applicable individual makes an
election under section 83(b) is AIR for the
disqualified taxable year of the covered
health insurance provider in which the
grant of the restricted stock is made. See
paragraph (b)(9)(ii) of this section for cer-
tain remuneration that is not treated as
AIR for purposes of this section.
(11) Deferred Deduction Remunera-
tion or DDR. For purposes of this section,
the term deferred deduction remuneration
or DDR means remuneration that would
be AIR for services performed in a dis-
qualified taxable year but for the fact that
the deduction (determined without regard
to section 162(m)(6)) for the remuneration
is allowable in a subsequent taxable year.
Whether remuneration is DDR is deter-
mined without regard to when the remu-
neration is paid, except to the extent that
the timing of the payment affects the tax-
able year in which the remuneration is
otherwise deductible. For example, pay-
ments that are otherwise deductible by a
covered health insurance provider in an
initial taxable year, but are paid to an
applicable individual by the 15th day of
the third month of the immediately subse-
quent taxable year of the covered health
insurance provider (as described in
§ 1.404(b)-1T, Q&A-2(b)(1)), are AIR
for the initial taxable year (and not DDR)
because the deduction for the payments is
allowable in the initial taxable year, and
not a subsequent taxable year. Except as
otherwise provided in paragraph (i) of this
section (regarding transition rules for cer-
tain DDR attributable to services per-
formed in taxable years beginning before
January 1, 2013), DDR that is attributable
to services performed in a disqualified
taxable year of a covered health insurance
provider is subject to the section
162(m)(6) deduction limitation even if the
taxable year in which the remuneration is
otherwise deductible is not a disqualified
taxable year. Similarly, DDR is subject to
the section 162(m)(6) deduction limitation
regardless of whether an applicable indi-
vidual is a service provider of the covered
health insurance provider in the taxable
year in which the DDR is otherwise de-
ductible. However, remuneration that is
attributable to services performed in a tax-
able year that is not a disqualified taxable
year is not DDR even if the remuneration
is otherwise deductible in a disqualified
taxable year. See also paragraph (b)(9)(ii)
of this section for certain remuneration
that is not treated as DDR for purposes of
this section.
(12) Substantial risk of forfeiture. For
purposes of this section, the term substan-
tial risk of forfeiture has the same mean-
ing as provided in § 1.409A-1(d).
(13) In-service payment. An in-service
payment is any amount that is paid with
respect to an applicable individual from
an account balance plan described in
§ 1.409A-1(c)(2)(i)(A) or (B) or a nonac-
count balance plan described in § 1.409A-
1(c)(2)(i)(C) in a taxable year of a covered
health insurance provider during which at
any time the applicable individual is a
service provider (including amounts that
became otherwise deductible, but were
not paid, in a previous taxable year of a
covered health insurance provider).
Amounts that are paid in the last year that
an applicable individual is a service pro-
vider (for example, amounts paid at sep-
aration from service) are in-service pay-
ments if the applicable individual is a
service provider at any time during the
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taxable year of the covered health insur-
ance provider in which the payment is
made.
(14) Payment year. For purposes of
this section, the term payment year means
the taxable year of a covered health insur-
ance provider for which remuneration be-
comes otherwise deductible.
(15) Measurement date. For purposes
of this section, the term measurement date
means the last day of the taxable year of a
covered health insurance provider.
(c) Deduction Limitation-(1) AIR. For
any disqualified taxable year beginning
after December 31, 2012, no deduction is
allowed under this chapter for AIR that is
attributable to services performed by an
applicable individual in that taxable year
to the extent that the amount of that re-
muneration exceeds $500,000.
(2) DDR. For any taxable year begin-
ning after December 31, 2012, no deduc-
tion is allowed under this chapter for DDR
that is attributable to services performed
by an applicable individual in any disqual-
ified taxable year beginning after Decem-
ber 31, 2009, to the extent that the amount
of such remuneration exceeds $500,000
reduced (but not below zero) by the sum
of:
(i) the AIR for that applicable individ-
ual for that disqualified taxable year; and
(ii) the portion of the DDR for those
services that was subject to the deduction
limitation under section 162(m)(6)(A)(ii)
and this paragraph (c)(2) in a preceding
taxable year, or would have been subject
to the deduction limitation under section
162(m)(6)(A)(ii) and this paragraph (c)(2)
in a preceding taxable year if section
162(m)(6) was effective for taxable years
beginning after December 31, 2009 and
before January 1, 2013.
(d) Services to which remuneration is
attributable-(1) Attribution to a taxable
year-(i) In general. The deduction limita-
tion under section 162(m)(6) applies to
AIR and DDR attributable to services per-
formed by an applicable individual in a
disqualified taxable year of a covered
health insurance provider. When an
amount of AIR or DDR becomes other-
wise deductible (and not before that time),
that remuneration must be attributed to
services performed by an applicable indi-
vidual in a taxable year of the covered
health insurance provider in accordance
with the rules of this paragraph (d). After
the remuneration has been attributed to
services performed by an applicable indi-
vidual in a taxable year of a covered
health insurance provider, the rules of
paragraph (e) of this section are then ap-
plied to determine whether the deduction
with respect to the remuneration is limited
by section 162(m)(6).
(ii) Overview. Paragraphs (d)(1)(iii)
through (d)(1)(v) of this section, and para-
graph (d)(2) of this section, set forth rules
of general applicability for attributing re-
muneration to services performed by an
applicable individual in a taxable year of a
covered health insurance provider. Para-
graph (d)(3) sets forth two methods for
attributing remuneration provided under
an account balance plan-the account bal-
ance ratio method (described in paragraph
(d)(3)(ii) of this section) and the principal
additions method (described in paragraph
(d)(3)(iii) of this section). Paragraph
(d)(4) of this section sets forth two meth-
ods for attributing remuneration provided
under a nonaccount balance plan-the
present value ratio method (described in
paragraph (d)(4)(ii) of this section) and
the formula benefit ratio method (de-
scribed in paragraph (d)(4)(iii) of this sec-
tion). Paragraph (d)(5) of this section sets
forth rules for attributing remuneration re-
sulting from equity-based remuneration
(such as stock options, stock appreciation
rights, restricted stock, and restricted
stock units). Paragraph (d)(6) of this sec-
tion sets forth rules for attributing remu-
neration that is involuntary separation
pay. Paragraph (d)(7) of this section sets
forth rules for attributing remuneration
that is received under a reimbursement
arrangement, and paragraph (d)(8) of this
section sets forth rules for attributing re-
muneration that results from a split-dollar
life insurance arrangement.
(iii) No attribution to taxable years
during which no services are performed
or before a legally binding right arises-
(A) In general. For purposes of this sec-
tion, remuneration is not attributable-
(1) to a taxable year of a covered health
insurance provider ending before the later
of the date the applicable individual be-
gins providing services to the covered
health insurance provider (or any member
of its aggregated group) and the date the
applicable individual obtains a legally
binding right to the remuneration, or
(2) to any other taxable year of a cov-
ered health insurance provider during
which the applicable individual is not a
service provider.
(B) Attribution of remuneration before
the commencement of services or a legally
binding right arises. To the extent that
remuneration would otherwise be attribut-
able in accordance with paragraphs (d)(2)
through (d)(11) of this section to a taxable
year ending before the later of the date an
applicable individual begins providing
services to a covered health insurance pro-
vider (or any member of its aggregated
group) and the date the applicable individ-
ual obtains a legally binding right to the
remuneration, the remuneration is attrib-
uted to services performed in the taxable
year in which the later of these dates oc-
curs. For example, if an applicable indi-
vidual obtains a contractual right to remu-
neration in a taxable year of a covered
health insurance provider and the remu-
neration would otherwise be attributable
to that taxable year pursuant to paragraph
(d)(2) of this section, but the applicable
individual does not begin providing ser-
vices to the covered health insurance pro-
vider until the next taxable year, the re-
muneration is attributable to the taxable
year in which the applicable individual
begins providing services.
(iv) Attribution to 12-month periods.
To the extent that a covered health insur-
ance provider is required to attribute re-
muneration on a daily pro rata basis under
this paragraph (d), it may treat any 12-
month period as having 365 days (and so
may ignore the extra day in leap years).
(v) Remuneration subject to nonlapse
restriction or similar formula. For pur-
poses of this section, if stock or other
property is subject to a nonlapse restric-
tion (as defined in § 1.83-3(h)), or if the
remuneration payable to an applicable in-
dividual is determined under a formula
that, if applied to stock or other property,
would be a nonlapse restriction, the
amount of the remuneration and the attri-
bution of that remuneration to taxable
years must be determined based upon ap-
plication of the nonlapse restriction or for-
mula. For example, if the earnings or
losses on an account under an account
balance plan are determined based upon
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the performance of company stock, the
valuation of which is based on a formula
that if applied to the stock would be a
nonlapse restriction, then that formula
must be used consistently for purposes of
determining the amount of the remunera-
tion credited to that account balance in
taxable years and the attribution of that
remuneration to taxable years.
(2) Legally binding right. Unless attrib-
utable to services performed in a different
taxable year pursuant to paragraphs (d)(3)
through (d)(11) of this section, remunera-
tion is attributable to services performed
in the taxable year of a covered health
insurance provider in which an applicable
individual obtains a legally binding right
to the remuneration. An applicable indi-
vidual does not have a legally binding
right to remuneration if the remuneration
may be reduced unilaterally or eliminated
by a covered health insurance provider or
other person after the services creating the
right to the remuneration have been per-
formed. However, if the facts and circum-
stances indicate that the discretion to re-
duce or eliminate the remuneration is
available or exercisable only upon a con-
dition, or the discretion to reduce or elim-
inate the remuneration lacks substantive
significance, an applicable individual will
be considered to have a legally binding
right to the remuneration. For this pur-
pose, remuneration is not considered to be
subject to unilateral reduction or elimina-
tion merely because it may be reduced or
eliminated by operation of the objective
terms of a plan, such as the application of
a nondiscretionary, objective provision
creating a substantial risk of forfeiture.
(3) Account balance plans-(i) In gen-
eral. When remuneration for services per-
formed by an applicable individual for a
covered health insurance provider be-
comes otherwise deductible (for example,
because the amount was paid or made
available during that taxable year) from a
plan described in § 1.409A-1(c)(2)(i)(A)
or (B) (an account balance plan), that
remuneration must be attributed to ser-
vices performed by the applicable individ-
ual in a taxable year of the covered health
insurance provider in accordance with an
attribution method described in either
paragraph (d)(3)(ii) or (d)(3)(iii) of this
section. However, except as provided in
paragraphs (d)(3)(ii)(D) and (f)(3) of this
section, the covered health insurance pro-
vider and all members of its aggregated
group must apply the same attribution
method under this paragraph (d)(3) con-
sistently for all taxable years beginning
after September 23, 2014 for all amounts
that become otherwise deductible under
all account balance plans.
(ii) Account balance ratio method-
(A) In general. Under this method, remu-
neration for services performed by an ap-
plicable individual for a covered health
insurance provider that becomes other-
wise deductible under an account balance
plan must be attributed to services per-
formed by the applicable individual in
each taxable year of the covered health
insurance provider ending with or before
the payment year during which the appli-
cable individual was a service provider
and for which the account balance of the
applicable individual increased (deter-
mined in accordance with paragraph
(d)(3)(ii)(B) and (C) of this section). The
amount attributed to each such taxable
year is equal to the amount of remunera-
tion that becomes otherwise deductible
multiplied by a fraction, the numerator of
which is the increase in the applicable
individual's account balance under the
plan for the taxable year, and the denom-
inator of which is the sum of all such
increases for all taxable years during
which the applicable individual was a ser-
vice provider. Thus, remuneration that be-
comes otherwise deductible under a plan
is attributed to a taxable year of the cov-
ered health insurance provider in propor-
tion to the increase in the applicable indi-
vidual's account balance for that taxable
year.
(B) Increase in the account balance.
For purposes of this paragraph (d)(3)(ii),
an increase in an account balance under an
account balance plan occurs for a taxable
year if the account balance as of the mea-
surement date in that taxable year is
greater than the account balance as of the
measurement date in every earlier taxable
year. In that case, the amount of the in-
crease for that taxable year is equal to the
excess of the applicable individual's ac-
count balance as of the measurement date
for that taxable year over the greatest of
the applicable individual's account bal-
ances under the plan as of the measure-
ment date in every earlier taxable year. If
the applicable individual's account bal-
ance as of the measurement date in a
taxable year is less than or equal to the
applicable individual's account balance as
of the measurement date in any earlier
taxable year, there is no increase in the
account balance for that later taxable year.
(C) Certain account balance adjust-
ments. For purposes of determining the
account balance on a measurement date
under paragraph (d)(3)(ii)(B) of this sec-
tion, the account balance is adjusted as
provided in this paragraph (d)(3)(ii)(C).
(1) In-service payments. If an in-
service payment is made from the account
of an applicable individual under an ac-
count balance plan in any taxable year of
a covered health insurance provider, then
the rules of this paragraph (d)(3)(ii)(C)(1)
apply.
(i) Solely for purposes of determining
the increase in the applicable individual's
account balance as of the measurement
date in the payment year (and not for
purposes of attributing any amount that
becomes otherwise deductible in any later
taxable year), the account balance as of
the measurement date for that taxable year
is increased by the amount of all in-
service payments made from the plan dur-
ing that taxable year.
(ii) For purposes of attributing any
amount that becomes otherwise deduct-
ible under the plan in any taxable year
after the payment year of the in-service
payment -
(A) the account balance as of the mea-
surement date in each taxable year that
ends before the taxable year to which the
in-service payment is attributed pursuant
to this paragraph (d)(3)(ii) is reduced by
the sum of the amount of the in-service
payment that is attributed to that taxable
year and the amount of the in-service pay-
ment that is attributed to each taxable year
that ends before that taxable year, if any,
and
(B) to the extent that the in-service
payment includes an amount that was de-
ductible by the covered health insurance
provider in a previous taxable year and,
therefore, was previously attributable to
services performed by the applicable indi-
vidual in one or more taxable years of the
covered health insurance provider (for ex-
ample, because the amount was made
available in a previous taxable year but
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was not paid at that time), the account
balance as of the measurement date for
each taxable year that ends before the
taxable year to which the in-service pay-
ment is attributed pursuant to this para-
graph (d)(3)(ii) is reduced by the sum of
the amount of the in-service payment pre-
viously attributable to that taxable year
and the amount of the in-service payment
previously attributable to each taxable
year that ends before that taxable year, if
any.
(2) Certain increases after ceasing to
be a service provider. Any addition (other
than income or earnings) to an account
balance plan made in a taxable year that
begins after an applicable individual
ceases to be a service provider (and that
ends before the applicable individual be-
comes a service provider again, if appli-
cable) is added to the account balance of
the applicable individual as of the mea-
surement date of the first preceding tax-
able year in which the applicable individ-
ual was a service provider.
(3) Account balance adjustments for
grandfathered amounts. If a covered
health insurance provider uses the princi-
pal additions method for determining
grandfathered amounts for an applicable
individual under paragraph (h) of this sec-
tion, then, for purposes of determining the
increase in the applicable individual's ac-
count balance, the account balance as of
any measurement date is reduced by the
amount of any grandfathered amounts
otherwise included in the account balance.
(D) Transition rule for amounts attrib-
uted before the applicability date of the
final regulations. Amounts that become
otherwise deductible in taxable years be-
ginning before September 23, 2014 may
be attributed to services performed in tax-
able years of a covered health insurance
provider under the rules set forth in the
proposed regulations. If a covered health
insurance provider attributes an amount
paid to an applicable individual pursuant
to a method permitted under the proposed
regulations and then chooses to use the
account balance ratio method to attribute
amounts that subsequently become other-
wise deductible with respect to that appli-
cable individual, then, for purposes of ap-
plying the account balance ratio method to
attribute any amount that becomes other-
wise deductible under the plan after the
taxable year in which the last payment
was made that was attributed pursuant to
the proposed regulations, the account bal-
ance as of the measurement date for each
taxable year that ends before the taxable
year in which the last payment that was
attributed pursuant to the proposed regu-
lations is reduced by the sum of the
amount previously attributed to that tax-
able year under the proposed regulations
and the amount previously attributable to
each taxable year that ends prior to that
taxable year under the proposed regula-
tions, if any.
(iii) Principal additions method-(A)
In general. Under this method, remunera-
tion that becomes otherwise deductible
under an account balance plan during a
payment year must be attributed to ser-
vices performed by the applicable individ-
ual in the taxable year of the covered
health insurance provider during which
the applicable individual was a service
provider and in which the principal addi-
tion to which the amount relates is cred-
ited under the plan (determined in accor-
dance with paragraph (d)(3)(iii)(B) and
(C) of this section). An amount relates to
a principal addition if the amount is a
payment of the principal addition or earn-
ings on the principal addition, based on a
separate accounting of these amounts. The
principal additions method described in
this paragraph may be used to attribute
amounts that become otherwise deduct-
ible under an account balance plan only if
the covered health insurance provider sep-
arately accounts for each principal addi-
tion to the plan (and any earnings thereon)
and traces each amount that becomes oth-
erwise deductible under the plan to a prin-
cipal addition made in a taxable year of
the covered health insurance provider.
(B) Principal addition-(1) For pur-
poses of this paragraph (d)(3)(iii), the ex-
cess (if any) of the sum of the account
balance of an applicable individual in an
account balance plan as of the last day of
a taxable year and any payments made
during the taxable year over the account
balance as of the last day of the immedi-
ately preceding taxable year, that is not
due to earnings or losses (as described in
paragraph (d)(3)(iii)(C) of this section), is
treated as a principal addition that is cred-
ited to the plan in that taxable year if the
applicable individual was a service pro-
vider during that taxable year. If the ap-
plicable individual was not a service pro-
vider during that taxable year, the excess
described in the preceding sentence is
treated as a principal addition that is cred-
ited to the plan in accordance with para-
graph (d)(3)(iii)(B)(2) of this section.
(2) Principal additions after termina-
tion of employment. Any principal addi-
tion to an account balance plan made in a
taxable year that begins after an applica-
ble individual ceases to be a service pro-
vider (and that ends before the applicable
individual becomes a service provider
again, if applicable) is treated as a princi-
pal addition that is credited in the first
preceding taxable year in which the appli-
cable individual was a service provider.
(C) Earnings. Whether remuneration
constitutes earnings on a principal addi-
tion is determined under the principles
defining income attributable to an amount
taken into account under § 31.3121(v)(2)-
1(d)(2). Therefore, for an account balance
plan, earnings on an amount deferred gen-
erally include an amount credited on be-
half of an applicable individual under
the terms of the arrangement that re-
flects a rate of return that does not ex-
ceed either the rate of return on a pre-
determined actual investment (as defined
in § 31.3121(v)(2)-1(d)(2)(i)(B)), or, if
the income does not reflect the rate of
return on a predetermined actual invest-
ment, a rate of return that reflects a rea-
sonable rate of interest (as defined in
§ 31.3121(v)(2)-1(d)(2)(i)(C)). For pur-
poses of this paragraph (d)(3)(iii), the use
of a rate of return that is not based on a
predetermined actual investment or a rea-
sonable rate of interest generally will result
in the treatment of some or all of the remu-
neration as a principal addition that is attrib-
utable to services performed by an applica-
ble individual in a taxable year of a covered
health insurance provider in accordance
with this paragraph (d)(3)(iii) of this section.
(4) Nonaccount balance plans-(i) In
general. When remuneration for services
performed by an applicable individual for
a covered health insurance provider be-
comes otherwise deductible under a plan
described in § 1.409A-1(c)(2)(i)(C) (a
nonaccount balance plan), that remunera-
tion must be attributed to services per-
formed by the applicable individual in a
taxable year of the covered health insur-
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ance provider in accordance with the at-
tribution method described in either para-
graph (d)(4)(ii) or (d)(4)(iii) of this
section. However, except as provided in
paragraphs (d)(4)(ii)(D) and (d)(4)(iii)(D)
and (f)(3) of this section, the covered
health insurance provider and all members
of its aggregated group must apply the
same attribution method under this para-
graph (d)(4) consistently for all taxable
years beginning after September 23, 2014
for all amounts that become deductible
under all nonaccount balance plans.
(ii) Present value ratio attribution
method-(A) In general. Under this
method, remuneration for services per-
formed by an applicable individual for a
covered health insurance provider that be-
comes otherwise deductible under a non-
account balance plan must be attributed to
services performed by the applicable indi-
vidual in each taxable year of the covered
health insurance provider ending with or
before the payment year during which the
applicable individual was a service pro-
vider for which the present value of the
future payment(s) to be made to or on
behalf of the applicable individual under
the plan increased (determined in accor-
dance with paragraph (d)(3)(ii)(B) and (C)
of this section). The amount attributed to
each such taxable year is equal to the
amount of remuneration that becomes oth-
erwise deductible under the plan multi-
plied by a fraction, the numerator of
which is the increase in the present value
of the future payment(s) to which the ap-
plicable individual has a legally binding
right under the plan for the taxable year,
and the denominator of which is the sum
of all such increases for all taxable years
during which the applicable individual
was a service provider. Thus, remunera-
tion that becomes otherwise deductible
under a plan is attributed to a taxable year
of the covered health insurance provider
in proportion to the increase in the present
value of the future payment(s) under the
plan for that taxable year.
(B) Increase in present value of future
payments. For purposes of this paragraph
(d)(4)(ii), for a taxable year of a covered
health insurance provider, an increase in
the present value of the future payment(s)
to which an applicable individual has a
legally binding right under a nonaccount
balance plan occurs if the present value of
the future payment(s) as of the measure-
ment date in the taxable year is greater
than the present value of the future pay-
ment(s) as of the measurement date in
every earlier taxable year. In that case, the
amount of the increase for that taxable
year is equal to the excess of the present
value of the future payment(s) to which
the applicable individual has a legally
binding right under the plan as of the
measurement date for that taxable year
over the greatest present value of the fu-
ture payment(s) to which the applicable
individual had a legally binding right un-
der the plan as of the measurement date in
every earlier taxable year. If the present
value of the future payment(s) as of a
measurement date in a taxable year is less
than or equal to the present value of the
future payment(s) as of the measurement
date in any earlier taxable year, then there
is no increase in the present value of the
future payment(s) to which the applicable
individual has a legally binding right un-
der the plan for that later taxable year. For
purposes of determining the increase (or
decrease) in the present value of a future
payment(s) under a nonaccount balance
plan, the rules of § 31.3121(v)(2)-1(c)(2)
apply (including the requirement that rea-
sonable actuarial assumptions and meth-
ods be used).
(C) Certain present value adjustments.
For purposes of determining the present
value of the future payment(s) to which an
applicable individual has a legally binding
right to receive as of a measurement date
under paragraph (d)(4)(ii)(B) of this sec-
tion, the present value is adjusted as pro-
vided in this paragraph (d)(3)(iii)(C).
(1) In-service payments. If an in-
service payment is made to or on behalf of
an applicable individual under a nonac-
count balance plan in any taxable year of
a covered health insurance provider, then
the rules of this paragraph (d)(3)(iii)(C)(1)
apply.
(i) Solely for purposes of determining
the increase in the present value of the
future payment(s) under the plan for the
payment year (and not for purposes of
attributing any amount that becomes oth-
erwise deductible in any later taxable
year), the present value of the future pay-
ment(s) under the plan as of the measure-
ment date in the payment year is increased
by the amount of any reduction in the
present value of the future payment(s) re-
sulting from the in-service payment made
from the plan during that taxable year.
(ii) For purposes of attributing any
amount that becomes otherwise deduct-
ible under the plan in any taxable year
after the payment year of the in-service
payment, the present value of the future
payment(s) as of the measurement date for
each taxable year that ends before the
payment year is reduced by the present
value of the future payment to which the
applicable individual had a legally bind-
ing right to be paid on the date of the
in-service payment (determined as of the
measurement date based upon all of the
applicable factors under the plan as of the
measurement date, such as compensation
and years of service on that date).
(2) Increases in the present value of
future payments after ceasing to be a ser-
vice provider. Any increase in the present
value of the future payment(s) under a
plan in a taxable year that begins after an
applicable individual ceases to be a ser-
vice provider (and that ends before the
applicable individual becomes a service
provider again, if applicable) that is not
due merely to the passage of time or a
change in the reasonable actuarial as-
sumptions used to determine the present
value of the future payment(s) is added to
the present value of the future payment(s)
for the applicable individual as of the
measurement date of the most recent pre-
ceding taxable year in which the applica-
ble individual was a service provider.
(D) Transition rule for amounts attrib-
uted before the effective date of the final
regulations. Amounts that become other-
wise deductible in taxable years beginning
before September 23, 2014 may be attrib-
uted under the rules set forth in the pro-
posed regulations. If a covered health in-
surance provider attributes an amount
paid to an applicable individual pursuant
to the proposed regulations and then
chooses to use the present value ratio
method to attribute amounts that subse-
quently become otherwise deductible with
respect to that applicable individual, then,
for purposes of applying the present value
ratio method to attribute any amount that
becomes otherwise deductible under the
plan in any taxable year after the taxable
year in which the last payment was made
that was attributed pursuant to the pro-
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posed regulations, the present value of the
future payment(s) as of the measurement
date for each taxable year that ends before
the taxable year in which the last payment
that was attributed pursuant to the pro-
posed regulations is reduced by the pres-
ent value of each future payment to which
the applicable individual had a legally
binding right to be paid that was attributed
pursuant to the proposed regulations (de-
termined as of the measurement date
based upon all of the applicable factors
under the plan as of the measurement date,
such as compensation and years of service
on that date), with no adjustment for an
amount that became otherwise deductible,
but was not paid.
(iii) Formula benefit ratio method-
(A) In general. Under this method, remu-
neration that becomes otherwise deduct-
ible under a nonaccount balance plan on a
date (referred to for these purposes as the
date of payment) must be attributed to
services performed by the applicable indi-
vidual in each taxable year of the covered
health insurance provider ending with or
before the payment year during which the
applicable individual was a service pro-
vider and for which the formula benefit of
the applicable individual under the plan
increased (determined in accordance with
paragraph (d)(3)(iii)(B), (C) and (D) of
this section). The amount attributed to
each such taxable year is equal to the
amount of remuneration that becomes oth-
erwise deductible under the plan on the
date of payment multiplied by a fraction,
the numerator of which is the increase in
the applicable individual's formula benefit
under the plan for the taxable year and the
denominator of which is the sum of all
such increases for all taxable years during
which the applicable individual was a ser-
vice provider (which will generally be the
amount that becomes otherwise deduct-
ible under the plan on the date of pay-
ment). Thus, remuneration that becomes
otherwise deductible under a plan is at-
tributed to a taxable year of the covered
health insurance provider in proportion to
the increase in the applicable individual's
formula benefit under the plan in that tax-
able year.
(B) Formula benefit. For purposes of
this paragraph (d)(4)(iii), an applicable in-
dividual's formula benefit as of any date is
the benefit (or portion thereof) to which
the applicable individual has a legally
binding right under a nonaccount balance
plan as of that date determined based upon
all of the applicable factors under the plan
(for example, compensation and years of
service as of that date), disregarding any
substantial risk of forfeiture and assuming
that the applicable individual meets any
applicable eligibility requirements for the
benefit as of that date. For this purpose,
the formula benefit is expressed in the
form that it has become otherwise deduct-
ible. For example, if an applicable indi-
vidual's benefit under a plan is paid in the
form of a single lump sum, then the ap-
plicable individual's formula benefit un-
der the plan is expressed in the form of a
single lump sum for all purposes under
this paragraph (d)(4)(iii). If the amount
that becomes otherwise deductible is pay-
able in more than one form of payment
(for example, 50 percent of the benefit is
paid in the form of a lump sum and 50
percent is paid in the form of a life annu-
ity), then each separate form of payment is
treated as a separate formula benefit to
which this paragraph (d)(4)(iii) is applied
separately.
(C) Increase in formula benefit. For
purposes of this paragraph (d)(4)(iii), an
increase in an applicable individual's for-
mula benefit under a nonaccount balance
plan occurs for a taxable year of a covered
health insurance provider if the formula
benefit as of the measurement date in that
taxable year is greater than the formula
benefit as of the measurement date in ev-
ery earlier taxable year. In that case, the
amount of the increase for that taxable
year is equal to excess of the formula
benefit as of the measurement date in that
taxable year over the greatest formula
benefit as of any measurement date in any
earlier taxable year. If the applicable in-
dividual's formula benefit as of a mea-
surement date in a taxable year is less than
or equal to the applicable individual's for-
mula benefit as of the measurement date
in any earlier taxable year, there is no
increase in the formula benefit to which
the applicable individual has a legally
binding right under the plan for that later
taxable year.
(D) Certain adjustments. For purposes
of determining the increase in the formula
benefit as of a date of payment under
paragraph (d)(4)(iii)(C) of this section, the
rules of this paragraph (d)(3)(iii)(D) ap-
ply-
(I) Attribution to payment year. Solely
for purposes of attributing a payment un-
der this paragraph (d)(4)(iii) (including an
in-service payment), the date of payment
is substituted for the measurement date in
the payment year to determine whether an
increase in the formula benefit occurs in
the payment year and the amount of any
such increase.
(II) Amounts not paid. If an amount
becomes otherwise deductible under a
nonaccount balance plan, but is not paid,
the formula benefit for that amount must
be determined using the form in which it
will be paid, if that form is known, or any
form in which it may be paid, if the actual
form of payment is unknown.
(III) Increases in the formula benefit
after ceasing to be a service provider.
Any increase in the formula benefit with
respect to an applicable individual result-
ing from a legally binding right arising in
a taxable year that begins after the appli-
cable individual ceases to be a service
provider (and that ends before the appli-
cable individual becomes a service pro-
vider again, if applicable) is added to the
formula benefit with respect to the appli-
cable individual as of the measurement
date of the first preceding taxable year in
which the applicable individual was a ser-
vice provider. However, any increase in
the formula benefit resulting from a le-
gally binding right arising in a taxable
year that begins before the applicable in-
dividual ceases to be a service provider is
added to the formula benefit with respect
to the applicable individual as of the mea-
surement date of the taxable year in which
the legally binding right arises, even if the
increase is not reflected until after the
applicable individual ceases to be a ser-
vice provider (such as in the case of a cost
of living adjustment).
(5) Equity-based remuneration-(i)
Stock options and stock appreciation
rights-(A) In general. Except as pro-
vided in paragraph (d)(5)(i)(B) of this sec-
tion, remuneration resulting from the ex-
ercise of a stock option (including
compensation income arising at the time
of a disqualifying disposition of an incen-
tive stock option described in section 422
or an option under an employee stock
purchase plan described in section 423) or
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a stock appreciation right (SAR) is attrib-
utable to services performed by an appli-
cable individual for a covered health in-
surance provider on a daily pro rata basis
over the period beginning on the date of
grant (within the meaning of § 1.409A-
1(b)(5)(vi)(B)) of the stock option or SAR
and ending on the date that the stock op-
tion or SAR is exercised, excluding any
days on which the applicable individual is
not a service provider.
(B) Stock options or SARs subject to a
substantial risk of forfeiture. If a stock
option or SAR is subject to a substantial
risk of forfeiture, a covered health insur-
ance provider may attribute remuneration
resulting from the exercise of the stock
option or SAR to services performed by
an applicable individual in a taxable year
on a daily pro rata basis over the period
beginning on the date of grant (within the
meaning of § 1.409A-1(b)(5)(vi)(B)) of
the stock option or SAR and ending on the
first date that the stock option or SAR is
no longer subject to a substantial risk of
forfeiture, but only if the covered health
insurance provider uses this attribution
method consistently for all stock options
or SARs exercised in taxable years of a
covered health insurance provider begin-
ning after September 23, 2014, except as
provided in paragraph (f)(3) of this sec-
tion.
(ii) Restricted stock. Remuneration re-
sulting from restricted stock, for which an
election under section 83(b) has not been
made, that becomes substantially vested
or transferred is attributed on a daily pro
rata basis to services performed by an
applicable individual for a covered health
insurance provider over the period, ex-
cluding any days on which the applicable
individual is not a service provider, begin-
ning on the date the applicable individual
obtains a legally binding right to the re-
stricted stock and ending on the earliest
of-
(A) the date the restricted stock be-
comes substantially vested, or
(B) the date the restricted stock is
transferred by the applicable individual.
(iii) Restricted stock units. Remunera-
tion resulting from a restricted stock unit
(RSU) is attributed on a daily pro rata
basis to services performed by an applica-
ble individual for a covered health insur-
ance provider over the period beginning
on the date the applicable individual ob-
tains a legally binding right to the RSU
and ending on the date the remuneration is
paid or made available, excluding any
days on which the applicable individual is
not a service provider.
(iv) Partnership interests and other eq-
uity. [Reserved]
(6) Involuntary separation pay. Invol-
untary separation pay is attributable to
services performed by an applicable indi-
vidual for a covered health insurance pro-
vider in the taxable year in which the
involuntary separation from service oc-
curs. Alternatively, the covered health in-
surance provider may attribute involun-
tary separation pay to services performed
by an applicable individual on a daily pro
rata basis beginning on the date that the
applicable individual obtains a legally
binding right to the involuntary separation
pay and ending on the date of the invol-
untary separation from service. Involun-
tary separation pay to different individuals
may be attributed using different methods;
however, if involuntary separation pay-
ments are made to the same individual
over multiple taxable years, all the pay-
ments must be attributed using the same
method. For purposes of this section, the
term involuntary separation pay means
remuneration to which an applicable indi-
vidual has a right to payment solely as a
result of the individual's involuntary sep-
aration from service (within the meaning
of § 1.409A-1(n)). To the extent that in-
voluntary separation pay is attributed to
services performed in two or more taxable
years of a covered health insurance pro-
vider as permitted under this paragraph,
any amount of involuntary separation pay
that is paid or made available must be
attributed to services performed in all of
those taxable years in the same proportion
that the total involuntary separation pay is
attributed to taxable years of the covered
health insurance provider.
(7) Reimbursements. Remuneration
that is provided in the form of a reim-
bursement or benefit provided in-kind
(other than cash) is attributable to services
performed by an applicable individual in
the taxable year of a covered health insur-
ance provider in which the applicable in-
dividual makes a payment for which the
applicable individual has a right to reim-
bursement or receives an in-kind benefit,
except that remuneration provided in the
form of a reimbursement or in-kind ben-
efit during a taxable year of a covered
health insurance provider in which an ap-
plicable individual is not a service pro-
vider is attributable to services performed
in the most recent preceding taxable year
of the covered health insurance provider
in which the applicable individual is a
service provider.
(8) Split-dollar life insurance. Remu-
neration resulting from a split-dollar life
insurance arrangement (as defined in
§ 1.61-22(b)) under which an applicable
individual has a legally binding right to
economic benefits described in § 1.61-
22(d)(2)(ii) (policy cash value to which
the non-owner has current access within
the meaning of § 1.61-22(d)(4)(ii)) or
§ 1.61-22(d)(2)(iii) (any other economic
benefits provided to the non-owner) is at-
tributable to services performed in the tax-
able year of the covered health insurance
provider in which the legally binding right
arises. Split-dollar life insurance arrange-
ments under which payments are treated
as split-dollar loans under § 1.7872-15
generally will not give rise to DDR within
the meaning of paragraph (b)(11) of this
section, although they may give rise to
AIR. However, in certain situations, this
type of arrangement may give rise to DDR
for purposes of section 162(m)(6), for ex-
ample, if amounts due on a split-dollar
loan are waived, cancelled, or forgiven.
(9) Examples. The following examples
illustrate the principles of paragraphs
(d)(1) through (8) of this section. For pur-
poses of these examples, each corporation
has a taxable year that is the calendar year
and is a covered health insurance provider
for all relevant taxable years, DDR is oth-
erwise deductible in the taxable year in
which it is paid, and amounts payable
under nonaccount balance plans are not
forfeitable upon the death of the applica-
ble individual. For purposes of these ex-
amples, the interest rates used in these
examples are assumed to be reasonable.
Example 1 (Account balance plan - account bal-
ance ratio method with earnings and a single pay-
ment). (i) B is an applicable individual of corporation
Y for all relevant taxable years. On January 1, 2016,
B begins participating in a nonqualified deferred
compensation plan of Y that is an account balance
plan. Under the terms of the plan, all amounts are
fully vested at all times, and Y will pay B's entire
account balance on January 1, 2019. B's account
earns five percent interest per year, compounded
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annually. Y credits $10,000 to B under the plan
annually on January 1 for three years beginning on
January 1, 2016. Thus, B's account balance is
$10,500 ($10,000 + ($10,000 × 5%)) on December
31, 2016; $21,525 ($10,500 + $10,000 + ($20,500
× 5%)) on December 31, 2017; and $33,101
($21,525 + $10,000 + ($31,525 × 5%)) on Decem-
ber 31, 2018. On January 1, 2019, Y pays B $33,101,
the entire account balance. Y attributes payments
under its account balance plans using the account
balance ratio method described in paragraph (d)(3)(i)
of this section.
(ii) The increase in B's account balance during
2016 is $10,500 ($10,500 - zero); the increase in B's
account balance for 2017 is $11,025 ($21,525 -
$10,500); and the increase in B's account balance for
2018 is $11,576 ($33,101 - $21,525). The sum of
all the increases is $33,101 ($10,500 + $11,025 +
$11,576). Accordingly, for Y's 2016 taxable year,
the attribution fraction is .3172 ($10,500 / $33,101);
for Y's 2017 taxable year, the attribution fraction is
.3331 ($11,025 / $33,101); and for Y's 2018 taxable
year, the attribution fraction is .3497 ($11,576 /
$33,101).
(iii) With respect to the $33,301 payment made
on January 1, 2019, $10,500 ($33,101 × .3172) of
DDR is attributable to services performed by B in
Y's 2016 taxable year; $11,026 ($33,101 × .3331)
of DDR is attributable to services performed by B in
Y's 2017 taxable year; and $11,575 ($33,101 ×
.3497) of DDR is attributable to services performed
by B in Y's 2018 taxable year.
Example 2 (Account balance plan - principal
additions method with earnings and a single pay-
ment. (i) The facts are the same as in Example 1,
except that Y attributes remuneration using the prin-
cipal additions method described in paragraph
(d)(3)(ii) of this section.
(ii) The $10,000 principal addition made on Jan-
uary 1, 2016 and $1,576 of earnings thereon (interest
on the 2016 $10,000 principal addition at five per-
cent for three years compounded annually) are at-
tributable to services performed by B in Y's 2016
taxable year; the principal addition of $10,000 on
January 1, 2017 and $1,025 of earnings thereon
(interest on the 2017 $10,000 principal addition at
five percent for two years compounded annually) are
attributable to services performed by B in Y's 2017
taxable year; and the principal addition of $10,000 to
B's account on January 1, 2018 and $500 of earnings
thereon (interest on the 2018 $10,000 principal ad-
dition at five percent for one year compounded an-
nually) are attributable to services performed by B in
Y's 2018 taxable year. Accordingly, with respect to
the $33,301 payment made on January 1, 2019,
$11,576 ($10,000 + $1,576) is attributable to ser-
vices performed by B in Y's 2016 taxable year;
$11,025 ($10,000 + $1,025) is attributable to ser-
vices performed in Y's 2017 taxable year; and
$10,500 ($10,000 + $500) is attributable to services
performed by B in Y's 2018 taxable year.
Example 3 (Account balance plan - account bal-
ance ratio method with earnings and losses). (i) J is
an applicable individual of corporation Z for all
relevant taxable years. On January 1, 2016, J begins
participating in a nonqualified deferred compensa-
tion plan of Z that is an account balance plan. Under
the terms of the plan, all amounts are fully vested at
all times, and Z will pay J's entire account balance
on January 1, 2019. Z credits $10,000 to J under the
plan on January 1, 2016 and January 1, 2018. Earn-
ings under the terms of the plan are based on a
predetermined actual investment (as defined in
§ 31.3121(v)(2)-1(e)(2)(i)(B)), which results in J's
account balance increasing by five percent in the
2016 taxable year, decreasing by five percent in the
2017 taxable year, and increasing again by five per-
cent in the 2018 taxable year. Therefore, on Decem-
ber 31, 2016, J's account balance is $10,500
($10,000 + ($10,000 × 5%)); on December 31,
2017, J's account balance is $9,975 ($10,500 -
($10,500 × 5%)); and on December 31, 2018, J's
account balance is $20,974 ($9,975 + $10,000 +
($19,975 × 5%). On January 1, 2019, Z pays J the
entire account balance of $20,974.
(ii) The increase in J's account balance for 2016
is $10,500 ($10,500 - zero); the increase in J's
account balance for 2017 is zero (because J's ac-
count balance decreased by $525 ($9,975 -
$10,500)); the increase in J's account balance for
2018 is $10,474 ($20,974 - $10,500, which is the
highest account balance in any prior taxable year).
The sum of all the increases is $20,974 ($10,500 +
$10,474). Thus, for Z's 2016 taxable year the attri-
bution fraction is .5006 ($10,500 / $20,974); for Z's
2017 taxable year the attribution fraction is zero
because there was a decrease in the account balance
for the year; and for Z's 2018 taxable year the
attribution fraction is .4994 ($10,474 / $20,974).
(iii) Accordingly, with respect to the $20,974
payment made on January 1, 2019, $10,499 ($20,974
X .5006) of DDR is attributable to services per-
formed by J in Z's 2016 taxable year, and $10,474
($20,973.75 × .4994) of DDR is attributable to
services performed by J in Z's 2018 taxable year. No
amount is attributable to services performed by J in
Z's 2017 taxable year because there was no increase
in the account balance for that taxable year.
Example 4 (Account balance plan - principal
additions method with earnings and losses). (i) The
facts are the same as in Example 3, except that Z
attributes remuneration using the principal additions
method described in paragraph (d)(3)(ii) of this sec-
tion.
(ii) The $10,000 principal addition made on Jan-
uary 1, 2016 and the $474 of net earnings thereon
($500 of earnings for 2016, $525 of losses for 2017,
and $499 of earnings for 2018) are attributable to
services performed by J in Z's 2016 taxable year;
and the $10,000 principal addition made on January
1, 2018 and the $500 of earnings thereon are attrib-
utable to services performed by J in Z's 2018 taxable
year. Accordingly, with respect to the $20,974 pay-
ment made on January 1, 2019, $10,474 ($10,000 +
$474) of DDR is attributable to services performed
by J in Z's 2016 taxable year, and $10,500 ($10,000
\+ $500) of DDR is attributable to services per-
formed by J in Z's 2018 taxable year.
Example 5 (Account balance plan - account bal-
ance ratio method with losses and an in-service
payment). (i) N is an applicable individual of corpo-
ration M for all relevant taxable years. On January 1,
2016, N begins participating in a nonqualified de-
ferred compensation plan sponsored by M that is an
account balance plan. Under the plan, all amounts
are fully vested at all times. The balances in N's
account are $110,000 on December 31, 2016;
$90,000 on December 31, 2017; $250,000 on De-
cember 31, 2018; and $240,000 on December 31,
2019. N ceases providing services to N on December
31, 2019. In accordance with the plan terms, M pays
to N $10,000 on September 30, 2017, $150,000 on
January 1, 2021, and $100,000 on January 1, 2022.
M attributes payments under its account balance
plans using the account balance ratio method de-
scribed in paragraph (d)(3)(i) of this section.
(ii) For purposes of attributing the $10,000 pay-
ment made on September 30, 2017 to taxable years,
the increase in N's account balance for 2016 is
$110,000 ($110,000 - zero). N's account balance for
2017 is treated as $100,000 ($90,000 + $10,000
payment on September 30, 2017), but, because the
account balance of $100,000 is less than the account
balance in an earlier year, the increase in N's account
balance for 2017 is zero. The sum of all the increases
in N's account balance is $110,000 ($110,000 + $0).
Thus, the attribution fraction for 2016 is 1 ($110,000
/ $110,000), and the attribution fraction for 2017 is
zero ($0 / $110,000). Accordingly, with respect to
the $10,000 payment made on September 30, 2017,
the entire $10,000 is attributable to services per-
formed by N in M's 2016 taxable year, and no
amount is attributable to services performed by N in
M's 2017 taxable year.
(iii) After attributing the September 30, 2017
payment of $10,000 to 2016, N's account balance for
2016 is treated as being $100,000 ($110,000 -
$10,000), and the increase for 2016 is likewise
treated as $100,000; N's account balance for 2017
decreased; the increase in N's account balance for
2018 is $150,000 ($250,000 - $100,000); and N's
account balance for 2018 decreased. The sum of all
the increases is $250,000 ($100,000 + $150,000).
Thus, the attribution fraction for 2016 is .40
($100,000 / $250,000); the attribution fraction for
2017 is zero ($0 / $250,000); the attribution fraction
for 2018 is .60 ($150,000 / $250,000); and the attri-
bution fraction for 2019 is zero ($0 / $250,000).
(iv) Accordingly, with respect to the $150,000
payment made on January 1, 2021, $60,000
($150,000 × .40) is attributable to services per-
formed by N in M's 2016 taxable year, and $90,000
($150,000 × .60) is attributable to services per-
formed by N in M's 2018 taxable year. With respect
to the $100,000 payment made on January 1, 2022,
$40,000 ($100,000 × .40) is attributable to services
performed by N in M's 2016 taxable year, and
$60,000 ($100,000 × .60) is attributable to services
performed by N in M's 2018 taxable year. No
amount is attributable to services performed by N in
M's 2017 and 2019 taxable years.
Example 6 (Account balance plan - principal
additions method with multiple payments). (i) O is an
applicable individual of corporation L for all rele-
vant taxable years. On January 1, 2016, O begins
participating in a nonqualified deferred compensa-
tion plan sponsored by L that is an account balance
plan. Under the plan, all amounts are fully vested at
all times. L credits principal additions to O's account
each year, and credits earnings based on a predeter-
mined actual investment within the meaning of
§ 31.3121(v)(2)-1(d)(2)(i)(B). L makes principal ad-
ditions of $90,000 on June 30, 2016; $140,000 on
June 30, 2017; and $180,000 on June 30, 2018. The
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predetermined actual investment earns five percent
for 2016, seven percent for 2017; eight percent for
2018; and nine percent for 2019. Thus, as of Decem-
ber 31, 2018, the earnings with respect to the
$90,000 principal addition made on June 30, 2016
are $16,605, for a total of $106,605; and the earnings
with respect to the $140,000 principal addition made
on June 30, 2017 are $16,492, for a total of
$156,492. As of January 1, 2020, the earnings with
respect to the $180,000 principal addition made on
June 30, 2018 are $24,048, for a total of $204,048.
Under the terms of the plan, the principal addition
(and earnings thereon) made on June 30, 2016 and
June 30, 2017 are payable on December 31, 2018,
and the principal addition (and earnings thereon)
made on June 30, 2018 is payable on January 1,
2020. On December 31, 2018, L pays O $263,097 in
accordance with the plan terms. On January 1, 2020,
L pays O the remaining account balance of $204,048
in accordance with the plan terms.
(ii) The $263,097 payment made on December
31, 2018 is attributed to services performed by O in
the 2016 and 2017 taxable years. Of the $263,097
payment, $106,605 is attributable to services per-
formed by O in L's 2016 taxable year because this
amount represents the $90,000 principal addition
made on June 30, 2016 and earnings thereon. The
remaining $156,492 is attributable to services per-
formed by O in L's 2017 taxable year because this
amount represents the $140,000 principal addition
made on June 30, 2017 and earnings thereon. The
$204,048 payment made on January 1, 2020 is at-
tributable to services performed by O in L's 2018
taxable year because this amount represents the
$180,000 principal addition made on June 30, 2018
and earnings thereon.
Example 7 (Account balance plan - account bal-
ance ratio method with an employer contribution
after the applicable individual ceases to be a service
provider). (i) A is an applicable individual of corpo-
ration Z for all relevant taxable years. On January 1,
2016, A begins participating in a nonqualified de-
ferred compensation plan of Z that is an account
balance plan. Under the terms of the plan, all
amounts are fully vested at all times. The balances in
A's account (including employer contributions and
earnings) are $20,000 on December 31, 2016, and
$60,000 on December 31, 2017. On December 31,
2017, A ceases providing services to Z. On January
1, 2019, Z makes a discretionary contribution of
$30,000 to A's account balance plan. On December
31, 2019, in accordance with the plan terms, Z pays
$120,000 to A, which is N's entire account balance.
Z attributes payments under its account balance
plans using the account balance ratio method de-
scribed in paragraph (d)(3)(i) of this section.
(ii) The increase in A's account balance for 2016
is $20,000; the increase in A's account balance for
2017 is $40,000. The discretionary contribution
made on January 1, 2019 of $30,000 is added to the
account balance for 2017. Thus, the discretionary
contribution of $30,000 on January 1, 2019, is
treated as increasing A's account balance for 2017
by $30,000. The increase in A's account balance for
2016 is $20,000, and the increase in A's account
balance for 2017 is $70,000 ($40,000 + $30,000).
The sum of all the increases is $90,000
($20,000+$70,000).
(iii) Thus, the attribution fraction for 2016 is
.2222 ($20,000 / $90,000); and the attribution frac-
tion for 2017 is .7778 ($70,000 / $90,000). Accord-
ingly, with respect to the $120,000 payment made on
January 1, 2019, $26,664 ($120,000 × .2222) is
attributable to services performed by A in Z's 2016
taxable year, and $93,336 ($120,000 × .7778) is
attributable to services performed by A in Z's 2017
taxable year.
Example 8 (Account balance plan - principal
additions method with a principal addition after the
applicable individual ceases to be a service pro-
vider). (i) C is an applicable individual of corpora-
tion X for all relevant taxable years. On January 1,
2016, C begins participating in a nonqualified de-
ferred compensation plan of X that is an account
balance plan. Earnings under the terms of the plan
are based on a predetermined actual investment (as
defined in § 31.3121(v)(2)-1(e)(2)(i)(B)). Under the
terms of the plan, all amounts are fully vested at all
times. X credits a $10,000 principal addition to C
under the plan on April 1, 2016, and a $20,000
principal addition to C on April 1, 2017. C ceases
providing services to X on December 31, 2017. On
January 1, 2019, X credits $30,000 to C's account in
recognition of C's past services. The $10,000 prin-
cipal addition made on April 1, 2016 increases to
$15,000 as of December 31, 2019, as a result of
earnings. The $20,000 principal addition made on
April 1, 2017, increases to $28,000 as of December
31, 2019 as a result of earnings. The January 1, 2019,
contribution of $30,000 increases to $33,000 as of
December 31, 2019, as a result of earnings. On
December 31, 2019, in accordance with the plan
terms, X pays C's entire account balance of $76,000.
X attributes payments under its account balance
plans using the principal additions method described
in paragraph (d)(3)(ii) of this section.
(ii) When the $76,000 payment is made to C on
December 31, 2019, the remuneration becomes at-
tributable to service performed by C in prior taxable
years. The $10,000 principal addition in 2016 plus
earnings thereon of $5,000 are attributable to ser-
vices performed by C in X's 2016 taxable year, and
the $20,000 principal addition in 2017 (plus earnings
thereon of $8,000) are attributable to services per-
formed by C in X's 2017 taxable year. The principal
addition of $30,000 plus earnings thereon of $3,000
($33,000) are also attributable to services performed
by C in X's 2017 taxable year. Thus, $16,500 of the
$33,000 is attributed to services performed by C in
X's 2017 taxable year.
(iii) Accordingly, with respect to the $76,000
payment by X to C on December 31, 2019, $15,000
($10,000 + $5,000) is attributed to services per-
formed by C in X's 2016 taxable year, and $61,000
($20,000 + $8,000 + $33,000) is attributed to ser-
vices performed by C in X's 2017 taxable year.
Example 9 (Nonaccount balance plan - present
value ratio method with a single payment). (i) C is an
applicable individual of corporation X for all rele-
vant taxable years. On January 1, 2015, X grants C
a vested right to a $100,000 payment on January 1,
2020. C ceases providing services on December 31,
2019. The payment of $100,000 is made on January
1, 2020. X determines the present value of the pay-
ment using an interest rate of five percent for all
years.
(ii) The present value of $100,000 payable on
January 1, 2020, determined using a five percent
interest rate, is $82,270 as of December 31, 2015;
$86,384 as of December 31, 2016; $90,703 as of
December 31, 2017; $95,238 as of December 31,
2018, and $100,000 as of December 31, 2019. Ac-
cordingly, $82,270 is the amount of the increase in
the present value of the future payment of $100,000
for X's 2015 taxable year ($82,270 - $0); $4,114
($86,384 - $82,270) is the increase in the present
value of the future payment for X's 2016 taxable
year; $4,319 ($90,703 - $86,384) is the increase in
the present value of the future payment for X's 2017
taxable year; $4,535 ($95,238 - $90,703) is the
increase in the present value of the future payment
for X's 2018 taxable year; and $4,762 ($100,000 -
$95,238) is the increase in the present value of the
future payment for X's 2019 taxable year. The sum
of all the increases is $100,000 ($82,270 + $4,114 +
$4,319 + $4,535 + $4,762). Thus, the attribution
fraction for 2015 is .8227 ($82,270 / $100,000); the
attribution fraction for 2016 is .0411 ($4,114 /
$100,000); the attribution fraction for 2017 is .0432
($4,319 / $100,000); the attribution fraction for 2018
is .0454 ($4,535 / $100,000); and the attribution
fraction for 2019 is .0476 ($4,762 / $100,000).
(iii) The $100,000 payment made on January 1,
2020 is multiplied by the attribution fraction for each
taxable year, and the result is the amount that is
attributable to service performed by C for that tax-
able year. Accordingly, $82,270 ($100,000 × .8227)
is attributable to services performed by C in X's
2015 taxable year; $4,114 ($100,000 × .0411) is
attributable to services performed by C in X's 2016
taxable year; $4,319 ($100,000 × .0432) is attribut-
able to services performed by C in X's 2017 taxable
year; $4,535 ($100,000 × .0454) is attributable to
services performed by C in X's 2018 taxable year;
and $4,762 ($100,000 × .0476) is attributable to
services performed by C in X's 2019 taxable year.
Example 10. (Nonaccount balance plan - present
value ratio method with an in-service payment). (i)
The facts are the same as Example 9, except that X
grants C a vested right to a $40,000 payment on June
30, 2018 and a vested right to a $60,000 payment on
January 1, 2020.
(ii) The present value of the future payments
($40,000 payable on June 30, 2018 and $60,000
payable on January 1, 2020), determined using a five
percent interest rate, is $84,758 as of December 31,
2015; $88,996 as of December 31, 2016; $93,446 as
of December 31, 2017; and $57,143 as of December
31, 2018. However, for purposes of determining the
increase in the present value of the future payments
during 2018 (the year of the in-service payment),
$57,143 must be increased by $40,000, the amount
of the in-service payment, resulting in a present
value of future payments as of December 31, 2018,
of $97,143 solely for purposes of attributing the
$40,000 in-service payment. Accordingly, $84,758
is the amount of the increase in the present value of
the future payments for X's 2015 taxable year,
$4,238 ($88,896 - $84,758) is the increase in the
present value of the future payments for X's 2016
taxable year, $4,450 ($93,446 - $88,996) is the
increase in the present value of the future payments
for X's 2017 taxable year, and $3,697 ($97,143 -
$93,446) is the increase in the present value of the
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future payments for X's 2018 taxable year. The sum
of all the increases is $97,143 ($84,758 + $4,238 +
$4,450 + $3,697). Thus, the attribution fraction for
2015 is .8725 ($84,758 / $97,143); the attribution
fraction for 2016 is .0436 ($4,238 / $97,143); the
attribution fraction for 2017 is .0458 ($4,450 /
$97,143); and the attribution fraction for 2018 is
.0381 ($3,697 / $97,143).
(iii) Accordingly, with respect to the $40,000
payment made on June 30, 2018, $34,900 ($40,000
X .8725) is attributable to services performed by C
in X's 2015 taxable year; $1,744 ($40,000 × .0436)
is attributable to services performed by C in X's
2016 taxable year; $1,832 ($40,000 x .0458) is at-
tributable to services performed by C in X's 2017
taxable year; and $1,524 ($40,000 × .0381) is at-
tributable to services performed by C in X's 2018
taxable year.
(iv) For purposes of attributing the $60,000 pay-
ment made on January 1, 2020, the present value of
the future payments for each taxable year that ends
prior to the taxable year in which the $40,000 in-
service payment is paid is reduced by the present
value of the future payment to which the applicable
individual had a legally binding right to be paid on
the date the $40,000 in-service is paid (based on the
applicable factors and plan provisions as of the mea-
surement date in each such taxable year). The pres-
ent value of that future payment is $35,396 as of
December 31, 2015; $37,166 as of December 31,
2016; and $39,024 as of December 31, 2017. There-
fore, for purposes of attributing the $60,000 payment
on January 1, 2020, the present value of future
payments as of December 31, 2015, is $49,362
($84,758 - $35,396); the present value of future
payments as of December 31, 2016, is $51,830
($88,996 - $37,166); the present value of future
payments as of December 31, 2017, is $54,422
($93,446 - $39,024). The present value of future
payments as of December 31, 2018, is $57,143.
Accordingly, $49,362 is the increase in the present
value of the future payment of $60,000 for X's 2015
taxable year; $2,468 ($51,830 - $49,362) is the
increase in the present value of the future payment
for X's 2016 taxable year; $2,592 ($54,422 -
$51,830) is the increase in the future value of the
payment for X's 2017 taxable year; $2,721 ($57,143
\- $54,422) is the increase in the future value of the
payments for X's 2018 taxable year; and $2,857
($60,000 - $57,143) is the increase in the future
value of the payment for X's 2019 taxable year. The
sum of all the increases is $60,000 ($49,362 +
$2,468 + $2,592 + $2,721 +$2,857). Thus, the
attribution fraction for 2015 is .8227 ($49,362 /
$60,000); the attribution fraction for 2016 is .0411
($2,468 / $60,000); the attribution fraction for 2017
is .0432 ($2,592 / $60,000); the attribution fraction
for 2018 is .0454 ($2,721 / $60,000); and the attri-
bution fraction for 2019 is .0476 ($2,857 / $60,000).
(v) Accordingly, with respect to the $60,000
payment made on January 1, 2020, $49,362 ($60,000
X .8227) is attributable to services performed by C
in X's 2015 taxable year; $2,468 ($60,000 × .0411)
is attributable to services performed by C in X's
2016 taxable year; $2,592($60,000 × .0432) is at-
tributable to services performed by C in X's 2017
taxable year; $2,721 ($60,000 × .0454) is attribut-
able to services performed by C in X's 2018 taxable
year; and $2,857 ($60,000 × .0476) is attributable to
services performed by C in X's 2019 taxable year.
Example 11 (Nonaccount balance plan - formula
benefit ratio method with losses and multiple pay-
ments). (i) D is an applicable individual of W for all
relevant taxable years. D becomes a participant in a
nonaccount balance plan sponsored by R on January
1, 2018. The plan provides W with the vested right to
receive a five annual installments each equal to
$20,000 times the full years of service that D com-
pletes. The first payment is to be made on the later of
December 31, 2027, or on the December 31 of the
first year in which D is no longer a service provider.
D has a break in service in 2020 and does not accrue
an additional benefit during 2020. D ceases to be a
service provider on December 31, 2022, after having
completed four years of service, entitling D to five
annual payments equal to $80,000 per year com-
mencing on December 31, 2027. W determines the
present value of amounts to be paid under the plan
using an interest rate of five percent for 2018 and
2019, and seven percent for 2021, 2022, and 2023.
W uses the formula benefit ratio method described in
paragraph (d)(4)(ii) of this section.
(ii) Under the plan formula, in 2018, E accrued
the right to a $20,000 annual payment for five years,
and E accrued an additional $20,000 in annual pay-
ments in 2019, 2021, and 2022, resulting in the right
to receive an annual payment of $80,000 commenc-
ing on December 31, 2027. Thus, the attribution
fraction is .25 for 2018 ($20,000 / $80,000), .25 for
2019 ($20,000 / $80,000), .25 for 2021 ($20,000 /
$80,000), and .25 for 2022 ($20,000 / $80,000). The
attribution fraction for 2020 is zero because no ad-
ditional formula benefit accrued during that year.
(iii) The attribution fraction for each disqualified
taxable year is multiplied by each payment and the
result is attributed to that taxable year. Accordingly,
with respect to each $80,000 payment, $20,000
($80,000 × .25) is attributable to services performed
by D in W's 2018 taxable year; $20,000 ($80,000 ×
.25) is attributable to services performed by D in W's
2019 taxable year; $20,000 ($80,000 × .25) is at-
tributable to services performed by D in W's 2021
taxable year; and $20,000 ($80,000 × .25) is attrib-
utable to services performed by D in W's 2022
taxable year. No amount is attributable to services
performed by D in W's 2020 taxable year.
Example 12 (Stock option). (i) E is an applicable
individual of corporation V for all relevant taxable
years. On January 1, 2016, V grants E an option to
purchase 100 shares of V common stock at an exer-
cise price of $50 per share (the fair market value of
V common stock on the date of grant). The stock
option is not subject to a substantial risk of forfei-
ture. On December 31, 2017, E ceases to be a service
provider of V or any member of V's aggregated
group. On January 1, 2019, E resumes providing
services for V and again becomes both a service
provider and an applicable individual of V. On De-
cember 31, 2020, when the fair market value of V
common stock is $196 per share, E exercises the
stock option. The remuneration resulting from the
stock option exercise is $14,600 (($196 - $50) X
100).
(ii) The $14,600 is attributed pro rata over the
1,460 days from January 1, 2016 to December 31,
2017 and from January 1, 2019 to December 31,
2020 (365 days per year for the 2016, 2017, 2019,
and 2020 taxable years), so that $10 ($14,600 di-
vided by 1,460) is attributed to each calendar day in
this period, and $3,650 (365 days × $10) of remu-
neration is attributed to services performed by E in
each of V's 2016, 2017, 2019, and 2020 taxable
years.
Example 13 (Stock option subject to a substantial
risk of forfeiture). (i) The facts are the same as
Example 14, except that the stock option is subject to
a substantial risk of forfeiture that lapses on Decem-
ber 31, 2017, and is not transferable until that date,
and V chooses to attribute remuneration resulting
from the exercise of stock options that are subject to
a substantial risk of forfeiture over the period begin-
ning on the date of grant and ending on the date the
substantial risk of forfeiture lapses, as permitted
under paragraph (d)(5)(i)(B) of this section.
(ii) The $14,600 is attributed pro rata over the
730 days from January 1, 2016 to December 31,
2017 (365 days per year for the 2016 and 2017
taxable years), so that $20 ($14,600 divided by 730)
is attributed to each calendar day in this period, and
$7,300 (365 days × $20) is attributed to services
performed by E in each of V's 2016 and 2017
taxable years.
Example 14 (Restricted stock). (i) F is an appli-
cable individual of corporation U for all relevant
taxable years. On January 1, 2017, U grants to F
1000 shares of restricted U common stock. Under the
terms of the grant, the shares will be forfeited if F
voluntarily terminates employment before December
31, 2019 (so that the shares are subject to a substan-
tial risk of forfeiture through that date) and are
nontransferable until the substantial risk of forfeiture
lapses. F does not make an election under section
83(b) and continues in employment with U through
December 31, 2019, at which time F's rights in the
stock become substantially vested within the mean-
ing of § 1.83-3(b) and the fair market value of a
share of the stock is $109.50. The remuneration
resulting from the vesting of the restricted stock is
$109,500 ($109.50 × 1000).
(ii) The $109,500 of remuneration is attributed to
services performed by F over the 1,095 days between
January 1, 2017 and December 31, 2019 (365 days
per year for the 2017, 2018, and 2019 taxable years),
so that $100 ($109,500 divided by 1,095) is attrib-
uted to each calendar day in this period, and remu-
neration of $36,500 (365 days × $100) is attributed
to services performed by F in each of U's 2017,
2018, and 2019 taxable years.
Example 15 (RSUs). (i) G is an applicable indi-
vidual of corporation T for all relevant taxable years.
On January 1, 2018, T grants to G 1000 RSUs.
Under the terms of the grant, T will pay G an amount
on December 31, 2020 equal to the fair market value
of 1000 shares of T common stock on that date, but
only if G continues to provide substantial services to
T (so that the RSU is subject to a substantial risk of
forfeiture) through December 31, 2020. G remains
employed by T through December 31, 2020, at
which time the fair market value of a share of the
stock is $219, and T pays G $219,000 ($219 ×
1000).
(ii) The $219,000 in remuneration is attributed to
services performed by G over the 1,095 days begin-
ning on January 1, 2018 and ending on December
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31, 2020 (365 days per year for the 2018, 2019, and
2020 taxable years), so that $200 ($219,000 / 1,095)
is attributed to each calendar day in this period, and
$73,000 (365 days × $200) is attributed to service
performed by G in each of T's 2018, 2019, and 2020
taxable years.
Example 16 (Involuntary separation pay). (i) H
is an applicable individual of corporation S. On
January 1, 2015, H and S enter into an employment
contract providing that S will make two payments of
$150,000 each to H if H has an involuntary separa-
tion from service. Under the terms of the contract,
the first payment is due on January 1 following the
involuntary separation from service, and the second
payment is due on January 1 of the following year.
On December 31, 2016, H has an involuntary sepa-
ration from service. S pays H $150,000 on January 1,
2017 and $150,000 on January 1, 2018.
(ii) Pursuant to paragraph (d)(6) of this section,
involuntary separation pay may be attributed to ser-
vices performed by H in the taxable year of S in
which the involuntary separation from service oc-
curs. Alternatively, involuntary separation pay may
be attributed to services performed by H on a daily
pro rata basis beginning on the date H obtains a
legally binding right to the involuntary separation
pay and ending on the date of the involuntary sepa-
ration from service. The entire $300,000 amount,
including both $150,000 payments, must be attrib-
uted using the same method. Therefore, the entire
$300,000 amount (comprised of two $150,000 pay-
ments) may be attributed to services performed by H
in S's 2016 taxable year, which is the taxable year in
which the involuntary separation from service oc-
curs. Alternatively, each $150,000 payment may be
attributed on a daily pro rata basis to the period
beginning on January 1, 2015 and ending December
31, 2016, so that $410.96 (($150,000 × 2) / (365 ×
2)) is attributed to each day of S's 2015 and 2016
taxable years. Accordingly, $150,000 is attributed to
services performed by H in each of S's 2015 and
2016 taxable years.
Example 17 (Reimbursement after termination of
services). (i) I is an applicable individual of corpo-
ration R. On January 1, 2018, I enters into an agree-
ment with R under which R will reimburse I's coun-
try club dues for two years following I's separation
from service. On December 31, 2020, I ceases to be
a service provider of R. I pays $50,000 in country
club dues on January 1, 2021 and $50,000 on Janu-
ary 2, 2022. Pursuant to the agreement, R reimburses
I $50,000 for the country club dues in 2021 and
$50,000 in 2022.
(ii) $100,000 is attributed to services performed
in R's 2020 taxable year, the taxable year in which I
ceases to be a service provider.
(10) Certain remuneration subject to a
substantial risk of forfeiture. If remuner-
ation is attributable in accordance with
paragraphs (d)(2) (legally binding right),
(d)(3) (account balance plan), or (d)(4)
(nonaccount balance plan) of this section
to services performed in a period that in-
cludes two or more taxable years of a
covered health insurance provider during
which the remuneration is subject to a
substantial risk of forfeiture, that remuner-
ation must be attributed using a two-step
process. First, the remuneration must be
attributed to the taxable years of the cov-
ered health insurance provider in accor-
dance with paragraph (d)(2), (d)(3), or
(d)(4) of this section, as applicable. Sec-
ond, the remuneration attributed to the
period during which the remuneration is
subject to a substantial risk of forfeiture
(the vesting period) must be reattributed
on a daily pro rata basis over that period
beginning on the date that the applicable
individual obtains a legally binding right
to the remuneration and ending on the
date that the substantial risk of forfeiture
lapses. If a vesting period begins on a day
other than the first day of a covered health
insurance provider's taxable year or ends
on a day other than the last day of the
covered health insurance provider's tax-
able year, the remuneration attributable to
that taxable year under the first step of the
attribution process is divided between the
portion of the taxable year that includes
the vesting period and the portion of the
taxable year that does not include the vest-
ing period. The amount attributed to the
portion of the taxable year that includes
the vesting period is equal to the total
amount of remuneration that would be
attributable to the taxable year under the
first step of the attribution process, multi-
plied by a fraction, the numerator of
which is the number of days during the
taxable year that the amount is subject to
a substantial risk of forfeiture and the de-
nominator of which is the number of days
in such taxable year. The remaining
amount is attributed to the portion of the
taxable year that does not include the vest-
ing period and, therefore, is not reattrib-
uted under the second step of the attribu-
tion process.
(11) Example. The following example
illustrates the principles of paragraph
(d)(10) of this section. For purposes of
this example, the corporation has a taxable
year that is the calendar year and is a
covered health insurance provider for all
relevant taxable years, DDR is otherwise
deductible in the taxable year in which it
is paid, and amounts payable under non-
account balance plans are not forfeitable
upon the death of the applicable individ-
ual.
Example (Account balance plan subject to a sub-
stantial risk of forfeiture using the principal addi-
tions method). (i) J is an applicable individual of
corporation Q for all relevant taxable years. On
January 1, 2016, J begins participating in a nonquali-
fied deferred compensation plan that is an account
balance plan. Under the terms of the plan, Q will pay
J's account balance on January 1, 2021, but only if J
continues to provide substantial services to Q
through December 31, 2018 (so that the amount
credited to J's account is subject to a substantial risk
of forfeiture through that date). Q credits $10,000 to
J's account annually for five years on January 1 of
each year beginning on January 1, 2016. The account
earns interest at a fixed rate of five percent per year,
compounded annually, which solely for the purposes
of this example, is assumed to be a reasonable rate of
interest. Q attributes increases in account balances
under the plan using the principal additions method
described in paragraph (d)(3)(ii) of this section.
(ii) Earnings on a principal addition are attrib-
uted to the same disqualified taxable year of Q to
which the principal addition is attributed; therefore,
the amount initially attributable to Q's 2016 taxable
year is $12,763 (the $10,000 principal addition in
2016 at five percent interest for five years); the
amount initially attributable to Q's 2017 taxable year
is $12,155 (the $10,000 principal addition in 2017 at
five percent interest for four years); the amount ini-
tially attributable to Q's 2018 taxable year is $11,576
(the $10,000 principal addition in 2018 at five per-
cent interest for three years); the amount attributable
to Q's 2019 taxable year is $11,025 (the $10,000
principal addition in 2019 at five percent interest for
two years); and the amount attributable to Q's 2020
taxable year is $10,500 (the $10,000 principal addi-
tion in 2020 at five percent interest for one year).
(iii) Remuneration that is attributable to two or
more taxable years of Q during which it is subject to
a substantial risk of forfeiture must be reattributed on
a daily pro rata basis to the period beginning on the
date that J obtains a legally binding right to the
remuneration and ending on the date that the sub-
stantial risk of forfeiture lapses. Therefore, $36,494
($12,763 + $12,155 + $11,576) is reattributed on a
daily pro rata basis over the period beginning on
January 1, 2016, and ending on December 31, 2018.
Thus, $12,165 is attributed to services performed by
J in each of Q's 2016, 2017, and 2018 taxable years.
(e) Application of the deduction limita-
tion-(1) Application to aggregate amounts.
The $500,000 deduction limitation is ap-
plied to the aggregate amount of AIR and
DDR attributable to services performed by
an applicable individual in a disqualified
taxable year. The aggregate amount of AIR
and DDR attributable to services performed
by an applicable individual in a disqualified
taxable year that exceeds the $500,000 de-
duction limit is not allowed as a deduction
in any taxable year. Therefore, for example,
if an applicable individual has more than
$500,000 of AIR attributable to services
performed for a covered health insurance
provider in a disqualified taxable year, the
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amount of that AIR that exceeds $500,000 is
not deductible in any taxable year, and no
DDR attributable to services performed by
the applicable individual in that disqualified
taxable year is deductible in any taxable
year. However, if an applicable individual
has AIR for a disqualified taxable year that
is $500,000 or less and DDR attributable to
services performed in the same disqualified
taxable year that, when combined with the
AIR for the year, exceeds $500,000, all of
the AIR is deductible in that disqualified
taxable year, but the amount of DDR attrib-
utable to that taxable year that is deductible
in future taxable years is limited to an
amount equal to $500,000 less the amount
of the AIR for that taxable year.
(2) Order of application and calcula-
tion of deduction limitation-(i) In general.
The deduction limitation with respect to
any applicable individual for any disqual-
ified taxable year is applied to AIR and
DDR attributable to services performed
by that applicable individual in that dis-
qualified taxable year at the time that the
remuneration becomes otherwise deduct-
ible, and each time the deduction limita-
tion is applied to an amount that is other-
wise deductible, the deduction limit is
reduced (but not below zero) by the
amount against which it is applied. Ac-
cordingly, the deduction limitation is ap-
plied first to an applicable individual's
AIR attributable to services performed in
a disqualified taxable year and is reduced
(but not below zero) by the amount of the
AIR to which the deduction limit is ap-
plied. If the applicable individual also has
an amount of DDR attributable to services
performed in that disqualified taxable year
that becomes otherwise deductible in a
subsequent taxable year, the deduction
limit, as reduced, is applied to that amount
of DDR in the first taxable in which the
DDR becomes otherwise deductible. The
deduction limit is then further reduced
(but not below zero) by the amount of the
DDR to which the deduction limit is ap-
plied. If the applicable individual has an
additional amount of DDR attributable to
services performed in the original disqual-
ified taxable year that becomes otherwise
deductible in a subsequent taxable year,
the deduction limit, as further reduced, is
applied to that amount of DDR in the
taxable year in which it is otherwise de-
ductible. This process continues for future
taxable years in which DDR attributable
to services performed by the applicable
individual in the original disqualified tax-
able year is otherwise deductible. No de-
duction is allowed in any taxable year for
any AIR or DDR attributable to services
performed by an applicable individual in a
disqualified taxable year for the excess of
those amounts over the deduction limit (as
reduced, if applicable) for that disqualified
taxable year at the time the deduction lim-
itation is applied to the remuneration.
(ii) Application to payments-(A) In
general. Any payment of remuneration
may include amounts that are attributable
to services performed by an applicable
individual in one or more taxable years of
a covered health insurance provider pur-
suant to paragraphs (d)(2) through (d)(11)
of this section. In that case, a separate
deduction limitation applies to each por-
tion of the payment that is attributed to
services performed in a different disqual-
ified taxable year. Any portion of a pay-
ment that is attributed to a taxable year
that is a disqualified taxable year is de-
ductible only to the extent that it does not
exceed the deduction limit that applies
with respect to the applicable individual
for that disqualified taxable year, as re-
duced by the amount, if any, of AIR and
DDR attributable to services performed in
that disqualified taxable year that was de-
ductible in an earlier taxable year.
(3) Examples. The following examples
illustrate the rules of paragraphs (e)(1)
and (e)(2) of this section. For purposes of
these examples, each corporation has a
taxable year that is the calendar year and
is a covered health insurance provider for
all relevant taxable years; DDR is other-
wise deductible in the taxable year in
which it is paid; and amounts payable
under nonaccount balance plans are not
forfeitable upon the death of the applica-
ble individual.
Example 1 (Lump-sum payment of DDR attrib-
utable to a single taxable year). (i) L is an applicable
individual of corporation O. During O's 2015 tax-
able year, O pays L $550,000 in salary, which is
AIR, and grants L a right to $50,000 of DDR payable
upon L's separation from service from O. L has a
separation from service in 2020, at which time O
pays L the $50,000 of DDR attributable to services
performed by L in O's 2015 taxable year.
(ii) The $500,000 deduction limitation for 2015
is applied first to L's $550,000 of AIR for 2015.
Because the $550,000 of AIR in 2015 is greater than
the deduction limit, O may deduct only $500,000 of
the AIR for 2015, and $50,000 of the $550,000 of
AIR is not deductible for any taxable year. The
deduction limit for remuneration attributable to ser-
vices provided by L in O's 2015 taxable year is then
reduced to zero. Because the $50,000 in DDR attrib-
utable to services performed by L in 2015 exceeds
the reduced deduction limit of zero, that $50,000 is
not deductible for any taxable year.
Example 2 (Installment payments of DDR attrib-
utable to a single taxable year). (i) M is an applica-
ble individual of corporation N. During N's 2016
taxable year, N pays M $300,000 in salary, which is
AIR, and grants M a right to $220,000 of DDR
payable on a fixed schedule beginning upon M's
separation from service. The $220,000 is attributable
to services provided by M in N's 2016 taxable year.
M ceases providing services on December 31, 2016.
In 2020, N pays M $120,000 of DDR that is attrib-
utable to services performed in N's 2016 taxable
year. In 2021, N pays M the remaining $100,000 of
DDR attributable to services performed by M in N's
2016 taxable year.
(ii) The $500,000 deduction limitation for 2016
is applied first to M's $300,000 of AIR for 2016.
Because the deduction limit is greater than the AIR,
N may deduct the entire $300,000 of AIR paid in
2016. The $500,000 deduction limit is then reduced
to $200,000 because the limitation is reduced by the
amount of AIR ($500,000 - $300,000). The reduced
deduction limit is then applied to M's $120,000 of
DDR attributable to services performed by M in N's
2016 taxable year that is paid in 2020. Because the
reduced deduction limit of $200,000 is greater than
the $120,000 of DDR, N may deduct the entire
$120,000 of DDR paid in 2020. The $200,000 de-
duction limit is reduced to $80,000 by the $120,000
in DDR because the limit is reduced by the amount
of DDR to which the deduction limit applied
($200,000 - $120,000). The reduced deduction limit
of $80,000 is then applied to the remaining $100,000
payment of DDR attributable to services performed
by M in N's 2016 taxable year. Because the
$100,000 payment by N for 2021 exceeds the re-
duced deduction limit of $80,000, N may deduct
only $80,000 of the payment for the 2021 taxable
year, and $20,000 of the $100,000 payment is not
deductible by N for any taxable year.
Example 3 (Lump-sum payment attributable to
multiple years from an account balance plan using
the account balance ratio method). (i) N is an appli-
cable individual of corporation M for all relevant
taxable years. On January 1, 2015, N begins partic-
ipating in a nonqualified deferred compensation plan
sponsored by M that is an account balance plan.
Under the plan, all amounts are fully vested at all
times. The balances in N's account (including earn-
ings) are $50,000 on December 31, 2015, $100,000
on December 31, 2016, and $200,000 on December
31, 2017. N's AIR from M is $425,000 for 2015,
$450,000 for 2016, and $500,000 for 2017. On Jan-
uary 1, 2018, in accordance with the plan terms, M
pays $200,000 to N, which is a payment of N's entire
account balance under the plan. M uses the account
balance ratio method to attribute amounts to services
performed in taxable years.
(ii) To determine the extent to which M is enti-
tled to a deduction for any portion of the $200,000
payment under the plan, the payment must first be
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attributed to services performed by N in M's taxable
years in accordance with the attribution rules set
forth in paragraph (d) of this section. The increase in
N's account balance during 2015 is $50,000
($50,000 - zero); the increase in N's account balance
for 2016 is $50,000 ($100,000 - $50,000); and the
increase in N's account balance for 2017 is $100,000
($200,000 - $100,000). The sum of all the increases
is $200,000 ($50,000 + $50,000 + $100,000). Ac-
cordingly, for N's 2015 taxable year, the attribution
fraction is .25 ($50,000 / $200,000); for N's 2016,
taxable year, the attribution fraction is .25 ($50,000
/ $200,000); and for N's 2017 taxable year, the
attribution fraction is .50 ($100,000 / $200,000).
(iii) With respect to the $200,000 payment made
on January 1, 2018, $50,000 ($200,000 × .25) of
DDR is attributable to services performed by N in
M's 2015 taxable year; $50,000 ($200,000 × .25) of
DDR is attributable to services performed by N in
M's 2016 taxable year; and $100,000 ($200,000 ×
.50) of DDR is attributable to services performed by
N in M's 2017 taxable year.
(iv) The $500,000 deduction limitation for 2015
is applied first to N's $425,000 of AIR for 2015.
Because the deduction limit is greater than the AIR,
M may deduct the entire $425,000 of AIR paid in
2015. The $500,000 deduction limit is then reduced
to $75,000 by the amount of AIR against which it is
applied ($500,000 - $425,000). The reduced deduc-
tion limit is then applied to N's $50,000 of DDR
attributable to services performed by N in M's 2015
taxable year that is paid in 2018. Because $50,000
does not exceed the reduced deduction limit of
$75,000, all $50,000 of the DDR attributable to
services performed by N in M's 2015 taxable year is
deductible for 2018, the year of payment. The de-
duction limit for remuneration attributable to ser-
vices performed by N in 2015 is then reduced to
$25,000 ($75,000 - $50,000), and this reduced limit
is applied to any future payment of DDR attributable
to services performed by N in 2015. With respect to
M's 2016 taxable year, the $500,000 deduction limit
for 2016 is applied first to N's $450,000 of AIR for
2016. Because the deduction limit is greater than the
AIR, M may deduct the entire $450,000 of AIR paid
in 2016. The $500,000 deduction limit is then re-
duced to $50,000 by the AIR ($500,000 -
$450,000). The reduced deduction limit is then ap-
plied to N's $50,000 of DDR attributable to services
performed by N in M's 2016 taxable year that is paid
in 2018. Because $50,000 does not exceed the re-
duced deduction limit of $50,000, all $50,000 of the
DDR attributed to M's 2016 taxable year is deduct-
ible for 2018, the year of payment. The deduction
limit for remuneration attributable to services per-
formed by N in 2016 is then reduced to zero, and this
reduced limit is applied to any future payment of
DDR attributable to services performed by N in
2016. With respect to M's 2017 taxable year, the
$500,000 deduction limit for 2017 is applied first to
N's $500,000 of AIR for 2017. Because the deduc-
tion limit is not greater than the AIR, M may deduct
the entire $500,000 of AIR paid in 2017. The
$500,000 deduction limit is then reduced to zero by
the amount of the AIR against which it is applied
($500,000 - $500,000). The reduced deduction limit
is applied to N's $100,000 of DDR attributable to
services performed by N in M's 2017 taxable year
that is paid in 2018. Because $100,000 exceeds the
reduced deduction limit of zero, the $100,000 of the
DDR attributed to services performed by N in M's
2017 taxable year is not deductible for the year of
payment (or any other taxable year). As a result,
$100,000 of the $200,000 payment ($50,000 +
$50,000 + $0) is deductible by M for M's 2018
taxable year, and the remaining $100,000 is not
deductible by M for any taxable year.
Example 4 (Installment payments and in-service
payment attributable to multiple taxable years from
an account balance plan using the account balance
ratio method). (i) O is an applicable individual of
corporation L for all relevant taxable years. On Jan-
uary 1, 2016, O begins participating in a nonquali-
fied deferred compensation plan sponsored by L that
is an account balance plan. Under the plan, all
amounts are fully vested at all times. L makes con-
tributions to O's account each year and credits earn-
ings based on a predetermined actual investment
within the meaning of § 31.3121(v)(2)-1(d)(2)(i)(B).
The closing balances in O's account (including con-
tributions, earnings, and distributions made during
the year) are $100,000 on December 31, 2016,
$250,000 on December 31, 2017, and $50,000 on
December 31, 2018. O's AIR from L is $500,000 for
2016, $300,000 for 2017, and $450,000 for 2018. On
December 31, 2018, L pays O $400,000 in accor-
dance with the plan terms. On December 31, 2019,
O's account balance is $200,000, reflecting addi-
tional credits of $125,000 made during the year and
earnings on the account. O's AIR from L is $200,000
for 2019. O ceases providing services to L on De-
cember 31, 2019. On January 1, 2020, L pays O
$200,000 in accordance with the plan terms. L uses
the account balance ratio method to attribute
amounts to services performed in taxable years.
(ii) To determine the extent to which L is entitled
to a deduction for any portion of either of the pay-
ments under the plan, O's payments under the plan
must first be attributed to services performed by O in
L's taxable years in accordance with the attribution
rules set forth in paragraph (d) of this section. For
purposes of attributing the $400,000 payment made
on December 31, 2018 to a taxable year, the increase
in O's account balance during 2016 is $100,000
($100,000 - zero); the increase in O's account bal-
ance for 2017 is $150,000 ($250,000 - $100,000);
and the increase in O's account balance for 2018 is
$200,000 ($50,000 - $250,000 + $400,000 (pay-
ment on December 31, 2018)). The sum of all the
increases is $450,000 ($100,000 + $150,000 +
$200,000). Thus, for L's 2016 taxable year, the at-
tribution fraction is .2222 ($100,000 / $450,000); for
L's 2017 taxable year, the attribution fraction is
.3333 ($150,000 / $450,000); and for L's 2018
taxable year, the attribution fraction is .4444
($200,000 / $450,000). Accordingly, with respect to
the $400,000 payment made on December 31, 2019,
$88,889 ($400,000 × .2222) is attributable to ser-
vices performed by O in L's 2016 taxable year;
$133,333 ($400,000 × .3333) is attributable to ser-
vices performed by O in L's 2017 taxable year; and
$177,778 ($400,000 × .4444) is attributable to ser-
vices performed by O in L's 2018 taxable year.
(iii) The portion of the $400,000 payment attrib-
uted to services performed in a disqualified taxable
year under paragraph (d) of this section that exceeds
the deduction limit for that disqualified taxable year,
as reduced through the date of payment, is not de-
ductible in any taxable year. The $500,000 deduction
limit for 2016 is applied first to O's $500,000 of AIR
for 2016. Because the deduction limit is equal to the
$500,000 of AIR, L may deduct the entire $500,000
of AIR paid in 2016. The $500,000 deduction limit is
then reduced to zero by the amount of the AIR
($500,000 - $500,000). The reduced deduction limit
is applied to O's $88,889 of DDR attributable to
services performed by O in L's 2016 taxable year
that is paid in 2018. Because $88,889 exceeds the
reduced deduction limit of zero, the $88,889 of DDR
attributed to 2016 is not deductible for L's 2018
taxable year or any other taxable year. With respect
to L's 2017 taxable year, the $500,000 deduction
limitation for 2017 is applied first to O's $300,000 of
AIR for 2017. Because the $500,000 deduction limit
is greater than the $300,000 of AIR, L may deduct
the entire $300,000 of AIR paid in 2017. The
$500,000 deduction limit is reduced to $200,000 by
the amount of the AIR ($500,000 - $300,000). The
reduced deduction limit is then applied to O's
$133,333 of DDR attributable to services performed
by O in L's 2017 taxable year that is paid in 2018.
Because $133,333 does not exceed that reduced de-
duction limit of $200,000, the $133,333 is deductible
for 2018. The deduction limit for remuneration at-
tributable to services performed by O in 2017 is then
reduced to $66,667 ($200,000 - $133,333), and this
reduced limit is applied to any future payment of
DDR attributable to services performed by O in
2017. With respect to L's 2018 taxable year, the
$500,000 deduction limit for 2018 is applied first to
O's $450,000 of AIR for 2018. Because the deduc-
tion limit is greater than the AIR, L may deduct the
entire $450,000 of AIR paid in 2017. The $500,000
deduction limit is reduced to $50,000 by the amount
of the AIR ($500,000 - $450,000). The reduced
deduction limit is applied to O's $177,778 attribut-
able to services performed by O in L's 2018 taxable
year that is paid in 2018. Because the $177,778
exceeds the reduced deduction limit of $50,000,
$50,000 of DDR is deductible for L's 2018 taxable
year, and $127,778 of the $177,778 is not deductible
for L's 2018 taxable year or any other taxable year.
As a result, $183,333 of the $400,000 payment ($0
\+ $133,333 + $50,000) is deductible by L for L's
2018 taxable year, and the remaining $216,667 is not
deductible by L for any taxable year.
(iv) For purposes of attributing amounts paid or
made available from the plan in future taxable years,
the following adjustments are made to O's account
balances to reflect the in-service payment of
$400,000 in 2018. O's account balance as of Decem-
ber 31, 2016 is reduced by the $88,889 attributable
to 2016; and for 2017 is reduced by the sum of the
$133,333 attributable to 2017 and the $88,889 attrib-
utable to 2016. Therefore, after attributing the
$400,000 payment, O's adjusted closing account bal-
ance as of December 31, 2016, is $11,111 ($100,000
\- $88,889), and as of December 31, 2017, is
$27,778 ($250,000 - $133,333 - $88,889).
(v) For purposes of attributing the $200,000 pay-
ment made on January 1, 2020, to services per-
formed in the taxable years of S, the increase in O's
account balance during 2016 is $11,111 ($11,111 -
$0); the increase in O's account balance for 2017 is
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$16,667 ($27,778 - $11,111); the increase in O's
account balance for 2018 is $22,222 ($50,000 -
$27,778), and the increase in O's account balance for
2019 is $150,000 ($200,000 - $50,000). The sum of
all such increases is $200,000 ($11,111 + $16,667
\+ $22,222 + $150,000). Thus, for O's 2016 taxable
year, the attribution fraction is .0556 ($11,111 /
$200,000); for O's 2017, taxable year, the attribution
fraction is .0833 ($16,667 / $200,000); for O's 2018
taxable year, the attribution fraction is .1111
($22,222 / $200,000); for O's 2019 taxable year, the
attribution fraction is .7500 ($150,000 / $200,000).
Accordingly, with respect to the $200,000 payment
made on January 1, 2020, $11,111 ($200,000 ×
.0556) of DDR is attributable to services performed
by O in L's 2016 taxable year; $16,667 ($200,000 ×
.0833) of DDR is attributable to services performed
by O in L's 2017 taxable year; $22,222 ($200,000 ×
.1111) of DDR is attributable to services performed
by O in L's 2018 taxable year; and $150,000
($200,000 × .7500) of DDR is attributable to ser-
vices performed by O in L's 2019 taxable year.
(vi) The portion of the DDR attributed to a
disqualified taxable year under paragraph (d) of this
section that exceeds the deduction limit for that
disqualified taxable year, as reduced, is not deduct-
ible for any taxable year. For L's 2016 taxable year,
the deduction limit is reduced to zero by the
$500,000 of AIR for that year. Because $11,111
exceeds the reduced deduction limit of zero, $11,111
of the DDR is not deductible for L's 2020 taxable
year or any other taxable year. For L's 2017 taxable
year, the deduction limit is reduced to $200,000 by
the $300,000 of AIR for that year and further re-
duced to $66,667 by the $133,333 of DDR previ-
ously attributed to 2017. Because $16,667 does not
exceed the $66,667 deduction limit, the $16,667 of
DDR is deductible for L's 2020 taxable year, the
year of payment. The deduction limit for remunera-
tion attributable to services performed by O in 2017
is then reduced to $50,000 ($66,667 - $16,667), and
this reduced limit is applied to any future payment
attributable to services performed by O in 2017. For
L's 2018 taxable year, the deduction limit is reduced
to zero by the $450,000 of AIR for that year and the
$50,000 of DDR previously attributed to 2018. Be-
cause $22,222 exceeds the reduced deduction limit
of zero for 2018, the $22,222 of DDR is not deduct-
ible for L's 2020 taxable year or any other taxable
year. For L's 2019 taxable year, the $500,000 de-
duction limit for 2019 is applied first to O's
$200,000 of AIR for 2019. Because the deduction
limit is greater than the AIR, L may deduct the entire
$200,000 of AIR paid in 2019. The $500,000 deduc-
tion limit is reduced to $300,000 by the amount of
the AIR ($500,000 - $200,000). The reduced de-
duction limit is applied to O's $150,000 of DDR
attributable to services performed by O in L's 2019
taxable year that is paid in 2020. Because $150,000
does not exceed the $300,000 limit, the $150,000 of
DDR is deductible for L's 2020 taxable year, the
year of payment. The deduction limit for remunera-
tion attributable to services performed by O in 2019
is then reduced to $150,000 ($500,000 - $200,000
\- $150,000), and this reduced limit is applied to any
future payment attributable to services performed by
O in 2019. As a result, $166,667 of the $200,000
payment ($0 + $16,667 + $0 + $150,000) is de-
ductible by L for L's 2020 taxable year, the year of
payment, and the remaining $33,333 is not deduct-
ible by L for any taxable year.
Example 5 (Installment payments and in-service
payment attributable to multiple taxable years from
an account balance plan using the principal addi-
tions method). (i) The facts are the same as set forth
in Example 4, paragraph (i), except that L uses the
principal additions method for attributing remunera-
tion from an account balance plan; principal addi-
tions under the plan are $100,000 in 2016, $125,000
in 2017, $150,000 in 2018, and $125,000 in 2019; as
of the December 31, 2018 initial date of payment,
earnings on the 2016, 2017, and 2018 principal ad-
ditions are $40,000, $30,000, and $5,000 respec-
tively. Under the terms of the plan, the $400,000
payment made on December 31, 2018, is from prin-
cipal additions in 2016, 2017, and 2018, and earn-
ings thereon, and the $200,000 payment made on
January 1, 2020, is from principal additions in 2018
and 2019, and earnings thereon.
(ii) To determine the extent to which L is entitled
to a deduction for any portion of either payment
under the plan, the payments to O under the plan
must first be attributed to services performed by O in
F's taxable years in accordance with the attribution
rules set forth in paragraph (d) of this section. Under
the rules in paragraph (d)(3)(ii) of this section, the
$400,000 payment on January 1, 2019, is attributed
to services performed by O in the taxable year to
which the payment relates under the terms of the
plan. DDR including principal additions and earn-
ings thereon are attributed to services performed by
O in a taxable year of L when the $400,000 payment
is made to O on December 31, 2018. Under the terms
of the plan, the $400,000 payment made on Decem-
ber 31, 2018 is attributed to services performed by O
in L's 2016 taxable year in the amount of $140,000,
and is attributed to services performed by O in L's
2017 taxable year in the amount of $155,000, and the
remaining $105,000 ($400,000 - $140,000 -
$155,000) is attributed to services performed by O in
L's 2018 taxable year.
(iii) The portion of the DDR attributable to ser-
vices performed in a disqualified taxable year under
paragraph (d) of this section that exceeds the deduc-
tion limit for that disqualified taxable year, as re-
duced, is not deductible for any taxable year. The
$500,000 deduction limitation for 2016 is applied
first to O's $500,000 of AIR for 2016. Because the
deduction limit is equal to the $500,000 of AIR, L
may deduct the entire $500,000 of AIR paid in 2016.
The $500,000 deduction limit is then reduced to zero
by the amount of the AIR ($500,000 - $500,000).
The reduced deduction limit is applied to O's
$140,000 of DDR attributable to services performed
by O in L's 2016 taxable year that is paid in 2018.
Because $140,000 exceeds the reduced deduction
limit of zero, the $140,000 is not deductible for L's
2018 taxable year (the year of payment), or any other
taxable year. For L's 2017 taxable year, the
$500,000 deduction limit for 2017 is applied first to
O's $300,000 of AIR for 2017. Because the deduc-
tion limit is greater than the AIR, L may deduct the
entire $300,000 of AIR paid in 2017. The $500,000
deduction limit is then reduced to $200,000 by the
amount of the AIR ($500,000 - $300,000). The
reduced deduction limit is applied to O's $155,000
of DDR attributable to services performed by O in
L's 2017 taxable year that is paid in 2018. Because
$155,000 does not exceed the reduced deduction
limit of $200,000, the $155,000 payment is deduct-
ible for 2018. For L's 2018 taxable year, the
$500,000 deduction limitation for 2018 is applied
first to O's $450,000 of AIR for 2018. Because the
deduction limit is greater than the AIR, L may de-
duct the entire $450,000 of AIR paid in 2018. The
$500,000 deduction limit is then reduced to $50,000
by the amount of the AIR ($500,000 - $450,000).
The reduced deduction limit is applied to O's
$105,000 of DDR attributable to services performed
by O in L's 2018 taxable year that is paid in 2018.
Because $105,000 exceeds the reduced deduction
limit of $50,000, $55,000 of the $105,000 attribut-
able to L's 2018 taxable year is not deductible for
2018 (the year of payment), or any other taxable
year. As a result, $205,000 of the $400,000 payment
($0 + $155,000 + $50,000) is deductible by L for
L's 2018 taxable year (the year of payment) and the
remaining $195,000 is not deductible by L for any
taxable year.
(iv) Earnings through January 1, 2020 on the
principal addition for L's 2018 taxable year
($50,000) that was not paid as part of the December
31, 2018 payment are $5,000. Earnings through Jan-
uary 1, 2020 on the $125,000 credited to O's account
on January 1, 2019 are $20,000. On December 31,
2018, after the $400,000 payment is applied to 2016,
2017, and 2018, the account balance for 2016 and
2017 is reduced to zero, and the account balance for
2018 is reduced to $50,000 ($150,000 + $5,000
(earnings) - $105,000). Under the terms of the plan,
the $200,000 payment made on January 1, 2020, is
attributable to services performed by O in L's 2018
and 2019 taxable years. Therefore, the $200,000
payment on January 1, 2020 is attributed to services
performed by O in L's taxable years as follows:
$55,000 ($50,000 + $5,000) to 2018 and $145,000
($125,000 + $20,000) to 2019.
(v) The portion of the DDR attributed to a dis-
qualified taxable year under paragraph (d) of this
section that exceeds the deduction limit for that
disqualified taxable year, as reduced, is not deduct-
ible for any taxable year. For L's 2018 taxable year,
the deduction limit is reduced to zero by the
$450,000 of AIR for that year and the payment of
$50,000 of DDR attributable to that year. Because
$55,000 exceeds the reduced deduction limit of zero,
the $55,000 is not deductible for 2020, the year of
payment (or any other taxable year). With respect to
L's 2019 taxable year, the $500,000 deduction limit
for 2019 is applied first to O's $200,000 of AIR for
2019. Because the deduction limit is greater than the
AIR, L may deduct the entire $200,000 of AIR paid
in 2019. The $500,000 deduction limit is then re-
duced to $300,000 by the amount of the AIR
($500,000 - $200,000). The reduced deduction limit
is applied to O's $145,000 of DDR attributable to
services performed by O in L's 2019 taxable year
that is paid in 2020. Because $145,000 does not
exceed the $300,000 reduced limit, the $145,000 is
deductible for 2020 (the year of payment). As a
result, $145,000 of the $200,000 payment ($0 +
$145,000) is deductible for L's 2020 taxable year,
and the remaining $55,000 is not deductible by L for
any taxable year.
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(4) Application of deduction limitation
to aggregated groups of covered health
insurance providers-(i) In general. The
total combined deduction for AIR and
DDR attributable to services performed
by an applicable individual in a disquali-
fied taxable year allowed for all members
of an aggregated group that are covered
health insurance providers for any taxable
year is limited to $500,000. Therefore, if
two or more members of an aggregated
group that are covered health insurance
providers may otherwise deduct AIR or
DDR attributable to services performed
by an applicable individual in a disquali-
fied taxable year, the AIR and DDR oth-
erwise deductible by all members of the
aggregated group is combined, and the
deduction limitation is applied to the total
amount.
(ii) Proration of deduction limitation.
If the total amount of AIR or DDR attrib-
utable to services performed by an appli-
cable individual in a disqualified taxable
year that is otherwise deductible by two or
more members of an aggregated group in
any taxable year exceeds the $500,000
deduction limit (as reduced by previously
deductible AIR or DDR, if applicable),
the deduction limit is prorated based on
the AIR or DDR otherwise deductible by
the members of the aggregated group in
the taxable year and allocated to each
member of the aggregated group. The de-
duction limit allocated to each member of
the aggregated group is determined by
multiplying the deduction limit for the
disqualified taxable year (as previously
reduced, if applicable) by a fraction, the
numerator of which is the AIR or DDR
otherwise deductible by that member in
that taxable year that is attributable to
services performed by the applicable indi-
vidual in the disqualified taxable year, and
the denominator of which is the total AIR
or DDR otherwise deductible by all mem-
bers of the aggregated group in that tax-
able year that is attributable to services
performed by the applicable individual in
the disqualified taxable year. The amount
of AIR or DDR otherwise deductible by a
member of the aggregated group in excess
of the portion of the deduction limit allo-
cated to that member is not deductible in
any taxable year. If a covered health in-
surance provider is a member of more
than one aggregated group, the deduction
limit for that covered health insurance
provider under section 162(m)(6) may in
no event exceed $500,000 for AIR and
DDR attributable to services performed
by an applicable individual in a disquali-
fied taxable year.
(5) Examples. The following examples
illustrate the rules of paragraph (e)(4) of
this section. For purposes of these exam-
ples, each corporation has a taxable year
that is the calendar year and is a covered
health insurance provider for all relevant
taxable years, and DDR is otherwise de-
ductible by the covered health insurance
provider in the taxable year in which it is
paid.
Example 1. (i) Corporations I, J, and K are mem-
bers of the same aggregated group under paragraph
(b)(3) of this section. At separate times during 2016,
C is an employee of, and performs services for, I, J,
and K. C's total AIR for 2016 is $1,500,000, which
consists of $750,000 of AIR for services performed
to K; $450,000 of AIR for services provided to J; and
$300,000 of AIR for services to I.
(ii) Because I, J, and K are members of the same
aggregated group, the AIR otherwise deductible by
them is aggregated for purposes of applying the
deduction limitation. Further, because the aggregate
AIR otherwise deductible by I, J, and K for 2016
exceeds the deduction limitation for C for that tax-
able year, the deduction limit is prorated and allo-
cated to the members of the aggregated group in
proportion to the AIR otherwise deductible by each
member of the aggregated group for that taxable
year. Therefore, the deduction limit that applies to
the AIR otherwise deductible by K is $250,000
($500,000 × ($750,000 / $1,500,000)); the deduc-
tion limit that applies to the AIR otherwise deduct-
ible by J is $150,000 ($500,000 × ($450,000 /
$1,500,000)); and the deduction limit that applies to
AIR otherwise deductible by I is $100,000
($500,000 ×($300,000/$1,500,000)). For the 2016
taxable year, K may not deduct $500,000 of the
$750,000 of AIR paid to C ($750,000 - $250,000);
J may not deduct $300,000 of the $450,000 of AIR
paid to C ($450,000 - $150,000); and I may not
deduct $200,000 of the $300,000 of AIR paid to C
($300,000 - $100,000).
Example 2. (i) The facts are the same as Example
1, except that C's total AIR for 2016 is $400,000,
which consists of $75,000 for services provided to
K; $150,000 for services provided to J; and $175,000
for services provided to I. In addition, C becomes
entitled to $60,000 of DDR attributable to services
provided to K in 2016, which is payable (and paid)
on April 1, 2018, and $75,000 of DDR attributable to
services provided to J in 2016, which is payable (and
paid) on April 1, 2019.
(ii) Because C's total AIR of $400,000 for 2016
for services provided to K, J, and I do not exceed the
$500,000 limitation, K, J, and I may deduct $75,000,
$150,000, and $175,000, respectively, for 2016. The
deduction limit is then reduced to $100,000 by the
total AIR deductible by all members of the aggre-
gated group ($500,000 - $400,000). The deduction
limit, as reduced, is then applied to any DDR attrib-
utable to services provided by C in 2016 in the first
subsequent taxable year that DDR becomes deduct-
ible. The first year that DDR for 2016 becomes
deductible is 2018, due to the $60,000 payment
made on April 1, 2018. Because the $60,000 of DDR
otherwise deductible by K does not exceed the 2016
$100,000 deduction limit, K may deduct the entire
$60,000 for its 2018 taxable year. The $100,000
deduction limit is then reduced by the $60,000 of
DDR deductible by K for 2018, and the reduced
deduction limit of $40,000 ($100,000 - $60,000) is
applied to the $75,000 of DDR that is otherwise
deductible for 2019. Because the DDR of $75,000
otherwise deductible by J exceeds the reduced de-
duction limit of $40,000, J may deduct only $40,000,
and the remaining $35,000 ($75,000 - $40,000) is
not deductible by J for that taxable year or any other
taxable year.
Example 3. (i) The facts are the same as Example
2, except that C's DDR of $75,000 attributable to
services performed by C in J's 2016 taxable year is
payable (and paid) on July 1, 2018.
(ii) The results are the same as Example 2, except
that the reduced deduction limit of $100,000 is pro-
rated between K and J in proportion to the DDR
otherwise deductible by them for 2018. Accordingly,
$44,444 of the remaining deduction limit is allocated
to K ($100,000 × ($60,000 / $135,000)), and $55,556
of the remaining deduction limit is allocated to J
($100,000 × ($75,000 / $135,000)). Because the
$60,000 of DDR otherwise deductible by K exceeds
the $44,444 deduction limit applied to that remuner-
ation, K may deduct only $44,444 of the $60,000
payment, and $15,556 may not be deducted by K for
the 2018 taxable year or any other taxable year.
Similarly, because the $75,000 of DDR otherwise
deductible by J exceeds the $55,556 deduction limit
applied to that remuneration, J may deduct only
$55,556 of the $75,000 payment, and $19,444 may
not be deducted by J for that taxable year or any
other taxable year.
(f) Corporate transactions-(1) Treat-
ment as a covered health insurance pro-
vider in connection with a corporate
transaction. Except as otherwise provided
in this paragraph (f), a person that partic-
ipates in a corporate transaction is a cov-
ered health insurance provider for the tax-
able year in which the corporate transaction
occurs (and any other taxable year) if it
would otherwise be a covered health in-
surance provider under paragraph (b)(4)
of this section for that taxable year. For
example, if a member of an aggregated
group that did not previously include a
health insurance issuer purchases a health
insurance issuer that is a covered health
insurance provider (so that the health in-
surance issuer becomes a member of the
aggregated group), each member of the
acquiring aggregated group will be a cov-
ered health insurance provider for its full
taxable year in which the corporate trans-
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action occurs and each subsequent taxable
year in which the health insurance issuer
continues to be a member of the group, if
it would otherwise be a covered health
insurance provider under paragraph
(b)(4), except as otherwise provided in
this paragraph (f). For purposes of this
section, the term corporate transaction
means a merger, acquisition or disposition
of assets or stock, reorganization, consol-
idation, separation, or any other transac-
tion resulting in a change in the composi-
tion of an aggregated group.
(2) Transition period relief for a per-
son becoming a covered health insurance
provider solely as a result of a corporate
transaction-(i) In general. Except as
provided in paragraph (f)(2)(ii) of this
section, a person that is not a covered
health insurance provider before a corpo-
rate transaction, but would (except for ap-
plication of this paragraph (f)(2)(i)) be-
come a covered health insurance provider
solely because it becomes a member of an
aggregated group with another person that
is a health insurance issuer as a result of
the corporate transaction, is not a covered
health insurance provider subject to the
deduction limitation of section 162(m)(6)
for the taxable year of that person in
which the corporate transaction occurs
(the transition period relief).
(ii) Certain applicable individuals. The
transition period relief described in para-
graph (f)(2)(i) of this section does not
apply with respect to the remuneration of
any individual who is an applicable indi-
vidual of a person that would have been a
covered health insurance provider for the
taxable year in which the corporate trans-
action occurred without regard to the oc-
currence of the corporate transaction (for
example, the applicable individuals of a
health insurance issuer and the members
of its affiliated group that were covered
health insurance issuers before the occur-
rence of a corporate transaction). This ex-
ception to the transition period relief ap-
plies even with respect to remuneration
attributable to services performed by the
applicable individual for a person that is
eligible for the transition period relief de-
scribed in paragraph (f)(1)(ii)(A) of this
section. Accordingly, each member of an
acquiring aggregated group that would be-
come a covered health insurance provider
solely as a result of a corporate transac-
tion, but is not a covered health insurance
provider under the transition period relief
described in paragraph (f)(1)(ii)(A) of this
section, is subject to the deduction limita-
tion of section 162(m)(6) for its taxable
year in which the corporate transaction
occurs with respect to AIR and DDR at-
tributable to services performed by any
individual who is an applicable individual
of the acquired health insurance issuer and
any member of its aggregated group that
would have been a covered health insur-
ance provider in the taxable year in which
the corporate transaction occurred, even if
the corporate transaction had not oc-
curred.
(3) Transition relief from the attribu-
tion consistency requirements-(i) In gen-
eral. Paragraphs (d)(3)(i), (d)(4)(i) and
(d)(5)(i)(B) of this section require a cov-
ered health insurance provider and all
members of its aggregated group to use
the same method for attributing remuner-
ation to services performed by applicable
individuals consistently for all taxable
years (attribution consistency require-
ments). As a result of a corporate transac-
tion, however, a covered health insurance
provider that uses an attribution method
for its account balance plans, nonaccount
balance plans, or stock options or SARs
may become a member of an aggregated
group with another covered health insur-
ance provider that uses a different attribu-
tion method for those types of plans or
arrangements. In that case, neither mem-
ber of the aggregated group will be treated
as violating the attribution consistency re-
quirements merely because it uses an at-
tribution method that is different from the
attribution method used by another mem-
ber of its aggregated group to attribute
remuneration that becomes otherwise de-
ductible in the taxable year in which the
corporate transaction occurs. However,
the attribution consistency requirements
apply with respect to remuneration that
becomes otherwise deductible in all sub-
sequent taxable years. Following the date
of the corporate transaction, any member
of the aggregated group may change the
attribution method that it used before the
date of the corporate transaction to attri-
bute remuneration under its account bal-
ance plans, nonaccount balance plans, or
stock options or SARs to make its method
consistent with the method used by any
other member of the aggregated group.
Notwithstanding the foregoing, the Secre-
tary may subject this change in attribution
method to limitations, or may otherwise
modify the attribution consistency re-
quirements, pursuant to a notice, revenue
ruling, or other guidance of general appli-
cability published in the Internal Revenue
Bulletin.
(ii) Exception for certain applicable
individuals. Notwithstanding the transi-
tion relief described in paragraphs
(f)(2)(A) of this section, if a covered
health insurance provider has attributed
remuneration under a method described in
paragraphs (d)(3), (d)(4), or (d)(5) of this
section with respect to an applicable indi-
vidual before a corporate transaction, the
covered health insurance provider must
continue at all times to use that attribution
method for all other remuneration that be-
comes otherwise deductible under the
same type of plan (that is, an account
balance plan, a nonaccount balance plan,
or a stock option or SAR) to which the
applicable individual has a legally binding
right as of the corporate transaction.
(4) Deduction limitation not prorated
for short taxable years. If a corporate
transaction results in a short taxable year
for a covered health insurance provider,
the $500,000 deduction limit for the short
taxable year is neither prorated nor re-
duced. For example, if a corporate trans-
action results in a short taxable year of
three months, the deduction limit under
section 162(m)(6) for that short taxable
year is $500,000 (and is not reduced to
$125,000).
(5) Effect of a corporate transaction on
the application of the de minimis excep-
tion. If a person becomes or ceases to be a
member of an aggregated group, only the
premiums and gross revenues of that per-
son for the portion of its taxable year
during which it is a member of the aggre-
gated group are taken into account for
purposes of determining whether the de
minimis exception applies.
(6) Examples. The following examples
illustrate the principles of this paragraph
(f). For purposes of these examples, each
corporation has a taxable year that is the
calendar year unless stated otherwise, and
none of the corporations qualify for the de
minimis exception under paragraph
(b)(4)(v) of this section.
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Example 1. (i) Corporation J merges with and
into corporation H on June 30, 2015, such that H is
the surviving entity. As a result of the merger, J's
taxable year ends on June 30, 2015. For its taxable
year ending June 30, 2015, J is a health insurance
issuer that is a covered health insurance provider.
For all taxable years before the taxable year of the
merger, H is not a covered health insurance provider.
(ii) Corporation J is a covered health insurance
provider for its short taxable year ending June 30,
2015. As a result of the merger, H becomes a cov-
ered health insurance provider for its 2015 taxable
year, but Corporation H is not a covered health
insurance provider for its 2015 taxable year by rea-
son of the transition period relief in paragraph
(f)(1)(ii)(A) of this section. However, applicable in-
dividuals of J continue to be subject to the deduction
limit under section 162(m)(6) for amounts that be-
come otherwise deductible in the 2015 taxable year
and DDR that is attributable to services performed
by applicable individuals of J, and H is a covered
health insurance provider for all subsequent taxable
years for which it is a covered health insurance
provider under paragraph (b)(4) of this section.
Example 2. (i) On January 1, 2016, corporations
D, E, and F are members of a controlled group
within the meaning of section 414(b). F is a health
insurance issuer that is a covered health insurance
provider under paragraph (b)(4)(i)(A) of this section.
D and E are not health insurance issuers (but are
covered health insurance providers pursuant to para-
graphs (b)(4)(i)(C) and (D) of this section). D is the
parent entity of the DEF aggregated group. F's tax-
able year ends on September 30. P is an applicable
individual of F for all taxable years. On May 1, 2016,
a controlled group within the meaning of section
414(b) consisting of corporations C and B purchases
all of the stock of corporation F, resulting in a
controlled group within the meaning of section
414(b) consisting of corporations C, B, and F. The
amount of premiums received by F from providing
minimum essential coverage during the portion of its
taxable year when it was a member of the DEF
aggregated group constitute more than two percent
of the gross revenues of the aggregated group for the
taxable year of D (the parent entity) ending on De-
cember 31, 2016, and the taxable years of E and F
ending with or within D's taxable year (December
31, 2016 and May 1, 2016 respectively). C and B are
not health insurance issuers. C is the parent entity of
the CBF aggregated group. The CBF aggregated
group is also a consolidated group within the mean-
ing of § 1.1502-1(h). Thus, F's taxable year ends on
May 1, 2016 by reason of § 1.1502-76(b)(1)(ii)(A)(I),
and F becomes part of the CBF consolidated group
for the taxable year ending December 31, 2016.
(ii) D and E are covered health insurance pro-
viders for the taxable year ending December 31,
2016, and the de minimis exception does not apply
because the amount of premiums received by F from
providing minimum essential coverage during the
short taxable year that it was a member of the DEF
aggregated group are more than two percent of the
gross revenues of the aggregated group for the tax-
able years during which the members would other-
wise be a covered health insurance providers under
paragraph (b)(4)(i) of this section. Accordingly, D
and E are subject to the deduction limitation under
section 162(m)(6) for their taxable years ending De-
cember 31, 2016. C and B are not covered health
insurance providers for their taxable year ending
December 31, 2016, by reason of the transition pe-
riod relief of paragraph (f)(1)(ii)(A) of this section.
(iii) As a result of leaving the aggregated group,
F has a new taxable year beginning on May 2, 2016
and ending on December 31, 2016. F is a covered
health insurance provider within the meaning of
paragraph (b)(4) of this section for its new taxable
year ending on December 31, 2016 (even though C
and B are not covered health insurance providers for
their taxable years ending December 31, 2016) un-
less the CBF aggregated group qualifies for the de
minimis exception for that taxable year.
(iv) P is an applicable individual whose remu-
neration from F is subject to the deduction limitation
under section 162(m)(6) for F's short taxable year
ending May 1, 2016 and F's taxable year ending
December 31, 2016. In addition, any remuneration
provided to P by C or B at any time for services
provided by P from May 1, 2016 to December 31,
2016 is also subject to the deduction limitation under
section 162(m)(6), even though C and B are not
covered health insurance providers for their taxable
years ending December 31, 2016 by reason of the
transition period relief of paragraph (f)(1)(ii)(A) of
this section. Remuneration to which P had the legally
binding right on or before the date of the transaction
is subject to the deduction limitation when that re-
muneration becomes otherwise deductible.
Example 3. (i) The same facts as Example 2,
except that E is a health insurance issuer that is a
covered health insurance provider under paragraph
(b)(4) of this section and thus receives premiums
from providing minimum essential coverage (instead
of F), and F is not a health insurance issuer.
(ii) F is a covered health insurance provider for
its short taxable year ending May 1, 2016. However,
because F is not a health insurance issuer that is a
covered health insurance provider and there are no
other health insurance issuers in the BCF aggregated
group, F is not a covered health insurance provider
for its short, post-acquisition taxable year ending
December 31, 2016.
(iii) With respect to P, remuneration to which P
had the legally binding right on or before the date of
the transaction is subject to the deduction limitation.
However, remuneration to which P obtains the le-
gally binding right after the date of the corporate
transaction is not subject to the deduction limitation.
Example 4. (i) Corporations N, O, and P are
members of an aggregated group as described in
paragraph (b)(2) of this section. N is a health insur-
ance issuer that is a covered health insurance pro-
vider pursuant to paragraph (b)(4)(i)(A) of this sec-
tion, but neither O nor P is a health insurance issuer.
P is the parent entity of the aggregated group. On
April 1, 2016, O ceases to be a member of the NOP
aggregated group as the result of a corporate trans-
action. O's taxable year does not end as a result of
the corporate transaction.
(ii) Because O was a member of the NOP aggre-
gated group during a portion of its taxable year, O is
a covered health insurance provider for its taxable
year ending December 31, 2016.
Example 5. (i) Corporations V, W, and X are
members of an aggregated group as described in
paragraph (b)(2) of this section. V is a health insur-
ance issuer that is a covered health insurance pro-
vider pursuant to paragraph (b)(4)(i)(A) of this sec-
tion, but neither W nor X is a health insurance issuer.
W is the parent entity of the aggregated group. V's
taxable year ends on December 31; W's taxable year
ends on June 30; and X's taxable year ends on
September 30. For its taxable year ending June 30,
2017, W has $100x in gross revenue. For its taxable
year ending September 30, 2016, X has $60x in
gross revenue. For its taxable year ending December
31, 2016, V receives $4x of premiums from provid-
ing minimum essential coverage and has no other
revenue. As of September 30, 2016, V ceases to be
a member of the VWX aggregated group. V's tax-
able year does not end on September 30, 2016 as a
result of the transaction. Of the $4x that that V
receives for providing minimum essential coverage
during its taxable year ending December 31, 2016,
$3x is received during the period from January 1,
2016 through September 30, 2016. As a result of the
corporate transaction, V's taxable year ends on Sep-
tember 30, 2016. The de minimis exception of para-
graph (b)(4)(v)(A) of this section did not apply to the
members of the VWX aggregated group for their
immediately preceding taxable years ending Decem-
ber 31, 2015, June 30, 2016, and September 30,
2015, respectively.
(ii) For purposes of applying the de minimis
exception to an aggregated group for a taxable year
during which a person leaves or joins the aggregated
group, only the premiums and revenues of the person
for the portion of its taxable year during which it was
a member of the aggregated group are taken into
account. The premiums from providing minimum
essential coverage received by the VWX aggregated
group for W's taxable year ending June 30, 2017 are
$3x. The revenues of the V, W, and X aggregated
group for W's taxable year ending June 30, 2017 are
$163x. Accordingly, the premiums received by the
members of the aggregated group from providing
minimum essential coverage are less than two per-
cent of the gross revenues of the aggregated group
($3x is less than $3.26x (two percent of $163x)).
Therefore, V, W and X are not covered health insur-
ance providers for their taxable years ending Decem-
ber 31, 2016, June 30, 2017, and September 30,
2016, respectively.
Example 6. (i) The facts are the same as Example
5, except that F received $4x of premiums during the
period from January 1, 2016 to September 30, 2016,
and the members of the VWX aggregated group
were not covered health insurance providers for their
taxable years ending December 31, 2015, June 30,
2016, and September 30, 2015, respectively (their
immediately preceding taxable years) solely by rea-
son of the de minimis exception of paragraph
(b)(4)(v)(A) of this section.
(ii) The premiums from providing minimum es-
sential coverage received by the VWX aggregated
group for W's taxable year ending June 30, 2017 are
$4x. The revenues of the VWX aggregated group for
W's taxable year ending June 30, 2017 are $164x.
Accordingly, the premiums received by the members
of the aggregated group from providing minimum
essential coverage are greater than two percent of the
gross revenues of the aggregated group ($4x is
greater than $3.28x (two percent of $164x)). There-
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fore, V, W, and X do not qualify for the de minimis
exception for their taxable years ending December
31, 2016, June 30, 2017, and September 30, 2016,
respectively. However, V, W, and X are not covered
health insurance providers for these taxable years by
reason of the de minimis exception one year transi-
tion period described in paragraph (b)(4)(v)(B) of
this section.
Example 7. (i) Corporation N is a health insur-
ance issuer that is a covered health insurance pro-
vider. Corporation O is also a health insurance issuer
that is a covered health insurance provider. Both N
and O have taxable years ending December 31. N
uses the account balance ratio method to attribute
remuneration that becomes otherwise deductible un-
der its account balance plans. O uses the principal
additions method to attribute amounts that become
otherwise deductible under its account balance plans.
On June 30, 2016, O purchases all of the stock of N.
(ii) For the taxable year of N and O ending
December 31, 2016, N may continue to attribute
amounts that become deductible under its account
balance plans using the account balance ratio
method, and O can continue to attribute amounts that
become otherwise deductible under its account bal-
ance plan using the principal additions method, even
though they are members of the same aggregated
group, pursuant to the transition period relief de-
scribed in paragraph (f)(2) of this section. In all
subsequent taxable years, N and O must use the same
method to attribute amounts that become otherwise
deductible under their account balance plans. Either
N or O may change the method that it uses to
attribute amounts under its account balance plans to
be consistent with the attribution method used by the
other.
Example 8. (i) The facts are the same as Example
7. In addition, B is an applicable individual of N
before the corporate transaction and is a participant
in an account balance plan of N. On December 31,
2015, N made a payment to B, and N used the
account balance ratio method described in paragraph
(d)(3)(ii) of this section to attribute the payment to
services performed by B in taxable years of N.
(ii) Because N used the account balance ratio
method described in paragraph (d)(3)(ii) of this sec-
tion to attribute an amount that became otherwise
deductible under the plan before the corporate trans-
action, N must continue to use the account balance
ratio method for attributing amounts to which B had
a legally binding right as of the corporate transac-
tion, whenever those amounts become otherwise de-
ductible.
(g) Coordination-(1) Coordination
with section 162(m)(1). If section
162(m)(1) and section 162(m)(6) both
otherwise would apply with respect to the
remuneration of an applicable individual,
the deduction limitation under section
162(m)(6) applies without regard to sec-
tion 162(m)(1). For example, if an appli-
cable individual is both a covered em-
ployee of a publicly held corporation (see
sections 162(m)(2) and (3); § 1.162-27)
and an applicable individual within the
meaning of paragraph (b)(7) of this sec-
tion, remuneration earned by the applica-
ble individual that is attributable to a dis-
qualified taxable year of a covered health
insurance provider is subject to the
$500,000 deduction limitation under sec-
tion 162(m)(6) with respect to such dis-
qualified taxable year, without regard to
section 162(m)(1).
(2) Coordination with disallowed ex-
cess parachute payments-(i) In general.
The $500,000 deduction limitation of sec-
tion 162(m)(6) is reduced (but not below
zero) by the amount (if any) that would
have been included in the AIR or DDR of
the applicable individual for a taxable
year but for the deduction for the AIR or
DDR being disallowed by reason of sec-
tion 280G.
(ii) Example. The following example
illustrates the rule of this paragraph (g)(2).
Example. Corporation A, a covered health insur-
ance provider, pays $750,000 of AIR to P, an appli-
cable individual, during A's disqualified taxable year
ending December 31, 2016. Of the $750,000,
$300,000 is an excess parachute payment as defined
in section 280G(b)(1), the deduction for which is
disallowed by reason of that section. The excess
parachute payment reduces the $500,000 deduction
limit to $200,000 ($500,000 - $300,000). There-
fore, A may deduct only $200,000 of the $750,000 in
AIR, and $250,000 of the payment is not deductible
by reason of section 162(m)(6).
(h) Grandfathered amounts attribut-
able to services performed in taxable
years beginning before January 1, 2010-
(1) In general. The section 162(m)(6) de-
duction limitation does not apply to remu-
neration attributable to services performed
in taxable years of a covered health insur-
ance provider beginning before January 1,
2010 (grandfathered amounts). For pur-
poses of this paragraph (h), whether remu-
neration is attributable to services per-
formed in a taxable year beginning before
January 1, 2010, is determined by apply-
ing an attribution method described in
paragraph (h)(2) of this section.
(2) Identification of services performed
in taxable years beginning before January
1, 2010-(i) In general. DDR described in
paragraphs (d)(2) (legally binding right),
(d)(3) (account balance plans), (d)(4)
(nonaccount balance plans), (d)(6) (invol-
untary separation pay), (d)(7) (reimburse-
ments), and (d)(8) (split dollar life insur-
ance) of this section is attributable to
services performed in a taxable year be-
ginning before January 1, 2010 if it is
attributable to services performed before
that date under the rules of these para-
graphs, without regard to whether that re-
muneration is subject to a substantial risk
of forfeiture on or after that date. Notwith-
standing the requirement under paragraph
(d)(3)(i) of this section that a covered
health insurance provider must use the
same attribution method for its account
balance plans for all taxable years, a cov-
ered health insurance provider that uses
the account balance ratio method de-
scribed in paragraph (d)(3)(i) of this sec-
tion to attribute remuneration to services
performed in taxable years beginning after
December 31, 2009 may use the principal
additions method described in paragraph
(d)(3)(ii) of this section to attribute remu-
neration under an account balance plan to
services performed in a taxable year be-
ginning before January 1, 2010 for pur-
poses of determining grandfathered amounts
under the plan. (See paragraph (d)(3)(ii)(C)(3)
of this section for required account bal-
ance adjustments if a covered health in-
surance provider generally uses the ac-
count balance ratio method to attribute
amounts otherwise deductible under its
account balance plans but uses the princi-
pal additions method to attribute remuner-
ation to services performed in taxable
years beginning before January 1, 2010.)
(ii) Equity-based remuneration. For
purposes of this section, all remuneration
resulting from a stock option, stock appre-
ciation right, restricted stock, or restricted
stock unit and the right to any associated
dividends or dividend equivalents (to-
gether, referred to as equity-based remu-
neration) granted before the first day of
the taxable year of the covered health in-
surance provider beginning on or after
January 1, 2010, is attributable to services
performed in taxable years beginning be-
fore January 1, 2010, regardless of the
date on which the equity-based remuner-
ation is exercised (in the case of a stock
option or SAR), the date on which the
amounts due under the equity-based re-
muneration are paid or includible in in-
come, or whether the equity-based remu-
neration is subject to a substantial risk of
forfeiture on or after the first day of the
taxable year of the covered health insur-
ance provider beginning on or after Janu-
ary 1, 2010. For example, appreciation in
the value of restricted shares granted be-
fore the first day of the taxable year be-
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ginning on or after January 1, 2010 is
treated as remuneration that is attributable
to services performed in taxable years be-
ginning before January 1, 2010, regardless
of whether the shares are vested at that
time.
(i) Transition rules for certain DDR-
(1) Transition rule for DDR attributable
to services performed in taxable years of
the covered health insurance provider be-
ginning after December 31, 2009 and be-
fore January 1, 2013. The deduction lim-
itation under section 162(m)(6) applies to
DDR attributable to services performed in
a disqualified taxable year of a covered
health insurance provider beginning after
December 31, 2009 and before January 1,
2013, only if that remuneration is other-
wise deductible in a disqualified taxable
year of the covered health insurance pro-
vider beginning after December 31, 2012.
However, if the deduction limitation ap-
plies to DDR attributable to services per-
formed by an applicable individual in a
disqualified taxable year of a covered
health insurance provider beginning after
December 31, 2009 and before January 1,
2013, the deduction limitation is calcu-
lated as if it had been applied to the ap-
plicable individual's AIR and DDR de-
ductible in those taxable years.
(2) Examples. The following examples
illustrate the principles of this paragraph
(i). For purposes of these examples, each
corporation has a taxable year that is the
calendar year, and DDR is otherwise de-
ductible by the covered health insurance
provider in the taxable year in which it is
paid.
Example 1. (i) Q is an applicable individual of
corporation Z. Z's 2010, 2011, and 2012 taxable
years are disqualified taxable years. Z's 2013, 2014,
and 2015 taxable years are not disqualified taxable
years. However, Z's 2016 taxable year and all sub-
sequent taxable years are disqualified taxable years.
Q receives $200,000 of AIR from Z for 2012, and
becomes entitled to $800,000 of DDR that is attrib-
utable to services performed by Q in 2012. Z pays Q
$350,000 of the DDR in 2015, and the remaining
$450,000 of the DDR in 2016. These payments are
otherwise deductible by Z in 2015 and 2016, respec-
tively.
(ii) DDR attributable to services performed by Q
in Z's 2010, 2011, and 2012 taxable years that is
otherwise deductible in Z's 2013, 2014, or 2015
taxable years is not subject to the deduction limita-
tion under section 162(m)(6) by reason of the tran-
sition rule under paragraph (i)(1) of this section.
However, DDR attributable to services performed in
Z's 2010, 2011, and 2012 taxable years that is oth-
erwise deductible in a later taxable year that is a
disqualified taxable year (in this case, Z's 2016 and
subsequent taxable years) is subject to the deduction
limitation under section 162(m)(6). Accordingly, the
deduction limitation with respect to AIR and DDR
attributable to services performed by Q in 2012 is
determined by reducing the $500,000 deduction limit
by the $200,000 of AIR paid to Q by Z for 2012
($500,000 - $200,000). Under the transition rule of
paragraph (i)(1) of this section, no portion of the
reduced deduction limit of $300,000 for the 2012
taxable year is applied against the $350,000 payment
made in 2015, and accordingly, the deduction limit is
not reduced by the amount of that payment. The
reduced deduction limit is then applied to Q's
$450,000 of DDR attributable to services performed
by Q in 2012 that is paid to Q and becomes other-
wise deductible in 2016. Because the reduced deduc-
tion limit of $300,000 is less than the $450,000
otherwise deductible by Z in 2016, Z may deduct
only $300,000 of the DDR, and $150,000 of the
$450,000 payment is not deductible by Z in that
taxable year or any taxable year.
Example 2. (i) R is an applicable individual of
corporation Y, which is a covered health insurance
provider for all relevant taxable years. During 2010,
Y pays R $400,000 in salary and grants R a right to
$200,000 in DDR payable on a fixed schedule in
2011, 2012, and 2013. Pursuant to the fixed sched-
ule, Y pays R $50,000 of DDR in 2011, $50,000 of
DDR in 2012, and the remaining $100,000 of DDR
in 2013.
(ii) Because the deduction limitation for DDR
under section 162(m)(6)(A)(ii) is effective for DDR
that is attributable to services performed by an ap-
plicable individual during any disqualified taxable
year beginning after December 31, 2009 that would
otherwise be deductible in a taxable year beginning
after December 31, 2012, only the DDR paid by Y in
2013 is subject to the deduction limitation. However,
the limitation is applied as if section 162(m)(6) and
paragraph (c)(2) of this section were effective for
taxable years beginning after December 31, 2009
and before January 1, 2013. Accordingly, the deduc-
tion limitation with respect to remuneration for ser-
vices performed by R in 2010 is determined by
reducing the $500,000 deduction limit by the
$400,000 of AIR paid to R for 2010 ($500,000 -
$400,000). The reduced deduction limit of $100,000
is further reduced to zero by the $50,000 of DDR
attributable to services performed by R in Y's 2010
taxable year that is deductible in each of 2011 and
2012 (($100,000 - $50,000 - $50,000). Because the
deduction limit is reduced to zero, none of the $100,000
of DDR attributable to services performed by R in Y's
2010 taxable year and paid to R in 2013 is deductible.
(j) Effective/Applicability dates. These
regulations are effective on September 23,
2014. The regulations apply to taxable years
beginning on or after September 23, 2014.
John Dalrymple
Deputy Commissioner
for Services and Enforcement.
Approved September 15, 2014.
Mark J. Mazur
Assistant Secretary of the
Treasury (Tax Policy)
(Filed by the Office of the Federal Register on September
18, 2014, 4:15 p.m. and published in the issue of the federal
Register for September 23, 2014, 79 F.R. 56892)
## Section 412 .- Minimum Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
## Section 446 .- General Rule for Methods of Accounting
Procedures are provided by which a taxpayer
may obtain the automatic consent of the Commis-
sioner of Internal Revenue to change to the methods
of accounting provided in §§ 1.168(i)-1, 1.168(i)-7,
and 1.168(i)-8 of the Income Tax Regulations (T.D.
9689). Procedures are also provided allowing a late
partial disposition election under § 1.168(i)-8 to be
treated as a change in method of accounting for a
limited period of time. Finally, modifications are
made to section 10.11 of the APPENDIX of Rev.
Proc. 2011-14 regarding a change to the method of
accounting described in Rev. Proc. 2014-16,
2014-9 I.R.B. 606, for amounts paid to acquire,
produce, or improve tangible property. Modifica-
tions are made to the procedures in Rev. Proc. 2014-
17, 2014-12 I.R.B. 661, and Rev. Proc. 2011-14,
2011-4 I.R.B. 330, regarding certain changes in method
of accounting for dispositions of tangible depreciable
property. See Rev. Proc. 2014-54, page 663.
## Section 467 .- Certain Payments for the Use of Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
Section 468 .- Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
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# Section 482 .- Allocation of Income and Deductions Among Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of October 2014. See
Rev. Rul. 2014-26, page 663.
## Section 483 .- Interest on Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
## Section 642 .- Special Rules for Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of October 2014. See
Rev. Rul. 2014-26, page 663.
## Section 807 .- Rules for Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
## Section 846 .- Discounted Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
### Section 1274 .- Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
### Rev. Rul. 2014-26
This revenue ruling provides various
prescribed rates for federal income tax
purposes for October 2014 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted
applicable federal rates (adjusted AFR)
for the current month for purposes of sec-
tion 1288(b). Table 3 sets forth the ad-
justed federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-
income housing credit described in sec-
tion 42(b)(1) for buildings placed in ser-
vice during the current month. However,
under section 42(b)(2), the applicable per-
centage for non-federally subsidized new
buildings placed in service after July 30,
2008, with respect to housing credit dollar
amount allocations made before January
1, 2014, shall not be less than 9%.
Finally,Table 5 contains the federal
rate for determining the present value of
an annuity, an interest for life or for a term
of years, or a remainder or a reversionary
interest for purposes of section 7520.
REV. RUL. 2014-26 TABLE 1 Applicable Federal Rates (AFR) for October 2014 Period for Compounding
Annual
Semiannual Short-term
Quarterly
Monthly
AFR
.38%
.38%
.38%
.38%
110% AFR
.42%
.42%
.42%
.42%
120% AFR
.46%
.46%
.46%
.46%
130% AFR
.49%
.49%
.49%
.49%
Mid-term
AFR
1.85%
1.84%
1.84%
1.83%
110% AFR
2.03%
2.02%
2.01%
2.01%
120% AFR
2.22%
2.21%
2.20%
2.20%
130% AFR
2.40%
2.39%
2.38%
2.38%
150% AFR
2.78%
2.76%
2.75%
2.74%
175% AFR
3.25%
3.22%
3.21%
3.20%
AFR
Long-term
2.89%
2.87%
2.86%
2.85%
110% AFR
3.18%
3.16%
3.15%
3.1%
120% AFR
3.47%
3.44%
3.43%
3.42%
130% AFR
3.76%
3.73%
3.71%
3.70%
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## REV. RUL. 2014-26 TABLE 2 Adjusted AFR for October 2014 Period for Compounding
REV. RUL. 2014-26 TABLE 3 Rates Under Section 382 for October 2014
Short-term adjusted AFR
Annual
Semiannual
Quarterly
Monthly
.38%
.38%
.38%
.38%
Mid-term adjusted AFR
1.27%
1.27%
1.27%
1.27%
Long-term adjusted AFR
2.77%
2.75%
2.74%
2.73%
Adjusted federal long-term rate for the current month
2.77%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)
3.05%
## REV. RUL. 2014-26 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for October 2014
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, with respect to housing credit dollar amount allocations made before January 1, 2014, shall not be less than 9%.
Appropriate percentage for the 70% present value loW-income housing credit
7.54%
Appropriate percentage for the 30% present value loW-income housing credit
3.23%
## REV. RUL. 2014-26 TABLE 5 Rate Under Section 7520 for October 2014
Applicable federal rate for determining the present value of an annuity, an interest for life or a term
of years, or a remainder or reversionary interest
2.2%
### Section 1288 .- Treatment of Original Issue Discount on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
### Section 7520 .- Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
### Section 7872 .- Treatment of Loans With Below- Market Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2014. See Rev. Rul. 2014-26, page 663.
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# Part III. Administrative, Procedural, and Miscellaneous
Section 4980H .- Shared
Responsibility for
Employers Regarding
Health Coverage -
Approach to Changes in
Measurement Periods or
Methods Applicable to an
Employee
Notice 2014-49
## PURPOSE
This notice describes a proposed ap-
proach to the application of the look-back
measurement method, which may be used
to determine if an employee is a full-time
employee for purposes of § 4980H of the
Internal Revenue Code (Code), in situa-
tions in which the measurement period
applicable to an employee changes. This
change may occur because the employee
transfers within the same applicable large
employer (or within the same applicable
large employer member (ALE member))
from a position to which one measure-
ment period applies to a position to which
a different measurement period applies.
This situation may also arise when the
ALE member modifies the measurement
period applicable to a position. This notice
is intended to address the topics for which
guidance was anticipated in section VII.G
of the preamble to the final § 4980H reg-
ulations (79 FR 8544, 8563 (Feb. 12,
2014)).
The Treasury Department and the IRS
invite comments on this proposed ap-
proach. However, taxpayers may rely on
the approach proposed in this notice until
further guidance is issued, and in any case
through the end of the 2016 calendar year.
The look-back measurement method
generally involves using an employee's
average hours of service per week during
a period (referred to in this notice as a
measurement period and in the final
§ 4980H regulations as either an initial
measurement period or a standard mea-
surement period, depending on the cir-
cumstances) to determine if an employee
is a full-time employee during a subse-
quent period (referred to both in this no-
tice and the final regulations as a stability
period).1 The look-back measurement
method is one of two alternative methods
for identifying full-time employees for
purposes of determining whether an ALE
member is potentially subject to a pay-
ment under § 4980H. Under § 54.4980H-
3(d)(1)(v), each ALE member that uses
the look-back measurement method may
establish its own measurement and stabil-
ity periods, subject to rules on maximum
and minimum period lengths, and may
also establish different measurement and
stability periods for different specified
categories of employees.
This notice addresses application of the
look-back measurement method to the fol-
lowing situations:
(1) An employee in a position to which
one measurement period applies transfers
within the same applicable large employer
(whether or not within the same ALE
member) to a position to which a different
measurement period applies (for example,
an employee moves from an hourly posi-
tion to which a 12-month measurement
period applies to a salaried position to
which a 6-month measurement period ap-
plies); and
(2) An ALE member changes the mea-
surement method applicable to employees
within a permissible category (for exam-
ple, an ALE member changes the mea-
surement period for all hourly employees
for the next calendar year from a 6-month
to a 12-month measurement period).
This notice describes how to address
these situations, in both the case in which
the employee is in a stability period at the
time of the transfer and the case in which
the employee is not yet in a stability pe-
riod at that time. In general, for an em-
ployee who has been employed for a full
measurement period at the time of transfer
(and thus has a status as either a full-time
employee or non-full-time employee for
the stability period associated with that
measurement period), the employee re-
tains his or her status through the end of
the associated stability period. For an em-
ployee who is not in a stability period (or
administrative period) at the time of trans-
fer, the employee's status is determined
using the measurement period applicable
to the second position, but including hours
of service in the first position in applying
that measurement period.
## BACKGROUND
### A. Section 4980H-In General
The Patient Protection and Affordable
Care Act (Pub. L. 111-148) was enacted
on March 23, 2010. The Health Care and
Education Reconciliation Act of 2010
(Pub. L. 111-152) was enacted on March
30, 2010. These statutes are collectively
known as the Affordable Care Act. The
Affordable Care Act added Section
4980H to the Code, and that section was
amended by the Department of Defense
and Full-Year Continuing Appropriations
Act, 2011 (enacted April 15, 2011, Pub. L.
No. 112-10). Section 4980H applies to
applicable large employers (generally,
employers who employed at least 50 full-
time employees, including full-time
equivalent employees, on business days
during the preceding calendar year).
Section 4980H generally provides that
an applicable large employer is subject to
an assessable payment if either (1)
§ 4980H(a) applies because the employer
fails to offer its full-time employees (and
their dependents) the opportunity to enroll
in minimum essential coverage under an
eligible employer-sponsored plan and any
full-time employee is certified to receive a
premium tax credit or cost-sharing reduc-
tion; or (2) § 4980H(b) applies because
the employer offers its full-time employ-
ees (and their dependents) the opportunity
to enroll in minimum essential coverage
and one or more full-time employees is
certified to receive a premium tax credit or
cost-sharing reduction. Section 4980H is
generally applicable for months beginning
after December 31, 2013; however, No-
tice 2013-45 provides transition relief un-
der which § 4980H does not apply for
2014.
1Unless otherwise noted, all terms used in this notice have the same meaning as provided in the final § 4980H regulations.
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B. Section 4980H-Identification of
Full-Time Employees
Section 4980H(c)(4) provides that a
full-time employee for any month is an
employee who is employed on average at
least 30 hours of service per week. The
final § 4980H regulations (79 FR 8544
(Feb. 12, 2014)) provide two alternative
methods for determining if an employee is
a full-time employee for purposes of
§ 4980H: (1) the monthly measurement
method; and (2) the look-back measure-
ment method.
Under the monthly measurement
method, an employee generally is treated
as a full-time employee for any calendar
month in which the employee averages 30
or more hours of service per week. See
§ 54.4980H-3(c)(1). Under the look-back
measurement method, an employee gen-
erally is treated as a full-time employee
for any month within a stability period if
the employee averaged 30 or more hours
of service per week during the applicable
measurement period preceding the stabil-
ity period. See § 54.4980H-3(d)(1). The
look-back measurement method for iden-
tifying full-time employees is available
only for determining potential liability un-
der § 4980H and not for determining sta-
tus as an applicable large employer.
An employer that uses the look-back
measurement method sets the starting date
and length of two separate measurement
periods: (1) the standard measurement pe-
riod, which is used for ongoing employees
(generally, all employees who have been
employed for at least one full standard
measurement period); and (2) the initial
measurement period, which is used for
new variable hour, seasonal, or part-time
employees.2 Each ALE member (that is,
each separate entity within a group of
entities that constitutes a single applicable
large employer) may establish different
measurement methods or may use mea-
surement periods that differ in duration or
that start on a different date, and each
ALE member is also permitted to use dif-
ferent measurement methods or to use
measurement periods that differ in dura-
tion or that start on a different date for
certain specified categories of employees.
These categories are (A) collectively bar-
gained and non-collectively bargained
employees, (B) each group of collectively
bargained employees covered by a sepa-
rate collective bargaining agreement, (C)
salaried employees and hourly employees,
and (D) employees whose primary places
of employment are in different States. See
§ 54.4980H-3(d)(1)(v).
## PROPOSED APPROACH
This section III proposes an approach
for applying the look-back measurement
method if the measurement period appli-
cable to a particular employee changes.
Section III.A addresses situations in
which an employee transfers from one
position to another within the same appli-
cable large employer (or ALE member),
in cases in which the employer uses a
different measurement period for each po-
sition. Section III.B addresses situations
in which the employer changes the mea-
surement period applicable to one or more
categories of employees, and also ad-
dresses situations in which an employer
changes the measurement method (in
other words, from the look-back measure-
ment method to the monthly measurement
method or vice versa) for one or more
categories of employees.
Nothing in this notice is intended to
prohibit or discourage employers from
adopting eligibility provisions that make
some employees eligible for coverage be-
fore they would be considered a full-time
employee under this approach.
A. Employee transferring from a posi-
tion to which one measurement period
applies to a position to which a different
measurement period applies.
This section III.A addresses changes in
measurement methods under the follow-
ing circumstances: the employee, who has
been employed by an ALE member in a
position (referred to as the first position)
for which the employer uses the look-back
measurement method, transfers to another
position (referred to as the second posi-
tion) for the same applicable large em-
ployer (whether or not with the same ALE
member) for which the employer also uses
the look-back measurement method, but
with a measurement period that is differ-
ent from the measurement period applica-
ble to the first position. For this purpose,
two measurement periods are different if
they are of different durations or if they
start on different dates (or both).
A transfer that may result in a change
of applicable measurement method in-
cludes a transfer from one ALE member
to another ALE member of the same ap-
plicable large employer or a transfer from
one category of employees identified in
§ 54.4980H-3(d)(1)(v) to another.
For purposes of this proposed ap-
proach, following a transfer, an employer
includes hours of service earned in the
first position either by (1) counting the
hours of service using the counting
method applied to the employee in the
first position (for example, using a weekly
equivalency method for non-hourly em-
ployees), or (2) recalculating the hours of
service earned in the first position using
the hours of service counting method
applied to the employee in the second
position (for example, using a monthly
equivalency method for non-hourly em-
ployees), provided that the employer
treats all similarly situated employees
consistently.
1\. Proposed Approach to Application
of Look-Back Measurement Method
Beginning with the date on which an
employee described above transfers from
the first position to the second position,
the look-back measurement method is ap-
plied as follows:
(i) Employees in a stability period or
administrative period. If an employee is in
a stability period applicable to the first
position as of the date of transfer, the
employee's status as a full-time or non-
full-time employee for the first position
remains in effect until the end of that
stability period. For this purpose, an em-
ployee is deemed to be in a stability pe-
riod if as of the date of transfer the em-
ployee has been assigned a status for that
stability period as a result of having been
employed by the ALE member for a full
standard measurement period or, if the
employee has been a new variable hour,
part-time, or seasonal employee, for a full
initial measurement period.
2 An initial measurement period does not apply to new employees who are full-time employees (because they are reasonably expected at time of hire to average at least 30 hours of service
per week for the months after hire), and so are not variable-hour, seasonal, or part-time employees. See § 54.4980H-3(d)(2).
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Similarly, in the case of a new em-
ployee who is in an administrative period
immediately following the end of the ini-
tial measurement period as of the date of
transfer, the employee's status as a full-
time or non-full-time employee based on
hours of service in the initial measurement
period under the first position will apply
from the start of the associated stability
period following the end of that adminis-
trative period through the end of that sta-
bility period.
At the end of the stability period during
which the transfer occurs (or, if the em-
ployee was in an administrative period at
the date of transfer, the end of the imme-
diately following stability period), the em-
ployee assumes the full-time employee or
non-full-time employee status that the em-
ployee would have under the look-back
measurement method applicable to the
second position, but including hours of
service in the first position when applying
that measurement method. For this pur-
pose, if an employee's status in the second
position cannot be determined under the
measurement method applicable to the
second position because, for example, the
employee is a variable hour employee
and, even including service performed in
the first position, has not yet been em-
ployed for a full initial measurement pe-
riod for the second position (and the ad-
ministrative period immediately following
that measurement period for the second
position), then the rule in section III.A.1.ii
applies to the employee in the second po-
sition.
(ii) Employees not in a stability period.
If an employee is not in a stability period
or in an administrative period immedi-
ately following the end of the initial mea-
surement period under the look-back mea-
surement method applicable to the first
position as of the date of transfer as de-
termined in paragraph (i) above, the em-
ployee's status as a full-time or non-full-
time employee is determined solely under
the look-back measurement method appli-
cable to the second position as of the date
of transfer, including all hours of service
in the first position.
In all other respects, the rules generally
applicable to the look-back measurement
method under § 54.4980H-3(d) continue
to apply. For example, whether a new
employee is a variable hour, part-time,
seasonal, or full-time employee is deter-
mined based on the applicable large em-
ployer's reasonable expectations at the time
of hire in accordance with § 54.4980H-
3(d)(2). However, a transfer of a new vari-
able hour, part-time, or seasonal employee
from the first position to the second position
may be a change in employment status de-
scribed in § 54.4980H-3(d)(3)(vii), if after
the transfer the employee is reasonably ex-
pected to average at least 30 hours of service
per week in the second position.
As provided in the final § 4980H reg-
ulations, a new employee who is not a
variable hour or seasonal employee and
who is reasonably expected to average at
least 30 hours of service per week at the
time of hire (and so is expected to be a
full-time employee) is not subject to an
initial measurement period. Instead, the
status of such a new employee as a full-
time employee or non-full-time employee
for § 4980H purposes is determined on the
basis of hours of service in each month.
See § 54.4980H-3(d)(2)(i). Such a new
employee by definition will never be in a
stability period for purposes of this sec-
tion A.1.ii (unless the employee has been
employed for a full standard measurement
period at the date of transfer, in which
case the employee would be a continuing
rather than a new employee).
Until a new employee described in the
preceding paragraph has been employed
for a full standard measurement period
applicable to the second position (includ-
ing service in the first position), the status
of the employee as a full-time or non-full-
time employee for § 4980H purposes con-
tinues to be determined on the basis of
hours of service in each calendar month. If
such an employee has been employed for
a full standard measurement period appli-
cable to the second position but not the
first position as of the date of transfer, the
employee's status as a full-time or non-
full-time employee is determined on the
basis of the employee's average hours of
service during that standard measurement
period for the second position (but count-
ing the hours of service accumulated dur-
ing that standard measurement period for
the first position), applied starting on the
first day of the first month following the
date of transfer and continuing through
the end of the associated stability period.
### 2. Examples
The following examples illustrate the
approach described in section III.A.1 of
this notice. For each example, Position 1
and Position 2 are two positions at the
same applicable large employer. Except as
otherwise noted, the employer does not
apply an optional administrative period
described in § 54.4980H-3(d)(1)(vi) or
§ 54.4980H-3(d)(3)(vi).
Example 1: Ongoing employee. For Position 1,
the employer uses 12-month standard measurement
and stability periods beginning January 1. For Posi-
tion 2, the employer uses 12-month standard mea-
surement and stability periods beginning July 1.
Employee A is a long-time employee in Position
1 and so is not in an initial measurement period
during the relevant periods. Employee A continues
working in Position 1 and averages less than 30
hours of service per week during the period from
January 1, 2015 through December 31, 2015. Em-
ployee A averages 30 or more hours of service per
week during the period from July 1, 2015 through
June 30, 2016.
On August 15, 2016, Employee A transfers from
Position 1 to Position 2. At the date of the transfer,
Employee A is in a stability period under Position 1
under which Employee A is treated as a non-full-
time employee because Employee A averaged less
than 30 hours of service per week during the mea-
surement period applicable to Position 1 beginning
January 1, 2015 and ending December 31, 2015. For
the period from August 15, 2016 through December
31, 2016 (the end of the stability period for Position
1 during which the transfer occurs), Employee A
retains his status as a non-full-time employee (al-
though the employer may choose to nonetheless ex-
tend an offer of coverage to the employee).
As of January 1, 2017 (the date immediately
following the end of the stability period for Position
1), Employee A's status is determined under the
look-back measurement method applicable to Posi-
tion 2. Employee A is a full-time employee starting
January 1, 2017, because Employee A averaged 30
or more hours of service per week in the measure-
ment period for Position 2 beginning July 1, 2015
and ending June 30, 2016 (which has a stability
period of July 1, 2016 through June 30, 2017). Em-
ployee A remains a full-time employee through the
end of that stability period (in other words, through
June 30, 2017). After June 30, 2017, Employee A's
status continues to be determined using the applica-
ble measurement period for Position 2.
Example 2: New variable hour employee in ini-
tial measurement period transfers to position in
which employee has completed initial measurement
period. For Position 1, the employer uses 12-month
standard measurement and stability periods begin-
ning January 1 and a 12-month initial measurement
period beginning on each employee's start date. For
Position 2, the employer uses 6-month standard mea-
surement and stability periods beginning January 1
and July 1 and a 6-month initial measurement period
beginning on an employee's start date.
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The employer hires Employee B into Position 1
as a new variable-hour employee on January 1, 2015.
Employee B averages 30 or more hours of service
per week during the period from January 1 through
June 30, 2015. On October 1, 2015, at which time
Employee B is in the initial measurement period for
Position 1, Employee B transfers from Position 1 to
Position 2.
At the date of the transfer, Employee B is not in
a stability period for Position 1 because Employee B
has not been employed for a full initial measurement
period or a full standard measurement period. Ac-
cordingly, Employee B's status is determined under
the measurement method applicable to Position 2 as
of the date of transfer, taking into account Employee
B's hours of service in Position 1.
Employee B is a full-time employee from the
date of transfer (October 1, 2015) through the end of
the applicable stability period for Position 2 (Decem-
ber 31, 2015) because Employee B averaged 30 or
more hours of service per week during the applicable
measurement period for Position 2 ending June 30,
2015 (for Employee B, the initial measurement pe-
riod and standard measurement period ran simulta-
neously from January 1, 2015 through June 30,
2015). After December 31, 2015, Employee B's
status continues to be determined using the applica-
ble measurement period for Position 2.
Example 3: New variable hour employee in ini-
tial measurement period transfers to position in
which employee is also in initial measurement pe-
riod. For Position 1, the employer uses a 3-month
initial measurement period that begins on the first
day of the month following the start date and, if the
employee is full-time during the initial measurement
period, a 6-month stability period immediately fol-
lowing the initial measurement period. For Position
2, the employer uses a 12-month initial measurement
period beginning on each employee's start date, ap-
plies an administrative period that runs from the end
of the initial measurement period until the end of the
month in which that date falls, and uses a one-year
stability period starting the day after the end of the
administrative period.
The employer hires Employee C into Position 1
as a new variable-hour employee on February 15,
2015. On May 1, 2015, Employee C transfers from
Position 1 to Position 2. Employee C is not reason-
ably expected to average 30 or more hours of service
per week in Position 2 (and thus the transfer from
Position 1 to Position 2 does not constitute a change
in employment status for purposes of § 54.4980H-
3(d)(3)(vii)). Employee C does not average 30 or
more hours of service per week during the period
from February 15, 2015 through February 14, 2016.
As of the date of transfer, Employee C had not
been employed for the full initial measurement pe-
riod for Position 1 and so, as of the date of transfer,
Employee C is not in a stability period. Accordingly,
Employee C's status is determined using the mea-
surement method applicable to Position 2 (February
15, 2015 through February 14, 2016).
Employee C continues to be treated as a new
variable hour employee from the date of transfer
through February 28, 2016 (the end of the initial
measurement period and associated administrative
period for Position 2). For the stability period begin-
ning March 1, 2016, Employee C's status is deter-
mined on the basis of Employee C's average hours
of service in the initial measurement period for Po-
sition 2, taking into account the hours of service in
Position 1. Employee C is not a full-time employee
for the stability period from March 1, 2016 through
February 28, 2017.
Example 4: New variable hour employee in ini-
tial measurement period transfers to new position
and has a change in employment status. Same facts
as Example 3, except that as of the date of transfer
Employee C is reasonably expected to average 30 or
more hours of service per week in Position 2.
Because Employee C had not been employed for
the full initial measurement period for Position 1,
Employee C is not in a stability period as of the
date of transfer. Accordingly, Employee C's status
is determined using the measurement method for
Position 2.
Because as of the date of transfer to Position 2,
Employee C is reasonably expected to average more
than 30 hours of service per week in Position 2, the
rules set forth in § 54.4980H-3(d)(3)(vii) for
changes in employment status during the initial mea-
surement period apply.
Example 5: Transfer of employee during admin-
istrative period. For Position 1, the employer uses a
12-month standard measurement period starting Jan-
uary 1 for ongoing employees and an 11-month
initial measurement period starting on the first day of
the month following the start date combined with a
one-month administrative period for new variable
hour, part-time, and seasonal employees. With re-
spect to Position 2, the employer uses 6-month stan-
dard measurement and stability periods beginning
January 1 and July 1.
The employer hires Employee D into Position 1
on March 15, 2016 as a new variable hour employee.
For the 11-month initial measurement period from
April 1, 2016 through February 28, 2017, Employee
D averages 30 or more hours of service per week. On
March 10, 2017, during the administrative period for
Position 1 from March 1, 2017 through March 31,
2017, Employee D transfers from Position 1 to Po-
sition 2.
The date of transfer occurs during the adminis-
trative period following the completion of Employee
D's initial measurement period applicable to Posi-
tion 1. Employee D's status must be determined
using the initial measurement method applicable to
Position 1 and applied from the start of the stability
period following the end of the administrative period
through the end of that stability period.
Accordingly, for the 12-month stability period
starting April 1, 2017, Employee D is a full-time
employee because Employee D averaged 30 or more
hours of service per week in the associated initial
measurement period ending February 28, 2017. Af-
ter the completion of the stability period (March 31,
2018), Employee D's status as a full-time employee
is determined using the measurement method appli-
cable to Position 2.
B. Employer-initiated changes in mea-
surement methods for one or more per-
missible categories of employees.
Pursuant to this notice, an employer
may change the measurement method ap-
plicable to a category of employees iden-
tified in § 54.4980H-3(d)(1)(v), provided
that for a transition period following the
date of any such change, the status of each
employee in that category is determined in
accordance with this section III.B. A
change in measurement method may in-
clude a change from the look-back mea-
surement method to the monthly measure-
ment method (or vice versa), or a change
in the duration or start date of any appli-
cable measurement period under the look-
back measurement method.
The § 4980H final regulations address
how to determine the full-time status of
employees who transfer from a category
to which the monthly measurement
method applies to a category to which the
look-back measurement method (or vice
versa). See § 54.4980H-3(f)(1). The final
regulations do not address whether, or un-
der what conditions, an employer that uses
a measurement method for a category of
employees may subsequently change that
measurement method. This section III.B
clarifies that an employer may change the
measurement method applicable to a cat-
egory of employees, provided that the
transition rules for employees who change
between the monthly and look-back mea-
surement methods due to such a change
by the employer as provided in
§ 54.4980H-3(f)(1) apply to all employ-
ees impacted by the change for a transi-
tion period after the effective date of the
change in method. For a change from the
look-back measurement method to the
monthly measurement method (or vice
versa), the status of each affected em-
ployee as of the date of the change is
determined in accordance with
§ 54.4980H-3(f)(1) as if on the date of the
change each of those employees had
transferred from a position to which the
original measurement method applied, to
a position to which the revised measure-
ment method applied.
The status of any employee whose ap-
plicable measurement period under the
look-back measurement method is
changed by the employer is determined as
if the employee had transferred from a
position to which the original measure-
ment method applies to a position to
which the revised measurement method
applies as of the effective date of the
change. Accordingly, if an employer
changes the duration or start date of the
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measurement period under the look-back
measurement method for a category of
employees, the status of each employee in
that category as a full-time employee after
the date of the change is determined in
accordance with this notice as if on the
date of the change each employee in the
category had transferred from a position
to which the original measurement
method applied, to a position to which the
revised measurement method applied.
Example 6: Employer-initiated change in mea-
surement periods. Starting January 1, 2015, the em-
ployer determines the full-time employee status of
employees covered by a particular collective bar-
gaining agreement (CBA) using 6-month measure-
ment and stability periods each starting April 1 and
October 1 and determines the status of employees
not covered by the CBA using 12-month measure-
ment and stability periods each starting January 1.
On April 1, 2017, the employer changes the
look-back measurement method for employees not
covered by the CBA to be the same as that used for
employees covered by the CBA.
For a transition period following the date of this
change, the status of employees not covered by the
CBA must be made in a manner consistent with this
notice, treating each employee who is subject to the
measurement method applicable to employees not
covered by the CBA as if on April 1, 2017, that
employee had transferred from a position subject to
the original measurement method to a position sub-
ject to the revised measurement method.
Accordingly, each employee subject to the mea-
surement method applicable to employees not cov-
ered by the CBA who is in a stability period as of
April 1, 2017 retains his or her status as a full-time
employee or non-full-time employee, as determined
under the original measurement method for the re-
mainder of the 12-month stability period applicable
to that employee. Each such employee who is not in
a stability period as of April 1, 2017 has his or her
status determined as of April 1, 2017 in accordance
with the 6-month measurement method.
## RELIANCE
The Treasury Department and the IRS
anticipate issuing further guidance after
consideration of all comments received
pursuant to section V of this notice. How-
ever, taxpayers may rely on the approach
described in this notice to determine an
employee's status as a full-time employee
for purposes of § 4980H until such guid-
ance is issued, and in any case, through
the end of calendar year 2016.
## REQUEST FOR COMMENTS AND APPLICATION TO CORPORATE TRANSACTIONS
The Treasury Department and the IRS
invite public comments on the proposed
approached described in this notice, and
on the potential application of the pro-
posed approach described in this notice, or
similar rules, in the context of a corporate
transaction such as a merger or acquisition
involving employers using different mea-
surement methods. In such a corporate
transaction, the two (or more) entities may
have different measurement methods for
their respective employees in a particular
category under § 54.4980H-3(d)(1)(v)
(for example, salaried employees). As a
result of the corporate transaction, these
groups of employees may become em-
ployed by the same ALE member.
Until further guidance is issued, and in
any case through the end of calendar year
2016, taxpayers involved in a corporate
transaction in which employers use differ-
ent measurement methods may rely on the
approach described in this notice in deter-
mining an employee's status as a full-time
employee for purposes of § 4980H. For
example, assume that one corporation
(Target) merges into another corporation
(Acquirer) and that both corporations use
the look-back measurement method but
with different measurement periods. The
corporations may apply the approach set
forth in section III of this notice by treat-
ing the Target employees as having trans-
ferred at the date of the merger from one
position (at Target) to another position (at
Acquirer) with a different measurement
period.
In addition, if a merger, acquisition or
similar corporate transaction occurs and,
in connection with the corporate transac-
tion, individuals not employed immedi-
ately prior to the transaction by an ALE
member become employed by that ALE
member (new ALE member employees),
the ALE member will not be treated as
applying an impermissible categorization
of employees under § 54.4980H-
3(d)(1)(v) merely because it applies dur-
ing the transition period, to some or all of
the new ALE member employees, the
measurement method applicable to those
employees immediately before the corpo-
rate transaction. For this purpose, the tran-
sition period is the period beginning on
the date of the corporate transaction and
ending on the last day of the first stability
period following a standard measurement
period that would have applied to the new
ALE member employees absent the cor-
porate transaction and that begins after the
date of such corporate transaction (or, in
the case of an ALE member that uses the
monthly measurement method with re-
spect to a category of employees, the last
day of the first calendar year that begins
after the date of the transaction).
Recognizing that the approach de-
scribed in the immediately preceding
paragraphs to addressing the conse-
quences of corporate transactions is not
necessarily the only permissible approach
and might in some cases present practical
issues, the Treasury Department and the
IRS encourage comments on this and
other possible approaches. As with the
other provisons of this notice, nothing in
this section of the notice prohibits em-
ployers from adopting eligibility provi-
sions that make some employees eligi-
ble for coverage in situations in which
the employee could potentially be clas-
sified as a non-full-time employee under
the approach described in this para-
graph.
Comments are also requested on
whether additional rules are necessary to
address situations where an applicable
large employer transfers employees to an-
other employment category or to a differ-
ent ALE member that uses a different
look-back measurement method for the
purpose of delaying or avoiding the clas-
sification of the employee as a full-time
employee for § 4980H purposes.
Public comments should be submitted
no later than December 29, 2014. Com-
ments should include a reference to No-
tice 2014-49. Send submissions to CC:
PA:LPD:PR (Notice 2014-49), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (Notice 2014-49),
Courier's Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20044, or sent electron-
ically, via the following e-mail address:
Notice.comments@irscounsel.treas.gov.
Please include "Notice 2014-49" in the
subject line of any electronic communi-
cation. All material submitted will be
available for public inspection and
copying.
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## DRAFTING INFORMATION
The principal author of this notice is
Shad C. Fagerland of the Office of Divi-
sion Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this no-
tice contact Mr. Fagerland at (202) 317-
5500 (not a toll-free number).
### Notice 2014-54 Guidance on Allocation of After-Tax Amounts to Rollovers
#### PURPOSE
This notice provides rules for allocat-
ing pretax and after-tax amounts among
disbursements that are made to multiple
destinations from a qualified plan de-
scribed in § 401(a) of the Internal Reve-
nue Code. These rules also apply to dis-
bursements from a § 403(b) plan or a
§ 457(b) plan maintained by a governmental
employer described in § 457(e)(1)(A) (a
"governmental § 457(b) plan"). Section VI
of this notice provides transition rules.
#### BACKGROUND
Section 402(a) provides generally that
any amount distributed from a trust de-
scribed in § 401(a) that is exempt from tax
under § 501(a) is taxable to the distributee
under § 72 in the taxable year of the
distributee in which distributed. Under
§ 403(b)(1), any amount distributed from
a § 403(b) plan is also taxable to the
distributee under § 72. (Under § 72(d), a
different allocation method applies to an-
nuity distributions.)
If a participant's account balance in a
plan qualified under § 401(a) or in a
§ 403(b) plan includes both after-tax and
pretax amounts, then, under § 72(e)(8),
each distribution from the account (other
than a distribution that is paid as part of an
annuity, which is subject to a different
rule) will include a pro rata share of both
after-tax and pretax amounts.
Under § 402A(d)(4), a designated Roth
account in an applicable retirement plan is
treated as a separate contract from other
amounts in the plan when applying the
rules of § 72.
Section 402(c) provides taxability rules
for amounts that are rolled over from
qualified trusts to eligible retirement
plans, including individual retirement ac-
counts or annuities ("IRAs"). Subject to
certain exceptions, § 402(c)(1) provides
that if any portion of an eligible rollover
distribution paid to an employee from a
qualified trust is transferred to an eligible
retirement plan, the portion of the distri-
bution so transferred is not includible in
gross income in the taxable year in which
paid.
Under § 402(c)(2), the maximum por-
tion of an eligible rollover distribution
that may be rolled over in a transfer to
which § 402(c)(1) applies generally can-
not exceed the portion of such distribution
which is otherwise includible in gross in-
come. However, under § 402(c)(2)(A) and
(B), the general rule does not apply to
such distribution to the extent that-
(A) such portion is transferred in a
direct trustee-to-trustee transfer to a qual-
ified trust or to an annuity contract de-
scribed in section 403(b) and such trust or
contract provides for separate accounting
for amounts so transferred (and earnings
thereon), including separately accounting
for the portion of such distribution which
is includible in gross income and the por-
tion of such distribution which is not so
includible, or
(B) such portion is transferred to an
[IRA].
In addition, § 402(c)(2) provides the
following special rule:
In the case of a transfer described in
subparagraph (A) or (B), the amount
transferred shall be treated as consist-
ing first of the portion of such distri-
bution that is includible in gross in-
come (determined without regard to
[§ 402(c)(1)]).
Under § 402A, an applicable retire-
ment plan, defined in § 402A(e)(1) to in-
clude a plan qualified under § 401(a), a
§ 403(b) plan, or a governmental § 457(b)
plan, may include a designated Roth ac-
count. Section 402A(d) provides that a
qualified distribution (as defined in
§ 402A(d)(2)) from a designated Roth ac-
count is not includible in gross income.
Section 1.402A-1, Q&A-5(a), of the
Income Tax Regulations provides tax-
ability rules for a distribution from a
designated Roth account that is rolled
over. The regulations provide in part
that "any amount paid in a direct roll-
over is treated as a separate distribution
from any amount paid directly to the
employee."
Section 402(f) requires that the plan
administrator of a plan qualified under
§ 401(a) provide any recipient of an eli-
gible rollover distribution with a written
explanation describing certain provisions
of law. Notice 2009-68, 2009-2 C.B.
423, provides two safe harbor explana-
tions that may be provided to recipients of
eligible rollover distributions from an em-
ployer plan in order to satisfy § 402(f).
The safe harbor explanation with respect
to distributions not from a designated
Roth account provides in part (under the
heading "If your payment includes after-
tax contributions") that "[i]f you do a di-
rect rollover of only a portion of the
amount paid from the Plan and a portion is
paid to you, each of the payments will
include an allocable portion of the after-
tax contributions." Similarly, for distribu-
tions from a designated Roth account, the
safe harbor explanation provides in part
(under the heading “How do I do a roll-
over?") that "[i]f you do a direct rollover
of only a portion of the amount paid from
the Plan and a portion is paid to you, each
of the payments will include an allocable
portion of the earnings in your designated
Roth account."
Sections 403(b)(8)(B) and 457(e)(16)(B)
provide that the rules of § 402(c)(2) through
(7), (9), and (11) and the rules of § 402(f)
also apply to § 403(b) plans and govern-
mental § 457(b) plans.
In response to Notice 2009-68, com-
ments were received requesting changes
to the rules regarding the allocation of
basis among simultaneous disbursements
to multiple destinations from a retirement
plan that contains both after-tax and pre-
tax amounts. Commenters indicated that
some plan providers were treating dis-
bursements to separate destinations not as
separate distributions but rather as a single
distribution of the aggregate disbursement
amounts. These plan providers permitted
allocation of all the after-tax amounts in-
cluded in the disbursements to a Roth
IRA. The commenters also pointed out
that even under the allocation method de-
scribed in Notice 2009-68 a participant
who wishes to disburse after-tax amounts
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to one destination and pretax amounts to
another could accomplish this result in a
series of steps. First, the participant could
take an eligible rollover distribution as a
single cash distribution. Second, by taking
advantage of the rule in § 402(c)(2) that
distribution amounts that are rolled over
are treated as consisting first of pretax
amounts, the participant could roll over
the pretax amounts included in the distri-
bution to one destination, such as a tradi-
tional IRA. The remaining amount of the
distribution would be after-tax, which the
participant could either roll over into a
Roth IRA or retain without incurring any
tax liability. The option to roll over all
after-tax amounts into a Roth IRA, how-
ever, would only be available to taxpayers
with sufficient funds available outside of
the plan to be able to roll over the entire
amount distributed, including the 20 per-
cent of the taxable portion of the distribu-
tion paid to the IRS as withholding pur-
suant to § 3405(c).
As described in section VI of this no-
tice, this notice is being issued in conjunc-
tion with proposed regulations that would
modify § 1.402A-1, Q&A-5(a).
## GUIDANCE ON THE ALLOCATION OF AFTER-TAX AND PRETAX AMOUNTS
For purposes of determining the por-
tion of a disbursement of benefits from a
plan to a participant, beneficiary, or alter-
nate payee that is not includible in gross
income under the rules of § 72, all dis-
bursements of benefits from the plan to
the recipient that are scheduled to be made
at the same time (disregarding differences
due to reasonable delays to facilitate plan
administration) are treated as a single dis-
tribution without regard to whether the
recipient has directed that the disburse-
ments be made to a single destination or
multiple destinations.
If the pretax amount with respect to the
aggregated disbursements that are treated
as a single distribution is less than the
amount of the distribution that is directly
rolled over to one or more eligible retire-
ment plans, the entire pretax amount is
assigned to the amount of the distribution
that is directly rolled over. In such a case,
if the direct rollover is to two or more
plans, then the recipient can select how
the pretax amount is allocated among
these plans. To make this selection, the
recipient must inform the plan administra-
tor of the allocation prior to the time of the
direct rollovers.
If the pretax amount with respect to the
aggregated disbursements in a distribution
equals or exceeds the amount of the dis-
tribution that is directly rolled over to one
or more eligible retirement plans, the pre-
tax amount is assigned to the portion of
the distribution that is directly rolled over
up to the amount of the direct rollover (so
that each direct rollover consists entirely
of pretax amounts). Any remaining pretax
amount is next assigned to any 60-day
rollovers (that is, rollovers that are not
direct rollovers) up to the amount of the
60-day rollovers. If the remaining pretax
amount is less than the amount rolled over
in 60-day rollovers, the recipient can se-
lect how the pretax amount is allocated
among the plans that receive 60-day roll-
overs.
If, after the assignment of the pretax
amount to direct rollovers and 60-day roll-
overs, there is a remaining pretax amount,
that amount is includible in the distribu-
tee's gross income. If the amount rolled
over to an eligible retirement plan exceeds
the portion of the pretax amount assigned
or allocated to the plan, the excess is an
after-tax amount.
## REPORTING REQUIREMENTS
Even though certain multiple disburse-
ments to different destinations are treated
as a single aggregated distribution under
the first paragraph of section III of this
notice, each disbursement may be re-
quired to be reported on a separate Form
1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc., in
accordance with the Instructions to Form
1099-R. In preparing the Form 1099-R,
the assignment and allocation rules in sec-
tion III must be taken into account in
determining the amount of pretax contri-
butions assigned or allocated among di-
rect rollovers and any amounts paid to the
recipient.
## EXAMPLES
Example 1. Employee C participates in a quali-
fied plan that does not contain a designated Roth
account. Employee C's $250,000 account balance
consists of $200,000 of pretax amounts and $50,000
of after-tax amounts. Employee C separates from
service and is entitled to, and requests, a distribution
of $100,000. Under § 72(e)(8), the pretax amount
with respect to the distribution is $80,000 ($100,000
x $200,000/$250,000). Employee C specifies that
$70,000 is to be directly rolled over to the qualified
plan maintained by his new employer and that
$30,000 is to be paid to Employee C. Because the
pretax amount exceeds the amount directly rolled
over, the amount directly rolled over to the new plan
consists entirely of pretax amounts. The amount paid
to Employee C (prior to application of withholding)
consists of $10,000 in pretax amounts and $20,000
in after-tax amounts. Prior to the 60th day after the
distribution, Employee C chooses to roll over
$12,000 to an IRA. Because the amount rolled over in
the 60-day rollover exceeds the remaining pretax
amounts, the amount rolled over to the IRA consists of
$10,000 of pretax amounts and $2,000 of after-tax
amounts.
Example 2. The facts are the same as in Example
1, except that Employee C chooses to transfer
$82,000 in direct rollovers - $50,000 to the new
qualified plan and $32,000 to an IRA. The remaining
$18,000 is paid to Employee C. The new qualified
plan separately accounts for after-tax contributions.
Because the amount rolled over exceeds the pretax
amount, the direct rollovers consist of $80,000 in
pretax amounts and $2,000 in after-tax amounts.
Employee C is permitted to allocate the pretax
amounts between the new qualified plan and the IRA
prior to the time the direct rollovers are made.
Example 3. The facts are the same as in Example
2, except that the new qualified plan does not sepa-
rately account for after-tax contributions. In this
case, it is impermissible for the $2,000 (which rep-
resents the after-tax portion of the distribution) to be
rolled over to the new qualified plan. Thus, the entire
$50,000 rolled over to the plan must consist of pretax
amounts. The $32,000 rolled over to the IRA con-
sists of $30,000 of pretax amounts and $2,000 of
after-tax amounts.
Example 4. The facts are the same as in Example
1, except that Employee C chooses to make a direct
rollover of $80,000 to a traditional IRA and $20,000
to a Roth IRA. Employee C is permitted to allocate
the $80,000 that consists entirely of pretax amounts to
the traditional IRA so that the $20,000 rolled over to
the Roth IRA consists entirely of after-tax amounts.
## PROPOSED REGULATIONS AND TRANSITION RULES
The allocation rules of section III of
this notice generally apply to distributions
made on or after January 1, 2015.
Concurrent with this notice, the Fed-
eral Register has filed for public inspec-
tion proposed regulations under § 402A
(REG-105739-11, filed for public in-
spection by the Federal Register on Sep-
tember 18, 2014). The proposed regula-
tions would limit the applicability of the
requirement in § 1.402A-1, Q&A-5(a),
applicable to distributions from desig-
nated Roth accounts that "any amount
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paid in a direct rollover is treated as a
separate distribution from any amount
paid directly to the employee." Under the
proposed regulations, that separate distri-
bution requirement would not apply to
distributions made on or after the applica-
bility date of the Treasury decision final-
izing the proposed regulations. The appli-
cability date of the regulations is proposed
to be January 1, 2015. However, in accor-
dance with § 7805(b)(7), taxpayers are
permitted to apply the proposed regula-
tions to distributions made before the ap-
plicability date, so long as such earlier
distributions are made on or after Septem-
ber 18, 2014. For distributions from des-
ignated Roth accounts, the allocation rules
of section III of this notice will apply to
distributions made on or after the applica-
bility date.
For distributions made on or after Sep-
tember 18, 2014 but before the allocation
rules of section III of this notice apply, tax-
payers may apply a reasonable interpreta-
tion of the last sentence of § 402(c)(2) to
allocate after-tax and pretax amounts among
disbursements made to multiple destina-
tions. In the case of such disbursements, a
reasonable interpretation of the last sentence
of § 402(c)(2) includes utilizing the sepa-
rate distribution allocation rule described
in § 1.402A-1, Q&A-5(a). For example,
it would be reasonable for a plan admin-
istrator to treat each disbursement as a
separate distribution that receives a pro
rata share of pretax amounts and for the
recipient to determine taxability in accor-
dance with that allocation. It would also
be reasonable for the plan administrator to
allocate pretax amounts in the manner de-
scribed in section III of this notice as
timely selected by the recipient of dis-
bursements made to multiple destinations.
In addition, it would be reasonable for a
plan administrator to switch from allocat-
ing pretax amounts using the separate dis-
tribution allocation rule to allocating pre-
tax amounts in the manner described in
section III of this notice as timely selected
by the recipient.
For distributions made prior to Sep-
tember 18, 2014, taxpayers may generally
apply the same reasonable interpretation
standard described in the preceding para-
graph. However, if such a distribution is
made from a designated Roth account, the
allocation of the pretax amounts must be
made in accordance with the rules set
forth in the § 402A regulations that were
in effect on the date of the distribution.
The IRS also intends to revise the safe
harbor explanations that may be provided to
recipients of eligible rollover distributions
from an employer plan in order to satisfy
§ 402(f) to reflect this revised method for
applying the last sentence of § 402(c)(2).
## DRAFTING INFORMATION
The principal author of this notice is
Kathleen Herrmann of the Employee
Plans, Tax Exempt and Government En-
tities Division. Questions regarding this
notice may be sent via e-mail to
RetirementPlanQuestions@irs.gov.
## Additional Permitted Election Changes for Health Coverage under § 125 Cafeteria Plans Notice 2014-55
### PURPOSE
This notice expands the application of
the permitted change rules for health cov-
erage under a § 125 cafeteria plan (cafe-
teria plan). In particular, this notice ad-
dresses two specific situations in which a
cafeteria plan participant may wish to re-
voke, during a period of coverage (com-
monly a plan year), the employee's elec-
tion for employer-sponsored health
coverage under the cafeteria plan in order
to purchase a Qualified Health Plan
through a competitive marketplace estab-
lished under § 1311 of the Patient Protec-
tion and Affordable Care Act, commonly
referred to as an Exchange or a Health
Insurance Marketplace (Marketplace).
The first situation involves a participating
employee whose hours of service are re-
duced so that the employee is expected to
average less than 30 hours of service per
week but for whom the reduction does not
affect the eligibility for coverage under
the employer's group health plan. (This
may occur, for example, under certain em-
ployer plan designs intended to avoid any
potential assessable payment under
§ 4980H of the Internal Revenue Code.)
The second situation involves an em-
ployee participating in an employer's
group health plan who would like to cease
coverage under the group health plan and
purchase coverage through a Marketplace
without that resulting either in a period of
duplicate coverage under the employer's
group health plan and the coverage pur-
chased through a Marketplace or in a pe-
riod of no coverage.
This notice permits a cafeteria plan to
allow an employee to revoke his or her
election under the cafeteria plan for cov-
erage under the employer's group health
plan (other than a flexible spending ar-
rangement (FSA)) during a period of cov-
erage in each of those situations provided
specified conditions are met. The Treasury
Department and the IRS intend to mod-
ify the regulations under § 125 consis-
tent with the provisions of this notice,
but taxpayers may rely on this notice
immediately.
## BACKGROUND
Section 125(d)(1) defines a cafeteria
plan as a written plan maintained by an
employer under which all participants are
employees, and all participants may
choose among two or more benefits con-
sisting of cash and qualified benefits. Sec-
tion 125(f) defines a qualified benefit as
any benefit which, with the application of
§ 125(a), is not includable in the gross
income of the employee by reason of an
express provision of the Code (with cer-
tain exceptions). Qualified benefits in-
clude employer-provided accident and
health plans excludable from gross in-
come under §§ 106 and 105(b), but ex-
clude long term care insurance and certain
Qualified Health Plans offered through
Marketplaces.
Proposed § 1.125-1(c)(1)(iii) of the In-
come Tax Regulations, consistent with
longstanding rules for cafeteria plans,
states that a written cafeteria plan must
provide that elections are irrevocable ex-
cept to the extent that the optional change
in status rules in Treas. Reg. § 1.125-4
have been included in the cafeteria plan.
Treas. Reg. § 1.125-4 provides rules on
the circumstances in which a cafeteria
plan may permit changes to elections un-
der the plan. Cafeteria plans are not re-
quired to allow any of the changes permit-
ted under Treas. Reg. § 1.125-4.
Treas. Reg. § 1.125-4(c) permits a caf-
eteria plan to allow an employee to revoke
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an election during a period of coverage
with respect to coverage under an accident
or health plan as defined in Treas. Reg.
§ 1.105-5, and make a new election for
the remaining portion of the period, if
under the facts and circumstances (i) a
change in status occurs, and (ii) the elec-
tion change satisfies the consistency re-
quirements of Treas. Reg. § 1.125-
4(c)(3). A change of status for this
purpose includes changes in employment
status as described in Treas. Reg. § 1.125-
4(c)(2)(iii). A change in employment sta-
tus for this purpose only includes a change
in an individual's employment status that
results in a change in the individual's el-
igibility for coverage under the group
health plan. Thus, under the existing reg-
ulations, a change in employment status
that does not result in an employee either
becoming or ceasing to be eligible for
coverage under the group health plan is
not a change in status for which a plan
may allow the employee to revoke an
election of health coverage under the caf-
eteria plan during a period of coverage.
Even if the change in status results in a
change in eligibility for coverage under
the group health plan, any revocation of
an election must meet the consistency re-
quirements of Treas. Reg. §§ 1.125-
4(c)(3)(i) and 1.125-4(c)(3)(iii). Those
requirements provide that if an employ-
ee's change in status only results in some
of the individuals covered by a group
health plan due to their relationship to the
employee ceasing to satisfy eligibility re-
quirements for coverage, the employee's
election under the cafeteria plan to cancel
coverage under the group health plan for
any individual other than the individuals
losing eligibility fails to correspond with
that change in status. Similarly, if a
change in status results in an individual
gaining eligibility for coverage under a
group health plan, an employee's election
to cease or decrease coverage for that in-
dividual under the cafeteria plan corre-
sponds with the change in status only if
the individual enrolls in the coverage for
which the individual is newly eligible.
That is, an individual gaining eligibility
for coverage under a group health plan
cannot use that change in status to revoke
coverage.
Treas. Reg. § 1.125-4(b) permits a caf-
eteria plan to allow an employee to revoke
an election under the group health plan
during a period of coverage and to make a
new election that corresponds with the
special enrollment rights under § 9801(f).
Special enrollment rights under § 9801(f)
concern rights to enroll in a group health
plan due to loss of other coverage or cer-
tain family events, but do not include the
ability to enroll in a Qualified Health Plan
through a Marketplace.
Interaction with § 4980H
Under § 4980H, an applicable large
employer is subject to an assessable pay-
ment if the applicable large employer does
not offer minimum essential coverage to
its full time employees and one or more
full time employees receive the premium
tax credit under § 36B. Under Treas. Reg.
§ 54.4980H-3(d), an applicable large em-
ployer may use the look-back measure-
ment method to determine the status of an
employee as full-time or not full-time.
Under the look-back measurement
method, for purposes of § 4980H, an em-
ployee determined to be full-time based
on hours of service during a measurement
period must be treated as a full-time em-
ployee during a subsequent stability pe-
riod, regardless of the employee's hours
of service during the stability period.
Thus, under the look-back measurement
method, an employee could have a change
in employment status (for example, a
change from a full-time position to a part-
time position) resulting in a reduction in
hours that does not change the employee's
status as a full-time employee for pur-
poses of § 4980H, at least for some period
of time. Under certain health plan designs
intended to avoid any potential assessable
payment under § 4980H by offering cov-
erage to employees for all periods during
which the employees are classified as full-
time employees for § 4980H purposes, the
change in employment status would not
result in a change in an employee's eligi-
bility for the group health plan. Because
the change in employment status would
not result in a change in the employee's
eligibility for the group health plan, under
Treas. Reg. § 1.125-4(c), the cafeteria
plan could not allow the employee to
change the employee's election under the
cafeteria plan during the period of cover-
age.
Interaction with Enrollment in a
Qualified Health Plan Through a
Marketplace
Under the current change in status
rules under Treas. Reg. § 1.125-4, a caf-
eteria plan may not allow an employee to
revoke an election under the group health
plan during a period of coverage solely to
enroll in a Qualified Health Plan through a
Marketplace. For an individual enrolled
through a cafeteria plan in a group health
plan with a calendar plan year, the em-
ployee may continue his or her coverage
under the plan for the remainder of the
plan year and then immediately begin
coverage under a Qualified Health Plan
purchased through a Marketplace. How-
ever, an individual enrolled through a caf-
eteria plan in a group health plan with a
noncalendar plan year might not be able to
synchronize the change in coverage to
avoid an overlapping period of coverage
or a period without coverage because the
open enrollment period rules for Market-
places do not permit the purchase of cov-
erage commencing upon the end of the
noncalendar cafeteria plan year.
Also, under Treas. Reg. § 1.125-4(b) a
cafeteria plan may allow an employee to
revoke an election under a group health
plan during a period of coverage and to
make a new election that corresponds with
special enrollment rights under § 9801(f).
Special enrollment rights under § 9801(f)
relate only to enrollment in another group
health plan, not to enrollment in a Quali-
fied Health Plan offered through a Mar-
ketplace. Thus, Treas. Reg. § 1.125-4(b)
does not permit a cafeteria plan to allow
an employee to revoke an election under a
group health plan during a period of cov-
erage and enroll in a Qualified Health Plan
offered through a Marketplace as the re-
sult of an employee's eligibility to enroll
in a Qualified Health Plan during Special
Enrollment Period for the Marketplace1
(even though most of the events giving
rise to special enrollment rights under
§ 9801(f) correspond to the events giving
1Marketplaces must provide Special Enrollment Periods during which qualified individuals may enroll in Qualified Health Plans offered through Marketplaces. See 45 CFR 155.420(d).
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rise to Special Enrollment Periods for a
Qualified Health Plan). However, in the
case of an event such as a birth or mar-
riage, it may be more advantageous for
some individuals to enroll themselves and
their families in a Qualified Health Plan
rather than to add family members to an
employer's group health plan. To permit
access to Qualified Health Plans in these
cases, this notice permits a cafeteria plan
to allow a participating employee to re-
voke an election in order to obtain cover-
age through a Marketplace.
## GUIDANCE
A cafeteria plan may allow an em-
ployee to prospectively revoke an election
of coverage under a group health plan that
is not a health FSA and that provides
minimum essential coverage (as defined
in § 5000A(f)(1)) provided the following
conditions are met:
### Conditions for revocation due to reduction in hours of service
(1) The employee has been in an em-
ployment status under which the em-
ployee was reasonably expected to aver-
age at least 30 hours of service per week
and there is a change in that employee's
status so that the employee will reason-
ably be expected to average less than 30
hours of service per week after the
change, even if that reduction does not
result in the employee ceasing to be eligi-
ble under the group health plan; and
(2) The revocation of the election of
coverage under the group health plan cor-
responds to the intended enrollment of the
employee, and any related individuals
who cease coverage due to the revocation,
in another plan that provides minimum
essential coverage with the new coverage
effective no later than the first day of the
second month following the month that
includes the date the original coverage is
revoked.
A cafeteria plan may rely on the rea-
sonable representation of an employee
who is reasonably expected to have an
average of less than 30 hours of service
per week for future periods that the em-
ployee and related individuals have en-
rolled or intend to enroll in another plan
that provides minimum essential coverage
for new coverage that is effective no later
than the first day of the second month
following the month that includes the date
the original coverage is revoked.
Conditions for revocation due to
enrollment in a Qualified Health Plan
(1) The employee is eligible for a Spe-
cial Enrollment Period to enroll in a Qual-
ified Health Plan through a Marketplace
pursuant to guidance issued by the De-
partment of Health and Human Services
and any other applicable guidance, or the
employee seeks to enroll in a Qualified
Health Plan through a Marketplace during
the Marketplace's annual open enrollment
period; and
(2) The revocation of the election of
coverage under the group health plan cor-
responds to the intended enrollment of the
employee and any related individuals who
cease coverage due to the revocation in a
Qualified Health Plan through a Market-
place for new coverage that is effective
beginning no later than the day immedi-
ately following the last day of the original
coverage that is revoked.
A cafeteria plan may rely on the rea-
sonable representation of an employee
who has an enrollment opportunity for a
Qualified Health Plan through a Market-
place that the employee and related indi-
viduals have enrolled or intend to enroll in
a Qualified Health Plan for new coverage
that is effective beginning no later than
the day immediately following the last
day of the original coverage that is re-
voked.
## EFFECTIVE DATE AND PLAN AMENDMENTS
The guidance in this notice is effective
on September 18, 2014. The Treasury De-
partment and the IRS intend to amend
Treas. Reg. § 1.125-4 to reflect the guid-
ance in this notice. Taxpayers may rely on
the guidance in this notice pending further
guidance.
To allow the new permitted election
changes under this notice, a cafeteria plan
must be amended to provide for such elec-
tion changes. The amendment must be
adopted on or before the last day of the
plan year in which the elections are al-
lowed, and may be effective retroactively
to the first day of that plan year, provided
that the cafeteria plan operates in accor-
dance with the guidance under this notice
and the employer informs participants of
the amendment, and provided further that
a cafeteria plan may be amended to adopt
the new permitted election changes for a
plan year that begins in 2014 at any time
on or before the last day of the plan year
that begins in 2015. However, in no event
may an election to revoke coverage on a
retroactive basis be allowed.
## DRAFTING INFORMATION
The principal author of this notice is R.
Lisa Mojiri-Azad of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For
further information regarding the clarifi-
cation in this notice, contact Ms. Mojiri-
Azad at (202) 317-5500 (not a toll free
number).
Sections 4375 & 4376 -
Insured and Self-Insured
Health Plans Adjusted
Applicable Dollar Amount
for Fee Imposed by
§§ 4375 and 4376
Notice 2014-56
PURPOSE
This notice provides the adjusted ap-
plicable dollar amount to be multiplied by
the average number of covered lives for
purposes of the fee imposed by §§ 4375
and 4376 of the Internal Revenue Code
for policy years and plan years that end on
or after October 1, 2014, and before Oc-
tober 1, 2015. This notice also provides
that the adjusted applicable dollar amount
for policy years and plan years that end on
or after October 1, 2015, will be published
in guidance of general applicability pub-
lished in the Internal Revenue Bulletin.
## BACKGROUND
Section 4375 imposes a fee on the is-
suer of a specified health insurance policy
for each policy year ending after Septem-
ber 30, 2012, and before October 1, 2019.
Section 4376 imposes a fee on the plan
sponsor of an applicable self-insured
health plan for each plan year ending after
September 30, 2012, and before October
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1, 2019. The fee imposed by §§ 4375 and
4376 helps to fund the Patient-Centered
Outcomes Research Institute (PCORI)
and is calculated using the average num-
ber of lives covered under the policy or
plan and the applicable dollar amount for
that policy year or plan year. Under
§§ 4375(a) and 4376(a), the applicable
dollar amount is $2 for policy and plan
years ending on or after October 1, 2013,
and before October 1, 2014.1 Treas. Reg.
§§ 46.4375-1(c)(4) and 46.4376-1(c)(3).
Under §§ 4375(d) and 4376(d) and
Treas. Reg. §§ 46.4375-1(c)(4) and
46.4376-1(c)(3), the applicable dollar
amount for policy years and plan years
ending in any Federal fiscal year begin-
ning on or after October 1, 2014 is in-
creased based on increases in the pro-
jected per capita amount of National
Health Expenditures. Specifically, the ap-
plicable dollar amount is the sum of -
(i) The applicable dollar amount for the
policy year or plan year ending in the
previous Federal fiscal year; plus
(ii) The amount equal to the product of -
(A) The applicable dollar amount for
the policy year or plan year ending in the
previous Federal fiscal year; and
(B)The percentage increase in the pro-
jected per capita amount of the National
Health Expenditures most recently re-
leased by the Department of Health and
Human Services (HHS) before the begin-
ning of the Federal fiscal year.
Based on the percentage increase in the
projected per capita amount of the Na-
tional Health Expenditures published by
HHS on September 3, 2014, the applica-
ble dollar amount that must be used to
calculate the fee imposed by §§ 4375 and
4376 for policy years and plan years that
end on or after October 1, 2014, and
before October 1, 2015, is $2.08. See
www.cms.gov/Research-Statistics-Data-
and-Systems/Statistics-Trends-and-
Reports/NationalHealthExpendData/
Downloads/Proj2013tables.zip, Table 3.
## ADJUSTED APPLICABLE DOLLAR AMOUNT
For policy years and plan years ending
on or after October 1, 2014, and before
October 1, 2015, the adjusted applicable
dollar amount is $2.08.
For policy years and plan years ending
on or after October 1, 2015, and before
October 1, 2019, the adjusted applicable
dollar amount will be published in guid-
ance of general applicability published in
the Internal Revenue Bulletin.
# I. EFFECTIVE DATE
This notice is effective for policy years
and plan years ending on or after October
1, 2014.
# II. DRAFTING INFORMATION
The principal author of this notice is R.
Lisa Mojiri-Azad of the Office of Associ-
ate Chief Counsel (Tax Exempt & Gov-
ernment Entities). For further information
regarding this notice, contact Ms. Mojiri-
Azad at (202) 317-5500 (not a toll free
number).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 168, 446, 481; 1.168(i)-1,
1.168(i)-7, 1.168(i)-8, 1.446-1.)
## Rev. Proc. 2014-54
### SECTION 1. PURPOSE
This revenue procedure modifies the
procedures in Rev. Proc. 2011-14,
2011-4 I.R.B. 330, and Rev. Proc. 2014-
17, 2014-12 I.R.B. 661, regarding certain
changes in method of accounting for dis-
positions of tangible depreciable property.
This revenue procedure provides the pro-
cedures by which a taxpayer may obtain
the automatic consent of the Commis-
sioner of Internal Revenue to change to
the methods of accounting provided in
§§ 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8
of the Income Tax Regulations. This rev-
enue procedure also allows a late partial
disposition election under § 1.168(i)-8 to
be treated as a change in method of ac-
counting for a limited period of time. Fi-
nally, this revenue procedure also modi-
fies section 10.11 of the APPENDIX of
Rev. Proc. 2011-14 regarding a change to
the method of accounting described in
Rev. Proc. 2014-16, 2014-9 I.R.B. 606,
for amounts paid to acquire, produce, or
improve tangible property.
### SECTION 2. BACKGROUND
.01 The Internal Revenue Service
(IRS) and the Treasury Department re-
cently issued final regulations under
§§ 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8
(T.D. 9689, 2014-36 I.R.B. 456, 79 Fed.
Reg. 48661) (the final regulations). Sec-
tion 1.168(i)-1 provides rules for general
asset accounts. Section 1.168(i)-7 pro-
vides rules for accounting for property
depreciated under § 168 of the Internal
Revenue Code (MACRS property). Sec-
tion 1.168(i)-8 provides rules for dispo-
sitions of MACRS property. The final reg-
ulations apply to taxable years beginning
on or after January 1, 2014, but also per-
mit a taxpayer to choose to apply the final
regulations to taxable years beginning on
or after January 1, 2012. Alternatively, the
final regulations permit a taxpayer to ap-
ply the temporary regulations under
§§ 1.168(i)-1T, 1.168(i)-7T, and
1.168(i)-8T (T.D. 9564, 2012-14 I.R.B.
614, 76 Fed. Reg. 81060) to, or to rely on
the proposed regulations under
§§ 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8
(REG-110732-13, 2013-43 I.R.B. 404,
78 Fed. Reg. 57547) for, taxable years
beginning on or after January 1, 2012, and
beginning before January 1, 2014.
.02 Except as otherwise expressly pro-
vided by the Code or the regulations
thereunder, § 446(e) and § 1.446-1(e)(2)
require a taxpayer to secure the consent of
the Commissioner before changing a
method of accounting for federal income
tax purposes.
.03 Section 1.446-1(e)(2)(ii)(d) pro-
vides the changes in depreciation or amor-
tization that are changes in a method of
accounting and the changes in deprecia-
tion or amortization that are not changes
in a method of accounting. For changes in
a method of accounting under § 1.446-
1(e)(2)(ii)(d) the item being changed gen-
erally is the depreciation treatment of each
individual depreciable or amortizable as-
set. However, for a depreciable asset for
which the taxpayer has elected general
asset account treatment under § 168(i)(4),
1The applicable dollar amount is $1 for policy and plan years ending before October 1, 2013.
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the item is the depreciation treatment of
each general asset account.
.04 Section 1.446-1(e)(2)(ii)(d)(2)
provides, in relevant part, that each of the
following changes in depreciation or
amortization is a change in method of
accounting:
(1) A change in the depreciation
method or amortization method, period of
recovery, or convention of a depreciable
or amortizable asset;
(2) A change in the accounting for de-
preciable or amortizable assets from a sin-
gle asset account to a multiple asset ac-
count (pooling), or vice versa, or from one
type of multiple asset account (pooling) to
a different type of multiple asset account
(pooling);
(3) For depreciable or amortizable as-
sets that are mass assets accounted for in
multiple asset accounts or pools, a change
in the method of identifying which assets
have been disposed of; and
(4) Any other change in depreciation or
amortization as the Secretary may desig-
nate by publication in the Federal Register
or in the Internal Revenue Bulletin.
.05 Section 1.446-1(e)(2)(ii)(d)(3)
provides, in relevant part, that none of the
following changes in depreciation or
amortization is a change in method of
accounting:
(1) An adjustment in the useful life of
a depreciable or amortizable asset for
which depreciation is determined under
§ 167 (other than under § 168, § 1400I,
§ 1400L(c), former § 168, or an additional
first year depreciation deduction provision
of the Code (for example, § 168(k),
§ 1400L(b), or § 1400N(d))). However, if
a taxpayer is changing to or from a useful
life (or recovery period or amortization
period) that is specifically assigned by the
Code (for example, § 167(f)(1), § 168(c),
§ 168(g)(2), § 168(g)(3), or § 197), the
regulations thereunder, or other guidance
published in the Internal Revenue Bulle-
tin, such a change is a change in method
of accounting;
(2) The making of a late depreciation
or amortization election or the revocation
of a timely valid depreciation or amorti-
zation election, except as otherwise ex-
pressly provided by the Code, the regula-
tions thereunder, or other guidance
published in the Internal Revenue Bulle-
tin;
(3) Any change in the placed-in-
service date of a depreciable or amortiz-
able asset, except as otherwise expressly
provided by the Code, the regulations
thereunder, or other guidance published in
the Internal Revenue Bulletin; and
(4) Any other change in depreciation or
amortization as the Secretary may desig-
nate by publication in the Federal Register
or in the Internal Revenue Bulletin.
.06 Section 1.446-1(e)(2)(ii)(d)(5)(iii)
provides that except as otherwise ex-
pressly provided by the Code, the regula-
tions thereunder, or other guidance pub-
lished in the Internal Revenue Bulletin, no
§ 481(a) adjustment is required or permit-
ted for a change from one permissible
method of computing depreciation or
amortization to another permissible
method of computing depreciation or
amortization for an asset. Instead, this
change is implemented by either a cut-off
method (see section 2.06 of Rev. Proc.
2011-14, 2011-4 I.R.B. at 338) or a mod-
ified cut-off method, as appropriate. Un-
der the modified cut-off method, the ad-
justed depreciable basis of the asset as of
the beginning of the year of change is
recovered using the new permissible
method of accounting. Section 1.446-
1(e)(2)(ii)(d)(5)(iii) also provides that a
change from an impermissible method of
computing depreciation or amortization to
a permissible method of computing depre-
ciation or amortization for an asset results
in a § 481 adjustment.
.07 Section 1.446-1(e)(3)(ii) autho-
rizes the Commissioner to prescribe ad-
ministrative procedures setting forth the
terms and conditions necessary for a tax-
payer to obtain consent to change a
method of accounting. Rev. Proc.
2011-14 provides the procedures by
which a taxpayer may obtain automatic
consent of the Commissioner to change to
a method of accounting described in the
APPENDIX of Rev. Proc. 2011-14.
.08 Section 3.02 of this revenue proce-
dure modifies the APPENDIX of Rev.
Proc. 2011-14 by: (1) removing section
6.19 (lessor improvements abandoned at
termination of lease) because it is obso-
lete; (2) revising section 6.29 (disposition
of a building or structural component) to
provide that such section does not apply to
any demolition of a structure to which
§ 280B and § 1.280B-1 apply; (3) revis-
ing sections 6.32 (general asset account
elections), 6.34 (revocation of a general
asset account election), and 6.35 (partial
dispositions of tangible depreciable assets
to which the IRS's adjustment pertains) to
allow these changes in method of account-
ing to be made under § 1.168(i)-1 or
§ 1.168(i)-8; (4) revising section 6.33
(late partial disposition election) to allow
a late partial disposition election under
§ 1.168(i)-8 to be treated as a change in
method of accounting for a limited period
of time; (5) revising section 6.37 (permis-
sible to permissible method of accounting
for depreciation of MACRS property) to
provide additional changes in method of
accounting that are consistent with
§ 1.168(i)-1 or § 1.168(i)-8; and (6) re-
vising section 10.11 (tangible property) to
clarify that this section of the APPENDIX
does not apply to amounts paid or in-
curred for certain materials and supplies
that the taxpayer has elected to capitalize
and depreciate under § 1.162-3(d) or
§ 1.162-3T(d).
.09 Section 3.03 of this revenue proce-
dure also modifies the APPENDIX of
Rev. Proc. 2011-14 by adding sections
6.38 through 6.40 to the APPENDIX to
provide additional changes in method of
accounting that are consistent with
§ 1.168(i)-1 or § 1.168(i)-8.
.10 Section 4 of this revenue procedure
provides charts that summarize the
changes in methods of accounting that
may be made under Rev. Proc. 2011-14
for dispositions of MACRS property.
### SECTION 3. CHANGES IN METHODS OF ACCOUNTING
#### .01 In general.
(1) Except as provided in section
3.01(2) of this revenue procedure and in
§ 1.446-1(e)(2)(ii)(d)(3)(iii) (the making
of a late depreciation or amortization elec-
tion or the revocation of a timely valid
depreciation or amortization election), a
change to comply with § 1.168(i)-1,
§ 1.168(i)-7, or § 1.168(i)-8 is a change
in method of accounting to which § 446(e)
applies. See § 1.168(i)-1(m)(5),
§ 1.168(i)-7(e)(5), and § 1.168(i)-8(j)(5).
A taxpayer that wants to change to a
method of accounting described in section
3.03 of this revenue procedure must use
the automatic change in method of ac-
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counting provisions in Rev. Proc. 2011-
14, as modified by this revenue procedure.
(2) If a taxpayer placed in service as-
sets in a taxable year ending before De-
cember 30, 2003 (pre-2003 assets), the
taxpayer may treat the change to comply
with § 1.168(i)-1, § 1.168(i)-7, or
§ 1.168(i)-8 for all, or some, of the pre-
2003 assets as not a change in method of
accounting. In this situation, the taxpayer
should file amended federal tax returns for
the placed-in-service year of the pre-2003
asset and all subsequent taxable years,
limited to the taxable years open under the
period of limitation for assessment, to im-
plement the change to comply with
§ 1.168(i)-1, § 1.168(i)-7, or § 1.168(i)-8
for these pre-2003 assets. If the taxpayer
files such amended federal tax returns for
the pre-2003 assets, neither an adjustment
under § 481 or a similar cumulative de-
preciation adjustment is required or per-
mitted.
.02 Modifications to existing automatic
changes.
(1) Section 6.19 of the APPENDIX of
Rev. Proc. 2011-14 is modified to read as
follows:
#### 6.19 Reserved.
(2) Section 6.29(1)(b) of the APPEN-
DIX of Rev. Proc. 2011-14 is modified to
read as follows:
(b) Inapplicability. This change does
not apply to the following:
(i) A taxpayer making this change for
any taxable year beginning before January
1, 2012, or beginning on or after January
1, 2014;
(ii) Any property (or if applicable, a
portion thereof) that is not depreciated
under § 168 under the taxpayer's present
method of accounting and, if applicable,
under the taxpayer's proposed method of
accounting;
(iii) Any property subject to a general
asset account election under § 168(i)(4)
and the regulations thereunder (but see
section 6.31 of this APPENDIX for mak-
ing a change for dispositions of tangible
depreciable assets subject to a general as-
set account election);
(iv) Any multiple buildings, condomin-
ium units, or cooperative units that are
treated as a single building under the
taxpayer's present method of account-
ing, or will be treated as a single build-
ing under the taxpayer's proposed
method of accounting, pursuant to
§ 1.1250-1(a)(2)(ii);
(v) Any disposition of a portion of an
asset for which a partial disposition elec-
tion under Prop. Reg. § 1.168(i)-8(d)(2)
is required but for which the taxpayer did
not make such election in accordance with
Prop. Reg. § 1.168(i)-8(d)(2)(ii) or (iii),
as applicable (but see section 6.33 of this
APPENDIX for making a late partial dis-
position election and section 6.35 of this
APPENDIX for making a partial disposi-
tion election pursuant to Prop. Reg.
§ 1.168(i)-8(d)(2)(iii)); or
(vi) Any demolition of a structure to
which § 280B and § 1.280B-1 apply.
(3) Section 6.32 of the APPENDIX of
Rev. Proc. 2011-14 is modified to read as
follows:
#### 6.32 General asset account elections (section 168(i)(4); § 1.168(i)-1;
§ 1.168(i)-IT, and Prop. Reg.
§ 1.168(i)-1).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that wants to
make:
(i) A late general asset account election
under § 168(i)(4) and § 1.168(i)-1,
§ 1.168(i)-1T, or Prop. Reg. § 1.168(i)-1,
for one or more items of property depre-
ciated under § 168 (MACRS property)
that is placed in service by the taxpayer in
a taxable year beginning before January 1,
2012, and owned by the taxpayer at the
beginning of the year of change. This
change also may affect whether the tax-
payer must capitalize amounts paid to re-
store a unit of property (as determined
under § 1.263(a)-3T(e) or (f), or
§ 1.263(a)-3(e) or (f), as applicable) un-
der § 1.263(a)-3T(i) or § 1.263(a)-3(k),
as applicable;
(ii) A late election to recognize gain or
loss upon the disposition of all of the
assets, or the last asset, in a general asset
account in accordance with § 1.168(i)-
1T(e)(3)(ii). This change also may affect
whether the taxpayer must capitalize
amounts paid to restore a unit of property
(as determined under § 1.263(a)-3T(e) or
(f), or § 1.263(a)-3(e) or (f), as applica-
ble) under § 1.263(a)-3T(i) or § 1.263(a)-
3(k), as applicable;
(iii) A late election to recognize gain or
loss upon the disposition of all of the
assets, the last asset, or the remaining por-
tion of the last asset, in a general asset
account in accordance with § 1.168(i)-
1(e)(3)(ii) or Prop. Reg. § 1.168(i)-
1(e)(3)(ii), as applicable. This change also
may affect whether the taxpayer must cap-
italize amounts paid to restore a unit of
property (as determined under § 1.263(a)-
3T(e) or (f), or § 1.263(a)-3(e) or (f), as
applicable) under § 1.263(a)-3T(i) or
§ 1.263(a)-3(k), as applicable;
(iv) For an item of MACRS property
subject to a general asset account election,
a late election to recognize gain or loss
upon the disposition of that item in a
qualifying disposition (as defined in
§ 1.168(i)-1T(e)(3)(iii)(B)) in accordance
with § 1.168(i)-1T(e)(3)(iii). This change
also may affect whether the taxpayer must
capitalize amounts paid to restore a unit of
property (as determined under § 1.263(a)-
3T(e) or (f), or § 1.263(a)-3(e) or (f), as
applicable) under § 1.263(a)-3T(i) or
§ 1.263(a)-3(k), as applicable; or
(v) For an item of MACRS property
subject to a general asset account election,
a late election to recognize gain or loss
upon the disposition of that item in a
qualifying disposition (as defined in
§ 1.168(i)-1(e)(3)(iii)(B) or Prop. Reg.
§ 1.168(i)-1(e)(3)(iii)(B), as applicable)
in accordance with § 1.168(i)-1(e)(3)(iii)
or Prop. Reg. § 1.168(i)-1(e)(3)(iii), as
applicable. This change also may affect
whether the taxpayer must capitalize
amounts paid to restore a unit of property
(as determined under § 1.263(a)-3T(e) or
(f), or § 1.263(a)-3(e) or (f), as applica-
ble) under § 1.263(a)-3T(i) or § 1.263(a)-
3(k), as applicable.
(b) Inapplicability. Because of the
changes made to the general asset account
temporary regulations (§ 1.168(i)-1T) by
§ 1.168(i)-1, the IRS will treat the making
of the late elections specified in section
6.32(1)(a) of this APPENDIX as a change
in method of accounting only for the time
specified in section 6.32(2) of this AP-
PENDIX. Accordingly, this treatment
does not apply to a taxpayer that makes
any election specified in section 6.32(1)(a)
of this APPENDIX before or after the
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time specified in section 6.32(2) of this
APPENDIX, and any such election is not
a change in method of accounting pursu-
ant to § 1.446-1(e)(2)(ii)(d)(3)(iii).
(2) Time for making the change. The
change under section 6.32 of this APPEN-
DIX must be made for any taxable year
beginning on or after January 1, 2012, and
beginning before January 1, 2014.
(3) Scope limitations inapplicable.
(a) In general. The scope limitations in
section 4.02 of this revenue procedure do
not apply to this change.
(b) Concurrent automatic change. If a
taxpayer makes both a change under this
section of this APPENDIX and a change
under section 6.01 of this APPENDIX for
any taxable year beginning on or after
January 1, 2012, and beginning before
January 1, 2014, on a single Form 3115
for the same asset for the same year of
change in accordance with section
6.32(6)(b) of this APPENDIX, the scope
limitations in section 4.02 of this revenue
procedure do not apply to the taxpayer for
either change.
(4) Audit protection limited. If a
method of accounting to be changed is (a)
an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with that change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(5) Manner of making change.
(a) The change specified in section
6.32(1)(a)(i) of this APPENDIX is made
using a modified cut-off method under
which the unadjusted depreciable basis
and the depreciation reserve of the asset as
of the beginning of the year of change are
accounted for using the new method of
accounting. This change requires the gen-
eral asset account to include a beginning
balance for both the unadjusted deprecia-
ble basis and the depreciation reserve. The
beginning balance for the unadjusted de-
preciable basis of each general asset ac-
count is equal to the sum of the unadjusted
depreciable bases as of the beginning of
the year of change for all assets included
in that general asset account. The begin-
ning balance of the depreciation reserve of
each general asset account is equal to the
sum of the greater of the depreciation al-
lowed or allowable as of the beginning of
the year of change for all assets included
in that general asset account.
(b) The change specified in section
6.32(1)(a)(ii), (iii), (iv), or (v) of this AP-
PENDIX is made with a § 481(a) adjust-
ment.
(c) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 24, 25, and 26; and
(vi) Schedule E, lines 3, 4a, 4b, and 4c.
(d) A taxpayer (including a qualifying
taxpayer) making the change specified in
section 6.32(1)(a)(i), (iv), or (v) of this
APPENDIX must attach to its Form 3115
a statement with a description of the as-
set(s) to which this change applies (for
example, all 5-year property placed in ser-
vice in 2009 in Holmdel, New Jersey fa-
cility (for a change specified in section
6.32(1)(a)(i) of this APPENDIX) or one
desk costing $2,000 in 2007 General Asset
Account #1 (for a change specified in sec-
tion 6.32(1)(a)(iv) of this APPENDIX)).
(e) A taxpayer (including a qualifying
taxpayer) making the change specified in
section 6.32(1)(a)(ii) or (iii) of this AP-
PENDIX must attach to its Form 3115 a
statement with a description of the general
asset account(s) to which this change ap-
plies (for example, General Asset Account
#2 - all 2008 5-year property additions).
(f) A taxpayer (including a qualifying
taxpayer) making the change specified in
section 6.32(1)(a)(i) of this APPENDIX
must attach to its Form 3115 a statement
providing that the taxpayer agrees to the
following additional terms and conditions:
(i) The taxpayer consents to, and
agrees to apply, all of the provisions of
[Insert, as appropriate, either: § 1.168(i)-1,
§ 1.168(i)-IT, or Prop. Reg. § 1.168(i)-1]
to the assets that are subject to the election
specified in section 6.32(1)(a)(i) of this AP-
PENDIX; and
(ii) Except as provided in [Insert, as ap-
propriate, either: § 1.168(i)-1(c)(1)(iii)(A),
(e)(3),(g), or (h), § 1.168(i)-IT(c)(1)(ii)(A),
(e)(3), (g), or (h), or Prop. Reg. § 1.168(i)-
1(c)(1)(iii)(A), (e)(3), (g), or (h)], the elec-
tion made by the taxpayer under section
6.32(1)(a)(i) of this APPENDIX is irrevoca-
ble and will be binding on the taxpayer for
computing taxable income for the year of
change and for all subsequent taxable years
with respect to the assets that are subject to
this election.
(g) If any asset is public utility property
within the meaning of § 168(i)(10), a tax-
payer (including a qualifying taxpayer)
making this change must attach to its
Form 3115 a statement providing that the
taxpayer agrees to the following addi-
tional terms and conditions:
(i) A normalization method of account-
ing (within the meaning of § 168(i)(9))
will be used for the public utility property
subject to the application;
(ii) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
application; and
(iii) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
the public utility property subject to the
application. This additional term and con-
dition only has to be included in the state-
ment by a taxpayer making the change
specified in section 6.32(1)(a)(ii), (iii),
(iv), or (v) of this APPENDIX.
(6) Concurrent automatic change.
(a) A taxpayer making this change for
more than one asset for the same year of
change should file a single Form 3115 for
all such assets. If the change for more than
one asset included in that Form 3115 is
specified in section 6.32(1)(a) of this AP-
PENDIX, the single Form 3115 should
provide a single net § 481(a) adjustment
for all such changes. If one or more of the
changes specified in section 6.32(1)(a) of
this APPENDIX in that single Form 3115
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generate a negative § 481(a) adjustment
and other changes specified in section
6.32(1)(a) of this APPENDIX in that same
Form 3115 generate a positive § 481(a)
adjustment, the taxpayer may provide a
single negative § 481(a) adjustment for all
such changes that are included in that
Form 3115 generating such negative ad-
justment and a single positive § 481(a)
adjustment for all such changes that are
included in that Form 3115 generating
such positive adjustment.
(b) A taxpayer making a change under
section 6.32(1)(a)(ii), (iii), (iv), or (v) of
this APPENDIX and any change listed in
this section 6.32(6)(b)(i)-(ix) of the AP-
PENDIX for the same year of change
should file a single Form 3115 for all such
changes and must enter the designated
automatic accounting method change
numbers for the changes on the appropri-
ate line on the Form 3115. This section
6.32(6)(b) of the APPENDIX applies only
if all of these changes are made for any
taxable year beginning on or after January
1, 2012, and beginning before January 1,
2014. For guidance on filing a single ap-
plication for two or more changes, see
section 6.02(1)(b)(ii) of this revenue pro-
cedure. The listed changes are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.28(3)(b)
of this APPENDIX;
(iii) A change under section 6.29 of
this APPENDIX;
(iv) A change under section 6.30 of this
APPENDIX;
(v) A change under section 6.31 of this
APPENDIX;
(vi) A change under section 6.37(4)(b)
of this APPENDIX;
(vii) A change under section 6.38 of
this APPENDIX;
(viii) A change under section 6.39 of
this APPENDIX; and
(ix) A change under section 6.40 of this
APPENDIX.
(7) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 6.32 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT (Ogden
copy), in lieu of filing the national office
copy, no earlier than the first day of the
year of change and no later than the date
the taxpayer files the original Form 3115
with its federal income tax return for the
year of change. See sections 6.02(3)(a)(ii)(B)
(providing the general rules) and 6.02(7)(b)
(providing the mailing address) of this rev-
enue procedure.
(8) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.32 of this AP-
PENDIX is "180." See section 6.02(4) of
this revenue procedure.
(9) Contact information. For further in-
formation regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
(4) Section 6.33 of the APPENDIX of
Rev. Proc. 2011-14 is modified to read as
follows:
6.33 Late partial disposition election
(section 168; § 1.168(i)-8 and Prop.
Reg. § 1.168(i)-8).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that wants to
make a late partial disposition election un-
der § 1.168(i)-8(d)(2)(i) or Prop. Reg.
§ 1.168(i)-8(d)(2)(i) for the disposition of a
portion of an asset (as determined under
§ 1.168(i)-8(c)(4) or Prop. Reg. § 1.168(i)-
8(c)(4), as applicable) by the taxpayer. This
change includes the late partial disposition
election specified in § 1.168(i)-8(d)(2)(i)
that is made pursuant to § 1.168(i)-
8(d)(2)(iv)(B) or in Prop. Reg. § 1.168(i)-
8(d)(2)(i) that is made pursuant to Prop.
Reg. § 1.168(i)-8(d)(2)(iv)(B). This change
also may affect whether the taxpayer must
capitalize amounts paid to restore a unit of
property (as determined under § 1.263(a)-
3T(e) or (f), or § 1.263(a)-3(e) or (f), as
applicable) under §1.263(a)-3T(i) or
§ 1.263(a)-3(k), as applicable.
(b) Inapplicability. This change does
not apply to the following:
(i) A taxpayer making a late partial
disposition election under Prop. Reg.
§ 1.168(i)-8(d)(2)(i) but does not apply
all the provisions of Prop. Reg.
§ 1.168(i)-8;
(ii) Any asset of which the disposed
portion was a part that is not owned by the
taxpayer at the beginning of the year of
change;
(iii) A taxpayer making any late elec-
tion specified in section 6.33(1)(a) of this
APPENDIX after the time specified in
section 6.33(3) of this APPENDIX. Any
such late election is not a change in
method of accounting pursuant to
§ 1.446-1(e)(2)(ii)(d)(3)(iii); or
(iv) The partial disposition election
specified in § 1.168(i)-8(d)(2)(i) that is
made pursuant to § 1.168(i)-8(d)(2)(iii)
or in Prop. Reg. § 1.168(i)-8(d)(2)(i) that
is made pursuant to Prop. Reg. § 1.168(i)-
8(d)(2)(iii), as applicable (but see section
6.35 of this APPENDIX for making this
change).
(2) Change in method of accounting.
The IRS will treat the making of the late
election specified in section 6.33(1) of this
APPENDIX as a change in method of
accounting only for the time specified in
section 6.33(3) of this APPENDIX.
(3) Time for making the change.
(a) If the change under this section 6.33
of the APPENDIX is made pursuant to
§ 1.168(i)-8(d)(2)(i), this change must be
made for any taxable year beginning on or
after January 1, 2012, and beginning be-
fore January 1, 2015.
(b) If the change under this section
6.33 of the APPENDIX is made pursuant
to Prop. Reg. § 1.168(i)-8(d)(2)(i), this
change must be made for any taxable year
beginning on or after January 1, 2012, and
beginning before January 1, 2014.
(c) If the change under this section 6.33
of the APPENDIX is made pursuant to
§ 1.168(i)-8(d)(2)(iv)(B) or Prop. Reg.
§ 1.168(i)-8(d)(2)(iv)(B), as applicable,
this change must be made for the first or
second taxable year succeeding the appli-
cable taxable year (as defined in
§ 1.168(i)-8(d)(2)(iv) or Prop. Reg.
§ 1.168(i)-8(d)(2)(iv), as applicable),
pursuant to § 1.168(i)-8(d)(2)(iv)(B) or
Prop. Reg. § 1.168(i)-8(d)(2)(iv)(B), as
applicable.
(4) Scope limitations inapplicable.
(a) In general. The scope limitations in
section 4.02 of this revenue procedure do
not apply to this change.
(b) Concurrent automatic change. If a
taxpayer makes both a change under this
section of this APPENDIX and a change
under section 6.01 of this APPENDIX for
any taxable year specified in section
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6.33(3) of this APPENDIX, as applicable,
on a single Form 3115 for the same asset
for the same year of change in accordance
with section 6.33(7)(b) of this APPEN-
DIX, the scope limitations in section 4.02
of this revenue procedure do not apply to
the taxpayer for either change.
(5) Audit protection limited. If a
method of accounting to be changed is (a)
an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with that change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(6) Manner of making change.
(a) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 25 and 26; and
(vi) Schedule E, line 3.
(b) A taxpayer (including a qualifying
taxpayer) making this change must:
(i) Apply § 1.168(i)-8(h)(1) and (3) or
Prop. Reg. § 1.168(i)-8(h)(1) and (3), as
applicable (accounting for asset disposed
of);
(ii) If the asset (as determined under
§ 1.168(i)-8(c)(4) or Prop. Reg.
§ 1.168(i)-8(c)(4), as applicable) of
which the disposed portion is a part is
properly included in one of the asset
classes 00.11 through 00.4 of Rev. Proc.
87-56, 1987-2 C.B. 674, classify the re-
placement portion of such asset under the
same asset class as the disposed portion of
the asset in the taxable year in which the
replacement portion is placed in service
by the taxpayer;
(iii) If the taxpayer's present method of
accounting is not in accord with
§ 1.168(i)-8(c)(4) or Prop. Reg.
§ 1.168(i)-8(c)(4), as applicable (determi-
nation of asset disposed of), change to the
appropriate asset as determined under
§ 1.168(i)-8(c)(4) or Prop. Reg.
§ 1.168(i)-8(c)(4), as applicable;
(iv) If the taxpayer continues to deduct
depreciation for the disposed portion of
the asset (as determined under § 1.168(i)-
8(c)(4) or Prop. Reg. § 1.168(i)-8(c)(4),
as applicable) under the taxpayer's pres-
ent method of accounting, change from
depreciating such disposed portion to rec-
ognizing gain or loss for the disposed por-
tion or, if § 280B and § 1.280B-1 apply to
the disposition, change from depreciating
such disposed portion to capitalizing the
loss sustained on account of the demoli-
tion to the land on which the demolished
structure was located;
(v) If the taxpayer recognized a gain or
loss under § 1.168(i)-1T or § 1.168(i)-8T
for the disposed portion of the asset in a
taxable year prior to the year of change,
recognize gain or loss for such disposed
portion under § 1.168(i)-8 or Prop. Reg.
§ 1.168(i)-8, as applicable; and
(vi) If any asset is public utility prop-
erty within the meaning of § 168(i)(10),
attach to its Form 3115 a statement pro-
viding that the taxpayer agrees to the fol-
lowing additional terms and conditions:
(A) A normalization method of ac-
counting (within the meaning of
§ 168(i)(9)) will be used for the public
utility property subject to the application;
(B) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
application; and
(C) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
the public utility property subject to the
application.
(7) Concurrent automatic change.
(a) A taxpayer making this change for
more than one asset for the same year of
change should file a single Form 3115 for
all such assets. If the change for more than
one asset included in that Form 3115 is
specified in section 6.33(1) of this AP-
PENDIX, the single Form 3115 should
provide a single net § 481(a) adjustment
for all such changes. If one or more of the
changes specified in section 6.33(1) of this
APPENDIX in that single Form 3115 gen-
erate a negative § 481(a) adjustment and
other changes specified in section 6.33(1)
of this APPENDIX in that same Form
3115 generate a positive § 481(a) adjust-
ment, the taxpayer may provide a single
negative § 481(a) adjustment for all such
changes that are included in that Form
3115 generating such negative adjustment
and a single positive § 481(a) adjustment
for all such changes that are included in
that Form 3115 generating such positive
adjustment.
(b) A taxpayer making this change and
any change listed in this section
6.33(7)(b)(i)-(ii) of the APPENDIX for the
same year of change should file a single
Form 3115 for all such changes and must
enter the designated automatic accounting
method change numbers for the changes on
the appropriate line on the Form 3115. This
section 6.33(7)(b) of the APPENDIX ap-
plies only if all of these changes are made
for any taxable year specified in section
6.33(3) of this APPENDIX, as applicable
(for example, for a taxable year beginning
on or after January 1, 2012, and beginning
before January 1, 2015 if the change under
this section 6.33 of the APPENDIX is made
pursuant to § 1.168(i)-8(d)(2)(i)). For guid-
ance on filing a single application for two or
more changes, see section 6.02(1)(b)(ii) of this
revenue procedure. The listed changes are:
(i) A change under section 6.01 of this
APPENDIX; and
(ii) A change under section 6.34 of this
APPENDIX.
(8) Examples. The following examples
illustrate the changes that may made be
under this section 6.33.
(a) Example 1. (i) X, a calendar year
taxpayer, acquired and placed in service a
truck in 2009. The truck is described in
asset class 00.242 of Rev. Proc. 87-56. X
depreciates the truck under § 168. X does
not reasonably expect to replace the en-
gine of the truck more than once during its
class life of 6 years. The engine is a major
component of the truck under § 1.263(a)-
3T(i)(1)(vi).
(ii) In 2012, X replaced the engine of
the truck. X applied § 1.168(i)-8T and
§ 1.263(a)-3T for its taxable year ended
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December 31, 2012. Because the truck is
the asset for disposition purposes, X did
not recognize a loss on the retirement of
the engine under § 1.168(i)-8T and contin-
ues to depreciate the original engine. Fur-
ther, X capitalized the new engine as an
improvement, classified the new engine un-
der asset class 00.242 of Rev. Proc. 87-56,
and depreciates the new engine under § 168.
(iii) X decides to apply § 1.168(i)-8
beginning with its taxable year ending De-
cember 31, 2013. X also decides to make
the late partial disposition election under
this section 6.33 for the truck's original
engine that X retired in 2012. Although
the truck is the asset for disposition pur-
poses under § 1.168(i)-8(c)(4)(ii)(C), the
partial disposition rule under § 1.168(i)-
8(d)(2)(i) results in the retirement of the
engine being a disposition under
§ 1.168(i)-8(b)(2). Thus, in accordance
with section 6.33 of this APPENDIX, X
may file a Form 3115 with its 2013 federal
income tax return to make the late dispo-
sition election for the engine and change
from depreciating the original engine to
recognizing a loss upon its retirement.
(b) Example 2. (i) Y, a calendar year
taxpayer, acquired and placed in service a
building and its structural components in
2000. Y depreciates this building and its
structural components under § 168. The
roof is a structural component of the
building. Y replaced the entire roof in
2010. On its federal income tax return for
the taxable year ended December 31,
2010, Y did not recognize a loss on the
retirement of the original roof and contin-
ued to depreciate the original roof. Y also
capitalized the cost of the replacement
roof and has been depreciating that roof
under § 168 since June 2010. The adjusted
depreciable basis of the original roof at
the time of its retirement in 2010 (taking
into account the applicable convention) is
$11,000, and Y claimed depreciation of
$1,000 for such roof after its retirement
(taking into account the applicable con-
vention) and before the 2012 taxable year.
(ii) In accordance with § 1.168(i)-
8T(c)(4)(ii)(A) and (B) and section
6.29(3)(a) and (b) of the APPENDIX to
Rev. Proc. 2011-14, as modified by Rev.
Proc. 2012-20, 2012-14 I.R.B. 700, Y
filed with its federal income tax return for
the taxable year ended December 31,
2012, a Form 3115 to treat the building as
an asset and each structural component of
the building as a separate asset for dispo-
sition purposes and also to change from
depreciating the original roof to recogniz-
ing a loss upon its retirement. The amount
of the net negative § 481(a) adjustment on
this Form 3115 is $10,000 (adjusted de-
preciable basis of $11,000 for the original
roof at the time of its retirement (taking
into account the applicable convention)
less depreciation of $1,000 claimed for
such roof after its retirement (taking into
account the applicable convention) and
before the 2012 taxable year).
(iii) Y complies with § 1.168(i)-8 be-
ginning with its taxable year ending De-
cember 31, 2014. Y also decides to make
the late partial disposition election under
this section 6.33 for the building's original
roof that Y retired in 2010. Although the
original building (including its original
roof and other original structural compo-
nents) is the asset for disposition purposes
under § 1.168(i)-8(c)(4)(ii)(A), the partial
disposition rule under § 1.168(i)-
8(d)(2)(i) results in the retirement of the
original roof being a disposition under
§ 1.168(i)-8(b)(2). Thus, in accordance
with section 6.33 of this APPENDIX, Y
may file a Form 3115 with its 2014 federal
income tax return to make a late partial
disposition election for the original roof,
treat the original building (including its
original roof and other original structural
components) as an asset and the replace-
ment roof to the building as a separate
asset for disposition purposes, and recog-
nize a loss upon the retirement of the
original roof under § 1.168(i)-8.
(iv) The computation of the net § 481
adjustment for this change is computed as
follows:
Net loss on retirement of $10,000
original roof on 2012 return
under § 1.168(i)-8T
Net loss on retirement of (10,000)
original roof
under § 1.168(i)-8
Net § 481(a) adjustment
for the roof
$ 0
(9) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 6.33 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT (Ogden
copy), in lieu of filing the national office
copy, no earlier than the first day of the
year of change and no later than the date
the taxpayer files the original Form 3115
with its federal income tax return for the
year of change. See sections 6.02(3)(a)(ii)(B)
(providing the general rules) and
6.02(7)(b) (providing the mailing address)
of this revenue procedure.
(10) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.33 of this AP-
PENDIX is "196." See section 6.02(4) of
this revenue procedure.
(11) Contact information. For further
information regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
(5) Section 6.34 of the APPENDIX of
Rev. Proc. 2011-14 is modified to read as
follows:
6.34 Revocation of a general asset
account election (section 168;
§ 1.168(i)-1, § 1.168(i)-1T, and Prop.
Reg. § 1.168(i)-1).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that wants to
revoke its general asset account election:
(i) Made under section 6.32(1)(a)(i) of
this APPENDIX for one or more items of
property depreciated under § 168
(MACRS property) included in the gen-
eral asset account. This change also may
affect whether the taxpayer must capital-
ize amounts paid to restore a unit of prop-
erty (as determined under § 1.263(a)-
3T(e) or (f), or § 1.263(a)-3(e) or (f), as
applicable) under § 1.263(a)-3T(i) or
§ 1.263(a)-3(k), as applicable; or
(ii) Made under § 1.168(i)-1,
§ 1.168(i)-1T, or Prop. Reg. § 1.168(i)-1
for one or more items of MACRS prop-
erty placed in service by the taxpayer in a
taxable year beginning on or after January
1, 2012, and beginning before January 1,
2014. This change also may affect
whether the taxpayer must capitalize
amounts paid to restore a unit of property
(as determined under § 1.263(a)-3T(e) or
(f), or § 1.263(a)-3(e) or (f), as applica-
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ble) under § 1.263(a)-3T(i) or § 1.263(a)-
3(k), as applicable.
(b) Inapplicability. Because of the
changes made to the general asset account
temporary regulations (§ 1.168(i)-1T) by
§ 1.168(i)-1, the IRS will treat the revo-
cation of the elections specified in section
6.34(1)(a) of this APPENDIX as a change
in method of accounting only for the time
specified in section 6.34(2) of this AP-
PENDIX. Accordingly, this treatment
does not apply to a taxpayer that makes
any revocation specified in section
6.34(1)(a) of this APPENDIX before or
after the time specified in section 6.34(2)
of this APPENDIX. Any such revocation
is not a change in method of accounting
pursuant to § 1.446-1(e)(2)(ii)(d)(3)(iii).
The elections specified in section 6.34(1)(a)
of this APPENDIX are irrevocable except
as provided in § 1.168(i)-1(c)(1)(ii)(A),
(e)(3), (g), or (h), § 1.168(i)-1T(c)(1)(ii)(A),
(e)(3), (g), or (h), or Prop. Reg. § 1.168(i)-
1(c)(1)(ii)(A), (e)(3), (g), or (h), as applicable.
(2) Time for making the change. The
change under section 6.34 of this APPEN-
DIX must be made for any taxable year
beginning on or after January 1, 2012, and
beginning before January 1, 2015.
(3) Scope limitations inapplicable.
(a) In general. The scope limitations in
section 4.02 of this revenue procedure do
not apply to this change.
(b) Concurrent automatic change. If a
taxpayer makes both a change under this
section of this APPENDIX and a change
under section 6.01 of this APPENDIX for
any taxable year beginning on or after
January 1, 2012, and beginning before
January 1, 2015, on a single Form 3115
for the same asset for the same year of
change in accordance with section
6.34(7)(b) of this APPENDIX, the scope
limitations in section 4.02 of this revenue
procedure do not apply to the taxpayer for
either change. If a taxpayer makes both a
change under this section of this APPEN-
DIX and a change under section 6.01 of
this APPENDIX for any taxable year be-
ginning on or after January 1, 2012, and
beginning before January 1, 2014, on a
single Form 3115 for the same asset for
the same year of change in accordance
with section 6.34(7)(c) of this APPEN-
DIX, the scope limitations in section 4.02
of this revenue procedure do not apply to
the taxpayer for either change.
(4) Audit protection limited. If a
method of accounting to be changed is (a)
an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with that change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(5) Section 481(a) adjustment period.
A taxpayer making this change must take
the entire amount of the § 481(a) adjust-
ment into account in computing taxable
income for the year of change.
(6) Manner of making change.
(a) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 25 and 26; and
(vi) Schedule E, lines 3, 4a, 4b, and 4c.
(b) A taxpayer (including a qualifying
taxpayer) making this change must:
(i) Attach to its Form 3115 a statement
with a description of the asset(s) to which
this change applies (for example, all general
asset accounts established pursuant to a
Form 3115 filed under section 6.32(1)(a)(i)
of this APPENDIX for the year of change
beginning January 1, 2012 (for a change
specified in section 6.34(1)(a)(i) of this AP-
PENDIX); one desk costing $2,000 in 2012
General Asset Account #1 (for a change
specified in section 6.34(1)(a)(ii) of this AP-
PENDIX));
(ii) Include the asset(s) that were in the
general asset account(s) at the end of the
taxable year immediately preceding the
year of change in a single asset account or
a multiple asset account in accordance
with § 1.168(i)-7. The single asset ac-
count or the multiple asset account must
include a beginning balance for both the
unadjusted depreciable basis and the de-
preciation reserve. For a single asset ac-
count, the beginning balance for the un-
adjusted depreciable basis of that single
asset account is equal to the unadjusted
depreciable basis as of the beginning of
the year of change for the asset included
in that single asset account and the begin-
ning balance of the depreciation reserve of
that single asset account is the greater of
the depreciation allowed or allowable as
of the beginning of the year of change for
the asset included in that single asset ac-
count. For a multiple asset account, the
beginning balance for the unadjusted de-
preciable basis of that multiple asset ac-
count is equal to the sum of the unadjusted
depreciable bases as of the beginning of
the year of change for all assets included
in that multiple asset account and the be-
ginning balance of the depreciation re-
serve of that multiple asset account is
equal to the sum of the greater of the
depreciation allowed or allowable as of
the beginning of the year of change for all
assets included in that multiple asset ac-
count; and
(iii) If any asset is public utility prop-
erty within the meaning of § 168(i)(10),
attach to its Form 3115 a statement pro-
viding that the taxpayer agrees to the fol-
lowing additional terms and conditions:
(A) A normalization method of ac-
counting (within the meaning of
§ 168(i)(9)) will be used for the public
utility property subject to the application;
(B) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
application; and
(C) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
the public utility property subject to the
application.
(7) Concurrent automatic change.
(a) A taxpayer making this change for
more than one asset for the same year of
change should file a single Form 3115 for
all such assets. If the change for more than
one asset included in that Form 3115 is
specified in section 6.34(1)(a) of this AP-
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PENDIX, the single Form 3115 must pro-
vide a single net § 481(a) adjustment for
all such changes.
(b) A taxpayer making this change and
any change listed in this section
6.34(7)(b)(i)-(iv) of the APPENDIX for
the same year of change should file a
single Form 3115 for all such changes and
must enter the designated automatic ac-
counting method change numbers for the
changes on the appropriate line on the
Form 3115. This section 6.34(7)(b) of the
APPENDIX applies only if all of these
changes are made for any taxable year
beginning on or after January 1, 2012, and
beginning before January 1, 2015. For
guidance on filing a single application for
two or more changes, see section
6.02(1)(b)(ii) of this revenue procedure.
The listed changes are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.33 of this
APPENDIX made pursuant to § 1.168(i)-
8(d)(2)(i);
(iii) A change under section 6.38 of
this APPENDIX; and
(iv) A change under section 6.39 of this
APPENDIX.
(c) A taxpayer making this change, any
change listed in section 6.34(7)(b)(i), (iii),
or (iv) of the APPENDIX, and any change
listed in this section 6.34(7)(c)(i)-(iii) of
the APPENDIX for the same year of
change should file a single Form 3115 for
all such changes and must enter the des-
ignated automatic accounting method
change numbers for the changes on the
appropriate line on the Form 3115. This
section 6.34(7)(c) of the APPENDIX ap-
plies only if all of these changes are made
for any taxable year beginning on or after
January 1, 2012, and beginning before
January 1, 2014. For guidance on filing a
single application for two or more
changes, see section 6.02(1)(b)(ii) of this
revenue procedure. The listed changes
are:
(i) A change under section 6.29 of this
APPENDIX;
(ii) A change under section 6.30 of this
APPENDIX; and
(iii) A change under section 6.33 of
this APPENDIX made pursuant to Prop.
Reg. § 1.168(i)-8(d)(2)(i).
(8) Examples. The following examples
illustrate the changes that may made be
under this section 6.34.
(a) Example 1. (i) On its federal tax
return for the taxable year ended Decem-
ber 31, 2012, X made a general asset
account election under § 1.168(i)-1T to
apply § 1.168(i)-1T to all of its assets
placed in service during 2012. No such
assets were disposed of during 2012. X
decides to apply §§ 1.168(i)-1 and
1.168(i)-8 for its taxable year ending De-
cember 31, 2013. Because of the change
in the definition of a qualifying disposi-
tion under § 1.168(i)-1(e)(3)(iii), X does
not want its assets placed in service during
2012 in general asset accounts. In accor-
dance with this section 6.34, X files with
its federal tax return for the taxable year
ending December 31, 2013, a Form 3115
to revoke the general asset account elec-
tion for all assets placed in service during
2012 and include such assets in one mul-
tiple asset account in accordance with
§ 1.168(i)-7. Because the adjusted depre-
ciable basis of the assets is not changed as
a result of this change, a § 481(a) adjust-
ment is neither required nor permitted.
(b) Example 2. (i) Y, a calendar year
taxpayer, acquired and placed in service
three used trucks in 2011. The trucks are
described in asset class 00.242 of Rev.
Proc. 87-56, 1987-2 C.B. 674. Of the
three trucks, one truck costs $20,000 and
the other two trucks cost a total of
$30,000. Y depreciates the trucks under
§ 168. In 2012, Y sold the truck that cost
$20,000 to an unrelated party for $12,000.
The adjusted depreciable basis of the
truck at the time of its disposition (taking
into account the applicable convention) is
$12,800 (cost of $20,000 less depreciation
of $7,200 for 2011 and 2012).
(ii) In accordance with § 1.168(i)-1T
and section 6.32(1)(a)(i) of the APPEN-
DIX to Rev. Proc. 2011-14, as modified
by Rev. Proc. 2012-20, 2012-14 I.R.B.
700, Y filed with its federal tax return for
the taxable year ended December 31,
2012, a Form 3115 to make a late general
asset account election to include the three
trucks in one general asset account. Because
a sales transaction is a qualifying disposition
under § 1.168(i)-1T(e)(3)(iii)(B), Y also
elected to apply § 1.168(i)-1T(e)(3)(iii) for
the sale of the truck in 2012. As a result,
Y removed this truck from the general
asset account and, on its 2012 federal tax
return, recognized a loss of $800 under
§ 1.168(i)-8T (sales proceeds of $12,000
less the adjusted depreciable basis of
$12,800 for the truck).
(iii) Y complies with §§ 1.168(i)-1 and
1.168(i)-8 beginning with its taxable year
ending December 31, 2014. Because a
sales transaction is not a qualifying dispo-
sition under § 1.168(i)-1(e)(3)(iii)(B), Y
should have recognized all of the sales
proceeds of $12,000 from the sale of the
truck in 2012 as ordinary income and con-
tinued to deduct depreciation for this truck
in the general asset account. As a result
and in accordance with sections 6.34 and
6.39(4)(i) of this APPENDIX, Y files with
its 2014 federal tax return a Form 3115 to
revoke the general asset account election
for the three trucks placed in service in
2011, include the two unsold trucks in one
multiple asset account in accordance with
§ 1.168(i)-7, and recognize the loss of
$800 upon the sale of the truck in 2012
under § 1.168(i)-8.
(iv) The computation of the § 481 adjust-
ment for this change is computed as follows:
Loss on sale of truck on
$ 800
2012 return under § 1.168(i)-8T
Loss on sale of truck under (800) § 1.168(i)-8
Net § 481(a) adjustment $ 0 for the asset
(c) Example 3. (i) Z, a calendar year
taxpayer, acquired and placed in service a
building and its structural components in
2000. Z depreciates this building and its
structural components under § 168. The
roof is a structural component of the
building. Z replaced the entire roof in
2010. On its federal tax return for the
taxable year ended December 31, 2010, Z
did not recognize a loss on the retirement
of the original roof and continued to de-
preciate the original roof. Z also capital-
ized the cost of the replacement roof and
has been depreciating this roof under
§ 168 since June 2010. The adjusted de-
preciable basis of the original roof at the
time of its retirement in 2010 (taking into
account the applicable convention) is
$11,000, and Z claimed depreciation of
$1,000 for such roof after its retirement
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(taking into account the applicable con-
vention) and before the 2012 taxable year.
Also the 12-month allowable depreciation
deduction for the original roof is $500 for
the 2012 taxable year.
(ii) In accordance with § 1.168(i)-1T
and section 6.32(1)(a) of the APPENDIX
to Rev. Proc. 2011-14, as modified by
Rev. Proc. 2012-20, 2012-14 I.R.B. 700,
Z filed with its federal tax return for the
taxable year ended December 31, 2012, a
Form 3115 to: (1) make a late general
asset account election to include the build-
ing (including its structural components)
placed in service in 2000 in one general
asset account and the replacement roof in
a separate general asset account; and (2)
make a late qualifying disposition election
for the retirement of the original roof in
2010. As a result, Z removed the original
roof from the general asset account and
reported a net negative § 481(a) adjust-
ment on this Form 3115 of $10,000 (ad-
justed depreciable basis of $11,000 for the
original roof at the time of its retirement
(taking into account the applicable con-
vention) less depreciation of $1,000
claimed for such roof after its retirement
(taking into account the applicable con-
vention) and before the 2012 taxable
year).
(iii) Z decides to apply §§ 1.168(i)-1
and 1.168(i)-8 for its taxable year ending
December 31, 2013, but decides not to
make any late partial disposition election
under section 6.33 of this APPENDIX. In
accordance with sections 6.34 and
6.38(4)(a) of this APPENDIX, Z files a
Form 3115 with its 2013 federal income
tax return to revoke the general asset ac-
count election for the building (including
its structural components) placed in ser-
vice in 2000 and for the replacement roof,
and to change to treating the building (in-
cluding its original roof and other original
structural components) placed in service
in 2000 as an asset and the replacement
roof as a separate asset for disposition
purposes. The net positive § 481(a) adjust-
ment for this change is $9,500 (net loss of
$10,000 claimed on the 2012 return for
the retirement of the original roof less
depreciation of $500 for the original roof
for 2012) and is included in Z's taxable
income for 2013.
(9) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 6.34 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT (Ogden
copy), in lieu of filing the national office
copy, no earlier than the first day of the
year of change and no later than the date the
taxpayer files the original Form 3115 with
its federal income tax return for the year of
change. See sections 6.02(3)(a)(ii)(B) (pro-
viding the general rules) and 6.02(7)(b)
(providing the mailing address) of this rev-
enue procedure.
(10) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.34 of this AP-
PENDIX is "197." See section 6.02(4) of
this revenue procedure.
(11) Contact information. For further
information regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
(6) Section 6.35 of the APPENDIX of
Rev. Proc. 2011-14 is modified to read as
follows:
6.35 Partial dispositions of tangible
depreciable assets to which the IRS's
adjustment pertains (section 168;
§ 1.168(i)-8 and Prop. Reg. § 1.168(i)-8).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that is de-
scribed in § 1.168(i)-8(d)(2)(iii) or Prop.
Reg. § 1.168(i)-8(d)(2)(iii) and, pursuant
to § 1.168(i)-8(d)(2)(iii) or Prop. Reg.
§ 1.168(i)-8(d)(2)(iii), that wants to make
the partial disposition election specified in
§ 1.168(i)-8(d)(2)(i) or Prop. Reg.
§ 1.168(i)-8(d)(2)(i) to the disposition of
a portion of an asset to which the IRS's
adjustment (as described in § 1.168(i)-
8(d)(2)(iii) or Prop. Reg. § 1.168(i)-
8(d)(2)(iii), as applicable) pertains.
(b) Inapplicability. This change does
not apply to:
(i) Any asset of which the disposed
portion was a part that is not owned by the
taxpayer at the beginning of the year of
change;
(ii) The partial disposition election
specified in § 1.168(i)-8(d)(2)(i) that is
made pursuant to § 1.168(i)-8(d)(2)(iv)
or specified in Prop. Reg. § 1.168(i)-
8(d)(2)(i) that is made pursuant to Prop.
Reg. § 1.168(i)-8(d)(2)(iv) (but see sec-
tion 6.33 of this APPENDIX for making
this change).
(2) Change in method of accounting.
The IRS will treat the making of the late
election specified in section 6.35(1) of this
APPENDIX as a change in method of
accounting.
(3) Scope limitations inapplicable. The
scope limitations in section 4.02 of this
revenue procedure do not apply to this
change.
(4) Audit protection limited. If a
method of accounting to be changed is (a)
an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with that change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(5) Manner of making change.
(a) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 25 and 26; and
(vi) Schedule E, line 3.
(b) A taxpayer (including a qualifying
taxpayer) making this change must:
(i) Apply § 1.168(i)-8(h)(1) and (3) or
Prop. Reg. § 1.168(i)-8(h)(1) and (3), as
applicable (accounting for asset disposed
of);
(ii) If the asset (as determined under
§ 1.168(i)-8(c)(4) or Prop. Reg.
§ 1.168(i)-8(c)(4), as applicable) of
which the disposed portion is a part is
properly included in one of the asset
classes 00.11 through 00.4 of Rev. Proc.
87-56, 1987-2 C.B. 674, classify the re-
placement portion of such asset under the
same asset class as the disposed portion of
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the asset in the taxable year in which the
replacement portion is placed in service
by the taxpayer;
(iii) If the taxpayer's present method of
accounting is not in accord with § 1.168(i)-
8(c)(4) or Prop. Reg. § 1.168(i)-8(c)(4), as
applicable (determination of asset disposed
of), change to the appropriate asset as deter-
mined under § 1.168(i)-8(c)(4) or Prop.
Reg. § 1.168(i)-8(c)(4), as applicable;
(iv) If the taxpayer continues to deduct
depreciation for the disposed portion of
the asset (as determined under § 1.168(i)-
8(c)(4) or Prop. Reg. § 1.168(i)-8(c)(4),
as applicable) under the taxpayer's pres-
ent method of accounting, change from
depreciating such disposed portion to
recognizing gain or loss for the disposed
portion or, if § 280B and § 1.280B-1
apply to the disposition, change from
depreciating such disposed portion to
capitalizing the loss sustained on ac-
count of the demolition to the land on
which the demolished structure was lo-
cated; and
(v) If any asset is public utility property
within the meaning of § 168(i)(10), attach
a statement to its Form 3115 providing
that the taxpayer agrees to the following
additional terms and conditions:
(A) A normalization method of ac-
counting (within the meaning of
§ 168(i)(9)) will be used for the public
utility property subject to the application;
(B) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
application; and
(C) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
the public utility property subject to the
application.
(6) Concurrent automatic change. A
taxpayer making this change for more
than one asset for the same year of change
should file a single Form 3115 for all such
assets. If the change for more than one
asset included in that Form 3115 is spec-
ified in section 6.35(1) of this APPEN-
DIX, the single Form 3115 should provide
a single net § 481(a) adjustment for all
such changes. If one or more of the
changes specified in section 6.35(1) of this
APPENDIX in that single Form 3115 gen-
erate a negative § 481(a) adjustment and
other changes specified in section 6.35(1)
of this APPENDIX in that same Form
3115 generate a positive § 481(a) adjust-
ment, the taxpayer may provide a single
negative § 481(a) adjustment for all such
changes that are included in that Form
3115 generating such negative adjustment
and a single positive § 481(a) adjustment
for all such changes that are included in
that Form 3115 generating such positive
adjustment.
(7) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 6.35 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT (Ogden
copy), in lieu of filing the national office
copy, no earlier than the first day of the year
of change and no later than the date the
taxpayer files the original Form 3115 with
its federal income tax return for the year of
change. See sections 6.02(3)(a)(ii)(B) (pro-
viding the general rules) and 6.02(7)(b)
(providing the mailing address) of this rev-
enue procedure.
(8) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.35 of this AP-
PENDIX is "198." See section 6.02(4) of
this revenue procedure.
(9) Contact information. For further in-
formation regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
(7) Section 6.37 of the APPENDIX of
Rev. Proc. 2011-14 is modified to read as
follows:
6.37 Permissible to permissible method
of accounting for depreciation of
MACRS property (section 168;
§§ 1.168(i)-1, 1.168(i)-7, and 1.168(i)-
8).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that wants to
make a change in method of accounting
for depreciation that is specified in section
6.37(4) of this APPENDIX for an asset:
(i) to which § 168 applies (MACRS
property);
(ii) for which the present and proposed
methods of accounting are permissible
methods of accounting under § 1.168(i)-1,
§ 1.168(i)-7, or § 1.168(i)-8, as applicable;
and
(iii) that is owned by the taxpayer at the
beginning of the year of change.
(b) Inapplicability. This change does
not apply to any property that is not de-
preciated under § 168 under the taxpay-
er's present and proposed methods of ac-
counting.
(2) Certain scope limitations inappli-
cable.
(a) In general. The scope limitation in
section 4.02(5) of this revenue procedure
does not apply to a taxpayer making this
change.
(b) Special rules.
(i) The scope limitations in section
4.02(1), (2), (3), (4), (6), and (7) of this
revenue procedure do not apply to a tax-
payer making this change for any taxable
year beginning on or after January 1,
2012, and beginning before January 1,
2015.
(ii) If a taxpayer makes both a change
under this section of this APPENDIX and
a change under section 6.01 of this AP-
PENDIX for any taxable year beginning
on or after January 1, 2012, and beginning
before January 1, 2015, on a single Form
3115 for the same asset for the same year
of change in accordance with section
6.37(6)(b) of this APPENDIX, the scope
limitations in section 4.02 of this revenue
procedure do not apply to the taxpayer for
either change. If a taxpayer makes both a
change under this section of this APPEN-
DIX and a change under section 6.01 of
this APPENDIX for any taxable year
beginning on or after January 1, 2012,
and beginning before January 1, 2014,
on a single Form 3115 for the same asset
for the same year of change in accor-
dance with section 6.37(6)(c) of this
APPENDIX, the scope limitations in
section 4.02 of this revenue procedure
do not apply to the taxpayer for either
change.
(3) Audit protection limited. If a
method of accounting to be changed is (a)
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an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with that change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(4) Changes covered. Section 6.37 of
this APPENDIX only applies to the fol-
lowing changes in methods of accounting
for depreciation of MACRS property:
(a) For the items of MACRS property
not subject to a general asset account elec-
tion under § 168(i)(4) and the regulations
thereunder-
(i) a change from single asset accounts
(or item accounts) for specific items of
MACRS property to multiple asset accounts
(or pools) for the same assets, or vice versa,
in accordance with § 1.168(i)-7;
(ii) a change from grouping specific
items of MACRS property in multiple as-
set accounts to a different grouping of the
same assets in multiple asset accounts in
accordance with § 1.168(i)-7(c);
(iii) a change in the method of identi-
fying which assets in multiple asset ac-
counts or which portions of assets have
been disposed of by the taxpayer from the
specific identification method under
§ 1.168(i)-8(g)(1) to the first-in, first-out
(FIFO) method of accounting under
§ 1.168(i)-8(g)(2)(i) or the modified
FIFO method of accounting under
§ 1.168(i)-8(g)(2)(ii);
(iv) a change in the method of identify-
ing which assets in multiple asset accounts
or which portions of assets have been dis-
posed of by the taxpayer from the FIFO
method of accounting under § 1.168(i)-
8(g)(2)(i) or the modified FIFO method of
accounting under § 1.168(i)-8(g)(2)(ii) to
the specific identification method under
§ 1.168(i)-8(g)(1);
(v) a change in the method of identify-
☒
ing which assets in multiple asset accounts
or which portions of assets have been dis-
posed of by the taxpayer from the FIFO
method of accounting under § 1.168(i)-
8(g)(2)(i) to the modified FIFO method of
accounting under § 1.168(i)-8(g)(2)(ii), or
vice versa;
(vi) a change in the method of identi-
fying which mass assets (as defined in
§ 1.168(i)-8(b)(3)) in multiple asset ac-
counts or which portions of mass assets
have been disposed of by the taxpayer
from the specific identification method
under § 1.168(i)-8(g)(1) to a mortality
dispersion table in accordance with
§ 1.168(i)-8(g)(2)(iii);
(vii) a change in the method of identi-
fying which mass assets (as defined in
§ 1.168(i)-8(b)(3)) in multiple asset ac-
counts or which portions of mass assets
have been disposed of by the taxpayer
from the FIFO method of accounting un-
der § 1.168(i)-8(g)(2)(i) or the modified
FIFO method of accounting under
§ 1.168(i)-8(g)(2)(ii) to a mortality dis-
persion table in accordance with
§ 1.168(i)-8(g)(2)(iii);
(viii) a change in the method of iden-
tifying which mass assets (as defined in
§ 1.168(i)-8(b)(3)) in multiple asset ac-
counts or which portions of mass assets
have been disposed of by the taxpayer
from a mortality dispersion table in accor-
dance with § 1.168(i)-8(g)(2)(iii) to the
specific identification method under
§ 1.168(i)-8(g)(1), the FIFO method of
accounting under § 1.168(i)-8(g)(2)(i), or
the modified FIFO method of accounting
under § 1.168(i)-8(g)(2)(ii);
(ix) if § 1.168(i)-8(f)(2) applies (dis-
position of an asset in a multiple asset
account) and it is impracticable from the
taxpayer's records to determine the unad-
justed depreciable basis of the asset dis-
posed of, a change in the method of de-
termining the unadjusted depreciable
basis of all assets in the same multiple
asset account from one reasonable method
to another reasonable method; or
(x) if § 1.168(i)-8(f)(3) applies (dispo-
sition of a portion of an asset) and it is
impracticable from the taxpayer's records
to determine the unadjusted depreciable
basis of the disposed portion of the asset,
a change in the method of determining the
unadjusted depreciable basis of all dis-
posed portions of the asset from one rea-
sonable method to another reasonable
method; and
(b) For the items of MACRS property
subject to a general asset account election
under § 168(i)(4) and the regulations
thereunder-
(i) a change from grouping specific
items of MACRS property in general asset
accounts to a different grouping of the
same assets in general asset accounts in
accordance with § 1.168(i)-1(c);
(ii) a change in the method of identi-
fying which assets or which portions of
assets have been disposed of by the tax-
payer from the specific identification
method under § 1.168(i)-1(j)(2)(i)(A) to
the FIFO method of accounting under
§ 1.168(i)-1(j)(2)(i)(B) or the modified
FIFO method of accounting under
§ 1.168(i)-1(j)(2)(i)(C);
(iii) a change in the method of identi-
fying which assets or which portions of
assets have been disposed of by the tax-
payer from the FIFO method of account-
ing under § 1.168(i)-1(j)(2)(i)(B) or the
modified FIFO method of accounting un-
der § 1.168(i)-1(j)(2)(i)(C) to the specific
identification method under § 1.168(i)-
1(j)(2)(i)(A);
(iv) a change in the method of identi-
fying which assets or which portions of
assets have been disposed of by the tax-
payer from the FIFO method of account-
ing under § 1.168(i)-1(j)(2)(i)(B) to the
modified FIFO method of accounting un-
der § 1.168(i)-1(j)(2)(i)(C), or vice versa;
(v) a change in the method of identify-
ing which mass assets (as defined in
§ 1.168(i)-1(b)(6)) or which portions of
mass assets that are in a separate general
asset account in accordance with § 1.168-
1(c)(2)(ii)(H), have been disposed of by
the taxpayer from the specific identifica-
tion method under § 1.168(i)-1(j)(2)(i)(A)
to a mortality dispersion table in accor-
dance with § 1.168(i)-1(j)(2)(i)(D);
(vi) a change in the method of identi-
fying which mass assets (as defined in
§ 1.168(i)-1(b)(6)) or which portions of
mass assets that are in a separate general
asset account in accordance with § 1.168-
1(c)(2)(ii)(H), have been disposed of by
the taxpayer from the FIFO method of
accounting under § 1.168(i)-1(j)(2)(i)(B)
or the modified FIFO method of account-
ing under § 1.168(i)-1(j)(2)(i)(C) to a
mortality dispersion table in accordance
with § 1.168(i)-1(j)(2)(i)(D);
(vii) a change in the method of identi-
fying which mass assets (as defined in
§ 1.168(i)-1(b)(6)), or which portions of
mass assets that are in a separate general
asset account in accordance with § 1.168-
1(c)(2)(ii)(H), have been disposed of by
the taxpayer from a mortality dispersion
table in accordance with § 1.168(i)-
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1(j)(2)(i)(D) to the specific identification
method under § 1.168(i)-1(j)(2)(i)(A), the
FIFO method of accounting under
§ 1.168(i)-1(j)(2)(i)(B), or the modified
FIFO method of accounting under
§ 1.168(i)-1(j)(2)(i)(C); or
(viii) if § 1.168(i)-1(j)(3) applies (basis
of a disposed asset or a disposed portion
of an asset in a general asset account) and
it is impracticable from the taxpayer's re-
cords to determine the unadjusted depre-
ciable basis of the disposed asset or the
disposed portion of the asset, a change in
the method of determining the unadjusted
depreciable basis of all assets in the same
general asset account from one reasonable
method to another reasonable method.
(5) Manner of making change.
(a) The changes in methods of account-
ing specified in section 6.37(4)(a)(i) and
(ii) and section 6.37(4)(b)(i) of this AP-
PENDIX are made using a modified cut-
off method under which the unadjusted
depreciable basis and the depreciation re-
serve of the asset as of the beginning of
the year of change are accounted for using
the new method of accounting.
(i) If the change specified in section
6.37(4)(a)(i) of this APPENDIX is a
change to a single asset account, the new
single asset account must include a begin-
ning balance for both the unadjusted de-
preciable basis and the depreciation re-
serve of the asset included in that single
asset account.
(ii) If the change specified in section
6.37(4)(a)(i) or (ii) of this APPENDIX is
a change to a multiple asset account (ei-
ther a new one or a different grouping),
the multiple asset account must include a
beginning balance for both the unadjusted
depreciable basis and the depreciation re-
serve. The beginning balance for the un-
adjusted depreciable basis of each multi-
ple asset account is equal to the sum of the
unadjusted depreciable bases as of the be-
ginning of the year of change for all assets
included in that multiple asset account.
The beginning balance of the depreciation
reserve of each multiple asset account is
equal to the sum of the greater of the
depreciation allowed or allowable as of
the beginning of the year of change for all
assets included in that multiple asset ac-
count.
(iii) The change specified in section
6.37(4)(b)(i) of this APPENDIX requires
the general asset account to include a be-
ginning balance for both the unadjusted
depreciable basis and the depreciation re-
serve. The beginning balance for the un-
adjusted depreciable basis of each general
asset account is equal to the sum of the
unadjusted depreciable bases as of the be-
ginning of the year of change for all assets
included in that general asset account. The
beginning balance of the depreciation re-
serve of each general asset account is
equal to the sum of the greater of the
depreciation allowed or allowable as of
the beginning of the year of change for all
assets included in that general asset ac-
count.
(b) The changes in methods of account-
ing specified in section 6.37(4)(a)(iii), (vi),
(ix), and (x) and section 6.37(4)(b)(ii), (v),
and (viii) of this APPENDIX are made us-
ing a cut-off method and apply to disposi-
tions occurring on or after the beginning of
the year of change.
(c) Even though the changes in meth-
ods of accounting specified in section
6.37(4)(a)(iv), (v), (vii), and (viii) and
section 6.37(4)(b)(iii), (iv), (vi), and (vii)
of this APPENDIX are changes from one
permissible method of accounting to an-
other permissible method of accounting,
these changes are made with a § 481(a)
adjustment. For the changes in methods
of accounting specified in section
6.37(4)(b)(iii), (iv), (vi), and (vii) of this
APPENDIX, the § 481(a) adjustment
should be zero unless § 1.168(i)-1(e)(3)
applies to the asset subject to the change.
(d) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 24, 25, and 26; and
(vi) Schedule E, lines 3, 4a, 4b, and 4c.
(e) If any asset subject to this change is
public utility property within the meaning
of § 168(i)(10), a taxpayer (including a
qualifying taxpayer) making this change
must attach to its Form 3115 a statement
providing that the taxpayer agrees to the
following additional terms and conditions:
(i) A normalization method of account-
ing (within the meaning of § 168(i)(9))
will be used for the public utility property
subject to the change;
(ii) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
a change in method of accounting speci-
fied in section 6.37(4)(a)(iv), (v), (vii), or
(viii) or section 6.37(4)(b)(iii), (iv), (vi),
or (vii) of this APPENDIX made for the
public utility property subject to the
change; and
(iii) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
change.
(6) Concurrent automatic change.
(a) A taxpayer making this change for
more than one asset for the same year of
change should file a single Form 3115 for
all such assets. If the change for more than
one asset included in that Form 3115 is
specified in section 6.37(4)(a)(iv), (v),
(vii), or (viii) or section 6.37(4)(b)(iii),
(iv), (vi), or (vii) of this APPENDIX, the
single Form 3115 also should provide a
single net § 481(a) adjustment for all such
changes. If one or more of the changes
specified in section 6.37(4)(a)(iv), (v),
(vii), or (viii) or section 6.37(4)(b)(iii),
(iv), (vi), or (vii) of this APPENDIX in
that single Form 3115 generate a negative
§ 481(a) adjustment and other changes
specified in section 6.37(4)(a)(iv), (v),
(vii), or (viii) or section 6.37(4)(b)(iii),
(iv), (vi), or (vii) of this APPENDIX in
that same Form 3115 generate a positive
§ 481(a) adjustment, the taxpayer may
provide a single negative § 481(a) adjust-
ment for all such changes that are in-
cluded in that Form 3115 generating such
negative adjustment and a single positive
§ 481(a) adjustment for all such changes
that are included in that Form 3115 gen-
erating such positive adjustment.
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(b) A taxpayer making this change and
any change listed in this section
6.37(6)(b)(i)-(iv) of the APPENDIX for
the same year of change should file a
single Form 3115 for all such changes and
must enter the designated automatic ac-
counting method change numbers for the
changes on the appropriate line on the
Form 3115. For guidance on filing a single
application for two or more changes, see
section 6.02(1)(b)(ii) of this revenue pro-
cedure. The listed changes are:
(i) A change under section 6.01 of this
Appendix;
(ii) A change under section 6.38 of this
APPENDIX;
(iii) A change under section 6.39 of
this APPENDIX; and
(iv) A change under section 6.40 of this
APPENDIX.
(c) A taxpayer making a change under
section 6.37(4)(b)(ii), (iii), (iv), (v), (vi),
(vii), or (viii) of this APPENDIX (certain
permissible to permissible changes for
general asset accounts) and a change un-
der section 6.32(1)(a)(ii), (iii), (iv), or (v)
of this APPENDIX (certain late general
asset account elections) and/or any change
listed in this section 6.37(6)(c)(i)-(vii) of
the APPENDIX for the same year of
change should file a single Form 3115 for
all such changes and must enter the des-
ignated automatic accounting method
change numbers for the changes on the
appropriate line on the Form 3115. This
section 6.37(6)(c) of the APPENDIX ap-
plies only if all of these changes are made
for any taxable year beginning on or after
January 1, 2012, and beginning before
January 1, 2014. For guidance on filing a
single application for two or more
changes, see section 6.02(1)(b)(ii) of this
revenue procedure. The listed changes
are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.29 of this
APPENDIX;
(iii) A change under section 6.30 of
this APPENDIX;
(iv) A change under section 6.31 of this
APPENDIX;
(v) A change under section 6.38 of this
APPENDIX;
(vi) A change under section 6.39 of this
APPENDIX; and
(vii) A change under section 6.40 of
this APPENDIX.
(7) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 6.37 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT (Ogden
copy), in lieu of filing the national office
copy, no earlier than the first day of the year
of change and no later than the date the
taxpayer files the original Form 3115 with
its federal income tax return for the year of
change. See sections 6.02(3)(a)(ii)(B) (pro-
viding the general rules) and 6.02(7)(b)
(providing the mailing address) of this rev-
enue procedure.
(8) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.37 of this AP-
PENDIX is "200." See section 6.02(4) of
this revenue procedure.
(9) Contact information. For further in-
formation regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
(8) Section 10.11(1)(b)(ii) of the AP-
PENDIX of Rev. Proc. 2011-14 is modi-
fied to read as follows:
(ii) Amounts paid or incurred for cer-
tain materials and supplies that the tax-
payer has elected to capitalize and depre-
ciate under § 1.162-3(d) or § 1.162-
3T(d);
#### .03 New automatic changes.
(1) Rev. Proc. 2011-14 is modified to
add new section 6.38 to the APPENDIX
to read as follows:
6.38 Disposition of a building or struc-
tural component (section 168; § 1.168(i)-
8).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that wants to
make a change in method of accounting
that is specified in section 6.38(4) of this
APPENDIX for disposing of a building or
a structural component or disposing of a
portion of a building (including its struc-
tural components) to which the partial dis-
position rule in § 1.168(i)-8(d)(1) applies.
These specified changes are consistent
with §§ 1.168(i)-8(b)(2), 1.168(i)-
8(c)(4)(ii)(A), (B), and (D), 1.168(i)-8(f),
and 1.168(i)-8(g), as applicable. This
change also affects the determination of
gain or loss from disposing of the build-
ing, the structural component, or the por-
tion of the building (including its struc-
tural components) and may affect whether
the taxpayer must capitalize amounts paid
to restore a unit of property (as deter-
mined under § 1.263(a)-3(e) or (f)) under
§ 1.263(a)-3(k).
(b) Inapplicability. This change does
not apply to the following:
(i) Any asset (as determined under
§ 1.168(i)-8(c)(4)) that is not depreciated
under § 168 under the taxpayer's present
method of accounting and, if applicable,
under the taxpayer's proposed method of
accounting;
(ii) Any asset subject to a general asset
account election under § 168(i)(4) and the
regulations thereunder (but see section
6.40 of this APPENDIX for making a
change in method of accounting for dis-
positions of tangible depreciable assets
subject to a general asset account elec-
tion);
(iii) Any multiple buildings, condo-
minium units, or cooperative units that are
treated as a single building under the tax-
payer's present method of accounting, or
will be treated as a single building under
the taxpayer's proposed method of ac-
counting, pursuant to § 1.1250-
1(a)(2)(ii);
(iv) Any disposition of a portion of an
asset for which a partial disposition elec-
tion under § 1.168(i)-8(d)(2) is required
but for which the taxpayer did not make
such election in accordance with
§ 1.168(i)-8(d)(2)(ii) or (iii), as applica-
ble (but see section 6.33 of this APPEN-
DIX for making a late partial disposition
election and section 6.35 of this APPEN-
DIX for making a partial disposition elec-
tion pursuant to § 1.168(i)-8(d)(2)(iii));
or
(v) Any demolition of a structure to
which § 280B and § 1.280B-1 apply.
(2) Certain scope limitations inappli-
cable.
(a) In general. The scope limitation in
section 4.02(5) of this revenue procedure
does not apply to a taxpayer making this
change.
(b) Special rules.
(i) The scope limitations in section
4.02(1), (2), (3), (4), (6), and (7) of this
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revenue procedure do not apply to a tax-
payer making this change for any taxable
year beginning on or after January 1,
2012, and beginning before January 1,
2015.
(ii) If a taxpayer makes both a change
under this section of this APPENDIX and
a change under section 6.01 of this AP-
PENDIX for any taxable year beginning
on or after January 1, 2012, and beginning
before January 1, 2015, on a single Form
3115 for the same asset for the same year
of change in accordance with section
6.38(10)(b) or (c) of this APPENDIX, the
scope limitations in section 4.02 of this
revenue procedure do not apply to the
taxpayer for either change.
(3) Audit protection limited. If a
method of accounting to be changed is (a)
an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with that change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(4) Covered changes. Section 6.38 of
this APPENDIX only applies to the fol-
lowing changes in methods of accounting
for a building (including its structural
components), condominium unit (includ-
ing its structural components), coopera-
tive unit (including its structural compo-
nents), or an improvement or addition
(including its structural components)
thereto:
(a) For purposes of applying § 1.168(i)-
8(c)(4) (determination of asset disposed of),
a change to the appropriate asset as deter-
mined under § 1.168(i)-8(c)(4)(ii)(A), (B),
or (D), as applicable;
(b) If the taxpayer makes the change
specified in section 6.38(4)(a) of this AP-
PENDIX, and if the taxpayer disposed of
the asset as determined under section
6.38(4)(a) of this APPENDIX or disposed
of a portion of such asset in a taxable year
prior to the year of change but under its
present method of accounting continues to
deduct depreciation for such disposed as-
set or such disposed portion, a change
from depreciating the disposed asset or
disposed portion to recognizing gain or
loss upon disposition;
(c) If the taxpayer's present method of
accounting for its buildings (including
their structural components), condomin-
ium units (including their structural com-
ponents), cooperative units (including
their structural components), and im-
provements or additions (including its
structural components) thereto that are de-
preciated under § 168 is in accord with
§ 1.168(i)-8(c)(4)(ii)(A), (B), and (D),
and if the taxpayer disposed of an asset as
determined under § 1.168(i)-8(c)(4)(ii)(A),
(B), or (D), as applicable, or disposed of a
portion of such asset in a taxable year prior
to the year of change but under its present
method of accounting continues to deduct
depreciation for such disposed asset or such
disposed portion, a change from depreciat-
ing the disposed asset or disposed portion to
recognizing gain or loss upon disposition;
(d) A change in the method of identi-
fying which assets in multiple asset ac-
counts or which portions of assets have
been disposed of from a method of ac-
counting not specified in § 1.168(i)-
8(g)(1) or (2)(i), (ii), or (iii) (for example,
the last-in, first-out (LIFO) method of ac-
counting) to a method of accounting spec-
ified in § 1.168(i)-8(g)(1) or (2)(i), (ii), or
(iii), as applicable;
(e) If § 1.168(i)-8(f)(2) applies (dispo-
sition of an asset in a multiple asset ac-
count) and it is practicable from the tax-
payer's records to determine the
unadjusted depreciable basis of the dis-
posed asset, a change in the method of
determining the unadjusted depreciable
basis of the disposed asset from a method
of not using the taxpayer's records to a
method of using the taxpayer's records;
(f) If § 1.168(i)-8(f)(2) applies (dispo-
sition of an asset in a multiple asset ac-
count) and it is impracticable from the
taxpayer's records to determine the unad-
justed depreciable basis of the disposed
asset, a change in the method of determin-
ing the unadjusted depreciable basis of all
assets in the same multiple asset account
from an unreasonable method (for exam-
ple, discounting the cost of the replace-
ment asset to its placed-in-service year
cost using the Consumer Price Index) to a
reasonable method;
(g) If § 1.168(i)-8(f)(3) applies (dispo-
sition of a portion of an asset) and it is
practicable from the taxpayer's records to
determine the unadjusted depreciable ba-
sis of the disposed portion of the asset, a
change in the method of determining the
unadjusted depreciable basis of the dis-
posed portion of the asset from a method
of not using the taxpayer's records to a
method of using the taxpayer's records;
(h) If § 1.168(i)-8(f)(3) applies (dispo-
sition of a portion of an asset) and it is
impracticable from the taxpayer's records
to determine the unadjusted depreciable
basis of the disposed portion of the asset,
a change in the method of determining the
unadjusted depreciable basis of the dis-
posed portion of the asset from an unrea-
sonable method (for example, discounting
the cost of the replacement portion of the
asset to its placed-in-service year cost us-
ing the Consumer Price Index) to a rea-
sonable method; or
(i) A change from recognizing gain or
loss under § 1.168(i)-8T upon the dispo-
sition of an asset (as determined under
§ 1.168(i)-8(c)(4)(ii)(A), (B), or (D), as
applicable) included in a general asset ac-
count to recognizing gain or loss upon the
disposition of the same asset under
§ 1.168(i)-8 if: (A) the taxpayer makes
the change specified in section 6.34 of this
APPENDIX (revocation of a general asset
account election); (B) the taxpayer made a
qualifying disposition election under
§ 1.168(i)-1T(e)(3)(iii) in a taxable year
prior to the year of change for the dispo-
sition of such asset; (C) the taxpayer's
present method of accounting for such
asset is in accord with § 1.168(i)-
8(c)(4)(ii)(A), (B), or (D), as applicable;
and (D) the taxpayer recognized a gain or
loss under § 1.168(i)-8T upon the dispo-
sition of such asset in a taxable year prior
to the year of change.
(5) Examples. The following examples
illustrate the covered changes specified in
section 6.38(4) of this APPENDIX.
(a) Example 1. X, a calendar-year tax-
payer, acquired and placed in service a
building and its structural components in
2000. In 2005, X constructed and placed
in service an addition to this building. X
depreciates the building, the addition, and
their structural components under § 168.
A change by X to treating the original
building (including its structural compo-
nents) as an asset and the addition to the
building (including the structural compo-
nents of such addition) as a separate asset
for disposition purposes is a change de-
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scribed in section 6.38(4)(a) of this APPEN-
DIX solely for purposes of § 1.168(i)-
8(c)(4).
(b) Example 2. Y, a calendar year tax-
payer, acquired and placed in service a
building and its structural components in
1990. Y depreciates this building and its
structural components under § 168. In
2000, a tornado damaged the roof and, as
a result, Y replaced the entire roof of the
building. Y did not recognize a loss on the
retirement of the original roof and contin-
ues to depreciate the original roof. Y also
capitalized the cost of the replacement
roof and has been depreciating this roof
under § 168 since 2000. Because the orig-
inal roof was disposed of as a result of a
casualty event described in § 165, a
change by Y from depreciating the origi-
nal roof to recognizing a loss upon its
retirement is a covered change described
in section 6.38(4)(c) of this APPENDIX
solely for purposes of § 1.168(i)-8.
(c) Example 3. The facts are the same
as in Example 2, except a tornado did not
occur, but Y still replaced the entire roof
of the building in 2000. Because the orig-
inal roof was not disposed of as a result of
any of the events described in § 1.168(i)-
8(d)(1) that require a partial disposition, a
partial disposition election must be made
to change from depreciating the original
roof to recognizing a loss upon its retire-
ment. Pursuant to section 6.38(1)(b)(iv) of
this APPENDIX, section 6.38 does not
apply to the disposition of the original
roof in 2000. But see section 6.33 of this
APPENDIX for making the late partial
disposition election under § 1.168(i)-
8(d)(2)(i) for the original roof.
(6) Manner of making change.
(a) A taxpayer (including a qualifying
taxpayer as defined in section 6.38(6)(b)
of this APPENDIX) making this change
must attach to its Form 3115 a statement
with the following:
(i) A description of the assets to which
this change applies;
(ii) If the taxpayer is making a change
specified in section 6.38(4)(a) of this AP-
PENDIX, a description of the assets for
disposition purposes under the taxpayer's
present and proposed methods of account-
ing;
(iii) If the taxpayer is making the
change specified in section 6.38(4)(d) of
this APPENDIX, a description of the
methods of identifying which assets have
been disposed of under the taxpayer's
present and proposed methods of account-
ing;
(iv) If the taxpayer is making the
change specified in section 6.38(4)(f) or
(h) of this APPENDIX, a description of
the methods of determining the unad-
justed depreciable basis of the disposed
asset or disposed portion of the asset, as
applicable, under the taxpayer's present
and proposed methods of accounting; and
(v) If any asset is public utility property
within the meaning of § 168(i)(10), a
statement providing that the taxpayer
agrees to the following additional terms
and conditions:
(A) A normalization method of ac-
counting (within the meaning of
§ 168(i)(9)) will be used for the public
utility property subject to the application;
(B) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
the public utility property subject to the
application; and
(C) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
application.
(b) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 25 and 26; and
(vi) Schedule E, line 3.
(7) No ruling on asset. The consent
granted under this revenue procedure for a
change specified in section 6.38(4)(a) of
this APPENDIX is not a determination by
the Commissioner that the taxpayer is us-
ing the appropriate asset under § 1.168(i)-
8(c)(4) for determining what asset is dis-
posed of by the taxpayer and does not
create any presumption that the proposed
asset is permissible under § 1.168(i)-
8(c)(4). The director will ascertain
whether the taxpayer's determination of
its asset under § 1.168(i)-8(c)(4) is per-
missible.
(8) Section 481(a) adjustment. A tax-
payer changing its method of accounting
under section 6.38 of the APPENDIX may
use statistical sampling in determining the
§ 481(a) adjustment by following the
guidance provided in Rev. Proc. 2011-42,
2011-37 I.R.B. 318.
(9) Section 481(a) adjustment period.
(a) A taxpayer must take the entire
amount of the § 481(a) adjustment into
account in computing taxable income for
the year of change:
(i) If the taxpayer is making the change
specified in section 6.38(4)(a) of this AP-
PENDIX and if the taxpayer recognized a
gain or loss under § 1.168(i)-8T on the
disposition of the asset (or if applicable, a
portion thereof) in a taxable year prior to
the year of change; or
(ii) If the taxpayer is making the
change specified in section 6.38(4)(i) of
this APPENDIX.
(b) If section 6.38(9)(a) of this AP-
PENDIX does not apply, see section 5.04
of this revenue procedure for the § 481(a)
adjustment period.
(c) Example. (i) Y, a calendar year
taxpayer, acquired and placed in service a
building and its structural components in
2000. Y depreciates this building and its
structural components under § 168. The
roof is a structural component of the
building. Y replaced the entire roof in
2010. On its federal tax return for the
taxable year ended December 31, 2010, Y
did not recognize a loss on the retirement
of the original roof and continues to de-
preciate the original roof. Y also capital-
ized the cost of the replacement roof and
has been depreciating this roof under
§ 168 since June 2010. The adjusted de-
preciable basis of the original roof at the
time of its retirement in 2010 (taking into
account the applicable convention) is
$11,000, and Y claimed depreciation of
$1,000 for such roof after its retirement
(taking into account the applicable con-
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vention) and before the 2012 taxable year.
Also the 12-month allowable depreciation
deduction for the original roof is $500 for
the 2012 taxable year and $500 for the
2013 taxable year.
(ii) In accordance with § 1.168(i)-
8T(c)(4)(ii)(A) and (B) and section
6.29(3)(a) and (b) of the APPENDIX to
Rev. Proc. 2011-14, as modified by Rev.
Proc. 2012-20, 2012-14 I.R.B. 700, Y
filed with its federal income tax return for
the taxable year ended December 31,
2012, a Form 3115 to treat the building as
an asset and each structural component of
the building as a separate asset for dispo-
sition purposes and also to change from
depreciating the original roof to recogniz-
ing a loss upon its retirement. The amount
of the net negative § 481(a) adjustment on
this Form 3115 is $10,000 (adjusted de-
preciable basis of $11,000 for the original
roof at the time of its retirement (taking
into account the applicable convention)
less depreciation of $1,000 claimed for
such roof after its retirement (taking into
account the applicable convention) and
before the 2012 taxable year).
(iii) Y complies with § 1.168(i)-8 be-
ginning with its taxable year ending De-
cember 31, 2014, but decides not to make
any late partial disposition election under
section 6.33 of this APPENDIX. In accor-
dance with section 6.38(4)(a) of this AP-
PENDIX, Y files a Form 3115 with its
2014 federal income tax return to change
to treating the original building (including
its original roof and other original struc-
tural components) as an asset and the re-
placement roof as a separate asset for dis-
position purposes. Because Y is not
making a late partial disposition election
for the original roof, Y does not recognize
the net loss of $10,000 upon the retire-
ment of the original roof under
§ 1.168(i)-8 and Y will continue to de-
preciate the original roof. Thus, the net
positive § 481(a) adjustment for this
change is $9,000 (net loss of $10,000
claimed on the 2012 return for the retire-
ment of the original roof less depreciation
of $1,000 for the original roof for 2012
and 2013) and is included in Y's taxable
income for 2014.
(10) Concurrent automatic change.
(a) A taxpayer making this change for
more than one asset for the same year of
change should file a single Form 3115 for
all such assets and provide a single net
§ 481(a) adjustment for all the changes
included in that Form 3115. If one or more
of the changes in that single Form 3115
generate a negative § 481(a) adjustment
and other changes in that same Form 3115
generate a positive § 481(a) adjustment,
the taxpayer may provide a single nega-
tive § 481(a) adjustment for all the
changes that are included in that Form
3115 generating such negative adjustment
and a single positive § 481(a) adjustment
for all the changes that are included in that
Form 3115 generating such positive ad-
justment.
(b) A taxpayer making this change and
any change listed in this section
6.38(10)(b)(i)-(iv) of the APPENDIX for
the same year of change should file a
single Form 3115 for all of such changes
and must enter the designated automatic
accounting method change numbers for
the changes on the appropriate line on the
Form 3115. For guidance on filing a single
application for two or more changes, see
section 6.02(1)(b)(ii) of this revenue pro-
cedure. The listed changes are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.37 of this
APPENDIX;
(iii) A change under section 6.39 of
this APPENDIX; and
(iv) A change under section 6.40 of this
APPENDIX.
(c) A taxpayer making this change and
a change under section 6.34 of this AP-
PENDIX (revocation of a general asset
account election) and/or any change listed
in this section 6.38(10)(c)(i)-(iii) of the
APPENDIX for the same year of change
should file a single Form 3115 for all such
changes and must enter the designated
automatic accounting method change
numbers for the changes on the appropri-
ate line on the Form 3115. This section
6.38(10)(c) of the APPENDIX applies
only if all of these changes are made for
any taxable year beginning on or after
January 1, 2012, and beginning before
January 1, 2015. For guidance on filing a
single application for two or more
changes, see section 6.02(1)(b)(ii) of this
revenue procedure. The listed changes
are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.37(4)(a)
of this APPENDIX; and
(iii) A change under section 6.39 of
this APPENDIX.
(11) Ogden copy of Form 3115 re-
quired in lieu of national office copy. A
taxpayer changing its method of account-
ing under this section 6.38 of the APPEN-
DIX must file a signed copy of its com-
pleted Form 3115 with the IRS in Ogden,
UT (Ogden copy), in lieu of filing the
national office copy, no earlier than the
first day of the year of change and no later
than the date the taxpayer files the original
Form 3115 with its federal income tax
return for the year of change. See sections
6.02(3)(a)(ii)(B) (providing the general
rules) and 6.02(7)(b) (providing the mail-
ing address) of this revenue procedure.
(12) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.38 of this AP-
PENDIX is "205." See section 6.02(4) of
this revenue procedure.
(13) Contact information. For further
information regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
(2) Rev. Proc. 2011-14 is modified to
add new section 6.39 to the APPENDIX
to read as follows:
6.39 Dispositions of tangible depreciable
assets (other than a building or its
structural components) (section 168;
§ 1.168(i)-8).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that wants to
make a change in method of accounting
that is specified in section 6.39(4) of this
APPENDIX for disposing of section 1245
property or a depreciable land improve-
ment or disposing of a portion of section
1245 property or a depreciable land im-
provement to which the partial disposition
rule in § 1.168(i)-8(d)(1) applies. These
specified changes are consistent with
§§ 1.168(i)-8(c)(4)(i), 1.168(i)-
8(c)(4)(ii)(C) and (D), 1.168(i)-8(f), and
1.168(i)-8(g), as applicable. This change
also affects the determination of gain or
loss from disposing of the section 1245
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property, the depreciable land improve-
ment, or a portion of the section 1245
property or depreciable land improve-
ment, and may affect whether the taxpayer
must capitalize amounts paid to restore a
unit of property (as determined under
§ 1.263(a)-3T(e) or (f) , or § 1.263(a)-3(e)
or (f), as applicable) under § 1.263(a)-3T(i)
or § 1.263(a)-3(k), as applicable.
(b) Inapplicability. This change does
not apply to the following:
(i) Any asset (as determined under
§ 1.168(i)-8(c)(4)) that is not depreciated
under § 168 under the taxpayer's present
method of accounting and, if applicable,
under the taxpayer's proposed method of
accounting;
(ii) Any building (including its struc-
tural components), condominium unit (in-
cluding its structural components), coop-
erative unit (including its structural
components), or an improvement or addi-
tion (including its structural components)
thereto (but see section 6.38 of this AP-
PENDIX for making this change);
(iii) Any asset subject to a general asset
account election under § 168(i)(4) and the
regulations thereunder (but see section
6.40 of this APPENDIX for making a
change for dispositions of tangible depre-
ciable assets subject to a general asset
account election); or
(iv) Any disposition of a portion of an
asset for which a partial disposition elec-
tion under § 1.168(i)-8(d)(2) is required
but for which the taxpayer did not make
such election in accordance with § 1.168(i)-
8(d)(2)(ii) or (iii), as applicable (but see
section 6.33 of this APPENDIX for making
a late partial disposition election and section
6.35 of this APPENDIX for making a par-
tial disposition election pursuant to
§ 1.168(i)-8(d)(2)(iii).
(2) Certain scope limitations inappli-
cable.
(a) In general. The scope limitation in
section 4.02(5) of this revenue procedure
does not apply to a taxpayer making this
change.
(b) Special rules.
(i) The scope limitations in section
4.02(1), (2), (3), (4), (6), and (7) of this
revenue procedure do not apply to a tax-
payer making this change for any taxable
year beginning on or after January 1,
2012, and beginning before January 1,
2015.
(ii) If a taxpayer makes both a change
under this section of this APPENDIX and
a change under section 6.01 of this AP-
PENDIX for any taxable year beginning
on or after January 1, 2012, and beginning
before January 1, 2015, on a single Form
3115 for the same asset for the same year
of change in accordance with section
6.39(9)(b) or (c) of this APPENDIX, the
scope limitations in section 4.02 of this
revenue procedure do not apply to the
taxpayer for either change.
(3) Audit protection limited. If a
method of accounting to be changed is (a)
an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with this change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(4) Covered changes. Section 6.39 of
this APPENDIX only applies to the fol-
lowing changes in methods of accounting
for a section 1245 property, a depreciable
land improvement, or an improvement or
addition thereto:
(a) For purposes of applying
§ 1.168(i)-8(c)(4) (determination of asset
disposed of), a change to the appropriate
asset as determined under § 1.168(i)-
8(c)(4)(i), (ii)(C), or (ii)(D), as applicable;
(b) If the taxpayer makes the change
specified in section 6.39(4)(a) of this AP-
PENDIX, and if the taxpayer disposed of
the asset as determined under section
6.39(4)(a) of this APPENDIX or disposed
of a portion of such asset in a taxable year
prior to the year of change but continues
to deduct depreciation for such disposed
asset or such disposed portion, as applica-
ble, under the taxpayer's present method
of accounting, a change from depreciating
the disposed asset or disposed portion, as
applicable, to recognizing gain or loss
upon disposition;
(c) If the taxpayer's present method of
accounting for the section 1245 property,
the depreciable land improvement, or the
improvement or addition thereto is in ac-
cord with § 1.168(i)-8(c)(4)(i) or (ii), as
applicable, and if the taxpayer disposed of
such asset or a portion of such asset in a
taxable year prior to the year of change
but under its present method of account-
ing continues to deduct depreciation for
this disposed asset or disposed portion, as
applicable, a change from depreciating the
disposed asset or disposed portion, as ap-
plicable, to recognizing gain or loss upon
disposition;
(d) A change in the method of identi-
fying which assets in multiple asset ac-
counts or which portions of assets have
been disposed of from a method of ac-
counting not specified in § 1.168(i)-
8(g)(1) or (2)(i), (ii), or (iii) (for example,
the last-in, first-out (LIFO) method of ac-
counting) to a method of accounting spec-
ified in § 1.168(i)-8(g)(1) or (2)(i), (ii), or
(iii), as applicable;
(e) If § 1.168(i)-8(f)(2) applies (dispo-
sition of an asset in a multiple asset ac-
count) and it is practicable from the taxpay-
er's records to determine the unadjusted
depreciable basis of the disposed asset, a
change in the method of determining the
unadjusted depreciable basis of the disposed
asset from a method of not using the tax-
payer's records to a method of using the
taxpayer's records;
(f) If § 1.168(i)-8(f)(2) applies (dispo-
sition of an asset in a multiple asset ac-
count) and it is impracticable from the
taxpayer's records to determine the unad-
justed depreciable basis of the disposed
asset, a change in the method of determin-
ing the unadjusted depreciable basis of all
assets in the same multiple asset account
from an unreasonable method (for exam-
ple, discounting the cost of the replace-
ment asset to its placed-in-service year
cost using the Consumer Price Index) to a
reasonable method;
(g) If § 1.168(i)-8(f)(3) applies (dispo-
sition of a portion of an asset) and it is
practicable from the taxpayer's records to
determine the unadjusted depreciable ba-
sis of the disposed portion of the asset, a
change in the method of determining the
unadjusted depreciable basis of the dis-
posed portion of the asset from a method
of not using the taxpayer's records to a
method of using the taxpayer's records;
(h) If § 1.168(i)-8(f)(3) applies (dispo-
sition of a portion of an asset) and it is
impracticable from the taxpayer's records
to determine the unadjusted depreciable
basis of the disposed portion of the asset,
a change in the method of determining the
unadjusted depreciable basis of the dis-
posed portion of the asset from an unrea-
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sonable method (for example, discounting
the cost of the replacement portion of the
asset to its placed-in-service year cost us-
ing the Consumer Price Index) to a rea-
sonable method; or
(i) A change from recognizing gain or
loss under § 1.168(i)-8T upon the dispo-
sition of a section 1245 property, depre-
ciable land improvement, or improvement
or addition thereto included in a general
asset account to recognizing gain or loss
upon the disposition of the same asset
under § 1.168(i)-8 if: (A) the taxpayer
makes the change specified in section 6.34
of this APPENDIX (revocation of a gen-
eral asset account election); (B) the tax-
payer made a qualifying disposition elec-
tion under § 1.168(i)-1T(e)(3)(iii) in a
taxable year prior to the year of change for
the disposition of such asset; (C) the tax-
payer's present method of accounting for
such asset is in accord with § 1.168(i)-
8(c)(4)(i) or (ii), as applicable; and (D) the
taxpayer recognized a gain or loss under
§ 1.168(i)-8T on the disposition of such
asset in a taxable year prior to the year of
change.
(5) Manner of making change.
(a) A taxpayer (including a qualifying
taxpayer as defined in section 6.39(5)(b)
of this APPENDIX) making this change
must attach to its Form 3115 a statement
with the following:
(i) A description of the assets to which
this change applies;
(ii) If the taxpayer is making a change
specified in section 6.39(4)(a) of this AP-
PENDIX, a description of the assets for
disposition purposes under the taxpayer's
present and proposed methods of account-
ing;
(iii) If the taxpayer is making the
change specified in section 6.39(4)(d) of
this APPENDIX, a description of the
methods of identifying which assets have
been disposed of under the taxpayer's
present and proposed methods of account-
ing;
(iv) If the taxpayer is making the
change specified in section 6.38(4)(f) or
(h) of this APPENDIX, a description of
the methods of determining the unad-
justed depreciable basis of the disposed
asset or disposed portion of the asset, as
applicable, under the taxpayer's present
and proposed methods of accounting; and
(v) If any asset is public utility property
within the meaning of § 168(i)(10), a
statement providing that the taxpayer
agrees to the following additional terms
and conditions:
(A) A normalization method of ac-
counting (within the meaning of
§ 168(i)(9)) will be used for the public
utility property subject to the application;
(B) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
the public utility property subject to the
application; and
(C) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
application.
(b) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 25 and 26; and
(vi) Schedule E, line 3.
(6) No ruling on asset. The consent
granted under this revenue procedure for a
change specified in section 6.39(4)(a) of
this APPENDIX is not a determination by
the Commissioner that the taxpayer is us-
ing the appropriate asset under § 1.168(i)-
8(c)(4) for determining what asset is dis-
posed of by the taxpayer and does not
create any presumption that the proposed
asset is permissible under § 1.168(i)-
8(c)(4). The director will ascertain
whether the taxpayer's determination of
its asset under § 1.168(i)-8(c)(4) is per-
missible.
(7) Section 481(a) adjustment. A tax-
payer changing its method of accounting
under section 6.39 of the APPENDIX may
use statistical sampling in determining the
§ 481(a) adjustment by following the
guidance provided in Rev. Proc. 2011-42,
2011-37 I.R.B. 318.
(8) Section 481 (a) adjustment period.
(a) A taxpayer must take the entire
amount of the § 481(a) adjustment into
account in computing taxable income for
the year of change:
(i) If the taxpayer is making the change
specified in section 6.39(4)(a) of this AP-
PENDIX and if the taxpayer recognized a
gain or loss under § 1.168(i)-8T on the
disposition of the section 1245 property,
depreciable land improvement, or im-
provement or addition thereto (or if appli-
cable, a portion of such asset) in a taxable
year prior to the year of change; or
(ii) If the taxpayer is making the
change specified in section 6.39(4)(i) of
this APPENDIX.
(b) If section 6.39(8)(a) of this AP-
PENDIX does not apply, see section 5.04
of this revenue procedure for the § 481(a)
adjustment period.
(9) Concurrent automatic change.
(a) A taxpayer making this change for
more than one asset for the same year of
change should file a single Form 3115 for
all such assets and provide a single net
§ 481(a) adjustment for all the changes
included in that Form 3115. If one or more
of the changes in that single Form 3115
generate a negative § 481(a) adjustment
and other changes in that same Form 3115
generate a positive § 481(a) adjustment,
the taxpayer may provide a single nega-
tive § 481(a) adjustment for all the
changes that are included in that Form
3115 generating such negative adjustment
and a single positive § 481(a) adjustment
for all the changes that are included in that
Form 3115 generating such positive ad-
justment. For guidance on filing a single
application for two or more changes, see
section 6.02(1)(b)(ii) of Rev. Proc. 2011-14.
(b) A taxpayer making this change and
any change listed in this section
6.39(9)(b)(i)-(iv) of the APPENDIX for
the same year of change should file a
single Form 3115 for all of such changes
and must enter the designated automatic
accounting method change numbers for
the changes on the appropriate line on the
Form 3115. For guidance on filing a single
application for two or more changes, see
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section 6.02(1)(b)(ii) of this revenue pro-
cedure. The listed changes are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.37 of this
APPENDIX;
(iii) A change under section 6.38 of
this APPENDIX; and
(iv) A change under section 6.40 of this
APPENDIX.
(c) A taxpayer making this change and
a change under section 6.34 of this AP-
PENDIX (revocation of a general asset
account election) and/or any change listed
in this section 6.39(9)(c)(i)-(iii) of the
APPENDIX for the same year of change
should file a single Form 3115 for all such
changes and must enter the designated
automatic accounting method change
numbers for the changes on the appropri-
ate line on the Form 3115. This section
6.39(9)(c) of the APPENDIX applies only
if all of these changes are made for any
taxable year beginning on or after January
1, 2012, and beginning before January 1,
2015. For guidance on filing a single ap-
plication for two or more changes, see
section 6.02(1)(b)(ii) of this revenue pro-
cedure. The listed changes are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.37(4)(a)
of this APPENDIX; and
(iii) A change under section 6.38 of
this APPENDIX.
(10) Ogden copy of Form 3115 re-
quired in lieu of national office copy. A
taxpayer changing its method of account-
ing under this section 6.39 of the APPEN-
DIX must file a signed copy of its com-
pleted Form 3115 with the IRS in Ogden,
UT (Ogden copy), in lieu of filing the
national office copy, no earlier than the
first day of the year of change and no later
than the date the taxpayer files the original
Form 3115 with its federal income tax
return for the year of change. See sections
6.02(3)(a)(ii)(B) (providing the general
rules) and 6.02(7)(b) (providing the mail-
ing address) of this revenue procedure.
(11) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.39 of this AP-
PENDIX is "206." See section 6.02(4) of
this revenue procedure.
(12) Contact information. For further
information regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
(3) Rev. Proc. 2011-14 is modified to
add new section 6.40 to the APPENDIX
to read as follows:
6.40 Dispositions of tangible depreciable
assets in a general asset account
(section 168(i)(4); § 1.168(i)-1).
(1) Description of change.
(a) Applicability. This change, as de-
scribed in Rev. Proc. 2014-54, 2014-41
I.R.B., applies to a taxpayer that wants to
make a change in method of accounting
that is specified in section 6.40(4) of this
APPENDIX for disposing of an asset sub-
ject to a general asset account election
under § 168(i)(4) and the regulations
thereunder. These specified changes are
consistent with §§ 1.168(i)-1(e)(1),
1.168(i)-1(e)(2)(viii), and 1.168(i)-1(j),
as applicable. This change also may affect
the determination of gain or loss from
disposing of the asset and may affect
whether the taxpayer must capitalize
amounts paid to restore a unit of property
(as determined under § 1.263(a)-3T(e) or
(f), or § 1.263(a)-3(e) or (f), as applica-
ble) under § 1.263(a)-3T(i) or § 1.263(a)-
3(k), as applicable.
(b) Inapplicability. This change does
not apply to the following:
(i) Any asset (as determined under
§ 1.168(i)-1(e)(2)(viii)) that is not depre-
ciated under § 168 under the taxpayer's
present method of accounting and, if ap-
plicable, proposed method of accounting;
or
(ii) Any asset not subject to a general
asset account election under § 168(i)(4)
and the regulations thereunder (but see
sections 6.38 and 6.39 of this APPENDIX
for making a change for dispositions of
tangible depreciable assets not subject to a
general asset account election).
(2) Certain scope limitations inappli-
cable.
(a) In general. The scope limitation in
section 4.02(5) of this revenue procedure
does not apply to a taxpayer making this
change.
(b) Special rules.
(i) The scope limitations in section
4.02(1), (2), (3), (4), (6), and (7) of this
revenue procedure do not apply to a tax-
payer making this change for any taxable
year beginning on or after January 1,
2012, and beginning before January 1,
2015.
(ii) If a taxpayer makes both a change
under this section of this APPENDIX and
a change under section 6.01 of this AP-
PENDIX for any taxable year beginning
on or after January 1, 2012, and beginning
before January 1, 2015, on a single Form
3115 for the same asset for the same year
of change in accordance with section
6.40(8)(b) of this APPENDIX, the scope
limitations in section 4.02 of this revenue
procedure do not apply to the taxpayer for
either change. If a taxpayer makes both a
change under this section of this APPEN-
DIX and a change under section 6.01 of
this APPENDIX for any taxable year be-
ginning on or after January 1, 2012, and
beginning before January 1, 2014, on a
single Form 3115 for the same asset for
the same year of change in accordance
with section 6.40(8)(c) of this APPEN-
DIX, the scope limitations in section 4.02
of this revenue procedure do not apply to
the taxpayer for either change.
(3) Audit protection limited. If a
method of accounting to be changed is (a)
an issue pending for any taxable year un-
der examination, (b) an issue under con-
sideration by an appeals office, or (c) an
issue under consideration by a federal
court, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure in connection with that change.
See sections 6.03(6), 6.04, and 6.05 of this
revenue procedure.
(4) Covered changes. Section 6.40 of
this APPENDIX only applies to the fol-
lowing changes in methods of accounting
for an asset subject to a general asset
account election under § 168(i)(4) and the
regulations thereunder:
(a) For purposes of applying
§ 1.168(i)-1(e)(2)(viii) (determination of
asset disposed of), a change to the appro-
priate asset as determined under
§ 1.168(i)-1(e)(2)(viii)(A) or (B), as ap-
plicable;
(b) A change in the method of identi-
fying which assets or which portions of
assets have been disposed of from a
method of accounting not specified in
§ 1.168(i)-1(j)(2)(i)(A), (B), (C), or (D)
(for example, the last-in, first-out (LIFO)
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method of accounting) to a method of
accounting specified in § 1.168(i)-
1(j)(2)(i)(A), (B), (C), or (D), as applica-
ble;
(c) If § 1.168(i)-1(j)(3) applies (basis
of disposed asset or disposed portion of an
asset) and it is practicable from the tax-
payer's records to determine the unad-
justed depreciable basis of the disposed
asset or the disposed portion of an asset,
as applicable, a change in the method of
determining the unadjusted depreciable
basis of the disposed asset or the disposed
portion of an asset, as applicable, from a
method of not using the taxpayer's re-
cords to a method of using the taxpayer's
records; or
(d) If § 1.168(i)-1(j)(3) applies (basis
of disposed asset or disposed portion of an
asset) and it is impracticable from the
taxpayer's records to determine the unad-
justed depreciable basis of the disposed
asset or the disposed portion of an asset,
as applicable, a change in the method of
determining the unadjusted depreciable
basis of all assets in the same general asset
account from an unreasonable method (for
example, discounting the cost of the re-
placement asset to its placed-in-service
year cost using the Consumer Price Index)
to a reasonable method.
(5) Manner of making change.
(a) A taxpayer (including a qualifying
taxpayer as defined in section 6.40(5)(b)
of this APPENDIX) making this change
must attach to its Form 3115 a statement
with the following:
(i) A description of the assets to which
this change applies;
(ii) If the taxpayer is making the
change specified in section 6.40(4)(a) of
this APPENDIX, a description of the as-
sets for disposition purposes under the
taxpayer's present and proposed methods
of accounting;
(iii) If the taxpayer is making the
change specified in section 6.40(4)(b) of
this APPENDIX, a description of the
methods of identifying which assets have
been disposed of under the taxpayer's
present and proposed methods of account-
ing;
(iv) If the taxpayer is making the
change specified in section 6.40(4)(d) of
this APPENDIX, a description of the
methods of determining the unadjusted
depreciable basis of the disposed asset or
disposed portion of the asset, as applica-
ble, under the taxpayer's present and pro-
posed methods of accounting; and
(v) If any asset is public utility property
within the meaning of § 168(i)(10), a
statement providing that the taxpayer
agrees to the following additional terms
and conditions:
(A) A normalization method of ac-
counting (within the meaning of
§ 168(i)(9)) will be used for the public
utility property subject to the application;
(B) As of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar ac-
count in the taxpayer's regulatory books
of account by the amount of the deferral
of federal income tax liability associated
with the § 481(a) adjustment applicable to
the public utility property subject to the
application; and
(C) Within 30 calendar days of filing
the federal income tax return for the year
of change, the taxpayer will provide a
copy of the completed application to any
regulatory body having jurisdiction over
the public utility property subject to the
application.
(b) A taxpayer whose average annual
gross receipts, as determined under
§ 1.263(a)-3(h)(3), for the three preceding
taxable years is less than or equal to
$10,000,000 ("qualifying taxpayer") is re-
quired to complete only the following in-
formation on Form 3115:
(i) The identification section of page 1
(above Part I);
(ii) The signature section at the bottom
of page 1;
(iii) Part I, line 1(a);
(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;
(v) Part IV, lines 25 and 26; and
(vi) Schedule E, line 3.
(6) No ruling on asset. The consent
granted under this revenue procedure for a
change specified in section 6.40(4)(a) of
this APPENDIX is not a determination by
the Commissioner that the taxpayer is us-
ing the appropriate asset under § 1.168(i)-
1(e)(2)(viii) for determining what asset is
disposed of by the taxpayer and does not
create any presumption that the proposed
asset is permissible under § 1.168(i)-
1(e)(2)(viii). The director will ascertain
whether the taxpayer's determination of
its asset under § 1.168(i)-1(e)(2)(viii) is
permissible.
(7) Section 481(a) adjustment period.
(a) If a taxpayer makes the change
specified in section 6.40(4)(a) of this AP-
PENDIX and if the taxpayer recognized a
gain or loss under § 1.168(i)-1T or
§ 1.168(i)-8T, as applicable, on the dis-
position of a portion of the asset in a
taxable year prior to the year of change,
the taxpayer must take the entire amount
of the § 481(a) adjustment into account in
computing taxable income for the year of
change.
(b) If section 6.40(7)(a) of this AP-
PENDIX does not apply, see section 5.04
of this revenue procedure for the § 481(a)
adjustment period.
(c) Example. (i) X, a calendar year
taxpayer, acquired and placed in service a
building and its structural components in
2000. X depreciates this building and its
structural components under § 168. The
roof is a structural component of the
building. X replaced the entire roof in
2010. On its federal tax return for the
taxable year ended December 31, 2010, X
did not recognize a loss on the retirement
of the original roof and continues to de-
preciate the original roof. X also capital-
ized the cost of the replacement roof and
has been depreciating this roof under
§ 168 since June 2010. The adjusted de-
preciable basis of the original roof at the
time of its retirement in 2010 (taking into
account the applicable convention) is
$11,000, and X claimed depreciation of
$1,000 for such roof after its retirement
(taking into account the applicable con-
vention) and before the 2012 taxable year.
Also the 12-month allowable depreciation
deduction for the original roof is $500 for
the 2012 taxable year and $500 for the
2013 taxable year.
(ii) In accordance with § 1.168(i)-1T
and section 6.32(1)(a) of the APPENDIX
to Rev. Proc. 2011-14, as modified by
Rev. Proc. 2012-20, 2012-14 I.R.B. 700,
X filed with its federal tax return for the
taxable year ended December 31, 2012, a
Form 3115 to: (1) make a late general
asset account election to include the build-
ing (including its structural components)
placed in service in 2000 in one general
asset account and the replacement roof in
a separate general asset account; and (2)
make a late qualifying disposition election
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for the retirement of the original roof in
2010. As a result, X removed the original
roof from the general asset account and
reported a net negative § 481(a) adjust-
ment on this Form 3115 of $10,000 (ad-
justed depreciable basis of $11,000 for the
original roof at the time of its retirement
(taking into account the applicable con-
vention) less depreciation of $1,000
claimed for such roof after its retirement
(taking into account the applicable con-
vention) and before the 2012 taxable
year).
(iii) X complies with § 1.168(i)-1 be-
ginning with its taxable year ending De-
cember 31, 2014. In accordance with sec-
tion 6.40(4)(a) of this APPENDIX, X files
a Form 3115 with its 2014 federal income
tax return to change to treating the build-
ing (including its original roof and other
original structural components) placed in
service in 2000 as an asset and the re-
placement roof as a separate asset for dis-
position purposes. As a result, X must
include the original roof that X retired in
2010 in the general asset account. Thus,
the net positive § 481(a) adjustment for
this change is $9,000 (net loss of $10,000
claimed on the 2012 return for the retire-
ment of the original roof less depreciation
of $1,000 for the original roof for 2012
and 2013) and is included in X's taxable
income for 2014.
(8) Concurrent automatic change.
(a) A taxpayer making this change for
more than one asset for the same year of
change should file a single Form 3115 for
all such assets and provide a single net
§ 481(a) adjustment for all the changes
included in that Form 3115. If one or more
of the changes in that single Form 3115
generate a negative § 481(a) adjustment
and other changes in that same Form 3115
generate a positive § 481(a) adjustment,
the taxpayer may provide a single nega-
tive § 481(a) adjustment for all the
changes that are included in that Form
3115 generating such negative adjustment
and a single positive § 481(a) adjustment
for all the changes that are included in that
Form 3115 generating such positive ad-
justment.
(b) A taxpayer making this change and
any change listed in this section
6.40(8)(b)(i)-(iv) of the APPENDIX for
the same year of change should file a
single Form 3115 for all of such changes
and must enter the designated automatic
accounting method change numbers for
the changes on the appropriate line on the
Form 3115. For guidance on filing a single
application for two or more changes, see
section 6.02(1)(b)(ii) of this revenue pro-
cedure. The listed changes are:
(i) A change under section 6.01 of this
APPENDIX;
(ii) A change under section 6.37 of this
APPENDIX;
(iii) A change under section 6.38 of
this APPENDIX; and
(iv) A change under section 6.39 of this
APPENDIX.
(c) A taxpayer making this change and
any change under section 6.32(1)(a)(ii),
(iii), (iv), or (v) of this APPENDIX (cer-
tain late general asset account elections)
or any change listed in this section
6.40(8)(c)(i)-(ii) of the APPENDIX for
the same year of change should file a
single Form 3115 for all such changes and
must enter the designated automatic ac-
counting method change numbers for the
changes on the appropriate line on the
Form 3115. This section 6.40(8)(c) of the
APPENDIX applies only if all of these
changes are made for any taxable year
beginning on or after January 1, 2012, and
beginning before January 1, 2014. For
guidance on filing a single application for
two or more changes, see section
6.02(1)(b)(ii) of this revenue procedure.
The listed changes are:
(i) A change under section 6.01 of this
APPENDIX; and
(ii) A change under section 6.37(4)(b)
of this APPENDIX.
(9) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 6.40 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT (Ogden
copy), in lieu of filing the national office
copy, no earlier than the first day of the year
of change and no later than the date the
taxpayer files the original Form 3115 with
its federal income tax return for the year of
change. See sections 6.02(3)(a)(ii)(B) (pro-
viding the general rules) and 6.02(7)(b)
(providing the mailing address) of this rev-
enue procedure.
(10) Designated automatic accounting
method change numbers. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.40 of this AP-
PENDIX is "207." See section 6.02(4) of
this revenue procedure.
(11) Contact information. For further
information regarding a change under this
section, contact Patrick Clinton at (202)
317-7005 (not a toll-free call).
### SECTION 4. SUMMARY OF CHANGES IN METHODS OF ACCOUNTING RELATED TO DISPOSITIONS OF MACRS PROPERTY
.01 Final regulations. The following
chart summarizes the changes in methods
of accounting under § 1.167(a)-4,
§ 1.168(i)-1, § 1.168(i)-7, and
§ 1.168(i)-8 that a taxpayer may make
under Rev. Proc. 2011-14.
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FINAL REGULATION SECTION
SECTION # in APPENDIX in REV. PROC. 2011-14
DESIGNATED CHANGE NUMBER (DCN)
FOR MORE INFORMATION SEE
§ 1.167(a)-4, Depreciation of leasehold improvements
6.36
199
Section 3.03(4) of Rev. Proc. 2014-17
General Asset Accounts:
a. § 1.168(i)-1(c), Change in grouping assets
6.37
200
Section 3.02(7) of
Rev. Proc. 2014-54
b. § 1.168(i)-1(e)(2)(viii), Change in determining asset disposed of
6.40
207
Section 3.03(3) of Rev. Proc. 2014-54
c. § 1.168(i)-1(j)(2), Change in method of identifying which assets or portions of assets have
6.37
200
Section 3.02(7) of Rev. Proc. 2014-54
been disposed of from one method to another method spec- ified in § 1.168(i)-1(j)(2)
d. § 1.168(i)-1(j)(2), Change in method of identifying which assets or portions of assets have been disposed of from a method not specified in § 1.168(i)- 1(j)(2) to a method specified in § 1.168(i)-1(j)(2)
6.40
207
Section 3.03(3) of Rev. Proc. 2014-54
e. § 1.168(i)-1(j)(3), Change in determining unadjusted depre- ciable basis of disposed asset or disposed portion of an asset from one reasonable method to another reasonable method when it is impracticable from the taxpayer's records to determine the unadjusted depreciable basis of disposed asset or disposed portion of asset
6.37
200
Section 3.02(7) of Rev. Proc. 2014-54
f. § 1.168(i)-1(j)(3), Change in determining unadjusted depre- ciable basis of disposed asset or disposed portion of an asset from not using to using the taxpayer's records when it is practicable from the taxpayer's records to determine the unadjusted depreciable basis of disposed asset or disposed portion of asset
6.40
207
Section 3.03(3) of Rev. Proc. 2014-54
g. § 1.168(i)-1(j)(3), Change in determining unadjusted depre- ciable basis of disposed asset or disposed portion of an asset from an unreasonable method to a reasonable method when it is impracticable from the taxpayer's records to determine the unadjusted depreciable basis of disposed asset or disposed portion of asset
6.40
207
Section 3.03(3) of Rev. Proc. 2014-54
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FINAL REGULATION SECTION
SECTION # in APPENDIX in REV. PROC. 2011-14
DESIGNATED CHANGE NUMBER (DCN)
FOR MORE INFORMATION SEE
Single Asset Accounts or Multiple Asset Accounts for MACRS Property:
a. § 1.168(i)-7, Change from single asset accounts to multiple asset accounts, or vice versa
6.37
200
Section 3.03(5) of Rev. Proc. 2014-17,
as modified by section 3.02(7) of Rev. Proc. 2014-54
b. § 1.168(i)-7(c), Change in grouping assets in multiple asset accounts
6.37
200
Section 3.03(5) of Rev. Proc. 2014-17, as modified by section 3.02(7) of Rev. Proc. 2014-54
Dispositions of MACRS Property (not in a general asset account):
6.38 (Building or structural component)
205
Section 3.03(1) of Rev. Proc. 2014-54
a. § 1.168(i)-8(c)(4), Change in determining asset disposed of
6.39 (Property other than a building or structural com- ponent)
206
Section 3.03(2) of Rev. Proc. 2014-54
b. § 1.168(i)-8(f)(2) or (3),
6.37
200
Section 3.02(7) of
Change in determining unadjusted depreciable basis of disposed asset in a multiple asset account or disposed portion of an asset from one reasonable method to another reasonable method when it is
Rev. Proc. 2014-54
impracticable from the taxpayer's records to determine the
unadjusted depreciable basis of disposed asset or disposed portion of asset
c. § 1.168(i)-8(f)(2) or (3),
6.38 (Building
205
Section 3.03(1) of
Change in determining
or structural
Rev. Proc. 2014-54
unadjusted depreciable basis of
component)
disposed asset in a multiple
6.39 (Property
206
Section 3.03(2) of
asset account or disposed portion of an asset from not using to using the taxpayer's records when it is practicable from the taxpayer's records to determine the unadjusted depreciable basis of disposed asset or disposed portion of asset
other than a building or structural com- ponent)
Rev. Proc. 2014-54
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FINAL REGULATION SECTION
SECTION # in APPENDIX in REV. PROC. 2011-14
DESIGNATED CHANGE NUMBER (DCN)
FOR MORE INFORMATION SEE
d. § 1.168(i)-8(f)(2) or (3),
6.38 (Building
205
Section 3.03(1) of
Change in determining unad-
or structural component)
Rev. Proc. 2014-54
justed depreciable basis of dis-
posed asset in a multiple asset account or disposed portion of an asset from an unreasonable method to a reasonable method when it is impracticable from the taxpayer's records to deter- mine the unadjusted depreciable
6.39 (Property other than a building or structural com- ponent)
206
Section 3.03(2) of Rev. Proc. 2014-54
basis of disposed asset or dis- posed portion of asset
e. § 1.168(i)-8(g), Change in method of identifying which assets in a multiple asset ac- count or portions of assets have been disposed of from one method to another method spec- ified in § 1.168(i)-8(g)(1) or (2)
6.37
200
Section 3.02(7) of Rev. Proc. 2014-54
f. § 1.168(i)-8(g), Change in method of identifying which assets in a multiple asset ac-
6.38 (Building or structural component)
205
Section 3.03(1) of Rev. Proc. 2014-54
count or portions of assets have been disposed of from a method not specified in § 1.168(i)-
6.39 (Property other than a building or
206
Section 3.03(2) of Rev. Proc. 2014-54
8(g)(1) or (2) to a method speci- fied in § 1.168(i)-8(g)(1) or (2)
structural com- ponent)
g. § 1.168(i)-8(h)(1), Change
6.38 (Building
205
Section 3.03(1) of
from depreciating a disposed asset or disposed portion of an
or structural component)
Rev. Proc. 2014-54
asset to recognizing gain or loss
6.39 (Property other than a building or
206
Section 3.03(2) of Rev. Proc. 2014-54
upon disposition when a tax- payer continues to depreciate
the asset or portion that the tax- payer disposed of prior to the year of change
structural com- ponent)
h. § 1.168(i)-8(d)(2)(iii), Partial disposition election for the dis- position of a portion of an asset to which the IRS's adjustment pertains
6.35
198
Section 3.02(6) of Rev. Proc. 2014-54
.02 Late elections or revocation of a
general asset account election. The fol-
lowing chart summarizes the late elec-
tions under § 1.168(i)-1, § 1.168(i)-8,
Prop. Reg. § 1.168(i)-1, Prop. Reg.
§ 1.168(i)-8, or § 1.168(1)-1T that are
treated as a change in method of ac-
counting for a limited period of time.
The chart includes the revocation of a
general asset account election that also
is treated as a change in method of ac-
counting for a limited period of time.
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ELECTION OR REVOCATION
TIME PERIOD FOR TREATING ELECTION OR REVOCATION AS A METHOD CHANGE
SECTION # IN APPEN- DIX IN REV. PROC. 2011- 14, AND DCN
FOR MORE INFORMATION SEE
General Asset Accounts:
a. Late general asset account election under § 1.168(i)-1, Prop. Reg. § 1.168(i)-1, or § 1.168(1)-1T
Taxable year beginning on or after 1/1/2012 and beginning before 1/1/2014
6.32 DCN 180
Section 3.02(9) of Rev. Proc. 2014-17, as modified by section 3.02(3) of Rev. Proc. 2014-54
b. Late election to recognize gain or loss upon disposition of all assets, the last asset, or the remaining portion of the last asset under § 1.168(i)- 1(e)(3)(ii) or Prop. Reg. § 1.168(i)-1(e)(3)(ii)
Taxable year beginning on or after 1/1/2012 and beginning before 1/1/2014
6.32 DCN 180
Section 3.02(9) of Rev. Proc. 2014-17, as modified by section 3.02(3) of Rev. Proc. 2014-54
c. Late election to recognize gain or loss upon disposition of all assets or the last asset under § 1.168(1)-1T(e)(3)(ii)
Taxable year beginning on or after 1/1/2012 and beginning before 1/1/2014
6.32 DCN 180
Section 3.02(9) of Rev. Proc. 2014-17, as modified by section 3.02(3) of Rev. Proc. 2014-54
d. Late election to recognize gain or loss upon disposition of an asset in a qualifying dis- position under § 1.168(i)- 1(e)(3)(iii), Prop. Reg. § 1.168(i)-1(e)(3)(iii), or § 1.168(1)-1T(e)(3)(iii)
Taxable year beginning on or after 1/1/2012 and beginning before 1/1/2014
6.32 DCN 180
Section 3.02(9) of Rev. Proc. 2014-17, as modified by section 3.02(3) of Rev. Proc. 2014-54
e. Revocation of a general as- set account election made un- der § 1.168(i)-1, Prop. Reg. § 1.168(i)-1, or § 1.168(1)-1T, or made under section 6.32 in Appendix in Rev. Proc. 2011-14
Taxable year beginning on or after 1/1/2012 and beginning before 1/1/2015
6.34 DCN 197
Section 3.03(2) of Rev. Proc. 2014-17, as modified by section 3.02(5) of Rev. Proc. 2014-54
Late Partial Disposition Election for MACRS Property (not in a general asset account):
a. Late partial disposition elec- tion made under § 1.168(i)- 8(d)(2)(iv)(B)
First or second taxable succeed- ing the applicable taxable year as defined in § 1.168(i)- 8(d)(2)(iv)
6.33 DCN 196
Section 3.02(4) of Rev. Proc. 2014-54
b. Other late partial disposition elections made under § 1.168(i)-8(d)(2)(i)
Taxable year beginning on or after 1/1/2012 and beginning before 1/1/2015
6.33 DCN 196
Section 3.02(4) of Rev. Proc. 2014-54
c. Late partial disposition elec- tion made under Prop. Reg. § 1.168(i)-8(d)(2)(iv)(B)
First or second taxable succeed- ing the applicable taxable year as defined in Prop. Reg. § 1.168(i)-8(d)(2)(iv)
6.33 DCN 196
Section 3.03(1) of Rev. Proc. 2014-17, as modified by section 3.02(4) of Rev. Proc. 2014-54
d. Other late partial disposition elections made under Prop. Reg. § 1.168(i)-8(d)(2)(i)
Taxable year beginning on or after 1/1/2012 and beginning before 1/1/2014
6.33 DCN 196
Section 3.03(1) of Rev. Proc. 2014-17, as modified by section 3.02(4) of Rev. Proc. 2014-54
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.03 Temporary and proposed regula-
tions. If a taxpayer applies § 1.167(a)-4T,
§ 1.168(i)-1T, § 1.168(i)-7T, §1.168(i)-
8T, Prop. Reg. § 1.168(i)-1, Prop. Reg.
§ 1.168(i)-7, or Prop. Reg. § 1.168(i)-8
for a taxable year beginning on or after
January 1, 2012, and beginning before
January 1, 2014, the following chart sum-
marizes the changes in methods of ac-
counting under those regulation sections
that the taxpayer may make under Rev.
Proc. 2011-14.
TEMPORARY OR PROPOSED REGULATION SECTION
SECTION # in APPENDIX in REV. PROC. 2011-14
DCN
FOR MORE INFORMATION SEE
§ 1.167(a)-4T, Depreciation of leasehold improvements
6.27
175
Section 3.02(4) of
Rev. Proc. 2014-17
General Asset Accounts:
a. § 1.168(i)-1T(c) or Prop. Reg.
6.28
176
Section 3.02(5) of
§ 1.168(i)-1(c), Change in grouping assets
Rev. Proc. 2014-17
b. § 1.168(i)-1T(e)(2)(viii) or Prop. Reg.
6.31
179
Section 3.02(8) of
§ 1.168(i)-1(e)(2)(viii), Change in deter- mining asset disposed of
Rev. Proc. 2014-17
c. § 1.168(i)-1T(j)(2) or Prop. Reg. § 1.168(i)-1(j)(2), Change in method of identifying which assets have been dis- posed of from one method to another method specified in § 1.168(i)-1T(j)(2), or from one method to another method speci- fied in Prop. Reg. § 1.168(i)-1(j)(2)
6.28
176
Section 3.02(5) of
Rev. Proc. 2014-17
d. § 1.168(i)-1T(j)(2) or Prop. Reg. § 1.168(i)-1(j)(2), Change in method of identifying which assets have been dis- posed of from a method not specified in § 1.168(i)-1T(j)(2) to a method specified in § 1.168(i)-1T(j)(2), or from a method not specified in Prop. Reg. § 1.168(i)- 1(j)(2) to a method specified in Prop. Reg. § 1.168(i)-1(j)(2)
6.31
179
Section 3.02(8) of Rev. Proc. 2014-17
e. § 1.168(i)-1T(j)(3), Change in determin- ing unadjusted depreciable basis of dis- posed asset from one reasonable method to another reasonable method
6.28
176
Section 3.02(5) of
Rev. Proc. 2014-17
f. Prop. Reg. § 1.168(i)-1(j)(3), Change in
6.28
176
Section 3.02(5) of
determining unadjusted depreciable basis of disposed asset or disposed portion of an asset from one reasonable method to an- other reasonable method
Rev. Proc. 2014-17
Single Asset Accounts or Multiple Asset Accounts
for MACRS Property:
a. § 1.168(i)-7T or Prop. Reg. § 1.168(i)-7, Change from single asset accounts to multiple asset accounts, or vice versa
6.28
176
Section 3.02(5) of
Rev. Proc. 2014-17
b. § 1.168(i)-7T(c), Change in grouping assets in multiple asset accounts
6.28
176
Section 3.02(5) of Rev. Proc. 2014-17
Dispositions of MACRS Property (not in a general
asset account):
a. § 1.168(i)-8T(c)(4) or Prop. Reg.
6.29 (Building or structural component)
177
Section 3.02(6) of Rev. Proc. 2014-17, as modi- fied by section 3.02(2) of Rev. Proc. 2014-54
§ 1.168(i)-8(c)(4), Change in determining asset disposed of
6.30 (Property other than a build- ing or structural component)
178
Section 3.02(7) of Rev. Proc. 2014-17
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TEMPORARY OR PROPOSED REGULATION SECTION
SECTION # in APPENDIX in REV. PROC. 2011-14
DCN
FOR MORE INFORMATION SEE
b. § 1.168(i)-8T(e)(2) or Prop. Reg. § 1.168(i)-8(f)(2), Change in determining unadjusted depreciable basis of disposed asset in a multiple asset account from one reasonable method to another reasonable method when it is impracticable from the taxpayer's records to determine the unad- justed depreciable basis of disposed asset
6.28
176
Section 3.02(5) of Rev. Proc. 2014-17
c. Prop. Reg. § 1.168(i)-8(f)(3), Change in determining unadjusted depreciable basis of disposed portion of an asset from one reasonable method to another reasonable method
6.28
176
Section 3.02(5) of Rev. Proc. 2014-17
d. § 1.168(i)-8T(f) or Prop. Reg. § 1.168(i)-8(g), Change in method of identifying which assets in a multiple asset account have been disposed of from one method to another method specified in § 1.168(i)-8T(f)(1) or (2), or from one method to another method specified in Prop. Reg. § 1.168(i)-8(g)(1) or (2)
6.28
176
Section 3.02(5) of Rev. Proc. 2014-17
e. § 1.168(i)-8T(f) or Prop. Reg.
6.29 (Building or structural compo- nent)
177
Section 3.02(6) of Rev. Proc. 2014-17, as modified by section 3.02(2) of Rev. Proc. 2014-54
§ 1.168(i)-8(g), Change in method of identifying which assets in a multiple asset account have been disposed of from a method not specified in § 1.168(i)-8T(f)(1)
or (2) to a method specified in § 1.168(i)- 8T(f)(1) or (2), or from a method not specified in Prop. Reg. § 1.168(i)-8(g)(1) or (2) to a method specified in Prop. Reg. § 1.168(i)-8(g)(1) or (2)
6.30 (Property other than a build- ing or structural component)
178
Section 3.02(7) of Rev. Proc. 2014-17
f. § 1.168(i)-8T(g)(1) or Prop. Reg.
6.29 (Building or structural compo-
177
Section 3.02(6) of Rev. Proc. 2014-17, as modified by section 3.02(2) of Rev. Proc. 2014-54
§ 1.168(i)-8(h)(1), Change from depreciat- ing a disposed asset or disposed portion of an asset to recognizing gain or loss upon
nent)
disposition when a taxpayer continues to depreciate the asset or portion that the tax- payer disposed of prior to the year of change
6.30 (Property other than a build- ing or structural component)
178
Section 3.02(7) of Rev. Proc. 2014-17
g. Prop. Reg. § 1.168(i)-8(d)(2)(iii), Par-
6.35
198
Section 3.03(3) of
tial disposition election for the disposition of a portion of an asset to which the IRS's adjustment pertains
Rev. Proc. 2014-17, as modified by section 3.02(6) of Rev. Proc. 2014-54
# SECTION 5. EFFECTIVE DATE
.01 In general. This revenue procedure
is effective September 18, 2014.
.02 Transition rules. The following
transition rules apply:
(1) Form 3115 filed under Rev. Proc.
97-27.
(a) Conversion to change under this
revenue procedure. If before September
18, 2014, a taxpayer properly filed a Form
3115 under Rev. Proc. 97-27, 1997-1
C.B. 680, requesting consent for a change
in method of accounting described in sec-
tion 3 of this revenue procedure, and the
Form 3115 is pending with the national
office on September 18, 2014, the tax-
payer may choose to make the change
under this revenue procedure if the tax-
payer is otherwise eligible under this rev-
enue procedure. The taxpayer must notify
the national office of its intent to make the
change under this revenue procedure prior
to the issuance of a letter ruling granting
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or denying consent for the change. If the
taxpayer timely notifies the national office
that it will make the change under this
revenue procedure, the national office or-
dinarily will return the Form 3115 to the
taxpayer to make the necessary modifica-
tions to comply with the applicable provi-
sions of this revenue procedure and will
refund the user fee submitted with the
Form 3115.
(b) Filing requirements. A Form 3115
that is returned to the taxpayer for neces-
sary modifications will be converted to a
Form 3115 under this revenue procedure
if the taxpayer resubmits the Form 3115
with the necessary modifications, along
with a copy of the national office letter
sent with the returned Form 3115, to the
IRS in Ogden, UT (mailing address is
provided in section 5.02(2)(c)(iv) of this
revenue procedure) within the later of (a)
the due date specified in section 6.02(3) of
Rev. Proc. 2011-14, or (b) 30 calendar
days after the date of the IRS's letter
returning the Form 3115 to the taxpayer.
(2) Form 3115 filed under Rev. Proc.
2014-17.
(a) Scope. This section 5.02(2) applies
to a taxpayer that properly filed a Form
3115 to make a change in method of ac-
counting under Rev. Proc. 2014-17,
2014-12 I.R.B. 661, to:
(i) Apply § 1.168(i)-1T, § 1.168(i)-7T,
§ 1.168(i)-8T, Prop. Reg. § 1.168(i)-1,
Prop. Reg. § 1.168(i)-7, or Prop. Reg.
§ 1.168(i)-8, for a taxable year beginning
on or after January 1, 2012, and beginning
before January 1, 2014; or
(ii) Apply § 1.168(i)-7 for a taxable year
beginning on or after January 1, 2012.
(b) General rule. If a taxpayer within
the scope of this section 5.02(2) properly
filed the Form 3115 with the IRS in
Ogden, UT (Ogden Copy) under Rev.
Proc. 2014-17 to make a change in
method of accounting described in section
3.02(5) (permissible to permissible
method of accounting for depreciation of
MACRS property under § 1.168(i)-7T or
Prop. Reg. § 1.168(i)-7), 3.02(9) (late
general asset account elections), 3.03(1)
(late partial disposition election), 3.03(2)
(revocation of a general asset account
election), 3.03(3) (partial dispositions of
tangible depreciable assets to which the
IRS's adjustment pertains), or 3.03(5)
(permissible to permissible method of ac-
counting for depreciation of MACRS
property under § 1.168(i)-7) of Rev. Proc.
2014-17 and the Form 3115 was either
post-marked or received by the IRS on or
before September 18, 2014, the taxpayer
makes the change under Rev. Proc. 2014-17.
(c) Option to file an amended Form
3115. If on or before September 18, 2014,
a taxpayer within the scope of this section
5.02(2) properly filed a Form 3115 under
Rev. Proc. 2014-17, the taxpayer may
choose to file an amended Form 3115
under this revenue procedure for the same
year of change on the Form 3115 filed
under Rev. Proc. 2014-17 if, on or before
December 31, 2014, the taxpayer (i) files
an amended federal income tax return us-
ing the new method of accounting pursu-
ant to this revenue procedure, (ii) attaches
the original of the amended Form 3115
filed under this revenue procedure to its
amended federal income tax return for the
year of change, (iii) writes on the top of
page 1 of the Ogden Copy of the amended
Form 3115 "FILED UNDER SECTION
5.02(2) OF REV. PROC. 2014-54"; and
(iv) sends the Ogden Copy of the
amended Form 3115 to the following ad-
dress no later than the date the amended
Form 3115 is filed with the amended fed-
eral income tax return: Internal Revenue
Service, 1973 North Rulon White Blvd.,
Mail Stop 4917, Ogden, UT 84404.
# SECTION 6. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2011-14 is modified and
clarified.
.02 Sections 3.02(6), 3.02(9), 3.03(1),
3.03(2), and 3.03(5) of Rev. Proc.
2014-17 are modified.
.03 Section 3.02(1) of Rev. Proc.
2014-16 is modified.
# SECTION 7. PAPERWORK REDUCTION ACT
The collection of information con-
tained in this revenue procedure has 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-
1551. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number.
The collections of information in this
revenue procedure are in sections 3.03 and
5.02(2)(c) of this revenue procedure. This
information is necessary and will be used
to determine whether the taxpayer prop-
erly changed to a permitted method of
accounting. The collections of informa-
tion are required for a taxpayer to obtain
consent to change its method of account-
ing. The likely respondents are the follow-
ing: individuals, farms, business or other
for-profit institutions, nonprofit institu-
tions, and small businesses or organiza-
tions.
The estimated total annual reporting
and/or recordkeeping burden is 1,200
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from 1/4 hour
to 1.5 hours, depending on individual cir-
cumstances, with an estimated average of
3/4 hour. The estimated number of respon-
dents is 1,600. The estimated annual fre-
quency of responses is on occasion.
# SECTION 8. DRAFTING INFORMATION
The principal author of this revenue
procedure is Kathleen Reed of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, contact
Patrick Clinton of the Office of Associate
Chief Counsel (Income Tax & Account-
ing) at (202) 317-7005 (not a toll free
number).
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# Part IV. Items of General Interest
Notice of Proposed
Rulemaking
Removal of Allocation Rule
for Disbursements from
Designated Roth Accounts
to Multiple Destinations
## REG-105739-11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed
rulemaking.
SUMMARY: This document contains
proposed amendments to the regulations
that address the tax treatment of distribu-
tions from designated Roth accounts un-
der tax-favored retirement plans. The pro-
posed regulations would limit the
applicability of the rule regarding the al-
location of after-tax amounts when dis-
bursements are made to multiple destina-
tions so the allocation rule applies only to
distributions made before the earlier of
January 1, 2015 or a date chosen by the
taxpayer that is on or after September 18,
2014. These regulations would affect ad-
ministrators of, employers maintaining,
participants in, and beneficiaries of desig-
nated Roth accounts under tax-favored re-
tirement plans.
DATES: Written or electronic comments
and requests for a public hearing must be
received by December 18, 2014.
ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-105739-11), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington
D.C. 20044. Submissions may be hand-
delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to: CC:PA:
LPD:PR (REG-105739-11), Courier's
Desk, Internal Revenue Service, 1111
Constitution Avenue, N.W., Washington,
D.C., or sent electronically via the Federal
eRulemaking Portal at http://www.
regulations.gov (IRS REG-105739-11).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Michael P. Brewer at (202) 317-6700;
concerning submission of comments or to
requests for a public hearing, Oluwafun-
milayo (Funmi) Taylor at (202) 317-6901
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
### Background
Section 402(a) provides generally that
any amount distributed from a trust de-
scribed in section 401(a) that is exempt
from tax under section 501(a) is taxable to
the distributee under section 72 in the
taxable year of the distributee in which
distributed. Under section 403(b)(1), any
amount distributed from a section 403(b)
plan is also taxable to the distributee un-
der section 72.
If a participant's account balance in a
plan qualified under section 401(a) or in a
section 403(b) plan includes both after-tax
and pretax amounts, then, under section
72(e)(8), each distribution (other than a
distribution that is paid as part of an an-
nuity) from the plan will include a pro rata
share of both after-tax and pretax
amounts. (Under section 72(d), a different
allocation method applies to annuity dis-
tributions.)
Under section 402A(d)(4), section 72
is applied separately with respect to dis-
tributions and payments from a designated
Roth account and other distributions and
payments from the plan.
Section 402(c) prescribes rules for
amounts that are rolled over from quali-
fied trusts to eligible retirement plans, in-
cluding individual retirement accounts or
annuities ("IRAs"). Subject to certain ex-
ceptions, section 402(c)(1) provides that if
any portion of an eligible rollover distri-
bution paid to an employee from a quali-
fied trust is transferred to an eligible re-
tirement plan, the portion of the
distribution so transferred is not includible
in gross income in the taxable year in
which paid.
Under section 402(c)(2), the maximum
portion of an eligible rollover distribution
that may be rolled over in a transfer to
which section 402(c)(1) applies generally
cannot exceed the portion of the distribution
that is otherwise includible in gross income.
However, under section 402(c)(2)(A) and
(B), the general rule does not apply to
such a distribution to the extent that such
portion is transferred in a direct trustee-
to-trustee transfer to a qualified trust or to
an annuity contract described in section
403(b) and such trust or contract provides
for separate accounting for amounts so
transferred (and earnings thereon), includ-
ing separately accounting for the portion
of such distribution which is includible in
gross income and the portion of such dis-
tribution which is not so includible, or
such portion is transferred to an IRA.
In addition, section 402(c)(2) pre-
scribes that, in the case of a transfer de-
scribed in subparagraph (A) or (B), the
amount transferred shall be treated as con-
sisting first of the portion of such distri-
bution that is includible in gross income
(determined without regard to section
402(c)(1)).
Under section 402A, an applicable re-
tirement plan may include a designated
Roth account. An applicable retirement
plan is defined in section 402A(e)(1) to
mean a plan qualified under section
401(a), a section 403(b) plan, and a gov-
ernmental section 457(b) plan. Section
402A(d) provides that a qualified distribu-
tion (as defined in section 402A(d)(2))
from a designated Roth account is not
includible in gross income.
Section 1.402A-1, Q&A-5(a), of the
Income Tax Regulations prescribes tax-
ability rules for a distribution from a des-
ignated Roth account that is rolled over.
Q&A-5(a) provides, in part, that "any
amount paid in a direct rollover is treated
as a separate distribution from any amount
paid directly to the employee."
Section 402(f) requires that the plan
administrator of a plan qualified under
section 401(a) provide any recipient of an
eligible rollover distribution with a writ-
ten explanation describing certain provi-
sions of law. Notice 2009-68, 2009-2
CB 423 (September 28, 2009), contains
two safe harbor explanations that may be
provided to recipients of eligible rollover
distributions from an employer plan in
order to satisfy section 402(f). The safe
harbor explanation with respect to distri-
butions that are not from a designated
Roth account provides in part (under the
heading "If your payment includes after-
tax contributions") that "[i]f you do a di-
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rect rollover of only a portion of the
amount paid from the Plan and a portion is
paid to you, each of the payments will
include an allocable portion of the after-
tax contributions." Similarly, for distribu-
tions from a designated Roth account, the
safe harbor explanation provides in part
(under the heading “How Do I Do a Roll-
over?") that "[i]f you do a direct rollover
of only a portion of the amount paid from
the Plan and a portion is paid to you, each
of the payments will include an allocable
portion of the earnings in your designated
Roth account."
Sections 403(b)(8)(B) and 457(e)(16)(B)
provide that the rules of section 402(c)(2)
through (7), (9), and (11) and the rules of
section 402(f) also apply to section 403(b)
plans and governmental section 457(b)
plans.
In response to Notice 2009-68, com-
ments were received requesting changes
to the rules regarding the allocation of
basis among simultaneous disbursements
to multiple destinations from a retirement
plan that contains both after-tax and pre-
tax amounts. Commenters indicated that
some plan providers were treating dis-
bursements to separate destinations not as
separate distributions but rather as a single
distribution of the aggregate disbursement
amounts. These plan providers permitted
allocation of all the after-tax amounts in-
cluded in the disbursements to a Roth
IRA. The commenters also pointed out
that, even under the allocation method
described in Notice 2009-68, a partici-
pant who wishes to disburse after-tax
amounts to one destination and pretax
amounts to another could accomplish this
result in a series of steps. First, the partic-
ipant could take an eligible rollover dis-
tribution as a single cash distribution. Sec-
ond, by taking advantage of the rule in
section 402(c)(2) that distribution
amounts that are rolled over are treated as
consisting first of pretax amounts, the par-
ticipant could roll over the pretax amounts
included in the distribution to one desti-
nation, such as a traditional IRA. The re-
maining amount of the distribution would
be after-tax, which the participant could
either roll over into a Roth IRA or retain
without incurring any tax liability. The
option to roll over all after-tax amounts
into a Roth IRA, however, would be avail-
able only to taxpayers with sufficient
funds available outside of the plan to be
able to roll over the entire amount distrib-
uted, including an amount equal to the 20
percent of the taxable portion of the dis-
tribution that is required to be paid to the
IRS as withholding pursuant to § 3405(c).
These proposed regulations are being
issued in conjunction with Notice
2014-54 (to be published in IRB
2014-41 (October 6, 2014)), which will
permit a taxpayer to direct after-tax and
pretax amounts that are simultaneously
disbursed to multiple destinations so as to
allocate them to specific destinations.
Taxpayers will be able to direct these al-
locations in connection with disburse-
ments that are directly rolled over, not
only in connection with 60-day rollovers
after receiving a distribution.
## Explanation of Provisions
The proposed regulations would limit
the applicability of the existing require-
ment in §1.402A-1, Q&A-5(a), that "any
amount paid in a direct rollover is treated
as a separate distribution from any amount
paid directly to the employee." Under the
proposed regulations, that separate distri-
bution requirement would not apply to
distributions made on or after January 1,
2015, or an earlier date chosen by the
taxpayer. An earlier date chosen by the
taxpayer for this purpose may not be ear-
lier than September 18, 2014. See the
"Proposed Effective Date" section of this
preamble for a description of the rules that
will apply after the separate distribution
rule of §1.402A-1, Q&A-5(a), no longer
applies to distributions.
## Proposed Effective Date
These regulations are proposed to ap-
ply to distributions from designated Roth
accounts made on or after January 1,
2015. For distributions from designated
Roth accounts made on or after the appli-
cability date of the Treasury decision that
finalizes these proposed regulations (but
no earlier than January 1, 2015), the rules
in section III of Notice 2014-54 will ap-
ply.
For distributions that are made on or
after September 18, 2014 and before the
applicability date of the Treasury decision
that finalizes these proposed regulations,
taxpayers may rely on these proposed reg-
ulations. Taxpayers relying on these pro-
posed regulations should apply a reason-
able interpretation of the last sentence of
section 402(c)(2) to allocate after-tax and
pretax amounts among disbursements
made to multiple destinations. For this
purpose, a reasonable interpretation of the
last sentence of section 402(c)(2) includes
the rules issued by the IRS in section III of
Notice 2014-54.
## Statement of Availability of IRS Documents
The IRS notices cited in this preamble
are published in the Internal Revenue Bul-
letin or Cumulative Bulletin and are avail-
able from the Superintendent of Docu-
ments, U.S. Government Printing Office,
Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
## 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 regula-
tions, and because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, these regulations have
been submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.
## Comments and Requests for Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The Treasury Department and the
IRS specifically request comments 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 at www.
regulations.gov or upon request. A public
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hearing will be scheduled if requested in
writing by any person that timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published in
the Federal Register.
## Drafting Information
The principal author of these proposed
regulations is Michael P. Brewer, IRS Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel from
the IRS and the Department of Treasury
participated in the development of the
proposed regulations.
## 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805
Par. 2. Section 1.402A-1 is amended
by adding a sentence after the third sen-
tence of paragraph A-5. (a) to read as
follows:
§ 1.402A-1 Designated Roth Accounts.
A-5. (a) * * * The preceding sentence
does not apply to distributions made on or
after January 1, 2015; in addition, a tax-
payer may elect not to apply the preceding
sentence to distributions made on or after
an earlier date that is no earlier than Sep-
tember 18, 2014. * * *
John Dalrymple,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on September
18, 2014, 8:45 a.m., and published in the issue of the Federal
Register for September 19, 2014, 79 F.R. 56310)
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# Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe 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 ap-
plied 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.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
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 applies 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 rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a 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 sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published 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 superseded.
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 published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings 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 formerly used will appear in ma-
terial published in the Bulletin.
A-Individual.
Acq .- Acquiescence.
B-Individual.
BE-Beneficiary.
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.
COOP-Cooperative.
IC-Insurance Company.
Ct.D .- Court Decision.
I.R.B .- Internal Revenue Bulletin.
CY-County.
LE-Lessee.
TT-Trustee.
D Decedent.
LP-Limited Partner.
LR-Lessor.
X-Corporation.
DE-Donee.
M-Minor.
Nonacq .- Nonacquiescence.
O Organization.
P-Parent Corporation.
PHC-Personal Holding Company.
PO Possession of the U.S.
PR-Partner.
PRS Partnership.
PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.
REIT-Real Estate Investment Trust.
Rev. Proc .- Revenue Procedure.
Rev. Rul .- Revenue Ruling.
S-Subsidiary.
S.P.R .- Statement of Procedural Rules.
Stat .- Statutes at Large.
BK-Bank.
B.T.A .- Board of Tax Appeals.
C-Individual.
C.B .- Cumulative Bulletin.
CFR-Code of Federal Regulations.
CI-City.
T.I.R .- Technical Information Release.
TP-Taxpayer.
TR-Trust.
U.S.C .- United States Code.
DC-Dummy Corporation.
Del. Order-Delegation Order.
DISC-Domestic International Sales Corporation.
DR-Donor.
E-Estate.
EE-Employee.
E.O .- Executive Order.
ER-Employer.
ERISA-Employee Retirement Income Security Act.
EX-Executor.
F-Fiduciary.
FC-Foreign Country.
FICA-Federal Insurance Contributions Act.
FISC-Foreign International Sales Company.
FPH-Foreign Personal Holding Company.
T-Target Corporation.
T.C .- Tax Court.
T.D .- Treasury Decision.
TFE-Transferee.
TFR-Transferor.
Y-Corporation.
Z-Corporation.
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## Numerical Finding List1
Bulletins 2014-27 through 2014-41
### Announcements:
2014-2, 2014-28 I.R.B. 120
2014-28, 2014-34 I.R.B. 391
2014-29, 2014-35 I.R.B. 452
### Notices:
2014-40, 2014-27 I.R.B. 100
2014-41, 2014-27 I.R.B. 97
2014-42, 2014-34 I.R.B. 387
2014-43, 2014-31 I.R.B. 249
2014-44, 2014-32 I.R.B. 270
2014-45, 2014-34 I.R.B. 388
2014-46, 2014-36 I.R.B. 520
2014-47, 2014-36 I.R.B. 522
2014-48, 2014-36 I.R.B. 523
2014-49, 2014-41 I.R.B. 665
2014-50, 2014-40 I.R.B. 590
2014-51, 2014-40 I.R.B. 594
2014-54, 2014-41 I.R.B. 670
2014-55, 2014-41 I.R.B. 672
2014-56, 2014-41 I.R.B. 674
### Proposed Regulations:
REG-104579-13, 2014-33 I.R.B. 370
REG-120756-13, 2014-31 I.R.B. 252
REG-105067-14, 2014-34 I.R.B. 391
REG-110948-14, 2014-30 I.R.B. 239
REG-121542-14, 2014-28 I.R.B. 119
REG-107012-14, 2014-33 I.R.B. 371
REG-123286-14, 2014-33 I.R.B. 377
REG-209459-78, 2014-31 I.R.B. 253
REG-129507-14, 2014-38 I.R.B. 561
REG-129786-14, 2014-38 I.R.B. 562
REG-105739-11, 2014-41 I.R.B. 704
## Revenue Procedures:
2014-26, 2014-27 I.R.B. 26
2014-27, 2014-27 I.R.B. 41
2014-29, 2014-28 I.R.B. 105
2014-37, 2014-33 I.R.B. 363
2014-38, 2014-29 I.R.B. 132
2014-39, 2014-29 I.R.B. 151
2014-40, 2014-30 I.R.B. 229
2014-41, 2014-33 I.R.B. 364
2014-42, 2014-29 I.R.B. 193
2014-43, 2014-32 I.R.B. 273
2014-44, 2014-32 I.R.B. 274
2014-45, 2014-34 I.R.B. 388
2014-46, 2014-33 I.R.B. 367
2014-47, 2014-35 I.R.B. 393
2014-48, 2014-36 I.R.B. 527
2014-49, 2014-37 I.R.B. 535
2014-50, 2014-37 I.R.B. 540
Revenue Procedures-Continued:
2014-51, 2014-37 I.R.B.
543
2014-52, 2014-38 I.R.B.
560
2014-53, 2014-39 I.R.B.
573
2014-54, 2014-41 I.R.B.
675
### Revenue Rulings:
2014-14, 2014-27 I.R.B. 12
2014-19, 2014-32 I.R.B. 266
2014-20, 2014-28 I.R.B. 101
2014-21, 2014-34 I.R.B. 381
2014-22, 2014-37 I.R.B. 523
2014-23, 2014-40 I.R.B. 575
2014-24, 2014-37 I.R.B. 529
2014-25, 2014-40 I.R.B. 574
2014-26, 2014-41 I.R.B. 663
### Treasury Decisions:
9664, 2014-32 I.R.B. 254
9668, 2014-27 I.R.B. 1
9669, 2014-28 I.R.B. 103
9670, 2014-29 I.R.B. 121
9671, 2014-29 I.R.B. 124
9672, 2014-30 I.R.B. 196
9673, 2014-30 I.R.B. 212
9674, 2014-30 I.R.B. 225
9675, 2014-31 I.R.B. 242
9676, 2014-32 I.R.B. 260
9677, 2014-31 I.R.B. 241
9678, 2014-32 I.R.B. 262
9679, 2014-32 I.R.B. 267
9680, 2014-32 I.R.B. 254
9681, 2014-33 I.R.B. 340
9682, 2014-33 I.R.B. 342
9683, 2014-33 I.R.B. 330
9684, 2014-33 I.R.B. 345
9685, 2014-34 I.R.B. 379
9686, 2014-34 I.R.B. 382
9687, 2014-36 I.R.B. 486
9688, 2014-36 I.R.B. 482
9689, 2014-36 I.R.B. 456
9690, 2014-38 I.R.B. 548
9691, 2014-38 I.R.B. 547
9692, 2014-40 I.R.B. 574
9693, 2014-41 I.R.B. 596
9694, 2014-41 I.R.B. 626
1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin
2014-26, dated June 30, 2014.
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Finding List of Current Actions on Previously Published Items1
Revenue Procedures-Continued:
Revenue Rulings:
2011-16
2008-40
Bulletins 2014-27 through 2014-41
Superseded by
Modified by
Rev. Proc. 2014-51, 2014-37 I.R.B. 543
Rev. Rul. 2014-24, 2014-37 I.R.B. 529
Announcements:
2011-16
2011-1
Modified by
Modified by
2012-11
Rev. Proc. 2014-51, 2014-51 I.R.B. 543
Rev. Rul. 2014-24, 2014-37 I.R.B. 529
Supplemented by
2012-38
Ann. 2014-2, 2014-28 I.R.B. 120
Superseded by
2012-6
Rev. Proc. 2014-27, 2014-27 I.R.B. 26
Modified by
2013-11
Rev. Rul. 2014-24, 2014-37 I.R.B. 529
Supplemented by
2012-46
Ann. 2014-2, 2014-28 I.R.B. 120
Superseded by
Rev. Proc. 2014-26, 2014-27 I.R.B. 41
Notices:
2010-41
Obsoleted by
2014-4
2013-11
Rev. Proc. 2014-43, 2014-32 I.R.B. 273
Amplified by
Modified by
Rev. Proc. 2014-40, 2014-30 I.R.B. 229
Notice 2014-48, 2014-36 I.R.B. 523
Revenue Procedures:
2014-4
2013-23
Modified by
Modified by
1981-38
Rev. Proc. 2014-54, 2014-41 I.R.B. 675
Notice 2014-48, 2014-36 I.R.B. 523
Superseded by
Rev. Proc. 2014-42, 2014-29 I.R.B. 193
2014-5
Amplified by
2013-28
Rev. Proc. 2014-40, 2014-30 I.R.B. 229
Modified by
93-37
Notice 2014-48, 2014-36 I.R.B. 523
Modified and Superseded by
2014-8
Rev. Proc. 2014-43, 2014-32 I.R.B. 273
Amplified by
2013-29
Rev. Proc. 2014-40, 2014-30 I.R.B. 229
Modified by
1981-38
Notice 2014-46, 2014-36 I.R.B. 520
Modified by
2014-9
Rev. Proc. 2014-42, 2014-29 I.R.B. 193
Amplified by Rev. Proc. 2014-40, 2014-30 I.R.B. 229
2013-29
Clarified by
2000-12
Notice 2014-46, 2014-36 I.R.B. 520
Superseded by
2014-10
Rev. Proc. 2014-39, 2014-29 I.R.B. 151
Amplified by Rev. Proc. 2014-40, 2014-30 I.R.B. 229
2013-32 Modified by
2002-55
Revoked by
2014-13
Notice 2014-48, 2014-36 I.R.B. 523
Rev. Proc. 2014-39, 2014-29 I.R.B. 151
Modified by Rev. Proc. 2014-38, 2014-29 I.R.B. 132
2013-37 Modified by
2003-64 Superseded by
2014-13
Notice 2014-48, 2014-36 I.R.B. 523
Rev. Proc. 2014-47, 2014-35 I.R.B. 393
Superseded by Rev. Proc. 2014-38, 2014-29 I.R.B. 132
2013-51 Obsoleted by
2004-21
2014-16
Notice 2014-42, 2014-34 I.R.B. 387
Superseded by
Superseded by
Rev. Proc. 2014-47, 2014-35 I.R.B. 393
Rev. Proc. 2014-51, 2014-37 I.R.B. 543
2013-60 Modified by
2005-77
2014-16
Notice 2014-46, 2014-36 I.R.B. 520
Superseded by
Modified by
Rev. Proc. 2014-47, 2014-35 I.R.B. 393
Rev. Proc. 2014-51, 2014-37 I.R.B. 543
2013-60
Clarified by
2011-14
2014-12
Notice 2014-46, 2014-36 I.R.B. 520
Modified by
Modified by
Rev. Proc. 2014-48, 2014-36 I.R.B. 527
Rev. Proc. 2014-54, 2014-41 I.R.B. 675
2014-44
Supplemented by
2011-14
2014-17
Notice 2014-45, 2014-34 I.R.B. 388
Modified by
Modified by
Rev. Proc. 2014-54, 2014-41 I.R.B. 675
Rev. Proc. 2014-54, 2014-41 I.R.B. 675
1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin 2014-26, dated June 30, 2014.
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## Treasury Decisions:
2005-47
Obsoleted by
T.D. 9668 2014-27 I.R.B. 1
2010-51
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345
2010-71
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345
2011-6
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345
2011-9
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345
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### Internal Revenue Bulletins 2014-27 through 2014-41
The abbreviation and number in parenthesis following the index
entry refer to the specific item; numbers in roman and italic type
following the parentheses refer to the Internal Revenue Bulletin in
which the item may be found and the page number on which it
appears.
Key to Abbreviations:
Ann
Announcement
CD
Court Decision
DO
Delegation Order
EO
Executive Order
PL
Public Law
PTE
Prohibited Transaction Exemption
RP
Revenue Procedure
RR
Revenue Ruling
SPR
Statement of Procedural Rules
TC
Tax Convention
TD
Treasury Decision
TDO
Treasury Department Order
# ADMINISTRATIVE
AJCA-Section 6707 and the Penalty for Failure to Furnish
Information Regarding Reportable Transactions by Material
Advisors (TD 9686) 34, 382
Adjusted Applicable Dollar Amount for Fee Imposed by §§ 4375
and 4376 (Notice 56) 41, 674
Announcement to Discontinue the Internal Revenue Bulletin
Index (Ann 27) 28, 120
Annual Filing Season Program (RP 42) 29, 193
Disclosure to Census Bureau (REG-120756-13) 31, 241
Disclosure to Census Bureau (TD 9677) 31, 241
Information reporting by passport applicants (TD 9679) 32, 267
Low-Income Housing Tax Credit (RP 52) 38, 560
Procedures to void backup withholding (RP 43) 32, 273
Proposed Regulations:
26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (REG-
120756-13) 31, 252
Regulations Governing Practice Before the Internal Revenue
Service (REG-138367-06) (TD 9668) 27, 1
Regulations:
31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31,
revised; 10.35, revised; 10.36, revised; 10.37, revised;
10.52, revised; 10.81, revised; 10.82, revised; 10.91, re-
vised. (TD 9668) 27, 1
26 CFR 301.6109-4, added; 1.6042-4, amended; 1.6043-4,
amended; 1.6044-5, amended; 1.6045-2, amended;
1.6045-3, amended; 1.6045-4, amended; 1.6045-5,
amended; 1.6049-6, amended; 1.6050A-1, amended;
1.6050E-1, amended; 1.6050N-1, amended; 1.6050P-1,
amended; 1.6050S-1, amended; 1.6050S-3, amended (TD
9675) 31, 242
# ADMINISTRATIVE-Cont.
26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (TD 9677) 31,
241
26 CFR part 301, amended; 26 CFR 301.6039E-1 added (TD
9679) 32, 267
26 CFR 301.6707-1, added; 301.6707-1T, removed; Rev.
Proc. 2007-21, sections 4.04, 4.05, and 4.06 superseded;
material advisor penalty for failure to furnish information
regarding reportable transactions (TD 9686) 34, 382
Substitute Forms Preparation for Certain Information Returns
(RP 27) 27, 41
Substitute Forms Preparation for Certain Information Returns
(RP 44) 32, 274
Truncated Taxpayer Identification Numbers (TD 9675) 31, 242
# EMPLOYEE PLANS
Additional Permitted Election Changes for Health Coverage
under § 125 Cafeteria Plans (Notice 55) 41, 672
Cash balance plans and other hybrid defined benefit pension
plans (TD 9693) 41, 596
Group Trusts (RR 24) 37, 529
Individual Retirement Account Rollover Limitations (REG-
209459-78) 31, 253
Longevity Annuity Contracts (TD 9673) 30, 212
Proposed Regulations:
26 CFR 408, Individual Retirement Accounts (REG-209459-
78) 31, 253
Qualified Plans
Rollovers (Notice 54) 41, 670
Regulations:
26 CFR 54.9815-2708, as amended (TD 9671) 29, 174
26 CFR 1.401(a)(9)-5, amended; 1.401(a)(9)-6, amended;
1.403(b)-6, amended; 1.408-8, amended; 1.408A-6,
amended; 1.6047-2, added (TD 9673) 30, 212
26 CFR 1.411(a)(13)-1, amended (TD 9693); 26 CFR
1.411(b)-1, amended (TD 9693); 41, 596
26 CFR 1.411(b)(5)-1, amended (TD 9693) 41, 596
26 CFR 1.162-31, added (REG-106796-12 TD 9694) 41, 626
Rules relating to 90 day waiting period limitation (TD 9671) 29,
174
The $500,000 deduction limitation for remuneration provided by
certain health insurance providers (REG-106796-12) (TD
9694) 41, 626
Weighted average interest rates
Segment rates for June 2014 (Notice 41) 27, 97
Segment rates for July 2014 (Notice 43) 31, 249
Segment rates for August 2014 (Notice 48) 36, 523
Segment rates for September 2014 (Notice 50) 40, 590
# EMPLOYMENT TAX
Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121
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# EMPLOYMENT TAX-Cont.
Method of accounting for gains and losses on shares in certain
money market funds; broker returns with respect to sales of
shares in money market funds (REG-107012-14) 33, 371
Publications:
1223, General Rules and Specifications for Substitute Forms
W-2c and W-3c (RP29) 28, 105
4436, General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941), and Schedule R (RP 26)
27, 26
Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103
Regulations:
26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103
26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed;
31.3306(c)(5)-1, amended; 31.3306(c)(5)-1T, removed;
301.7701-2, amended; 301.7701-2T, removed; extending
religious and family member FICA and FUTA exceptions
to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD
9670) 29, 121
26 CFR 1.446-7 added; 1.6045-1 amended; method of ac-
counting for gains and losses on shares in certain money
market funds; broker returns with respect to sales of shares
in money market funds (REG-107012-14) 33, 371
# ESTATE TAX
Section 2032A .- Valuation of Certain Farm, Etc., Real Property
(RR 21) 34, 381
Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103
Regulations:
26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103
# EXCISE TAX
Adjusted Applicable Dollar Amount for Fee Imposed by §§ 4375
and 4376 (Notice 56) 41, 674
Alternative process for religious objections to providing contra-
ceptive coverage under section 9815 (REG-129507-14) 38, 561
Alternative process for religious objections to providing contra-
ceptive coverage under section 9815 (TD 9690) 38, 548
Branded Prescription Drug Fee (REG-123286-14) 33, 377
Branded Prescription Drug Fee (TD 9684) 33, 245
Branded Prescription Drug Fee (Notice 42) 34, 387
Definition of "eligible organization" under section 9815, regard-
ing coverage of preventive services, including contraceptive
coverage (REG-129786-14) 38, 562
Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121
# EXCISE-Cont.
Section 9010 of the ACA; health insurance providers fee (Notice
47) 36, 522
Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103
Proposed Regulations:
26 CFR 54.9815-2713A is revised; accommodations in con-
nection with coverage of preventive health services under
section 9815 (REG-129507-14) 38, 561
26 CFR 54.9815-2713A(a) amended; accommodations in
connection with coverage of preventive health services
under section 9815 (REG-129786-14) 38, 562
Regulations:
26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103
26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed;
31.3306(c)(5)-1, amended; 31.3306(c)(5)-1T, removed;
301.7701-2, amended; 301.7701-2T, removed; extending
religious and family member FICA and FUTA exceptions
to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD
9670) 29, 121
26 CFR 54.9815-2708, as amended (TD 9671) 29, 121
26 CFR 51.2(e)(3), amended; (REG-123286-14) 33, 377
26 CFR 54.9815-2713A(b), (c)(1), and (c)(2)(i) introductory
text amended; 54.9815-2713A(f) and 54.9815-2713AT
added; accommodations in connection with coverage of
preventive health services under section 9815 (TD 9690)
38, 548
Rules relating to 90 day waiting period limitation (TD 9671) 29,
121
# EXEMPT ORGANIZATIONS
Streamlined Application for Recognition of Exemption Under
Section 501(c)(3) (RP 2014-40) 30, 229
Streamlined process for 501(c)(3) recognition (REG-110948-
14) 30, 225
Streamlined process for 501(c)(3) recognition (TD 9674) 30, 225
Regulations:
26 CFR 1.501(c)-1 amended 1. 501(a)-1T added;
1.501(c)(3)-1 amended, 1.501(c)(3)-1T added; and
1.508-1 amended, 1.508-1T added (REG-110948-
14)(TD 9674) 30, 225
# GIFT TAX
Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103
Regulations:
26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews (REG-121542-14) (TD
9669) 28, 103
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# INCOME TAX
Accounting method change, retail inventory method (RP 48) 36,
132
AJCA-Section 6707 and the Penalty for Failure to Furnish
Information Regarding Reportable Transactions by Material
Advisors (TD 9686) 34, 382
Allocation and Apportionment of Interest Expense (TD 9676)
32, 260
Awards for Information Relating to Detecting Underpayments of
Tax or Violations of the Internal Revenue Laws (TD 9687) 36,
486
Basis of indebtedness of S corporations to their shareholders (TD
9682) 33, 342
Credit for carbon dioxide Sequestration (Notice 40) 27, 100
Debt that is a position in personal property that is part of a
straddle (TD 9691) 38, 547
Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents, and enrolled actuaries, enrolled retire-
ment plan agents, and appraisers (ANN 29) 35, 452
Disclosure to Census Bureau (REG-120756-13) 31, 252
Disclosure to Census Bureau (TD 9677) 31, 241
Dispositions of property subject to depreciation under section
168 (TD 9689) 36, 456
Employer shared responsibility; look-back measurement method
(Notice 49) 41, 665
FFI Agreement for Participating FFI and Reporting Model 2 FFI
(RP 38) 29, 132
Foreign Earned Income Exclusion (ANN 2014-28) 34, 391
Foreign tax credit guidance under section 901 (m) (Notice 44)
32, 391
Foreign tax credit guidance under section 901 (m) (Notice 45)
34, 270
Information reporting by passport applicants (TD 9679) 32, 267
Insurance; effectively connected income (RP 53) 39, 573
Interest:
Investment:
Federal short-term, mid-term, and long-term rates for: July
2014 (RR 20) 28, 101
Federal short-term, mid-term, and long-term rates for: Au-
gust 2014 (RR 19) 32, 266
Federal short-term, mid-term, and long-term rates for: Sep-
tember 2014 (RR 22) 37, 533
Federal short-term, mid-term, and long-term rates for: Oc-
tober 2014 (RR 26) 41, 663
Method change procedures for dispositions of tangible deprecia-
ble property (RP 2014-54) 41, 675
Money market funds and the wash sale rules (RP 45) 34, 388
Premium Tax Credit (REG-104579-13) 33, 370
Premium Tax Credit (RP 37) 33, 363
Premium Tax Credit (RP 41) 33, 364
Premium Tax Credit (TD 9683) 33, 330
Production Tax Credit, Investment Tax Credit, Beginning of
Construction (Notice 46) 36, 520
Proposed Regulations:
26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (REG-
120756-13) 31, 252
# INCOME TAX-Cont.
26 C.F.R. 1.382-3(j)(17), modified; 1.382-3T(j)(17), added,
segregation rules for public groups of shareholders (REG-
105067-14) 34, 391
Publications:
1223, General Rules and Specifications for Substitute Forms
W-2c and W-3c (RP 29) 28, 105
4436, General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941), and Schedule R (RP 26)
27, 26
Qualified Intermediary (QI) Agreement (RP 39) 29, 151
Qualified residential rental projects (RP-105272-13) (RP 50) 37,
540
Regulations:
31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31,
revised; 10.35, revised; 10.36, revised; 10.37, revised;
10.52, revised; 10.81, revised; 10.82, revised; 10.91, re-
vised (TD 9668) 27, 1
26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews (REG-121542-14) (TD
9669) 28, 103
26 CFR 1.45R-0, added; 1.45R-1, added; 1.45R-2, added;
1.45R-3, added; 1.45R-4, added; 1.45R-5, added; tax
credit for employee health insurance expenses of small
employers (TD 9672) 30, 196
26 CFR 301.6109-4, added; 1.6042-4, amended; 1.6043-4,
amended; 1.6044-5, amended; 1.6045-2, amended;
1.6045-3, amended; 1.6045-4, amended; 1.6045-5,
amended; 1.6049-6, amended; 1.6050A-1, amended;
1.6050E-1, amended; 1.6050N-1, amended; 1.6050P-1,
amended; 1.6050S-1, amended; 1.6050S-3, amended (TD
9675) 31, 242
26 CFR 1.67-4, amended (TD 9667) 32, 254
26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (TD 9677) 31,
241
26 CFR 1.861-9 amended, 1.861-11 amended; (TD 9676) 32,
260
26 CFR 1.1092(b)-6, added; 1.1092(b)-6T, removed;
1.1092(b)-3T, amended; (TD 9678) 32, 262
26 CFR part 301, amended; 26 CFR 301.6039E-1 added (TD
9679) 32, 267
26 CFR 1.174-2 amended; (TD 9680) 32, 254
26 CFR 1.36B-2T, 26 CFR 1.36B-3T, 1.36B-4T, added; 26
CFR 1.36B-2, 26 CFR 1.36B-3\\, 1.36B-4, amended; 26
CFR 1.162(1)-1 and 26 CFR 1.162(1)-1T, added. (REG-
104579-13) 33, 370
26 CFR 1.195-2, added; 26 CFR 1.708-1, amended; 26 CFR
1.709-1, amended. (TD 9681) 33, 340
26 CFR 1.1366-2(a), added new paragraph (a)(2) and moved
current (a)(2) through (a)(6) to (a)(3) through (a)(7), re-
spectively; basis of indebtedness of S corporations to their
shareholders (TD 9682) 33, 342
26 CFR 1.36B-2T, 26 CFR 1.36B-3T, 1.36B-4T added, 26
CFR 1.36B-2, 26 CFR 1.36B-3\\, 1.36B-4, amended, 26
CFR 1.162(1)-1 and 26 CFR 1.162(1)-1T added, (TD
9683) 33, 330
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# INCOME TAX-Cont.
26 C.F.R. 1.382-3(j)(17), modified; 1.382-3T(j)(17), added,
segregation rules for public groups of shareholders (TD
9685) 34, 379
26 CFR 301.6707-1, added; 301.6707-1T, removed; Rev.
Proc. 2007-21, sections 4.04, 4.05, and 4.06 superseded;
material advisor penalty for failure to furnish information
regarding reportable transactions (TD 9686) 34, 382
26 CFR 301.7623-1, revised; 26 CFR 301.7623-4, added; 26
CFR 301.7623-2, added; 26 CFR 301.6103(h)(4)-1, added
26 CFR 301.7623-3, added; (TD 9687) 36, 486
26 CFR 1.471-8 amended (TD 9688) 36, 482
26 CFR 1.168(i)-8 added; 1.165-2, 1.168(i)-0, 1.168(i)-1,
1.168(i)-7, 1.263(a)-3, 1.1016-3 amended; 1.168(i)-0T,
1.168(i)-1T, 1.168(i)-8T removed; dispositions of prop-
erty subject to depreciation under section 168 (TD 9689)
36, 456
26 CFR 1.1092(d)-1, amended; 1.1092(d)-1T, removed; debt
that is a position in personal property that is part of a
straddle (TD 9691) 38, 547
26 CFR 1.402A-1, amended; Removal of Allocation Rule for
Disbursements from Designated Roth Accounts to Multi-
ple Destinations (REG-105739-11) 41, 704
Regulations Governing Practice Before the Internal Revenue
Service (REG-138367-06) (TD 9668) 27, 1
REIT Distressed Debt (RP 51) 37, 543
Removal of Allocation Rule for Disbursements from Designated
Roth Accounts to Multiple Destinations (REG-105739-11)
41, 704
Research and experimental expenditures (TD 9680) 32, 254
Retail inventory method (TD 9688) 36, 482
Tax Credit for Employee Health Insurance Expenses of Small
Employers (TD 9672) 30, 196
Temporary relief from certain requirements of § 42 (Rev. Proc.
2014-39) (RP 49) 37, 535
Truncated Taxpayer Identification Numbers (TD 9675) 31, 242
Section 67 Limitations on Estates or Trusts; Change of Effective
Date (TD 9664) 32, 254
Section 1298(f) Reporting Requirements for U.S. Persons that
Hold Stock of a Passive Foreign Investment Company that is
Marked to Market Under Section 475 or Another Chapter 1
Code Provision Other Than Section 1296 (Notice 51) 40, 594
Section 5000A national average premium for a bronze level of
coverage (RP 46) 33, 367
Segregation rules for public groups of shareholders, (REG-
105067-14) 34, 391
Segregation rules for public groups of shareholders, (TD 9685)
34, 574
Standard Industry Fare Level (RR 2014-25) 40, 574
Substitute Forms Preparation for Certain Information Returns
(RP 27) 27, 379
Substitute Forms Preparation for Certain Information Returns
(RP 44) 32, 41
Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103
Unamortized organization and syndication expenses following a
partnership technical termination (TD 9681) 33, 340
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# INCOME TAX-Cont.
Underpayment and overpayments, quarter beginning: July 1,
2014 (RR 14) 27, 12
Underpayment and overpayments, quarter beginning: October 1,
2014 (RR-129839-14) 40, 575
Unrealized gain or loss treatment upon establishment of an
identified mixed straddle (TD 9678) 32, 262
Voluntary withholding(TD-9692) 40,
26 CFR 31.3402(p)-1, section (c) added (TD 9692) 40, 574
Withholding Foreign Partnership and Trust Agreements (RP 47)
35, 393
# SELF-EMPLOYMENT TAX
Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121
Regulations:
26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed;
31.3306(c)(5)-1, amended; 31.3306(c)(5)-1T, removed;
301.7701-2, amended; 301.7701-2T, removed; extending
religious and family member FICA and FUTA exceptions
to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD
9670) 29, 121
# SPECIAL ANNOUNCEMENT
Annual Filing Season Program (RP 42) 29, 193
Procedures to Avoid Backup Withholding (RP 43) 32, 273
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