Internal Revenue Bulletin 2013-48 (PDF rendition): IRS Announcements

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

# Internal Revenue bulletin

Bulletin No.

2013-48

November

25, 2013

## 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

Rev. Rul. 2013-23, page 590.

Section 1274A - inflation adjusted numbers for 2014. This
ruling provides the dollar amounts, increased by the 2014
inflation adjustment, for section 1274A of the Code. Rev. Rul.
2012-33 is supplemented and superseded.

### T.D. 9639, page 588.

These final regulations under section 1001 explain when the
transfer or assignment of certain derivative contracts does not
result in a realization event for the nonassigning counterparty
to the contract.

## EMPLOYMENT TAX

Notice 2013-72, page 592.

2014 Social Security contribution and benefit base; domestic
employee coverage threshold. The Commissioner of the Social
Security Administration has announced (1) the OASDI contribu-
tion and benefit base for remuneration paid in 2014 and self-
employment income earned in taxable years beginning in
2014, and (2) the domestic employee coverage threshold
amount for 2014.

## EXCISE TAX

### T.D. 9640, page 548.

These final regulations implement the Paul Wellstone and Pete
Domenici Mental Health Parity and Addiction Equity Act of
2008, which requires parity between mental health or sub-
stance use disorder benefits and medical/surgical benefits

Finding Lists begin on page ii.
Index for July through November begins on page iv.

Department of the Treasury
Internal Revenue Service

with respect to financial requirements and treatment limitations
under group health plans and group and individual health insur-
ance coverage.

## ADMINISTRATIVE

Announcement 2013-46, page 593.

This announcement contains a correction to Rev. Proc. 2011-
42, 2011-37 I.R.B. 318, regarding the use and evaluation of
statistical samples and sampling estimates.

## 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.

# Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

## Section 483 .- Interest on Certain Deferred Payments

This ruling provides the dollar amounts, increased
by the 2014 inflation adjustment, for section 1274A of
the Code. Rev. Rul. 2012-33 supplemented and super-
seded. See Rev. Rul. 2013-23, page 590.

Section 9812 .- Parity in
Mental Health and
Substance Use Disorder
Benefits

T.D. 9640

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 54

DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2590

DEPARTMENT OF HEALTH
AND HUMAN SERVICES
CMS-4140-F
45 CFR Parts 146 and 147

Final Rules under the Paul
Wellstone and Pete Domenici
Mental Health Parity and
Addiction Equity Act of 2008;
Technical Amendment to
External Review for Multi-
State Plan Program

AGENCIES: Internal Revenue Service,
Department of the Treasury; Employee
Benefits Security Administration, Depart-
ment of Labor; Centers for Medicare &
Medicaid Services, Department of Health
and Human Services.

ACTION: Final rules.

SUMMARY: This document contains fi-
nal rules implementing the Paul Wellstone

and Pete Domenici Mental Health Parity
and Addiction Equity Act of 2008, which
requires parity between mental health or
substance use disorder benefits and med-
ical/surgical benefits with respect to finan-
cial requirements and treatment limita-
tions under group health plans and group
and individual health insurance coverage.
This document also contains a technical
amendment relating to external review
with respect to the multi-state plan pro-
gram administered by the Office of Per-
sonnel Management.

DATES: Effective date. These final regu-
lations are effective on January 13, 2014,
except that the technical amendments to
29 CFR 2590.715-2719 and 45 CFR
147.136 are effective on December 13,
2013.

Applicability date. The mental health
parity provisions of these final regulations
apply to group health plans and health
insurance issuers for plan years (or, in the
individual market, policy years) begin-
ning on or after July 1, 2014. Until the
final rules become applicable, plans and
issuers must continue to comply with the
mental health parity provisions of the in-
terim final regulations.

## FOR FURTHER INFORMATION

CONTACT: Amy Turner or Amber Riv-
ers, Employee Benefits Security Adminis-
tration, Department of Labor, at (202)
693-8335; Karen Levin, Internal Revenue
Service, Department of the Treasury, at
(202) 622-6080 or (202) 317-5500; Jacob
Ackerman, Centers for Medicare & Med-
icaid Services, Department of Health and
Human Services, at (410) 786-1565.

Customer service information: Individ-
uals interested in obtaining information
from the Department of Labor concerning
employment-based health coverage laws,
including the mental health parity provi-
sions, may call the EBSA Toll-Free Ho-
tline at 1-866-444-EBSA (3272) or visit
the Department of Labor's website (http://
www.dol.gov/ebsa). In addition, informa-
tion from HHS on private health insur-
ance for consumers (such as mental

health and substance use disorder par-
ity) can be found on the Centers for
Medicare & Medicaid Services (CMS)
website (www.cms.gov/cciio) and infor-
mation on health reform can be found at
www.HealthCare.gov. In addition, in-
formation about mental health is avail-
able at www.mentalhealth.gov.

## SUPPLEMENTARY INFORMATION:

### I. Background

The Paul Wellstone and Pete Domenici
Mental Health Parity and Addiction Eq-
uity Act of 2008 (MHPAEA) was en-
acted on October 3, 2008 as sections 511
and 512 of the Tax Extenders and Al-
ternative Minimum Tax Relief Act of
2008 (Division C of Public Law 110-
343).1 MHPAEA amends the Employee
Retirement Income Security Act of 1974
(ERISA), the Public Health Service Act
(PHS Act), and the Internal Revenue Code
of 1986 (Code). In 1996, Congress en-
acted the Mental Health Parity Act of
1996 (MHPA 1996), which required par-
ity in aggregate lifetime and annual dollar
limits for mental health benefits and med-
ical/surgical benefits. Those mental health
parity provisions were codified in section
712 of ERISA, section 2705 of the PHS
Act, and section 9812 of the Code, and
applied to employment-related group
health plans and health insurance cover-
age offered in connection with a group
health plan. The changes made by
MHPAEA were codified in these same
sections and consist of new requirements,
including parity for substance use disorder
benefits, as well as amendments to the
existing mental health parity provisions.
The changes made by MHPAEA are gen-
erally effective for plan years beginning
after October 3, 2009.

The Patient Protection and Affordable
Care Act, Pub. L. 111-148, was enacted
on March 23, 2010, and the Health Care
and Education Reconciliation Act of
2010, Pub. L. 111-152, was enacted on
March 30, 2010 (collectively, the “Af-
fordable Care Act"). The Affordable Care

1A technical correction to the effective date for collectively bargained plans was made by Public Law 110-460, enacted on December 23, 2008.

Act reorganizes, amends, and adds to the
provisions of part A of title XXVII of the
PHS Act relating to group health plans
and health insurance issuers in the group
and individual markets. The Affordable
Care Act adds section 715(a)(1) to ERISA
and section 9815(a)(1) to the Code to in-
corporate the provisions of part A of title
XXVII of the PHS Act into ERISA and
the Code, and to make them applicable to
group health plans and health insurance
issuers providing health insurance cover-
age in connection with group health plans.
The PHS Act sections incorporated by
these references are sections 2701 through
2728.

The Affordable Care Act extended
MHPAEA to apply to the individual
health insurance market and redesignated
MHPAEA in the PHS Act as section
2726.2 Additionally, section 1311(j) of the
Affordable Care Act applies section 2726
of the PHS Act to qualified health plans
(QHPs) in the same manner and to the
same extent as such section applies to
health insurance issuers and group health
plans. Furthermore, the Department of
Health and Human Services (HHS) final
regulation regarding essential health ben-
efits (EHB) requires health insurance is-
suers offering non-grandfathered health
insurance coverage in the individual and
small group markets, through an Afford-
able Insurance Exchange (Exchange, also
called a Health Insurance Marketplace or
Marketplace) or outside of an Exchange,
to comply with the requirements of the
MHPAEA regulations in order to satisfy
the requirement to cover EHB.3

On April 28, 2009, the Departments of
the Treasury, Labor, and HHS published
in the Federal Register (74 FR 19155) a
request for information (RFI) soliciting
comments on the requirements of MH-
PAEA. (Subsequent references to the
"Departments" include all three Depart-
ments, unless the headings or context in-
dicate otherwise.) On February 2, 2010,
after consideration of the comments re-
ceived in response to the RFI, the Depart-
ments published in the Federal Register

(75 FR 5410) comprehensive interim final
regulations implementing MHPAEA (in-
terim final regulations). The interim final
regulations generally became applicable
to group health plans and group health
insurance issuers for plan years beginning
on or after July 1, 2010.

The interim final regulations established
six classifications of benefits4 and provided
that the parity requirements be applied on
a classification-by-classification basis.
The general parity requirement set forth in
paragraph (c)(2) of the interim final regu-
lations prohibited plans and issuers from
imposing a financial requirement or quan-
titative treatment limitation on mental
health and substance use disorder benefits
in any classification that is more restric-
tive than the predominant financial re-
quirement or quantitative treatment limi-
tation that applies to substantially all
medical/surgical benefits in the same clas-
sification. For this purpose, the interim
final regulations incorporated the two-
thirds "substantially all" numerical stan-
dard from the regulations implementing
MHPA 1996, and quantified "predomi-
nant" to mean that more than one-half of
medical/surgical benefits in the classifica-
tion are subject to the financial require-
ment or quantitative treatment limitation
in the relevant classification. Using these
numerical standards, the Departments es-
tablished a mathematical test by which
plans and issuers could determine what
level of a financial requirement or quanti-
tative treatment limitation, if any, is the
most restrictive level that could be im-
posed on mental health or substance use
disorder benefits within a classification.
(This mathematical test is referred to in
this preamble as the quantitative parity
analysis.)

The interim final regulations also pro-
hibited plans and issuers from applying
cumulative financial requirements (such
as deductibles or out-of-pocket maxi-
mums) or cumulative quantitative treat-
ment limitations (such as annual or life-
time day or visit limits) to mental health
or substance use disorder benefits in a

classification that accumulate separately
from any such cumulative financial re-
quirements or cumulative quantitative
treatment limitations established for med-
ical/surgical benefits in the same classifi-
cation.

Additionally, the interim final regula-
tions set forth parity protections with re-
spect to nonquantitative treatment limita-
tions (NQTLs), which are limits on the
scope or duration of treatment that are not
expressed numerically (such as medical
management techniques like prior autho-
rization). The interim final regulations
stated that a plan or issuer may not impose
an NQTL with respect to mental health or
substance use disorder benefits in any
classification unless, under the terms of
the plan as written and in operation, any
processes, strategies, evidentiary standards,
or other factors used in applying the NQTL
to mental health or substance use disorder
benefits in the classification are compara-
ble to, and are applied no more stringently
than, the processes, strategies, evidentiary
standards, or other factors used in apply-
ing the limitation with respect to medical/
surgical benefits in the same classification,
except to the extent that recognized clin-
ically appropriate standards of care may
permit a difference. The Departments also
set forth a special rule for evaluating par-
ity of multi-tiered prescription drug bene-
fits. The interim final regulations included
several examples to illustrate each of
these parity standards.

The interim final regulations also im-
plemented MHPAEA's disclosure provi-
sions requiring that the criteria for medi-
cal necessity determinations and the
reason for any denial of reimbursement or
payment under a group health plan (or
health insurance coverage) with respect to
mental health or substance use disorder
benefits be made available upon request in
certain circumstances.

The interim final regulations also spe-
cifically requested comments in several
areas, including whether additional exam-
ples would be helpful to illustrate the ap-
plication of the NQTL rule to other fea-

2These final regulations apply to both grandfathered and non-grandfathered health plans. See section 1251 of the Affordable Care Act and its implementing regulations at 26 CFR
54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140. Under section 1251 of the Affordable Care Act, grandfathered health plans are exempted only from certain Affordable Care
Act requirements enacted in Subtitles A and C of Title I of the Affordable Care Act. The provisions extending MHPAEA requirements to the individual market and requiring that qualified
health plans comply with MHPAEA were not part of these sections.

3See 45 CFR 147.150 and 156.115 (78 FR 12834, February 25, 2013).

4The six classifications of benefits are inpatient, in-network; inpatient, out-of-network; outpatient, in-network; outpatient, out-of-network; emergency care; and prescription drugs.

tures of medical management or general
plan design; whether and to what extent
MHPAEA addresses the "scope of ser-
vices" or "continuum of care" provided by
a group health plan or health insurance
coverage; what additional clarifications
might be helpful to facilitate compliance
with the disclosure requirement for med-
ical necessity criteria or denials of mental
health or substance use disorder benefits;
and implementing the new statutory re-
quirements for the increased cost exemp-
tion under MHPAEA, as well as informa-
tion on how many plans expect to use the
exemption.

In light of the comments and other
feedback received in response to the in-
terim final regulations, the Departments
issued clarifications in several rounds of
Frequently Asked Questions (FAQs). In
the first FAQ about MHPAEA, the De-
partments set forth an enforcement safe
harbor under which the Departments
would not take enforcement action against
plans and issuers that divide benefits fur-
nished on an outpatient basis into two
sub-classifications - (1) office visits, and
(2) all other outpatient items and services
\- for purposes of applying the financial
requirement and treatment limitation rules
under MHPAEA.5

The Departments issued additional
FAQs providing further clarifications.6
The FAQs issued in December 2010 ad-
dressed the changes made to the definition
of "small employer" after the enactment
of the Affordable Care Act, made clear
how the disclosure requirements under
MHPAEA interact with other ERISA dis-
closure requirements (and that health care
providers are entitled to request such in-
formation on behalf of participants), and
provided temporary information on how
to claim the increased cost exemption.7
Additional FAQs issued in November
2011 addressed specific NQTLs, such as

prior authorization and concurrent re-
view.8 The Departments also clarified that
plans and issuers may charge the special-
ist copayment for mental health and sub-
stance use disorder benefits only if it is
determined that this level of copayment is
the predominant level that applies to sub-
stantially all medical/surgical benefits
within a classification.9

After consideration of the comments
and other feedback received from stake-
holders, the Departments are publishing
these final regulations.

### II. Overview of the Regulations

In general, these final regulations in-
corporate clarifications issued by the De-
partments through FAQs since the issu-
ance of the interim final regulations, and
provide new clarifications on issues such
as NQTLs and the increased cost exemp-
tion. The HHS final regulation also imple-
ments the provisions of MHPAEA for the
individual health insurance market.

A. Meaning of Terms

Under MHPAEA and the interim final
regulations, the term "medical/surgical
benefits" means benefits for medical or
surgical services, as defined under the
terms of the plan or health insurance cov-
erage. This term does not include mental
health or substance use disorder benefits.
The terms "mental health benefits" and
"substance use disorder benefits" mean
benefits with respect to services for men-
tal health conditions or substance use dis-
orders, respectively, as defined under the
terms of the plan and in accordance with
applicable Federal and State law. The in-
terim final regulations further provided
that the plan terms defining whether the
benefits are medical/surgical benefits or
mental health or substance use disorder
benefits must be consistent with generally
recognized standards of current medical
practice (for example, the most current

version of the Diagnostic and Statistical
Manual of Mental Disorders (DSM), the
most current version of the International
Classification of Diseases (ICD), or State
guidelines).

These final regulations make minor,
technical changes to the meaning of these
terms for consistency and clarity. Specif-
ically, the final regulations clarify that the
definitions of "medical/surgical benefits,"
"mental health benefits," and "substance
use disorder benefits" include benefits for
items as well as services. The final regu-
lations also clarify that medical conditions
and surgical procedures, and mental
health conditions and substance use disor-
ders, are defined under the terms of the
plan or coverage and in accordance with
applicable Federal and State law.

One commenter suggested that the def-
initions of mental health benefits and sub-
stance use disorder benefits should be re-
vised to refer only to the terms of the plan
and applicable State law. The Depart-
ments decline to adopt this suggestion.
The statutory definitions provided in
MHPAEA specifically refer to applicable
Federal law. Moreover, the reference to
Federal law is appropriate because State
law does not apply to all group health
plans, and Federal law also identifies EHB
categories, including the category of men-
tal health and substance use disorder ser-
vices, that non-grandfathered health plans
in the individual and small group markets
are required to cover beginning in 2014.
B. Clarifications - Parity Requirements

#### 1. Classification of Benefits

As described earlier in this preamble,
the interim final regulations set forth that
the parity analysis be conducted on a
classification-by-classification basis in six
specific classifications of benefits. Subse-
quent to the issuance of the interim final
regulations, several plans and issuers
brought to the Departments' attention that,

5See FAQ About Mental Health Parity and Addiction Equity Act, available at http://www.dol.gov/ebsa/faqs/faq-mhpaea.html.

6See FAQs about Affordable Care Act Implementation (Part V) and Mental Health Parity Implementation, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and http://www.cms.gov/
CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html, and FAQs about Affordable Care Act Implementation (Part VII) and Mental Health Parity Implementation,
available at http://www.dol.gov/ebsa/faqs/faq-aca7.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs7.html#Mental Health Parity and Ad-
diction Equity Act of 2008.

7See FAQs about Affordable Care Act Implementation (Part V) and Mental Health Parity Implementation, questions 8-11, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html

8 See FAQs about Affordable Care Act Implementation (Part VII) and Mental Health Parity Implementation, questions 2-6, available at http://www.dol.gov/ebsa/faqs/faq-aca7.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs7.html#Mental Health Parity and Addiction Equity Act of 2008.

9See FAQs about Affordable Care Act Implementation (Part VII) and Mental Health Parity Implementation, question 7, available at http://www.dol.gov/ebsa/faqs/faq-aca7.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs7.html#Mental Health Parity and Addiction Equity Act of 2008.

with respect to outpatient benefits, many
plans and issuers require a copayment for
office visits (such as physician or psychol-
ogist visits) and coinsurance for all other
outpatient services (such as outpatient sur-
gery). In response to this information, the
Departments published an FAQ establishing
an enforcement safe harbor under which the
Departments would not take enforcement
action against plans and issuers that divide
benefits furnished on an outpatient basis into
two sub-classifications ((1) office visits and
(2) all other outpatient items and services)
for purposes of applying the financial re-
quirement and treatment limitation rules un-
der MHPAEA.10

The Departments have incorporated
the terms of the FAQ in paragraph
(c)(3)(iii)(C) of these final regulations,
permitting sub-classifications for office
visits, separate from other outpatient ser-
vices. Other sub-classifications not specif-
ically permitted in these final regulations,
such as separate sub-classifications for
generalists and specialists, must not be
used for purposes of determining parity.
After the sub-classifications are estab-
lished, a plan or issuer may not impose
any financial requirement or quantitative
treatment limitation on mental health or
substance use disorder benefits in any sub-
classification (i.e., office visits or non-
office visits) that is more restrictive than
the predominant financial requirement or
quantitative treatment limitation that ap-
plies to substantially all medical/surgical
benefits in the sub-classification using the
methodology set forth in paragraph
(c)(3)(i) of these final regulations. Exam-
ple 6 under paragraph (c)(3)(iv) of these
final regulations illustrates the approach
that plans and issuers may employ when
dividing outpatient benefits into sub-
classifications in accordance with these
final regulations.

Additionally, commenters requested
that the final regulations permit plans and
issuers to create sub-classifications to ad-
dress plan designs that have two or more
network tiers of providers. Commenters
asserted that utilizing tiered networks
helps plans manage the costs and quality

of care and requested that the final regu-
lations allow plans to conduct the parity
analysis separately with respect to these
various network tiers.

The Departments have considered these
comments and recognize that tiered net-
works have become an important tool for
health plan efforts to manage care and con-
trol costs. Therefore, for purposes of apply-
ing the financial requirement and treatment
limitation rules under MHPAEA, these final
regulations provide that if a plan (or health
insurance coverage) provides in-network
benefits through multiple tiers of in-network
providers (such as an in-network tier of pre-
ferred providers with more generous cost
sharing to participants than a separate in-
network tier of participating providers), the
plan may divide its benefits furnished on an
in-network basis into sub-classifications that
reflect those network tiers, if the tiering is
based on reasonable factors and without re-
gard to whether a provider is a mental health
or substance use disorder provider or a med-
ical/surgical provider.11 After the sub-
classifications are established, the plan or
issuer may not impose any financial require-
ment or quantitative treatment limitation on
mental health or substance use disorder ben-
efits in any sub-classification that is more
restrictive than the predominant financial re-
quirement or quantitative treatment limita-
tion that applies to substantially all medical/
surgical benefits in the sub-classification
using the methodology set forth in para-
graph (c)(3)(i) of these final regulations.

The Departments are aware that some
plans may have an uneven number of tiers
between medical/surgical providers and
mental health or substance use disorder
providers (e.g., 3 tiers for medical/surgical
providers and 2 tiers for mental health or
substance use disorder providers). The
Departments may provide additional guid-
ance if questions persist with respect to
plans with an uneven number of tiers or if
the Departments become aware of tier
structures that may be inconsistent with
the parity analysis required under these
final regulations. Until the issuance of fur-
ther guidance, the Departments will con-
sider a plan or issuer to comply with the

financial requirement and quantitative treat-
ment limitation rules under MHPAEA if a
plan or issuer treats the least restrictive
level of the financial requirement or quan-
titative treatment limitation that applies to
at least two-thirds of medical/surgical
benefits across all provider tiers in a clas-
sification as the predominant level that it
may apply to mental health or substance
use disorder benefits in the same classifi-
cation.

Some commenters requested clarifica-
tion that all medical/surgical benefits and
mental health or substance use disorder
benefits offered by a plan or coverage
must be contained within the six classifi-
cations of benefits and that plans and is-
suers could not classify certain benefits
outside of the six classifications in order
to avoid the parity requirements. Other
commenters suggested that specific men-
tal health or substance use disorder bene-
fits be cross-walked or paired with spe-
cific medical/surgical benefits (e.g.,
physical rehabilitation with substance use
disorder rehabilitation) for purposes of the
parity analysis.

The final regulations retain the six clas-
sifications enumerated in the interim final
regulations, specify the permissible sub-
classifications, and provide that the parity
analysis be performed within each classi-
fication and sub-classification. The classi-
fications and sub-classifications are in-
tended to be comprehensive and cover the
complete range of medical/surgical bene-
fits and mental health or substance use
disorder benefits offered by health plans
and issuers. Medical/surgical benefits and
mental health or substance use disorder
benefits cannot be categorized as being
offered outside of these classifications and
therefore not subject to the parity analysis.

Cross-walking or pairing specific men-
tal health or substance use disorder bene-
fits with specific medical/surgical benefits
is a static approach that the Departments
do not believe is feasible, given the diffi-
culty in determining "equivalency" be-
tween specific medical/surgical benefits
and specific mental health and substance
use disorder benefits and because of the

10See FAQ About Mental Health Parity and Addiction Equity Act, available at http://www.dol.gov/ebsa/faqs/faq-mhpaea.html.

11Under PHS Act section 2719A (incorporated into ERISA and the Code) and its implementing regulations, non-grandfathered group health plans and non-grandfathered group or individual
health insurance coverage are prohibited from imposing any cost-sharing requirement expressed as a copayment amount or coinsurance rate with respect to a participant or beneficiary for
out-of-network emergency services that exceeds the cost-sharing requirement imposed with respect to a participant or beneficiary if the services were provided in-network. 26 CFR
54.9815-2719AT(b); 29 CFR 2590.715-2719A(b); 45 CFR 147.138(b).

differences in the types of benefits that
may be offered by any particular plan.

#### 2. Measuring Plan Benefits

Some commenters supported the "sub-
stantially all" and "predominant" tests as
formulated in the interim final regulations,
while other commenters were concerned
that they were too restrictive and may
create an administrative burden on plans.
A few commenters requested clarification
that the parity analysis would not need to
be performed annually absent changes in
plan design or indications that assump-
tions or data were inaccurate.

The interim final regulations incorpo-
rated the two-thirds "substantially all" nu-
merical standard from the regulations im-
plementing MHPA 1996, and quantified
"predominant" to mean more than one-
half of medical/surgical benefits in the
classification are subject to the financial
requirement or quantitative treatment lim-
itation. The Departments believe group
health plans and issuers have developed
the familiarity and expertise to implement
these parity requirements and therefore
retain the numerical standards as set forth
in the interim final regulations. The De-
partments clarify that a plan or issuer is
not required to perform the parity analysis
each plan year unless there is a change in
plan benefit design, cost-sharing structure,
or utilization that would affect a financial
requirement or treatment limitation within
a classification (or sub-classification).

These final regulations, like the interim
final regulations, provide that the determi-
nation of the portion of medical/surgical
benefits in a classification of benefits sub-
ject to a financial requirement or quanti-
tative treatment limitation (or subject to
any level of a financial requirement or
quantitative treatment limitation) is based
on the dollar amount of all plan payments
for medical/surgical benefits in the classi-
fication expected to be paid under the plan
for the plan year. Any reasonable method
may be used to determine the dollar
amount expected to be paid under the plan
for medical/surgical benefits subject to a

financial requirement or quantitative treat-
ment limitation. One commenter asked
whether plan benefits are measured based
on allowed plan costs, for purposes of the
"substantially all" and "predominant"
tests. The dollar amount of plan payments
is based on the amount the plan allows
(before enrollee cost sharing) rather than
the amount the plan pays (after enrollee
cost sharing) because payment based on
the allowed amount covers the full scope
of the benefits being provided.

3\. Cumulative Financial Requirements
and Cumulative Quantitative Treatment
Limitations

The interim final regulations provide
that a plan or issuer may not apply cumu-
lative financial requirements (such as de-
ductibles and out-of-pocket maximums)
or cumulative quantitative treatment lim-
itations (such as annual or lifetime day or
visit limits) for mental health or substance
use disorder benefits in a classification
that accumulate separately from any cu-
mulative requirement or limitation estab-
lished for medical/surgical benefits in the
same classification. These final regula-
tions retain this standard and continue to
provide that cumulative requirements and
limitations must also satisfy the quantita-
tive parity analysis. Accordingly, these fi-
nal regulations continue to prohibit plans
and issuers from applying separate cumu-
lative financial requirements and cumula-
tive quantitative treatment limitations to
medical/surgical and mental health and
substance use disorder benefits in a clas-
sification, and continue to provide that
such cumulative requirements or limita-
tions are only permitted to be applied for
mental health and substance use disorder
benefits in a classification to the extent
that such unified cumulative requirements
or limitations also apply to substantially
all medical/surgical benefits in the classi-
fication.

Several commenters argued that the re-
quirement in the interim final regulations
to use a single, combined deductible in a
classification was burdensome and would

require significant resources to imple-
ment, especially for Managed Behavioral
Health Organizations (MBHOs) that often
work with multiple plans. One commenter
asserted that this requirement could im-
pact the willingness of plan sponsors to
offer mental health or substance use dis-
order benefits. A study sponsored by
HHS, however, found that nearly all plans
had eliminated the use of separate deduct-
ibles for mental health and substance use
disorder benefits by 2011.12 According to
this study, even in 2010, only a very small
percentage of plans were using separate
deductibles. This study and other re-
search13 have shown that the overwhelm-
ing majority of plans have retained mental
health and substance use disorder cover-
age after issuance of the interim final reg-
ulations and, for the very small percent of
plans that have dropped mental health or
substance use disorder coverage, there is
no clear evidence they did so because of
MHPAEA. Accordingly, these final regu-
lations retain the requirement that plans
and issuers use a single, combined deduct-
ible in a classification.

4\. Interaction with PHS Act Section
2711 (No Lifetime or Annual Limits)

MHPA 1996 and paragraph (b) of the
interim final regulations set forth the parity
requirements with respect to aggregate life-
time and annual dollar limits on mental
health benefits or substance use disorder
benefits where a group health plan or health
insurance coverage provides both medical/
surgical benefits and mental health benefits
or substance use disorder benefits.

PHS Act section 2711, as added by the
Affordable Care Act, prohibits lifetime and
annual limits on the dollar amount of EHB,
as defined in section 1302(b) of the Af-
fordable Care Act. The definition of EHB
includes "mental health and substance use
disorder services, including behavioral
health treatment."14 Thus, notwithstanding
the provisions of MHPAEA that permit ag-
gregate lifetime and annual dollar limits
with respect to mental health or substance
use disorder benefits as long as those limits

12Final Report: Consistency of Large Employer and Group Health Plan Benefits with Requirements of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity
Act of 2008. NORC at the University of Chicago for the Office of the Assistant Secretary for Planning and Evaluation. This study analyzed information on large group health plan benefit
designs from 2009 through 2011 in several databases maintained by benefits consulting firms that advise plans on compliance with MHPAEA as well as other requirements.

13The 2010 Kaiser Family Foundation/HRET and the 2010 Mercer survey found that fewer than 2% of firms with over 50 employees dropped coverage of mental health or substance use
disorder benefits. Final Report: Consistency of Large Employer and Group Health Plan Benefits with Requirements of the Paul Wellstone and Pete Domenici Mental Health Parity and
Addiction Equity Act of 2008. NORC at the University of Chicago for the Office of the Assistant Secretary for Planning and Evaluation, pp. 43-44.

14See section 1302(b)(1)(E) of the Affordable Care Act.

are in accordance with the parity require-
ments for such limits, such dollar limits are
prohibited with respect to mental health or
substance use disorder benefits that are cov-
ered as EHB. While these final regulations
generally retain the provisions of the interim
final regulations regarding the application of
the parity requirements to aggregate lifetime
and annual dollar limits on mental health or
substance use disorder benefits, language
has been added specifying that these final
regulations do not address the requirements
of PHS Act section 2711. That is, the parity
requirements regarding annual and lifetime
limits described in these final regulations
only apply to the provision of mental health
and substance use disorder benefits that are
not EHB. Because this greatly reduces the
instances in which annual or lifetime limits
will be permissible, the examples from the
interim final regulations that expressly dem-
onstrated how a plan could apply lifetime or
annual dollar limits have been deleted.15

5\. Interaction with PHS Act Section
2713 (Coverage of Preventive Health Ser-
vices)

The interim final regulations provide that
if a plan or issuer provides mental health or
substance use disorder benefits in any clas-
sification, mental health or substance use
disorder benefits must be provided in every
classification in which medical/surgical ben-
efits are provided. Under PHS Act section
2713, as added by the Affordable Care Act,
non-grandfathered group health plans and
health insurance issuers offering non-
grandfathered group and individual cover-
age are required to provide coverage for
certain preventive services without cost
sharing.16 These preventive services pres-
ently include, among other things, alcohol
misuse screening and counseling, depres-
sion counseling, and tobacco use screening
as provided for in the guidelines issued by
the United States Preventive Services Task
Force.

The Departments received several
comments asking whether or to what ex-

tent a non-grandfathered plan that pro-
vides mental health or substance use dis-
order benefits pursuant to PHS Act section
2713 is subject to the requirements of
MHPAEA. Many commenters urged the
Departments to clarify that the provision
of mental health and substance use disor-
der benefits in this circumstance does not
trigger a broader requirement to comply
with MHPAEA for non-grandfathered
plans that do not otherwise offer mental
health or substance use disorder benefits.

The Departments agree that compliance
with PHS Act section 2713 should not, for
that reason alone, require that the full range
of benefits for a mental health condition or
substance user disorder be provided under
MHPAEA. Accordingly, paragraph (e)(3)(ii)
of these final regulations provides that nothing
in these regulations requires a group health
plan (or health insurance issuer offering cov-
erage in connection with a group health plan)
that provides mental health or substance use
disorder benefits only to the extent required
under PHS Act section 2713 to provide addi-
tional mental health or substance use disorder
benefits in any classification.

C. Nonquantitative Treatment Limitations
1\. Exceptions for Clinically Appropri-
ate Standards of Care

The final regulations generally retain
the provision in the interim final regula-
tions setting forth the parity requirements
with respect to NQTLs. Under both the
interim final regulations and these final
regulations, a plan or issuer may not im-
pose an NQTL with respect to mental
health or substance use disorder benefits
in any classification unless, under the
terms of the plan as written and in opera-
tion, any processes, strategies, evidentiary
standards, or other factors used in apply-
ing the NQTL to mental health or sub-
stance use disorder benefits in the classi-
fication are comparable to, and are applied
no more stringently than, the processes,
strategies, evidentiary standards, or other
factors used in applying the limitation

with respect to medical/surgical benefits
in the same classification.

The interim final regulations also con-
tained an exception to the NQTL require-
ments allowing for variation "to the extent
that recognized clinically appropriate
standards of care may permit a differ-
ence." A few commenters expressed sup-
port for the exception, emphasizing inher-
ent differences in treatment for medical/
surgical conditions and mental health
conditions and substance use disorders.
Many other commenters raised concerns
that this exception could be subject to
abuse and recommended the Departments
set clear standards for what constitutes a
"recognized clinically appropriate stan-
dard of care." For example, commenters
suggested a recognized clinically appro-
priate standard of care must reflect input
from multiple stakeholders and experts;
be accepted by multiple nationally recog-
nized provider, consumer, or accrediting
organizations; be based on independent
scientific evidence; and not be developed
solely by a plan or issuer. Additionally,
since publication of the interim final reg-
ulations, some plans and issuers may have
attempted to invoke the exception to jus-
tify applying an NQTL to all mental
health or substance use disorder benefits
in a classification, while only applying the
NQTL to a limited number of medical/
surgical benefits in the same classification.
These plans and issuers generally argue
that fundamental differences in treatment
of mental health and substance use disor-
ders and medical/surgical conditions, jus-
tify applying stricter NQTLs to mental
health or substance use disorder benefits
than to medical/surgical benefits under the
exception in the interim final regulations.

In consideration of these comments,
the Departments are removing the specific
exception for "recognized clinically ap-
propriate standards of care."17 Plans and
issuers will continue to have the flexibility
contained in the NQTL requirements to

15For self-insured group health plans, large group market health plans, and grandfathered health plans, to determine which benefits are EHB for purposes of complying with PHS Act section
2711, the Departments have stated that they will consider the plan to have used a permissible definition of EHB under section 1302(b) of the Affordable Care Act if the definition is one
that is authorized by the Secretary of HHS (including any available benchmark option, supplemented as needed to ensure coverage of all ten statutory categories). Furthermore, the
Departments intend to use their enforcement discretion and work with those plans that make a good faith effort to apply an authorized definition of EHB to ensure there are no annual or
lifetime dollar limits on EHB. See FAQ-10 of Frequently Asked Questions on Essential Health Benefits Bulletin (published February 17, 2012), available at: http://www.cms.gov/CCIIO/
Resources/Files/Downloads/ehb-faq-508.pdf.

16See 26 CFR 54.9815-2713T; 29 CFR 2590.715-2713; 45 CFR 147.130.

17HHS convened a technical expert panel on March 3, 2011 to provide input on the use of NQTLs for mental health and substance use disorder benefits. The panel was comprised of
individuals with clinical expertise in mental health and substance use disorder treatment as well as general medical treatment. These experts were unable to identify situations for which the
clinically appropriate standard of care exception was warranted - in part because of the flexibility inherent in the NQTL standard itself.

take into account clinically appropriate
standards of care when determining
whether and to what extent medical man-
agement techniques and other NQTLs ap-
ply to medical/surgical benefits and men-
tal health and substance use disorder
benefits, as long as the processes, strate-
gies, evidentiary standards, and other fac-
tors used in applying an NQTL to mental
health and substance use disorder benefits
are comparable to and applied no more
stringently than those with respect to med-
ical/surgical benefits. In particular, the
regulations do not require plans and issu-
ers to use the same NQTLs for both men-
tal health and substance use disorder ben-
efits and medical/surgical benefits, but
rather that the processes, strategies, evi-
dentiary standards, and other factors used
by the plan or issuer to determine whether
and to what extent a benefit is subject to
an NQTL are comparable to and applied
no more stringently for mental health or
substance use disorder benefits than for
medical/surgical benefits. Disparate re-
sults alone do not mean that the NQTLs in
use do not comply with these require-
ments. The final regulations provide ex-
amples of how health plans and issuers
can comply with the NQTL requirements
absent the exception for a recognized clin-
ically appropriate standard of care.

However, MHPAEA specifically pro-
hibits separate treatment limitations that
are applicable only with respect to mental
health or substance use disorder benefits.
Moreover, as reflected in FAQs18 released
in November 2011, it is unlikely that a
reasonable application of the NQTL re-
quirement would result in all mental
health or substance use disorder benefits
being subject to an NQTL in the same
classification in which less than all medi-
cal/surgical benefits are subject to the
NQTL.

2\. Parity Standards for NQTLs Versus
Quantitative Treatment Limitations

As mentioned earlier in this preamble,
MHPAEA and the interim final regula-
tions prohibit plans and issuers from im-
posing a financial requirement or quanti-
tative treatment limitation on mental

health and substance use disorder benefits
that is more restrictive than the predomi-
nant financial requirement or quantitative
treatment limitation that applies to sub-
stantially all medical/surgical benefits in
the same classification. The interim final
regulations incorporated the two-thirds
"substantially all" numerical standard
from the rules implementing the require-
ments of MHPA 1996, and quantified
"predominant" to mean more than one-
half. Using these numerical standards, the
Departments established a mathematical
test by which plans and issuers could de-
termine what level of a financial require-
ment or quantitative treatment limitation,
if any, is the most restrictive level that
could be imposed on mental health or
substance use disorder benefits within a
classification.

The Departments recognized that plans
and issuers impose a variety of NQTLs
affecting the scope or duration of benefits
that are not expressed numerically. Some
commenters recommended that the De-
partments adopt the same quantitative par-
ity analysis for NQTLs. While NOTLs are
subject to the parity requirements, the De-
partments understood that such limitations
cannot be evaluated mathematically.
These final regulations continue to pro-
vide different parity standards with re-
spect to quantitative treatment limitations
and NQTLs, because although both kinds
of limitations operate to limit the scope or
duration of mental health and substance
use disorder benefits, they apply to such
benefits differently.19

3\. Clarification Regarding the Applica-
tion of Certain NQTLs

Under the interim final regulations, the
Departments set forth the parity require-
ment with respect to NQTLs and provided
an illustrative list of NQTLs that plans
and issuers commonly use. These NQTLs
included: medical management standards
limiting or excluding benefits based on
medical necessity or medical appropriate-
ness, or based on whether the treatment is
experimental or investigative; formulary
design for prescription drugs; standards
for provider admission to participate in a

network, including reimbursement rates;
plan methods for determining usual, cus-
tomary, and reasonable charges; refusal to
pay for higher-cost therapies until it can
be shown that a lower-cost therapy is not
effective (also known as fail-first policies
or step therapy protocols); and exclusions
based on failure to complete a course of
treatment. The interim final regulations
also included examples illustrating the op-
eration of the requirements for NQTLs.

After the interim final regulations were
issued, some stakeholders asked questions
regarding the application of the NQTL
rule to other features of medical manage-
ment or general plan design not specifi-
cally addressed in the interim final regu-
lations. Many commenters requested that
the Departments address additional
NQTLs, such as prior authorization and
concurrent review, service coding, pro-
vider network criteria, policy coverage
conditions, and both in- and out-of-
network limitations.

These final regulations make clear that,
while an illustrative list is included in
these final regulations, all NQTLs im-
posed on mental health and substance use
disorder benefits by plans and issuers sub-
ject to MHPAEA are required to be ap-
plied in accordance with these require-
ments. To the extent that a plan standard
operates to limit the scope or duration of
treatment with respect to mental health or
substance use disorder benefits, the pro-
cesses, strategies, evidentiary standards,
or other factors used to apply the standard
must be comparable to, and applied no
more stringently than, those imposed with
respect to medical/surgical benefits. By
being comparable, the processes, strate-
gies, evidentiary standards and other fac-
tors cannot be specifically designed to re-
strict access to mental health or substance
use disorder benefits. Specifically, plan
standards, such as in- and out-of-network
geographic limitations, limitations on in-
patient services for situations where the
participant is a threat to self or others,
exclusions for court-ordered and involun-
tary holds, experimental treatment limita-
tions, service coding, exclusions for ser-

18 See FAQs About Affordable Care Act Implementation (Part VII) and Mental Health Parity Implementation, question 5, available at: http://www.dol.gov/ebsa/faqs/faq-aca7.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs7.html.

19The Departments reiterated the different parity standards with respect to quantitative treatment limitations and nonquantitative treatment limitations in an FAQ. See FAQs on Understanding
Implementation of the Mental Health Parity and Addiction Equity Act of 2008, question 6, available at http://www.dol.gov/ebsa/faqs/faq-mhpaeaimplementation.html.

vices provided by clinical social workers,
and network adequacy, while not specifi-
cally enumerated in the illustrative list of
NQTLs, must be applied in a manner that
complies with these final regulations. In
response to the comments received, in
paragraph (c)(4)(ii) of these final regula-
tions, the Departments added two addi-
tional examples of NQTLs to the illustra-
tive list: network tier design and
restrictions based on geographic location,
facility type, provider specialty and other
criteria that limit the scope or duration of
benefits for services provided under the
plan or coverage. Furthermore, the De-
partments included additional and revised
examples on how NQTLs, enumerated in
these final regulations or otherwise, may
be applied in accordance with the require-
ments of these final regulations.

The Departments are aware that some
commenters have asked how the NQTL
requirements apply to provider reimburse-
ment rates. Plans and issuers may consider
a wide array of factors in determining
provider reimbursement rates for both
medical/surgical services and mental
health and substance use disorder ser-
vices, such as service type; geographic
market; demand for services; supply of
providers; provider practice size; Medi-
care reimbursement rates; and training,
experience and licensure of providers. The
NQTL provisions require that these or
other factors be applied comparably to
and no more stringently than those applied
with respect to medical/surgical services.
Again, disparate results alone do not mean
that the NQTLs in use fail to comply with
these requirements. The Departments may
provide additional guidance if questions
persist with respect to provider reimburse-
ment rates.

Some commenters requested that the
Departments require plans and issuers to
comply with certain guidelines, indepen-
dent national or international standards, or
State government guidelines. While plans
and issuers are not required under these
final regulations to comply with any such
guidelines or standards with respect to the
development of their NQTLs, these stan-
dards, such as the behavioral health ac-
creditation standards set forth by the Na-
tional Committee for Quality Assurance

or the standards for implementing parity
in managed care set forth by URAC, may
be used as references and best practices in
implementing NQTLs, if they are applied
in a manner that complies with these final
regulations.

#### D. Scope of Services

In response to the RFI and interim final
regulations, the Departments received
many comments addressing an issue char-
acterized as "scope of services" or "con-
tinuum of care." Scope of services gener-
ally refers to the types of treatment and
treatment settings that are covered by a
group health plan or health insurance cov-
erage. Some commenters requested that,
with respect to a mental health condition
or substance use disorder that is otherwise
covered, the regulations clarify that a plan
or issuer is not required to provide bene-
fits for any particular treatment or treat-
ment setting (such as counseling or non-
hospital residential treatment) if benefits
for the treatment or treatment setting are
not provided for medical/surgical condi-
tions. Other commenters requested that
the regulations require plans and issuers to
provide benefits for the full scope of med-
ically appropriate services to treat a men-
tal health condition or substance use dis-
order if the plan or issuer covers the full
scope of medically appropriate services to
treat medical/surgical conditions, even if
some treatments or treatment settings are
not otherwise covered by the plan or cov-
erage. Other commenters requested that
MHPAEA be interpreted to require that
group health plans and issuers provide
benefits for any evidence-based treatment.

The interim final regulations established
six broad classifications that in part define
the scope of services under MHPAEA.
The interim final regulations require that,
if a plan or issuer provides coverage for
mental health or substance use disorder
benefits in any classification, mental
health or substance use disorder benefits
must be provided in every classification in
which medical/surgical benefits are pro-
vided. The interim final regulations did
not, however, address the scope of ser-
vices that must be covered within those
classifications. The Departments invited
comments on whether and to what extent
the final regulations should address the

scope of services or continuum of care
provided by a group health plan or health
insurance coverage.

Many commenters requested that the
Departments clarify how MHPAEA af-
fects the scope of coverage for intermedi-
ate services (such as residential treatment,
partial hospitalization, and intensive out-
patient treatment) and how these services
fit within the six classifications set forth
by the interim final regulations. Some
commenters suggested that the final regu-
lations establish what intermediate mental
health and substance use disorder services
would be analogous to various intermedi-
ate medical/surgical services for purposes
of the MHPAEA parity analysis. Other
commenters suggested that the Depart-
ments not address scope of services in the
final regulations.

The Departments did not intend that
plans and issuers could exclude interme-
diate levels of care covered under the plan
from MHPAEA's parity requirements. At
the same time, the Departments did not
intend to impose a benefit mandate
through the parity requirement that could
require greater benefits for mental health
conditions and substance use disorders
than for medical/surgical conditions. In
addition, the Departments' approach de-
fers to States to define the package of
insurance benefits that must be provided
in a State through EHB.20

Although the interim final regulations
did not define the scope of the six classi-
fications of benefits, they directed that
plans and issuers assign mental health and
substance use disorder benefits and med-
ical/surgical benefits to these classifica-
tions in a consistent manner. This general
rule also applies to intermediate services
provided under the plan or coverage.
Plans and issuers must assign covered in-
termediate mental health and substance
use disorder benefits to the existing six
benefit classifications in the same way that
they assign comparable intermediate med-
ical/surgical benefits to these classifica-
tions. For example, if a plan or issuer
classifies care in skilled nursing facilities
or rehabilitation hospitals as inpatient
benefits, then the plan or issuer must like-
wise treat any covered care in residential
treatment facilities for mental health or

20 See 45 CFR 147.150 and 156.115 (78 FR 12834, February 25, 2013).

substance user disorders as an inpatient
benefit. In addition, if a plan or issuer
treats home health care as an outpatient
benefit, then any covered intensive outpa-
tient mental health or substance use dis-
order services and partial hospitalization
must be considered outpatient benefits as
well.

These final regulations also include ad-
ditional examples illustrating the applica-
tion of the NQTL rules to plan exclusions
affecting the scope of services provided
under the plan. The new examples clarify
that plan or coverage restrictions based on
geographic location, facility type, pro-
vider specialty, and other criteria that limit
the scope or duration of benefits for ser-
vices must comply with the NQTL parity
standard under these final regulations.

E. Disclosure of Underlying Processes
and Standards

MHPAEA requires that the criteria for
plan medical necessity determinations
with respect to mental health or substance
use disorder benefits (or health insurance
coverage offered in connection with the
plan with respect to such benefits) be
made available by the plan administrator
(or the health insurance issuer offering
such coverage) to any current or potential
participant, beneficiary, or contracting
provider upon request in accordance with
regulations. MHPAEA also requires that
the reason for any denial under the plan
(or coverage) of reimbursement or pay-
ment for services with respect to mental
health or substance use disorder benefits
in the case of any participant or benefi-
ciary must be made available on request
or as otherwise required by the plan ad-
ministrator (or health insurance issuer) to
the participant or beneficiary in accor-
dance with regulations.

Several commenters expressed concern
about the lack of health plan transparency,
or made recommendations to improve
transparency, including a request that
plans and issuers be required to provide
sufficient information to determine
whether a plan is applying medical neces-
sity criteria and other factors comparably
to medical/surgical benefits and mental
health and substance use disorder benefits.
In addition, since the issuance of the in-
terim final regulations, stakeholders have
expressed concern that it is difficult to
understand whether a plan complies with
the NQTL provisions without information
showing that the processes, strategies, ev-
identiary standards, and other factors used
in applying an NQTL to mental health or
substance use disorder benefits and med-
ical/surgical benefits are comparable, im-
pairing plan participants' means of ensur-
ing compliance with MHPAEA.

In response to these concerns, the De-
partments published several FAQs clari-
fying the breadth of disclosure require-
ments applicable to group health plans
and health insurance issuers under both
MHPAEA and other applicable law, in-
cluding ERISA and the Affordable Care
Act.21 The substance of these FAQs is
included in new paragraph (d)(3) of the
final regulations, which reminds plans, is-
suers, and individuals that compliance
with MHPAEA's disclosure requirements
is not determinative of compliance with
any other provision of applicable Federal
or State law. In particular, in addition to
MHPAEA's disclosure requirements, pro-
visions of other applicable law require
disclosure of information relevant to med-
ical/surgical, mental health, and substance
use disorder benefits. For example,
ERISA section 104 and the Department of
Labor's implementing regulations22 pro-

vide that, for plans subject to ERISA, in-
struments under which the plan is estab-
lished or operated must generally be
furnished by the plan administrator to plan
participants23 within 30 days of request.
Instruments under which the plan is estab-
lished or operated include documents with
information on medical necessity criteria
for both medical/surgical benefits and
mental health and substance use disorder
benefits, as well as the processes, strate-
gies, evidentiary standards, and other fac-
tors used to apply an NQTL with respect
to medical/surgical benefits and mental
health or substance use disorder benefits
under the plan.

In addition, the Department of Labor's
claims procedure regulations (applicable
to ERISA plans), as well as the Depart-
ments' claims and appeals regulations un-
der the Affordable Care Act (applicable to
all non-grandfathered group health plans
and health insurance issuers in the group
and individual markets),24 set forth rules
regarding claims and appeals, including
the right of claimants (or their authorized
representative) upon appeal of an adverse
benefit determination (or a final internal
adverse benefit determination) to be pro-
vided by the plan or issuer, upon request
and free of charge, reasonable access to
and copies of all documents, records, and
other information relevant to the claim-
ant's claim for benefits.25 In addition, the
plan or issuer must provide the claimant
with any new or additional evidence con-
sidered, relied upon, or generated by the
plan or issuer (or at the direction of the
plan or issuer) in connection with a claim.
If the plan or issuer is issuing an adverse
benefit determination on review based on
a new or additional rationale, the claimant
must be provided, free of charge, with the
rationale. Such evidence or rationale must

21 See FAQs for Employees about the Mental Health Parity and Addiction Equity Act, available at http://www.dol.gov/ebsa/faqs/faq-mhpaea2.html; FAQs about Affordable Care Act
Implementation (Part V) and Mental Health Parity Implementation, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs5.html.

2229 CFR 2520.104b-1.

23ERISA section 3(7) defines the term "participant" to include any employee or former employee who is or may become eligible to receive a benefit of any type from an employee benefit
plan or whose beneficiaries may become eligible to receive any such benefit. Accordingly, employees who are not enrolled but are, for example, in a waiting period for coverage, or who
are otherwise shopping amongst benefit package options at open season, generally are considered plan participants for this purpose.

2429 CFR 2560.503-1. See also 26 CFR 54.9815-2719T(b)(2)(i), 29 CFR 2590.715-2719(b)(2)(i), and 45 CFR 147.136(b)(2)(i), requiring non-grandfathered plans and issuers to incorporate
the internal claims and appeals processes set forth in 29 CFR 2560.503-1.

25 See 29 CFR 2560.503-1. The Department of Labor's claim procedure regulation stipulates specific timeframes in which a plan administrator must notify a claimant of the plan's benefit
determination, which includes, in the case of an adverse benefit determination, the reason for the denial. Accordingly, a plan administrator must notify a claimant of the plan's benefit
determination with respect to a pre-service claim within a reasonable time period appropriate to the medical circumstances, but not later than 15 days after the receipt of the claim. With
respect to post-service claims, a plan administrator must notify the claimant within a reasonable time period, but not later than 30 days after the receipt of the claim. In the case of an urgent
care claim, a plan administrator must notify the claimant of the plan's benefit determination, as soon as possible, taking into account the medical exigencies, but not later than 72 hours after
the receipt of the claimant's request.

be provided as soon as possible and suf-
ficiently in advance of the date on which
the notice of adverse benefit determina-
tion on review is required to be provided
to give the claimant a reasonable oppor-
tunity to respond prior to that date.26 The
information required to be provided under
these provisions includes documents of a
comparable nature with information on
medical necessity criteria for both medi-
cal/surgical benefits and mental health and
substance use disorder benefits, as well as
the processes, strategies, evidentiary stan-
dards, and other factors used to apply an
NQTL with respect to medical/surgical
benefits and mental health or substance
use disorder benefits under the plan.

Even with these important disclosure
requirements under existing law,27 the
Departments remain focused on transpar-
ency and whether individuals have the
necessary information to compare NQTLs
of medical/surgical benefits and mental
health or substance use disorder benefits
under the plan to effectively ensure com-
pliance with MHPAEA. Accordingly,
contemporaneous with the publication of
these final regulations, the Departments of
Labor and HHS are also publishing an-
other set of MHPAEA FAQs, which,
among other things, solicit comments on
whether and how to ensure greater trans-
parency and compliance.28

#### F. Small Employer Exemption

Paragraph (f) of these final regulations
implements the exemption for a group
health plan (or health insurance issuer of-
fering coverage in connection with a
group health plan) for a plan year of a
small employer. Prior to the Affordable
Care Act, MHPAEA defined a small em-
ployer, in connection with a group health
plan with respect to a calendar year and a
plan year, as an employer who employed
an average of not more than 50 employees
on business days during the preceding cal-
endar year.

Section 2791 of the PHS Act was
amended by the Affordable Care Act to
define a small employer as one that has
100 or fewer employees, while also pro-
viding States the option to use 50 employ-
ees rather than 100 for 2014 and 2015.29
This definition is incorporated by refer-
ence in the MHPAEA provisions con-
tained in section 2726 of the PHS Act.
However, the MHPAEA provisions codi-
fied in ERISA section 712 and Code sec-
tion 9812, together with section 732(a) of
ERISA and section 8931(a) of the Code,
continue to define an exempt small em-
ployer as one that has 50 or fewer employ-
ees. The Departments issued an FAQ30 in
December 2010 stating that, "for group
health plans and health insurance issuers
subject to ERISA and the Code, the Depart-
ments will continue to treat group health
plans of employers with 50 or fewer em-
ployees as exempt from the MHPAEA re-
quirements under the small employer ex-
emption, regardless of any State insurance
law definition of small employer." The FAQ
also acknowledged that, for non-Federal
governmental plans, which are not subject
to ERISA or the Code, the PHS Act was
amended to define a small employer as one
that has 100 or fewer employees. Consistent
with the FAQs, the Department of Labor
and the Department of the Treasury final
regulations continue to exempt group health
plans and group health insurance coverage
of employers with 50 or fewer employees
from MHPAEA. The HHS final regulations,
which generally apply to non-Federal gov-
ernmental plans, exempt group health plans
and group health insurance coverage of em-
ployers with 100 or fewer employees (sub-
ject to State law flexibility for 2014 and
2015). Despite this difference, and certain
other differences, in the applicability of the
provisions of the Code, ERISA, and the
PHS Act, the Departments do not find there
to be a conflict in that no entity will be put
in a position in which compliance with all of

the provisions applicable to that entity is
impossible.

At the same time, plans and issuers pro-
viding coverage in connection with group
health plans sponsored by small employers
should be aware that, on February 25, 2013,
HHS published a final regulation on EHB31
that requires issuers of non-grandfathered
plans in the individual and small group mar-
kets to ensure that such plans provide all
EHB, including mental health and sub-
stance use disorder benefits. The extent of
the coverage of EHB is determined based
on benchmark plans that are selected by
the States. Furthermore, the EHB final
regulation at 45 CFR 156.115(a)(3) re-
quires issuers providing EHB to provide
mental health and substance use disorder
benefits in compliance with the require-
ments of the MHPAEA regulations, even
where those requirements would not other-
wise apply directly. Thus, all insured, non-
grandfathered, small group plans must cover
EHB in compliance with the MHPAEA
regulations, regardless of MHPAEA's
small employer exemption. (Also, as dis-
cussed in section H.1. below, MHPAEA
was amended to include individual health
insurance coverage. Accordingly, both
grandfathered and non-grandfathered cov-
erage in the individual market must com-
ply with MHPAEA.)

#### G. Increased Cost Exemption

MHPAEA contains an increased cost
exemption that is available for plans and
health insurance issuers that make
changes to comply with the law and incur
an increased cost of at least two percent in
the first year that MHPAEA applies to the
plan or coverage or at least one percent in
any subsequent plan or policy year. Under
MHPAEA, plans or coverage that comply
with the parity requirements for one full
plan year and that satisfy the conditions
for the increased cost exemption are ex-
empt from the parity requirements for the
following plan or policy year, and the

26 See 26 CFR 54.9815-2719T(b)(2)(ii)(C), 29 CFR 2590.715-2719(b)(2)(ii)(C), and 45 CFR 147.136(b)(2)(ii)(C).

27For other disclosure requirements that may be applicable to plans and issuers under existing Federal law, including disclosure requirements regarding prescription drug formulary coverage,
see the summary plan description requirements for ERISA plans under 29 CFR 2520.102-3(j)(2) and (j)(3) and the preamble discussion at 65 FR 70226, 70237 (Nov. 11, 2000), as well
as Department of Labor Advisory Opinion 96-14A (available at http://www.dol.gov/ebsa/programs/ori/advisory96/96-14a.htm). See also the summary of benefits and coverage requirements
under 26 CFR 54.9815-2715(a)(2)(i)(K), 29 CFR 2590.715-2715(a)(2)i)(K), and 45 CFR 147.200(a)(2)(i)(K).

28 Available at http://www.dol.gov/ebsa/healthreform/ and http://www.cms.gov/cciio/Resources/Fact-Sheets-and-FAQs/index.html.

29 See section 1304(b)(3) of the Affordable Care Act.

30 See FAQs about Affordable Care Act Implementation (Part V) and Mental Health Parity Implementation, question 8, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html.

3178 FR 12834.

exemption lasts for one plan or policy
year. Thus, the increased cost exemption
may only be claimed for alternating plan
or policy years.32

The interim final regulations reserved
paragraph (g) regarding the increased cost
exemption and solicited comments. The
Departments issued guidance establishing
an interim enforcement safe harbor under
which a plan that has incurred an in-
creased cost of two percent during its first
year of compliance can obtain an exemp-
tion for the second plan year by following
the exemption procedures described in the
Departments' 1997 regulations imple-
menting MHPA 1996,33 except that, as
required under MHPAEA, for the first
year of compliance the applicable percent-
age of increased cost is two percent and
the exemption lasts only one year.34

The Departments received several
comments on the interim final regulations
that requested guidance on attribution of
cost increases to MHPAEA. Some com-
menters emphasized that the cost exemp-
tion must be based on actual total plan
costs measured at the end of the plan year.
Other commenters stated that plans should
be permitted to estimate claims that have
not yet been reported for purposes of cal-
culating incurred expenditures. Addition-
ally, some commenters stated that a plan's
costs for purposes of the increased cost
exemption should include not only claims
costs, but also administrative expenses as-
sociated with complying with the parity
requirements.

Paragraph (g) of these final regulations
generally applies standards and proce-
dures for claiming an increased cost ex-
emption under MHPAEA consistent with
MHPAEA's statutory standards and pro-
cedures as well as prior procedures set
forth in the Departments' regulations im-
plementing MHPA 1996. The test for an
exemption must be based on the estimated
increase in actual costs incurred by the
plan or issuer that is directly attributable
to expansion of coverage due to the re-
quirements of this section and not other-
wise due to occurring trends in utilization

and prices, a random change in claims ex-
perience that is unlikely to persist, or sea-
sonal variation commonly experienced in
claims submission and payment patterns.

Under the final regulations, the in-
crease in actual total costs attributable to
MHPAEA is described by the formula
[(E1 -E0)/To]-D> k, where E represents
the level of health plan spending with
respect to mental health and substance use
disorder benefits over the measurement
period, T is a measure of total actual costs
incurred by a plan or coverage on all
benefits (medical/surgical benefits and
mental health and substance use disorder
benefits under the plan), D is the average
change in spending over the prior five
years, and k is the applicable percentage
of increased cost for qualifying for the
cost exemption (i.e., one percent or two
percent depending on the year). k will be
expressed as a fraction for the purposes of
this formula. The subscripts 1 and 0 refer
to a base period and the most recent ben-
efit period preceding the base period, re-
spectively. Costs incurred under E include
paid claims by the plan or coverage for
services to treat mental health conditions
and substance use disorders, and adminis-
trative costs associated with providing
mental health or substance use disorder
benefits (amortized over time).

In estimating the costs attributable to
MHPAEA, a plan or issuer must rely on
actual claims or encounter data incurred in
the benefit period reported within 90 days
of the end of the benefit period. Although
MHPAEA specifies that determinations
with regard to the cost exemption shall be
made after a plan has complied with the
law for six months of the plan year in-
volved, the provision does not require that
the benefit period used to make this cal-
culation be limited to six months. Data
from a six month period will not typically
reflect seasonal variation in claims expe-
rience. To estimate E1 - E0, a plan or
coverage must first calculate secular
trends over five years in the volume of
services and the prices paid for services
for the major classifications of services by

applying the formula (E1 - E()/T, to men-
tal health and substance use disorder
spending to each of the five prior years
and then calculating the average change in
spending. The components of spending
are estimated because secular trends can
occur in prices and volume. After the av-
erage change in spending across the five
years is calculated for each service type,
the change in mental health and substance
use disorder benefits spending attributable
to MHPAEA is calculated net of the av-
erage annual spending growth that is due
to a secular trend. This change in calcula-
tion is the main difference from the pre-
vious methodology used under prior guid-
ance. It is recognized that for some
smaller employers covered by MHPAEA,
year to year spending may be somewhat
unstable. In this case, an employer or is-
suer may propose an alternative estima-
tion method. It is important to note that
the language of the statute indicates that
the base period against which the impact
of MHPAEA is assessed moves up each
year to the year prior to the current benefit
year.

Administrative costs attributable to the
implementation of MHPAEA must be rea-
sonable and supported with detailed doc-
umentation from accounting records.
Software and computing expenses associ-
ated with implementation of the prohibi-
tion on separate cumulative financial re-
quirements or other provisions of the
regulation should be based on a straight-
line depreciation over the estimated useful
life of the asset (computer hardware five
years; software three years, according to
the American Hospital Association's Es-
timated Useful Life of depreciable Hospi-
tal Assets). Any other fixed administrative
costs should also be amortized.

Some commenters suggested addi-
tional clarifications regarding the statutory
provision that determinations as to in-
creases in actual costs must be made and
certified by a qualified and licensed actu-
ary who is a member in good standing of
the American Academy of Actuaries.
Some commenters suggested that the ac-

32 An employer or issuer may elect to continue to provide mental health and substance use disorder benefits in compliance with this section with respect to the plan or coverage involved
regardless of any increase in total costs. That is, mere eligibility for the exemption does not require an employer or issuer to use it. An exempt plan or coverage can continue to provide
mental health and substance use disorder benefits during the exemption period in compliance with some, all, or none of the parity provisions.

3362 FR 66932, December 22, 1997.

34See FAQs about Affordable Care Act Implementation (Part V) and Mental Health Parity Implementation, question 11, available at: http://www.dol.gov/ebsa/faqs/faq-aca5.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html.

tuary must be qualified to perform such
work based on meeting the Qualification
Standards for Actuaries Issuing State-
ments of Actuarial Opinion in the United
States. Other commenters suggested that
the actuary must be independent and not
employed by the group health plan or
health insurance issuer claiming the ex-
emption. The Departments believe the
statutory language is sufficient to ensure
reliable cost increase determinations.
Moreover, this approach is consistent with
the approach applicable to EHB in that the
only qualification required for actuaries is
that they be a member in good standing of
the American Academy of Actuaries.35
Accordingly, the Departments decline to
adopt these suggestions. Determinations
as to increases in actual costs attributable
to implementation of the requirements of
MHPAEA must be made and certified by
a qualified and licensed actuary who is a
member in good standing of the American
Academy of Actuaries. All such determi-
nations must be based on the formula
specified in these final regulations in a
written report prepared by the actuary.
Additionally, the written report, along
with all supporting documentation relied
upon by the actuary, must be maintained
by the group health plan or health insur-
ance issuer for a period of six years.

Several commenters expressed concern
regarding the administrative burden that
would result from qualifying for the in-
creased cost exemption for one year and
then having to comply with the law the
following year. MHPAEA's statutory lan-
guage specifies that plans and issuers may
qualify for the increased cost exemption
for only one year at a time, stating that if
the application of MHPAEA "results in an
increase for the plan year involved of the
actual total costs of coverage ... by an
amount that exceeds the applicable per-
centage ... the provisions of this section
shall not apply to such plan (or coverage)
during the following plan year, and such
exemption shall apply to the plan (or cov-
erage) for 1 plan year."36

Before a group health plan or health in-
surance issuer may claim the increased cost

exemption, it must furnish a notice of the
plan's exemption from the parity require-
ments to participants and beneficiaries cov-
ered under the plan, the Departments (as
described below), and appropriate State
agencies. The notification requirements for
the increased cost exemption under these
final regulations are consistent with the re-
quirements under the Departments' 1997
regulations implementing MHPA 1996.

With respect to participants and bene-
ficiaries, a group health plan subject to
ERISA may satisfy this requirement by
providing a summary of material reduc-
tions in covered services or benefits under
29 CFR 2520.104b-3(d), if it includes all
the information required by these final
regulations.

With respect to notification to the De-
partments, a plan or issuer must furnish a
notice that satisfies the requirements of
these final regulations. A group health
plan that is a church plan (as defined in
section 414(e) of the Code) must notify
the Department of the Treasury. A group
health plan subject to Part 7 of Subtitle B
of Title I of ERISA must notify the De-
partment of Labor. A group health plan
that is a non-Federal governmental plan or
a health insurance issuer must notify
HHS. In all cases, the exemption is not
effective until 30 days after notice has
been sent to both participants and benefi-
ciaries and to the appropriate Federal
agency. The Departments will designate
addresses for delivery of these notices in
future guidance.

Finally, a plan or issuer must make avail-
able to participants and beneficiaries (or
their representatives), on request and at no
charge, a summary of the information on
which the exemption was based. For pur-
poses of this paragraph (g), an individual
who is not a participant or beneficiary and
who presents a notice described in para-
graph (g)(6) of the final regulations is
considered to be a representative. Such a
representative may request the summary
of information by providing the plan a
copy of the notice provided to the partic-
ipant or beneficiary with any personally
identifiable information redacted. The

summary of information must include the
incurred expenditures, the base period, the
dollar amount of claims incurred during
the base period that would have been de-
nied under the terms of the plan absent
amendments required to comply with par-
ity, and the administrative expenses attrib-
utable to complying with the parity re-
quirements. In no event should a summary
of information include individually iden-
tifiable information.

The increased cost exemption provi-
sion in paragraph (g) of these final regu-
lations is effective for plan or policy years
beginning on or after July 1, 2014 (see
paragraph (i) of these final regulations),
which for calendar year plans means the
provisions apply on January 1, 2015. Ac-
cordingly, plans and issuers must use the
formula specified in paragraph (g) of these
final regulations to determine whether
they qualify for the increased cost exemp-
tion in plan or policy years beginning on
or after July 1, 2014. For claiming the
increased cost exemption in plan or policy
years beginning before July 1, 2014, plans
and issuers should follow the interim en-
forcement safe harbor outlined in previ-
ously issued FAQs.37

H. General Applicability Provisions and
Application to Certain Types of Plans and
Coverage

The interim final regulations combined
in paragraph (e)(1) what had been sepa-
rate rules under MHPA 1996 for (1) de-
termining if a plan provides both medical/
surgical and mental health or substance
use disorder benefits; (2) applying the par-
ity requirements on a benefit-package-by-
benefit-package basis; and (3) counting
the number of plans that an employer or
employee organization maintains. The
combined rule provides that (1) the parity
requirements apply to a group health plan
offering both medical/surgical benefits
and mental health or substance use disor-
der benefits, (2) the parity requirements
apply separately with respect to each com-
bination of medical/surgical coverage and
mental health or substance use disorder
coverage that any participant (or benefi-
ciary) can simultaneously receive from an

35 See 45 CFR 156.135(b).

36Code section 9812(c)(2), ERISA 712(c)(2), PHS Act section 2726(c)(2).

37See FAQs about Affordable Care Act Implementation (Part V) and Mental Health Parity Implementation, question 11, available at: http://www.dol.gov/ebsa/faqs/faq-aca5.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html.

employer's or employee organization's
arrangement or arrangements to provide
medical care benefits, and (3) all such
combinations constitute a single group
health plan for purposes of the parity re-
quirements. Some comments expressed
concern that the new combined rule would
disrupt benefit programs that employers
have maintained as separate plans for im-
portant reasons having nothing to do with
a desire to escape the parity requirements
and that the rule should be rescinded or
issued only in proposed form. Other com-
ments welcomed the rule as an important
protection to prevent evasion of the parity
requirements. The final regulations do not
change the combined rule from the in-
terim final regulations. In the Depart-
ments' view, the combined rule is neces-
sary to prevent potential evasion of the
parity requirements by allocating mental
health or substance use disorder benefits
to a plan or benefit package without med-
ical/surgical benefits (when medical/sur-
gical benefits are also otherwise avail-
able).

The preamble to the interim final reg-
ulations illustrated how the parity require-
ments would apply to various benefit
package configurations, including multi-
ple medical/surgical benefit packages
combined with a single mental health and
substance use disorder benefit package.
One commenter asked for clarification in
the case of a plan with an HMO option
and a PPO option in which mental health
and substance use disorder benefits are an
integral part of each option. In such a
case, the parity requirements apply sepa-
rately to the HMO option and the PPO
option.

The Departments are aware that em-
ployers and health insurance issuers
sometimes contract with MBHOs or sim-
ilar entities to provide or administer men-
tal health or substance use disorder bene-
fits in group health plans or in health
insurance coverage. The fact that an em-
ployer or issuer contracts with one or
more entities to provide or administer
mental health or substance use disorder

benefits does not, however, relieve the
employer, issuer, or both of their obliga-
tions under MHPAEA. The coverage as a
whole must still comply with the applica-
ble provisions of MHPAEA, and the re-
sponsibility for compliance rests on the
group health plan and/or the health insur-
ance issuer, depending on whether the
coverage is insured or self-insured. This
means that the plan or issuer will need to
provide sufficient information in terms of
plan structure and benefits to the MBHO
to ensure that the mental health and sub-
stance use disorder benefits are coordi-
nated with the medical/surgical benefits
for purposes of compliance with the re-
quirements of MHPAEA. Liability for any
violation of MHPAEA rests with the
group health plan and/or health insurance
issuer.

Several commenters requested clarifi-
cation about whether a plan or issuer may
exclude coverage for specific diagnoses or
conditions under MHPAEA. These final
regulations continue to provide that noth-
ing in these regulations requires a plan or
issuer to provide any mental health bene-
fits or substance use disorder benefits.
Moreover, the provision of benefits for
one or more mental health conditions or
substance use disorders does not require
the provision of benefits for any other
condition or disorder. Other Federal and
State laws may prohibit the exclusion of
particular disorders from coverage where
applicable, such as the Americans with
Disabilities Act. Other Federal and State
laws may also require coverage of mental
health or substance use disorder benefits,
including the EHB requirements under
section 2707 of the PHS Act and section
1302(a) of the Affordable Care Act.

1\. Individual Health Insurance Market
Section 1563(c)(4) of the Affordable
Care Act38 amended section 2726 of the
PHS Act to apply MHPAEA to health
insurance issuers in the individual health
insurance market. These changes are ef-
fective for policy years beginning on or
after January 1, 2014. The HHS final reg-
ulation implements these requirements in

new section 147.160 of title 45 of the
Code of Federal Regulations. Under these
provisions, unless otherwise specified, the
parity requirements outlined in 45 CFR
146.136 of these final regulations apply to
health insurance coverage offered by a
health insurance issuer in the individual
market in the same manner and to the
same extent as such provisions apply to
health insurance coverage offered by a
health insurance issuer in connection with
a group health plan in the large group
market. These provisions apply to both
grandfathered and non-grandfathered in-
dividual health insurance coverage for
policy years beginning on or after the ap-
plicability dates set forth in paragraph (i)
of these final regulations.

#### 2. Non-Federal governmental plans

Prior to enactment of the Affordable
Care Act, sponsors of self-funded, non-
Federal governmental plans were permitted
to elect to exempt those plans from ("opt out
of') certain provisions of title XXVII of the
PHS Act. This election was authorized un-
der section 2721(b)(2) of the PHS Act (re-
numbered as section 2722(a)(2) by the Af-
fordable Care Act). The Affordable Care
Act made a number of changes, with the
result that sponsors of self-funded, non-
Federal governmental plans can no longer
opt out of as many requirements of title
XXVII of the PHS Act. However, under the
PHS Act, sponsors of self-funded, non-
Federal governmental plans may continue to
opt out of the requirements of MHPAEA.39
If the sponsor of a self-funded, non-Federal
governmental plan wishes to exempt its plan
from the requirements of MHPAEA, it must
follow the procedures and requirements out-
lined in section 2722 and corresponding
Centers for Medicare & Medicaid Services
(CMS) guidance, which includes notifying
CMS to that effect in writing. 40

#### 3. Retiree-only plans

Some commenters requested clarifica-
tion regarding the applicability of these
final regulations to retiree-only plans.
ERISA section 732(a) generally provides
that part 7 of ERISA-and Code section
9831(a) generally provides that chapter

38There are two sections numbered 1563 in the Affordable Care Act. The section 1563 that is the basis for this rulemaking is the section titled "Conforming amendments."

39 See Memo on Amendments to the HIPAA Opt-Out Provision Made by the Affordable Care Act (September 21, 2010). Available at: http://www.cms.gov/CCIIO/Resources/Files/
Downloads/opt_out_memo.pdf.

40See Self-Funded Non-Federal Governmental Plans: Procedures and Requirements for HIPAA Exemption Election. Available at: http://www.cms.gov/CCIIO/Resources/Files/
hipaa_exemption_election_instructions_04072011.html

100 of the Code-does not apply to group
health plans with less than two partici-
pants who are current employees (includ-
ing retiree-only plans that, by definition,
cover less than two participants who are
current employees).41 The Departments
previously clarified in FAQs that the ex-
ceptions of ERISA section 732 and Code
section 9831, including the exception for
retiree-only health plans, remain in ef-
fect.42 Since the provisions of MHPAEA
contained in ERISA section 712 and Code
section 9812 are contained in part 7 of
ERISA and chapter 100 of the Code, re-
spectively, group health plans that do not
cover at least two employees who are cur-
rent employees (such as plans in which
only retirees participate) are exempt from
the requirements of MHPAEA and these
final regulations.43

#### 4. Employee Assistance Programs

Several comments also requested clar-
ification regarding the applicability of the
parity requirements to employee assis-
tance programs (EAPs). An example in
the interim final regulations clarified that a
plan or issuer that limits eligibility for
mental health and substance use disorder
benefits until after benefits under an EAP
are exhausted has established an NQTL
subject to the parity requirements, and
stated that if no comparable requirement
applies to medical/surgical benefits, such
a requirement could not be applied to
mental health or substance use disorder
benefits.44 The final regulations retain this
example and approach.45

The Departments have also received
questions regarding whether benefits un-
der an EAP are considered to be excepted
benefits. The Departments recently pub-

lished guidance announcing their inten-
tions to amend the excepted benefits reg-
ulations46 to provide that benefits under an
EAP are considered to be excepted bene-
fits, but only if the program does not pro-
vide significant benefits in the nature of
medical care or treatment.47 Under this
approach, EAPs that qualify as excepted
benefits will not be subject to MHPAEA
or these final regulations.

The guidance provides that until rule-
making regarding EAPs is finalized,
through at least 2014, the Departments
will consider an EAP to constitute ex-
cepted benefits only if the EAP does not
provide significant benefits in the nature
of medical care or treatment. For this pur-
pose, employers may use a reasonable,
good faith interpretation of whether an
EAP provides significant benefits in the
nature of medical care or treatment.

#### 5. Medicaid and CHIP Managed Care Plans

These final regulations apply to group
health plans and health insurance issuers.
These final regulations do not apply to
Medicaid managed care organizations
(MCOs), alternative benefit plans (ABPs),
or the Children's Health Insurance Pro-
gram (CHIP). However, MHPAEA re-
quirements are incorporated by reference
into statutory provisions that do apply to
those entities. On January 16, 2013, CMS
released a State Health Official Letter re-
garding the application of the MHPAEA
requirements to Medicaid MCOs, ABPs,
and CHIP.48 In this guidance, CMS ad-
opted the basic framework of MHPAEA
and applied the statutory principles as ap-
propriate across these Medicaid and CHIP
authorities. The letter also stated that

CMS intends to issue additional guidance
that will assist States in their efforts to
implement the MHPAEA requirements in
their Medicaid programs.

I. Interaction with State Insurance Laws

Several commenters requested that the
final regulations clearly describe how
MHPAEA interacts with State insurance
laws. Commenters sought clarification as
to how MHPAEA may or may not pre-
empt State laws that require parity for
mental health or substance use disorder
benefits, mandate coverage of mental
health or substance use disorder benefits,
or require a minimum level of coverage
(such as a minimum dollar, day, or visit
level) for mental health conditions or sub-
stance use disorders. These commenters
expressed a desire that the final regula-
tions articulate that existing State laws on
mental health or substance use disorder
benefits would remain in effect to the ex-
tent they did not prevent the application of
MHPAEA.

The preemption provisions of section
731 of ERISA and section 2724 of the
PHS Act (added by the Health Insurance
Portability and Accountability Act of
1996 (HIPAA) and implemented in 29
CFR 2590.731 and 45 CFR 146.143(a))
apply so that the MHPAEA requirements
are not to be "construed to supersede any
provision of State law which establishes,
implements, or continues in effect any
standard or requirement solely relating to
health insurance issuers in connection
with group health insurance coverage ex-
cept to the extent that such standard or
requirement prevents the application of a
requirement" of MHPAEA and other ap-

41 Prior to the enactment of the Affordable Care Act, the PHS Act had a parallel provision at section 2721(a); however, after the Affordable Care Act amended, reorganized, and renumbered
title XXVII of the PHS Act, that exception no longer exists. See 75 FR 34538-34539.

42See FAQs About the Affordable Care Act Implementation Part III, question 1, available at http://www.dol.gov/ebsa/faqs/faq-aca3.html and http://www.cms.gov/CCIIO/Resources/Fact-
Sheets-and-FAQs/aca_implementation_faqs3.html, which states that "statutory provisions in effect since 1997 exempting group health plans with 'less than two participants who are current
employees' from HIPAA also exempt such plans from the group market reform requirements of the Affordable Care Act."

43 Additionally, as provided in the interim final regulations regarding grandfathered health plans, HHS does not intend to use its resources to enforce the requirements of title XXVII of the
PHS Act, including the requirements of MHPAEA and these final regulations, with respect to non-Federal governmental retiree-only plans and encourages States not to apply those provisions
to issuers of retiree-only plans. HHS will not cite a State for failing to substantially enforce the provisions of part A of title XXVII of the PHS Act in these situations. See 75 FR at 34538,
34540 (June 17, 2010).

44See Example 5 in paragraph (c)(4)(iii) of the interim final regulations.

45See Example 6 in paragraph (c)(4)(iii) of the final regulations.

4626 CFR 54.9831-1(c), 29 CFR 2590.732(c), 45 CFR 146.145(c).

47See IRS Notice 2013-54 (available at http://www.irs.gov/pub/irs-drop/n-13-54.pdf) and DOL Technical Release 2013-03 (available at http://www.dol.gov/ebsa/newsroom/tr13-03.html),
Q&A 9. See also CMS Insurance Standards Bulletin - Application of Affordable Care Act Provisions to Certain Healthcare Arrangements (available at http://www.cms.gov/CCIIO/
Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf).

48 Application of the Mental Health Parity and Addiction Equity Act to Medicaid MCOs, CHIP, and Alternative Benefit (Benchmark) Plans, available at: http://www.medicaid.gov/Federal-
Policy-Guidance/downloads/SHO-13-001.pdf.

plicable provisions.49 The HIPAA confer-
ence report indicates that this is intended
to be the "narrowest" preemption of State
laws.50

For example, a State law may man-
date that an issuer offer coverage for a
particular condition or require that an
issuer offer a minimum dollar amount of
mental health or substance use disorder
benefits. (While MHPAEA does not re-
quire plans or issuers to offer any mental
health benefits, once benefits are offered,
for whatever reason (except as previously
described related to PHS Act section
2713), MHPAEA applies to the benefits.)
These State law provisions do not prevent
the application of MHPAEA, and there-
fore would not be preempted. To the ex-
tent the State law mandates that an issuer
provide some coverage for any mental
health condition or substance use disorder,
benefits for that condition or disorder
must be provided in parity with medical/
surgical benefits under MHPAEA. This
means that an issuer subject to MHPAEA
may be required to provide mental health
or substance use disorder benefits beyond
the State law minimum in order to comply
with MHPAEA.

##### J. Enforcement

Comments received in response to the
interim final regulations suggested some
confusion and concern regarding the De-
partments' authority to impose penalties
and ensure compliance with the require-
ments under MHPAEA. The enforcement
responsibilities of the Federal government
and the States with respect to health in-
surance issuers are set forth in the PHS
Act. Pursuant to PHS Act section 2723(a),
States have primary enforcement author-
ity over health insurance issuers regarding
the provisions of part A of title XXVII of
the PHS Act, including MHPAEA. HHS
(through CMS) has enforcement authority
over the issuers in a State if the State

notifies CMS that it has not enacted leg-
islation to enforce or is otherwise not en-
forcing, or if CMS determines that the
State is not substantially enforcing, a pro-
vision (or provisions) of part A of title
XXVII of the PHS Act. Currently, CMS
believes that most States have the author-
ity to enforce MHPAEA and are acting in
the areas of their responsibility. In States
that lack the authority to enforce MH-
PAEA, CMS is either directly enforcing
MHPAEA or collaborating with State de-
partments of insurance to ensure enforce-
ment.

The Departments of Labor and the
Treasury generally have primary enforce-
ment authority over private sector
employment-based group health plans,
while HHS has primary enforcement au-
thority over non-Federal governmental
plans, such as those sponsored by State
and local government employers.

Some commenters suggested that
States need a stronger understanding of
MHPAEA and its implementing regula-
tions to better inform the public about the
protections of the law and to ensure
proper compliance by issuers. These com-
menters believed that States would benefit
from additional and continued guidance
from CMS regarding the requirements of
MHPAEA and its impact upon State law.
The Departments encourage State regula-
tors to familiarize themselves with the
MHPAEA requirements, in particular the
rules governing NQTLs, and any guid-
ance issued by the Departments, so that
the States can instruct issuers in their ju-
risdictions on the correct implementation
of the statute and regulations, and appro-
priately enforce the provisions. The De-
partments will continue to provide tech-
nical assistance to State regulators either
individually or through the National As-
sociation of Insurance Commissioners
to ensure that the States have the tools

they need to implement and enforce
MHPAEA.

K. Applicability Dates

MHPAEA's statutory provisions were
self-implementing and generally became
effective for plan years beginning after
October 3, 2009.51 The requirements of
the interim final regulations generally be-
came effective on the first day of the first
plan year beginning on or after July 1,
2010. These final regulations apply to
group health plans and health insurance
issuers offering group health insurance
coverage on the first day of the first plan
year beginning on or after July 1, 2014.
Examples, cross-references, and other
clarifications have been added in some
places to facilitate compliance and ad-
dress common questions, much of which
has already been published by the Depart-
ments.52 Each plan or issuer subject to the
interim final regulations must continue to
comply with the applicable provisions of
the interim final regulations until the cor-
responding provisions of these final regu-
lations become applicable to that plan or
issuer.

L. Technical Amendment Relating to
OPM Multi-State Plan Program and Ex-
ternal Review

This document also contains a techni-
cal amendment relating to external review
with respect to the Multi-State Plan Pro-
gram (MSPP) administered by the Office
of Personnel Management (OPM). Sec-
tion 2719 of the PHS Act and its imple-
menting regulations provide that group
health plans and health insurance issuers
must comply with either a State external
review process or the Federal external re-
view process. Generally, if a State has an
external review process that meets, at a
minimum, the consumer protections set
forth in the interim final regulations on
internal claims and appeals and external

49The preemption provision of PHS Act section 2724 also applies to individual health insurance coverage.

50 See House Conf. Rep. No. 104-736, at 205, reprinted in 1996 U.S. Code Cong. & Admin. News 2008.

51There is a special effective date for group health plans maintained pursuant to one or more collective bargaining agreements ratified before October 3, 2008, which states that the
requirements of the interim final regulations do not apply to the plan (or health insurance coverage offered in connection with the plan) for plan years beginning before the later of either
the date on which the last of the collective bargaining agreements relating to the plan terminates (determined without regard to any extension agreed to after October 3, 2008), or July 1,
2010. MHPAEA also provides that any plan amendment made pursuant to a collective bargaining agreement solely to conform to the requirements of MHPAEA will not be treated as a
termination of the agreement.

52For additional examples and other clarifications published by the Departments to facilitate compliance under the interim final rules, see also http://www.dol.gov/ebsa/faqs/faq-mhpaea.html;
FAQs about Affordable Care Act Implementation (Part V) and Mental Health Parity Implementation, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and http://www.cms.gov/
CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html; FAQs about Affordable Care Act Implementation (Part VII) and Mental Health Parity Implementation, available
at http://www.dol.gov/ebsa/faqs/faq-aca7.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs7.html; FAQs on Understanding Implementation
of the Mental Health Parity and Addiction Equity Act of 2008, available at http://www.dol.gov/ebsa/faqs/faq-mhpaeaimplementation.html; and FAQs for Employees about the Mental Health
Parity and Addiction Equity Act, available at http://www.dol.gov/ebsa/faqs/faq-mhpaea2.html.

review,53 then an issuer (or a plan) subject
to the State process must comply with
the State process.54 For plans and issu-
ers not subject to an existing State ex-
ternal review process (including self-
insured plans), a Federal external review
process applies.55 The statute requires
the Departments to establish standards,
"through guidance," governing a Fed-
eral external review process. Through
guidance issued by the Departments,
HHS has established a Federal external
review process for self-insured non-
Federal governmental health plans, as
well as for plans and issuers in States
that do not have an external review pro-
cess that meets the minimum consumer
protections in the regulations.

In proposed regulations published on
March 21, 2013 (78 FR 17313), the De-
partments proposed to amend the interim
final regulations implementing PHS Act
section 2719 to specify that MSPs will be
subject to the Federal external review pro-
cess under PHS Act section 2719(b)(2)
and paragraph (d) of the internal claims
and appeals and external review regula-
tions. This proposal reflects the Depart-
ments' interpretation of section
2719(b)(2) as applicable to all plans not
subject to a State's external review pro-
cess. OPM has interpreted section
1334(a)(4) of the Affordable Care Act to
require OPM to maintain authority over
external review because Congress di-
rected that OPM implement the MSPP in
a manner similar to the manner in which it
implements the contracting provisions of
the FEHBP, and in the FEHBP, OPM
resolves all external appeals on a nation-
wide basis as a part of its contract admin-
istration responsibilities.56 This assures
consistency in benefit administration for
those OPM plans that are offered on a

nationwide basis. Accordingly, under
OPM's interpretation, it would be incon-
sistent with section 1334(a)(4) of the Af-
fordable Care Act for MSPs and MSPP
issuers to follow State-specific external
review processes under section 2719(b)(1)
of the PHS Act. OPM's final rule on the
establishment of the multi-State plan pro-
gram nonetheless does require the MSPP
external review process to meet the re-
quirements of PHS Act section 2719 and
its implementing regulations.57

The Departments also proposed to
amend the interim final regulations imple-
menting PHS Act section 2719 to specify
that the scope of the Federal external re-
view process, as described in paragraph
(d)(1)(ii), is the minimum required scope
of claims eligible for external review for
plans using a Federal external review pro-
cess, and that Federal external review pro-
cesses developed in accordance with para-
graph (d) may have a scope that exceeds
the minimum requirements.

The Departments did not receive any
comments relating to these proposed
amendments and therefore retain the
amendments in this final rule without
change, except for one minor correction.58
The Departments made a typographical
error in the March 21, 2013 proposed rule,
inadvertently omitting the word "internal"
from paragraph (d)(1)(i). That provision
should have stated that the Federal exter-
nal review process "applies, at a mini-
mum, to any adverse benefit determina-
tion or final internal adverse benefit
determination . . . " (emphasis added). The
Departments did not intend to remove the
word "internal" from the interim final rule
through the proposed amendment, and we
are correcting the final amendment to in-
clude the word.

### III. Economic Impact and Paperwork Burden

Executive Orders 12866 (Regulatory
Planning and Review, September 30,
1993) and 13563 (Improving Regulation
and Regulatory Review, February 2,
2011) direct agencies to propose or adopt
a regulation only upon a reasoned deter-
mination that its benefits justify its costs,
to assess the costs and benefits of regula-
tory alternatives, and to select regulatory
approaches that maximize net benefits (in-
cluding potential economic, environmen-
tal, public health and safety effects, dis-
tributive impacts, and equity).

Agencies must determine whether a
regulatory action is "significant" which is
defined in Executive Order 12866 as an
action that is likely to result in a rule (1)
having an annual effect on the economy of
$100 million or more, or adversely and
materially affecting a sector of the econ-
omy, productivity, competition, jobs, the
environment, public health or safety, or
State, local or tribal governments or com-
munities (also referred to as “economi-
cally significant"); (2) creating a serious
inconsistency or otherwise interfering
with an action taken or planned by another
agency; (3) materially altering the budget-
ary impacts of entitlement grants, user
fees, or loan programs or the rights and
obligations of recipients thereof; or (4)
raising novel legal or policy issues arising
out of legal mandates, the President's pri-
orities, or the principles set forth in the
Executive Order.

A. Summary - Department of Labor and
Department of Health and Human Ser-
vices

The Departments have determined that
this regulatory action is economically sig-
nificant within the meaning of section

53The interim final regulations relating to internal claims and appeals and external review processes are codified at 26 CFR 54.9815-2719T, 29 CFR 2590.715-2719, and 45 CFR 147.136.
These requirements do not apply to grandfathered health plans. The interim final regulations relating to status as a grandfathered health plan are codified at 26 CFR 54.9815-1251T, 29 CFR
2590.715-1251, and 45 CFR 147.140.

54More information on the regulatory requirements for State external review processes, including the regulations, Uniform Health Carrier External Review Model Act promulgated by the
National Association of Insurance Commissioners, technical releases, and other guidance, is available at http://www.dol.gov/ebsa and http://cciio.cms.gov.

55More information on the regulatory requirements for the Federal external review process, including the regulations, technical releases, and other guidance, is available at http://
www.dol.gov/ebsa and http://cciio.cms.gov.

56See the OPM proposed rule on establishment of the MSPP, 77 FR 72582, 72585 (Dec. 5, 2012); see also the final rule, 78 FR 15559, 15574 (Mar. 11, 2013) ("we believe our approach
to external review is required by section 1334 of the Affordable Care Act[.]".

57See 45 CFR 800.115(k) and 45 CFR part 800; see also 78 FR at 15574 ("the level playing field provisions of section 1324 of the Affordable Care Act would not be triggered because
MSPs and MSPP issuers would comply with the external review requirements in section 2719(b) of the PHS Act, just as other health insurance issuers in the group and individual markets
are required to do.").

58Treasury is not adopting amendments to the external review regulations in 26 CFR at this time. Any changes to the Treasury external review regulations will be made when the entire
section of those regulations is adopted as final regulations.

3(f)(1) of the Executive Order, because it
is likely to have an effect on the economy
of $100 million or more in at least one
year. Accordingly, the Departments pro-
vide the following assessment of the po-
tential costs and benefits of these final
regulations. As elaborated below, the De-
partments believe that the benefits of the
rule justify its costs.

As described earlier in this preamble,
these final regulations expand on the pro-
tections and parity requirements set forth
in the interim final regulations, incorpo-
rate clarifications issued by the Depart-
ments through sub-regulatory guidance
since the issuance of the interim final reg-
ulations, and provide clarifications related
to NQTLs and disclosure requirements.
These final regulations also include addi-
tional clarifications and examples illus-
trating the parity requirements and their
applicability, as well as provisions to im-
plement the increased cost exemption
with respect to financial requirements and
treatment limitations. The HHS final reg-
ulation also implements the parity re-
quirements for individual health insur-
ance coverage.

A recent study on plan responses to
MHPAEA indicates that by 2011, most
plans had removed most financial require-
ments and treatment limitations that did
not meet the requirements of MHPAEA
and the interim final regulations.59 The
use of higher copays and coinsurance for
inpatient mental health and substance use
disorder services declined rapidly in large
employer plans following implementation
of MHPAEA.60 In addition, nearly all
plans had eliminated the use of separate
deductibles for mental health or substance
use disorder out-of-pocket costs by
2011.61 (Even by 2010, only 3.2 percent
of plans had used separate deductibles.)
The HHS study also found that the num-
ber of plans that applied unequal inpatient

day limits, outpatient visit limits or other
quantitative treatment limitations for men-
tal health or substance use disorder bene-
fits had dropped significantly by 2011.

Since this study found that the imple-
mentation of the requirements of MH-
PAEA has progressed consistent with the
interim final rules, this impact analysis
includes estimates of any additional costs
and benefits resulting from changes made
to the provisions in the interim final reg-
ulations by these final regulations. As
background, in section III.D of this pre-
amble, the Departments summarize the
cost estimates included in the interim final
regulations.

#### B. Need for Regulatory Action

Congress directed the Departments to
issue regulations implementing the MH-
PAEA provisions. In response to this Con-
gressional directive, these final regula-
tions clarify and interpret the MHPAEA
provisions under section 712 of ERISA,
section 2726 of the PHS Act, and section
9812 of the Code. Historically, plans have
offered coverage for mental health condi-
tions and substance use disorders at lower
levels than coverage for other conditions.
Plans limited coverage through restrictive
benefit designs that discouraged enroll-
ment by individuals perceived to be high-
cost due to their behavioral health condi-
tions and by imposing special limits on
mental health and substance use disorder
benefits out of concern that otherwise uti-
lization and costs would be unsustainable.
Parity advocates argued that these ap-
proaches were unfair and limited access to
needed treatment for vulnerable popula-
tions. In addition, research demonstrated
that restrictive benefit designs were not
the only way to address costs.62 Initially,
MHPA 1996 was designed to eliminate
more restrictive annual and lifetime dollar
limits on mental health benefits. However,
as illustrated in a General Accountability

Office report on implementation of
MHPA 1996, the statute had an unin-
tended consequence: most plans coming
into compliance instead turned to more
restrictive financial requirements and
treatment limitations.63

These final regulations provide the
specificity and clarity needed to effec-
tively implement the provisions of MH-
PAEA and prevent the use of prohibited
limits on coverage, including nonquanti-
tative treatment limitations that dispropor-
tionately limit coverage of treatment for
mental health conditions or substance use
disorders. The requirements in these final
regulations are needed to address ques-
tions and concerns that have been raised
regarding the implications of the interim
final regulations with regard to intermedi-
ate level services, NQTLs, and the in-
creasing use of multi-tiered provider net-
works. The Departments' assessment of
the expected economic effects of these
regulations is discussed in detail below.
C. Response to Comments on the Eco-
nomic Impact Analysis for the Interim Fi-
nal Regulations - Department of Labor
and Department of Health and Human
Services

The Departments received the follow-
ing public comments regarding the eco-
nomic impact analysis in the interim final
regulations.

One commenter urged that the discus-
sion on cost implications for increased
utilization of mental health and substance
use disorder services must take into ac-
count the cost savings that will result from
the elimination of the costs associated
with "unique and discriminatory medical
management controls" (or NQTLs). Al-
though the Departments concur that the
nature and rigor of utilization manage-
ment affects the cost of care and the ad-
ministrative expenses associated with care
management, there is scant evidence at

59Final Report: Consistency of Large Employer and Group Health Plan Benefits with Requirements of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity
Act of 2008. NORC at the University of Chicago for the Office of the Assistant Secretary for Planning and Evaluation. This study analyzed information on large group health plan benefit
designs from 2009 through 2011 in several databases maintained by benefits consulting firms that advise plans on compliance with MHPAEA as well as other requirements.

60Ibid.

61 Ibid.

62See discussion in the preamble to the interim final rule on the effect of managed care in controlling health plan spending on mental health and substance use disorder treatment under state
parity laws and in the Federal Employee Health Benefit Program, Interim Final Rules Under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008,
75 Fed. Reg. 5410, 5424-5425 (see e.g., footnote 46) (February 2, 2010).

63 General Accountability Office, Mental Health Parity Act: Despite New Federal Standards, Mental Health Benefits Remain Limited, May 2000,(GAO/HEHS-00-95), p. 5. In this report,
GAO found that 87 percent of compliant plans contained at least one more restrictive provision for mental health benefits with the most prevalent being limits on the number of outpatient
office visits and hospital day limits.

this time on the way that utilization man-
agement will evolve under MHPAEA. Ex-
isting evidence suggests that plans and
issuers can apply a range of tools to man-
age care and that even when management
of care is consistent with the principles of
parity, care management continues. (See
the discussion of Oregon state parity law
later in this preamble).

Several commenters asserted that the
Departments had underestimated the cost
and burden of complying with the interim
final regulations. However, a study spon-
sored by HHS found that by 2011 most
plans had removed most financial require-
ments that did not meet the requirements
of MHPAEA and the interim final regula-
tions.64 In addition, the number of plans
that applied unequal inpatient day limits,
outpatient visit limits, or other quantita-
tive treatment limitations for mental
health or substance use disorder benefits
had dropped significantly by 2011. Yet,
there is no evidence that plans' costs and
burdens have been significantly impacted
by the requirements of the statute and its
implementing interim final regulations.
Research has shown that only a very small
percentage of plans have dropped mental
health or substance use disorder benefits
after implementation of MHPAEA and
even for those plans that did so, there is no
clear evidence that they dropped mental
health or substance use disorder benefits
because of MHPAEA. Moreover, no plans
have applied for the increased cost ex-
emption under MHPAEA. Finally, in
spending reports that have been reported
in the aggregate, there is no evidence that
spending growth for behavioral health
saw a significant upturn in 2011, the first
full year in which the interim final regu-
lations generally were in effect.

One commenter asserted that plans are
not set up to conduct a parity analysis
within the six classifications and as a re-

sult the interim final regulations impose a
substantial burden, especially on employ-
ers that offer multiple plans. In response,
the Departments note that the alternative
to using the six classifications would re-
quire conducting a parity analysis across
all types of benefits grouped together that
would have resulted in incongruous and
unintended consequences with, for exam-
ple, day limits for inpatient care being the
standard for outpatient benefits. More-
over, there is no evidence that plans or
issuers have found these requirements to
be overly burdensome.

One commenter stated that the Federal
Employees' Health Benefits Program (FE-
HBP) parity requirements and State parity
laws are not comparable to the standards
in the interim final regulations and there-
fore are not predictive of the possible cost
impacts of the interim final regulations,
especially regarding NQTLs. In response,
the Departments note that, like MHPAEA,
the parity requirements for FEHBP apply
to financial requirements and treatment
limitations for both mental health condi-
tions and substance use disorders. Further-
more, the FEHBP requirements are more
expansive in that "plans must cover all
categories of mental health or substance
use disorders to the extent that the ser-
vices are included in authorized treatment
plans ... developed in accordance with
evidence-based clinical guidelines, and
meet[ing] medical necessity criteria."65
Under the MHPAEA statute, plans and
issuers have discretion as to which diag-
noses and conditions are covered under
the plan.

Several State parity laws are very sim-
ilar to MHPAEA. For example, Ver-
mont's parity law applies to both mental
health and substance use disorder bene-
fits.66 The Vermont parity law also re-
quires that management of care for these
conditions be in accordance with rules

adopted by the State Department of Insur-
ance to assure that timely and appropriate
access to care is available; that the quan-
tity, location and specialty distribution of
health care providers is adequate and that
administrative or clinical protocols do not
serve to reduce access to medically nec-
essary treatment.67 These requirements
are very similar to the NQTL require-
ments under MHPAEA which likewise
seek to ensure plans and issuers do not
inequitably limit access to mental health
or substance use disorder treatment. In
addition, the NQTLs requirements like-
wise require comparable approaches to
utilization management through protocols
and other strategies in determining cover-
age of mental health and substance use
disorder treatment compared to medical/
surgical treatment. A study of this State
parity law also did not find significant
increases in cost.68

The Oregon State parity law is also
very similar to MHPAEA in that it applies
to mental health and substance use disor-
der financial requirements and treatment
limitations and also applies to NQTLs.
According to the Oregon Insurance Divi-
sion, utilization management tools such as
"selectively contracted panels of provid-
ers, health policy benefit differential de-
signs, preadmission screening, prior au-
thorization, case management, utilization
review, or other mechanisms designed to
limit eligible expenses to treatment that is
medically necessary" may not be used for
management of mental health or sub-
stance use disorder benefits unless they
were used in the same manner that such
methods were used for other medical con-
ditions.69 A study of the Oregon parity
law found that plans removed coverage
limits as required and used management
techniques to the same degree or less un-
der this law and the impact on mental
health and substance use disorder spend-

64Final Report: Consistency of Large Employer and Group Health Plan Benefits with Requirements of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity
Act of 2008. NORC at the University of Chicago for the Office of the Assistant Secretary for Planning and Evaluation. This study analyzed information on large group health plan benefit
designs from 2009 through 2011 in several databases maintained by benefits consulting firms that advise plans on compliance with MHPAEA as well as other requirements.

65FEHB Program Carrier Letter, No. 2009-08, April 20, 2009.

66Vt. Stat. Ann tit. 8, § 4089b (1998).

67Ibid.

68Rosenbach M, Lake T, Young C, et al. Effects of the Vermont Mental Health and Substance Abuse Parity Law. DHHS Pub. No. SMA 03-3822, Rockville, MD: Substance Abuse and
Mental Health Services Administration, 2003.

69Q&A Oregon Mental Health Parity Law for Providers. Oregon Insurance Division Web site. http://www.cbs.state.or.us/ins/FAQs/mental-health-parity_provider-faqs.pdf.

ing was minimal.70 Together, the similar-
ities between the FEHBP, Vermont, and
Oregon parity requirements lead the De-
partments to conclude that any differences
in terms of the impacts on cost would be
small.

Several commenters argued that the re-
quirement in the interim final regulations
to use a single or shared deductible in a
classification is overly burdensome and
would require significant resources to im-
plement, particularly by MBHOs since
they often work with multiple plans. One
commenter asserted that this requirement
could impact the willingness of sponsors
to offer mental health or substance use
disorder benefits. In response, the Depart-
ments note that a study sponsored by HHS
found that nearly all plans had eliminated
the use of separate deductibles for mental
health and substance use disorder benefits
by 2011.71 According to this study, even
in 2010, only a very small percentage of
plans were using separate deductibles.
This study and other research have shown
that only a very small percent of plans
have dropped mental health or substance
use disorder benefits after implementation
of MHPAEA and there is no clear evi-
dence they did so because of MHPAEA.

One commenter urged that the regula-
tions be revised to be less burdensome for
plans that are part of a more comprehen-
sive network of benefits within Medicaid
healthcare delivery systems. These final
regulations apply to group health plans
and health insurance issuers but do not, by
their own terms, apply to Medicaid. In
response, the Departments note that CMS
oversees implementation of federal re-
quirements for the Medicaid program.
CMS issued a state health official letter on
the application of MHPAEA to Medicaid
managed care organizations, the Chil-
dren's Health Insurance Program, and Al-
ternative Benefit (Benchmark) plans on
January 16, 2013.72

Two commenters raised concerns
about the burden imposed on plans by the

requirement that provider reimbursement
rates be based on comparable criteria par-
ticularly for MBHOs that may as a result
have to use multiple rate schedules. The
Departments believe that the process of
establishing rate schedules is already
complex, that MBHOs that contract with
other multiple plans are likely to already
have multiple rate schedules, and that add-
ing a parity requirement to ensure that
rates for behavioral health providers are
based on comparable criteria to those used
for medical/surgical providers does not
add much to this complexity.

One commenter argued that the costs
for outpatient mental health and substance
use disorder benefits will be higher than
estimated because the NQTL parity stan-
dard would hamper plans' ability to man-
age care and control costs. In response,
the Departments note that, as discussed
above, the Oregon State parity law also
applies to NQTLs and a study of this law
found that plans in that State removed
coverage limits as required and used man-
agement techniques to the same degree or
less under the Oregon law and the impact
on mental health and substance use disor-
der spending was minimal.73

D. Summary of the Regulatory Impact
Analysis for the Interim Final Regula-
tions- Department of Labor and Depart-
ment of Health and Human Services

In the regulatory impact analysis for
the interim final regulations, the Depart-
ments quantified the costs associated with
three aspects of that rulemaking: the cost
of implementing a unified deductible,
compliance review costs, and costs asso-
ciated with information disclosure re-
quirements in MHPAEA. The Depart-
ments estimated the cost of developing the
interface necessary to implement a single
deductible as $35,000 per affected inter-
face between a managed behavioral health
company and a group health plan with a
total estimated cost at $39.2 million
(amounting to $0.60 per health plan en-
rollee) in the first year. The interim final

regulations' impact analysis estimated the
cost to health plans and insurance issuers
of reviewing coverage for compliance
with MHPAEA and the interim final reg-
ulations at $27.8 million total. This esti-
mate was based on findings that there
were about 460 issuers and at least 120
MBHOs and assumed that per-plan com-
pliance costs would be low because third
party administrators for self-insured plans
would spread the cost across multiple cli-
ent plans.

Regarding the requirement to disclose
medical necessity criteria, the Depart-
ments assumed that each plan would re-
ceive one such request on average, that it
would take a trained staff person about
five minutes to respond, and with an av-
erage hourly rate of $27, the total annual
cost would be about $1 million. The De-
partments assumed only 38 percent of re-
quests would be delivered electronically
with de minimis cost and that the materi-
als, printing and postage costs of respond-
ing to about 290,000 requests by paper
would be an additional $192,000 for a
total of about $1.2 million per year. These
costs totaled $114.6 million undiscounted
over ten years (2010-2019). The Depart-
ments did not include a cost for the re-
quirement in MHPAEA to disclose the
reasons for any claims denials because the
Department of Labor's claims procedure
regulation (at 29 CFR 2560.503-1) al-
ready required such disclosures and the
same third-party administrators and insur-
ers are hired by ERISA and non-ERISA
covered plans so both types of plans were
likely to already be in compliance with
these rules.

In terms of transfers, in the interim
final regulations impact analysis, the De-
partments estimated premiums would rise
0.4 percent due to MHPAEA, reflecting a
transfer from individuals not using mental
health and substance use disorder benefits
to those that do. This estimated increase in
premiums amounted to a transfer of $2.36
billion in 2010 gradually increasing each

70McConnell JK, Gast SH, Ridgely SM. Behavioral health insurance parity: does Oregon's experience presage the national experience with the Mental Health Parity and Addiction Equity
Act? American Journal of Psychiatry 2012; 169(1): 31-38.

71Final Report: Consistency of Large Employer and Group Health Plan Benefits with Requirements of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity
Act of 2008. NORC at the University of Chicago for the Office of the Assistant Secretary for Planning and Evaluation.

72 Application of the Mental Health Parity and Addiction Equity Act to Medicaid MCOs, CHIP, and Alternative Benefit (Benchmark) Plans, available at: http://www.medicaid.gov/Federal-
Policy-Guidance/downloads/SHO-13-001.pdf.

73McConnell JK, Gast SH, Ridgely SM. Behavioral health insurance parity: does Oregon's experience presage the national experience with the Mental Health Parity and Addiction Equity
Act? American Journal of Psychiatry 2012; 169(1): 31-38.

year over a ten year period to $2.81 billion
in 2019. This estimate was based on find-
ings in the literature. For a more complete
discussion, see section III.I later in this
preamble.

E. Summary of the Impacts of the Final
Rule - Department of Labor and Depart-
ment of Health and Human Services

Table 1, below, summarizes the costs
associated with the final regulations above
the costs estimated for the interim final
regulations. Over a five-year period of
2014 to 2018, the total undiscounted cost
of the rule is estimated to be $1.16 billion
in 2012 dollars. Columns D and E display
the costs discounted at 3 percent and 7

percent, respectively. Column F shows a
transfer of $3.5 billion over the five-year
period. All other numbers included in the
text are not discounted, except where
noted.

Table 1-Total Costs of Final Regulations [in millions of 2012 dollars]

Year

Incremental Change in Individual Market Plan Spending

Disclosure Requirements

Total undiscounted costs

Total 3% discounted costs

Total 7% discounted costs

Transfers (undiscounted)

(A)

(B)

A+B

(D)

(E)

(F)

2014

$ 189.9

$ 4.3

$ 194.2

$ 699.2

2015

$ 208.4

$ 4.3

$ 212.7

$ 206.5

$ 198.8

$ 732.0

2016

$ 226.8

$ 4.3

$ 231.1

$ 217.9

$ 201.9

$ 764.8

2017

$ 245.3

$ 4.3

$ 249.6

$ 228.4

$ 203.7

$ 797.6

2018

$ 263.8

$ 4.3

$ 268.1

$ 238.2

$ 204.5

$ 830.4

Total

$1,134.2

$21.5

$1,155.6

$1,085.1

$1,003.1

$3,824.0

1\. Estimated Number of Affected En-
tities

MHPAEA has already brought about
coverage changes for approximately 103
million participants in 420,700 ERISA-
covered employment-based group health
plans with more than 50 participants, and an
estimated 29.5 million participants in the
approximately 23,000 public, non-Federal
employer group health plans with more than
50 participants sponsored by State and local
governments. Plans with 50 or fewer par-
ticipants were previously exempt from
MHPAEA.74 In addition, approximately
510 health insurance issuers providing men-
tal health or substance use disorder benefits
in the group and individual health insurance
markets and at least 120 MBHOs providing
mental health or substance use disorder ben-
efits to group health plans are also affected
by these final regulations.75

As discussed earlier, the Affordable Care
Act extended MHPAEA to apply to a health

insurance issuer offering individual health
insurance coverage and the HHS final reg-
ulation regarding EHB requires QHPs and
non-grandfathered health insurance plans in
the individual and small group markets to
provide covered mental health and sub-
stance use disorder services in a manner that
complies with the parity requirements of the
MHPAEA implementing regulations in or-
der to satisfy the requirement to cover EHB.
According to the 2012 Medical Loss Ratio
filings, about 11 million people are covered
in the individual market; another 7 million
are expected to gain coverage in 2014 under
the Affordable Care Act.76 There are an
estimated 12.3 million participants in about
837,000 non-grandfathered ERISA-covered
employment-based group plans with 50 or
fewer participants, and an estimated
800,000 participants in approximately
59,000 non-grandfathered public, non-
Federal employer group health plans with
50 or fewer participants sponsored by State

and local governments which were previ-
ously exempt from MHPAEA.

About one-third of those who are cur-
rently covered in the individual market
have no coverage for substance use disor-
der services and nearly 20 percent have no
coverage for mental health services, in-
cluding outpatient therapy visits and inpa-
tient crisis intervention and stabiliza-
tion.77 In addition, even when individual
market plans provide these benefits, the
federal parity law previously did not apply
to these plans to ensure that coverage for
mental health and substance use disorder
services is generally comparable to cover-
age for medical and surgical care.

In the small group market, coverage of
mental health and substance use disorder
treatment is more common than in the
individual market. We estimate that about
95 percent of those with small group mar-
ket coverage have substance abuse and
mental health benefits.78 Again, the fed-

74The Departments' estimates of the numbers of affected participants are based on DOL estimates using the 2012 CPS. ERISA plan counts are based on DOL estimates using the 2011
MEP-IC and Census Bureau statistics. The number of State and local government employer-sponsored plans was estimated using 2012 Census data and DOL estimates. Please note that
the estimates are based on survey data that is not broken down by the employer size covered by MHPAEA making it difficult to exclude from estimates those participants employed by
employers who employed an average of at least 2 but no more than 50 employees on the first day of the plan year.

75The Departments' estimate of the number of insurers is based on medical loss ratio reports submitted by issuers for 2012 reporting year and industry trade association membership. Please
note that these estimates could undercount small State-regulated insurers.

76"Effects on Health Insurance and the Federal Budget for the Insurance Coverage Provisions in the Affordable Care Act-May 2013 Baseline," Congressional Budget Office, May 14, 2013.

77 ASPE Issue Brief, "Essential Health Benefits: Individual Market Coverage," ed. U.S. Department of Health & Human Services (2011).

78 ASPE Issue Brief, "Essential Health Benefits: Comparing Benefits in Small Group Products and State and Federal Employee Plans," ed. U.S. Department of Health & Human Services (2011).

eral parity law previously did not apply to
small group plans. In many States, State
parity laws offer those covered in this
market some parity protection, but most
State parity laws are narrower than the
federal parity requirement.

##### 2. Anticipated Benefits

a. Benefits Attributable to the Statute
or Interim Final Regulations

In enacting MHPAEA, one of Con-
gress' primary objectives was to improve
access to mental health and substance use
disorder benefits by eliminating more re-
strictive visit limits and inpatient days
covered as well as higher cost-sharing for
mental health and substance use disorder
benefits that were prevalent in private in-
surance plans after implementation of
MHPA 1996.79

A recent study funded by HHS found
that large group health plans and insur-
ance issuers have made significant
changes to financial requirements and
treatment limitations for mental health
and substance use disorder benefits in the
first few years following enactment of
MHPAEA.80 The statute went into effect
for plan years beginning after October 3,
2009 (calendar year 2010 for many plans)
and the interim final regulations went into
effect for plans years beginning on or after
July 10, 2010 (calendar year 2011 for
many plans). This HHS study found that
by 2011, most plans had removed most
financial requirements and treatment lim-
itations that did not meet the requirements
of MHPAEA and its implementing in-
terim final regulations.

According to this HHS study, in 2010,
ten percent of a nationally representative
sample of large employers' behavioral
health benefits had inpatient financial re-
quirements (e.g., deductibles, co-pays, or
co-insurance) that needed modification to
comply with MHPAEA. Analysis of a
separate set of large employer-based plans
for 2011 found virtually all 230 large
employer-based plans included had inpa-
tient benefits that conformed to MHPAEA

standards. A third database of plan de-
signs from 2009 through 2011 confirmed
that the use of higher copayments and
coinsurance for inpatient mental health
and substance use disorder services de-
clined rapidly in large employer plans fol-
lowing implementation of MHPAEA.81

Among the representative sample of
plans for 2010 included in this study,
more than 30 percent had copayments or
coinsurance rates for outpatient mental
health and substance use disorder benefits
that were inconsistent with MHPAEA. In
a separate sample of large employer-based
plans for 2011, the use of higher coinsur-
ance for mental health and substance use
disorder benefits dropped dramatically.
However, the study found that about 20
percent of the 140 plans tested continued
to utilize outpatient in-network co-pays
that failed to meet MHPAEA standards. A
third database of plan designs for 2009
through 2011 confirmed a dramatic de-
cline in the use of more restrictive cost-
sharing for outpatient mental health and
substance use disorder benefits although a
minority continued to use high copays.

Nearly all plans had eliminated the use
of separate deductibles for mental health
or substance use disorder out-of-pocket
costs by 2011. (Even by 2010, only 3.2
percent of plans had used separate deduct-
ibles.)82

The HHS study also found that the
number of plans that applied unequal in-
patient day limits, outpatient visit limits or
other quantitative treatment limitations for
mental health or substance use disorder
benefits had dropped significantly by
2011. In 2010, it found that most large
employer-based plans used day limits on
mental health inpatient benefits that gen-
erally conformed to MHPAEA standards.
While almost 20 percent of these plans
imposed more restrictive day limits on
in-network, inpatient benefits for sub-
stance use disorders than applied to med-
ical/surgical benefits, the separate sample
of 2011 large employer-based plans indi-

cated a significant decline with only eight
percent of plans using stricter day limits
for inpatient benefits for substance use
disorders. These findings were corrobo-
rated by analysis of an additional database
of plan designs from 2009 through 2011,
which also indicated a dramatic decline in
the proportion of plans using more restric-
tive inpatient day limits on mental health
and substance use disorder benefits (from
50 percent in 2009 to ten percent in 2010).

In 2010, more than 50 percent of large
employer-based plans in the study's repre-
sentative sample used more restrictive visit
limits for outpatient mental health and sub-
stance use disorder services that did not
conform to MHPAEA standards. But, in the
2011 sample of large employer-based health
plans, less than seven percent were using
unequal visit limits. This trend was also
evident in the plan design database compar-
ing plans across 2009, 2010, and 2011.
There too, substantial reductions in quanti-
tative treatment limitations for mental health
and substance use disorder benefits in large
employer-based plans were seen after enact-
ment of MHPAEA.

b. Potential Benefits of the Final Reg-
ulations

The Departments expect that MHPAEA
and these final regulations will have their
greatest impact on people needing the most
intensive treatment and financial protection.
The Departments cannot estimate how large
this impact will be, but the numbers of ben-
eficiaries who have a medical necessity for
substantial amount of care are likely to be
relatively small.

Improving coverage in the small group
and individual markets will also expand
financial protection for a significant seg-
ment of those covered and soon to be
covered by private health insurance. One
indicator of the consequences of unpro-
tected financial risk is bankruptcies. The
literature on bankruptcies identifies men-
tal health care as a source of high spend-
ing that is less protected than other areas
of health care.83 One estimate is that about

79See the interim final regulations for a fuller discussion of the legislative history.

80Final Report: Consistency of Large Employer and Group Health Plan Benefits with Requirements of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity
Act of 2008 at pages vii-ix. NORC at the University of Chicago for the Office of the Assistant Secretary for Planning and Evaluation. This study analyzed information on large group health
plan benefit designs from 2009 through 2011 in several databases maintained by benefits consulting firms that advise plans on compliance with MHPAEA as well as other requirements.

81Ibid at page xii.

82Ibid at page xi.

83Robertson CT, R Egelhof, M Hoke, Get Sick, Get Out: The Medical Causes of Home Mortgage Foreclosures, Health Matrix 18:65-105, 2008.

17 percent of bankruptcies are due to
health care bills.84 Another estimate using
the same data is that about ten percent of
medical bankruptcies are attributable to
high mental health care costs, and an ad-
ditional two to three percent of bankrupt-
cies are attributable to drug and alcohol
abuse.85 Improvements in coverage of
mental health and substance use disorder
services expected to result from imple-
mentation of MHPAEA can be expected
to reduce some of the financial risk and
also yield successful treatment for people
with mental health or substance use dis-
order problems.

Earlier entry into treatment may have a
salutary impact on entry into disability
programs. Of the 8.6 million disabled
workers receiving Social Security Disabil-
ity Insurance benefits, 28 percent are iden-
tified as having a disability related to men-
tal disorders, not including intellectual
disability. Mental disorders are the second
largest diagnostic category among awards
to disabled workers, after conditions asso-
ciated with the musculoskeletal system
and connective tissue (29 percent) but
ahead of those related to the circulatory
system (8.5 percent).86

Improving coverage of mental health
and substance use disorder treatment
could also more generally improve pro-
ductivity and improve earnings among
those with these conditions. Studies have
shown that the high prevalence of depres-
sion causes $31 billion to $51 billion an-
nually in lost productivity in the United
States.87 More days of work loss and work
impairment are caused by mental illness

than by various other chronic conditions,
including diabetes and lower back pain.88
A recent meta-analysis of randomized
studies that examined the impact of treat-
ing depression on labor market outcomes
showed that while the labor supply effects
were smaller than the impact on clinical
symptoms, there were consistently signif-
icant and positive effects of treatment on
labor supply.89, 90 Although the expected
impact of MHPAEA on labor supply is
likely modest for large employers, it is
probably considerably larger for small
group and individual plans where pre-
MHPAEA coverage was more limited
than in the large group market.

As stated earlier, these final regulations
clarify that the general rule regarding con-
sistency in classification of benefits ap-
plies to intermediate services provided un-
der the plan or coverage. These final
regulations are expected to maintain or
perhaps slightly improve coverage for in-
termediate levels of care. These services
that fall between inpatient care for acute
conditions and regular outpatient care can
be effective at improving outcomes for
people with mental health conditions or
substance use disorders.91, 92,9

This final rule allows for policies such
as multi-tiered provider networks. Multi-
tiered networks are spreading rapidly
among large group policies. There is some
early evidence that such approaches can
successfully attenuate costs and improve
quality of care.

##### 3. Anticipated Costs

a. Illustrative Results from Past Policy
Interventions

Existing evidence on implementation
of parity in States and FEHBP suggests
there will not be significant increases in
plan expenditures and premiums as a
result of the increased access to mental
health and substance use disorder ser-
vices that are expected to result from
these final regulations. Since the effec-
tive date of the interim final regulations,
no employer has applied for a cost ex-
emption. A recent research study funded
by HHS shows that in general, large
employer-sponsored plans eliminated
higher financial requirements and more
limited inpatient day limits, outpatient
visit limits and other quantitative treat-
ment limitations for mental health or
substance use disorder benefits fairly
quickly in the first few years following
the enactment of MHPAEA. Differences
in cost sharing for prescription medica-
tions and emergency care also declined,
and by 2011 almost all large employer-
based plans studied appeared to comply
with MHPAEA for those benefits.94
Over that same period, a very small
percent of employers dropped mental
health or substance use disorder cover-
age. Moreover, there is no clear evi-
dence that the small number of plans
that did drop mental health and sub-
stance use disorder coverage did so be-
cause of MHPAEA.

Furthermore, evidence suggests that
plans did not exclude more mental health
or substance use disorder diagnoses from
coverage in response to MHPAEA and
there is no evidence that plans or employ-
ers reduced medical/surgical benefits to

84Dranove D and ML Millenson, Medical Bankruptcy: Myth Versus Fact, Health Affairs 25, w74-w83 February 28, 2006.

85Dranove D and ML Millenson, Medical Bankruptcy: Myth Versus Fact, Health Affairs 25, w74-w83 February 28, 2006.
86Social Security Administration (SSA). (2012). Annual Statistical Report on the Social Security Disability Insurance Program, 2011. SSA Publication No. 13-11826.

87Stewart, W.F., Ricci, J.A., Chee, E., Hahn, S.R. & Morgenstein, D. (2003, June 18). "Cost of lost productive work time among US workers with depression." JAMA: Journal of the
American Medical Association. 289, 23, 3135-3144; Kessler, R.C., Akiskal, H.S., Ames, M., Birnbaum, H., Greenberg, P., Hirschfeld, H.M.A. et al. (2006). "Prevalence and effects of mood
disorders on work performance in a nationally representative sample of U.S. workers." American Journal of Psychiatry, 163, 1561-1568.

88Stewart, W.F., Ricci, J.A., Chee, E., Hahn, S.R. & Morgenstein, D. (2003, June 18). "Cost of lost productive work time among US workers with depression." JAMA: Journal of the
American Medical Association. 289, 23, 3135-3144.

89Timbie JW, M Horvitz-Lennon, RG Frank and SLT Normand, A Meta-Analysis of Labor Supply Interventions for Major Depressive Disorder, Psychiatric Services 57(2) 212-219, 2006.
90Wang PS, GE Simon, J Avorn et al, Telephone Screening, Outreach, and Care Management for Depressed Workers and Impact on Clinical and Work Productivity Outcomes, JAMA 298(12)
1401-1411, 2007.

91Bateman A, Fonagy P: Treatment of borderline personality disorder with psychoanalytically oriented partial hospitalization: an 18-month follow-up. Am J Psychiatry 2001; 158:36-42.

92Horvitz-Lennon M, Normand SL, Gaccione P and Frank RG. "Partial vs. Full Hospitalization for Adults in Psychiatric Distress: A Systematic Review of the Published Literature."
American Journal of Psychiatry, 158(5), 2001.

93Drake, Robert E., Erica L. O'Neal, and Michael A. Wallach. "A systematic review of psychosocial research on psychosocial interventions for people with co-occurring severe mental and
substance use disorders." Journal of substance abuse treatment 34.1 (2008): 123-138.

94Final Report for ASPE: Consistency of Large Employer and Group Health Plan Benefits with Requirements of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction
Equity Act of 2008 at page x. NORC at the University of Chicago for the Office of the Assistant Secretary for Planning and Evaluation.

comply with parity requirements.95 All of
these findings indicate that any increases
in the costs of covering mental health and
substance use disorder benefits following
implementation of MHPAEA did not have a
substantial impact on overall plan spending.

Other recent analyses of claims data
from self-insured employer-sponsored
group health plans have suggested that an
overwhelming majority of privately in-
sured individuals who used mental health
or substance use disorder services prior to
MHPAEA did so at a rate far below pre-
parity limits on benefits.96 Using econo-
metric models to estimate the effect of
MHPAEA on high-utilization beneficia-
ries who are most likely to use expanded
coverage, researchers have estimated that
MHPAEA may at most increase total
health care costs by 0.6 percent.97 Further-
more, a recent study of substance use dis-
order spending from 2001 to 2009 by
large employer-sponsored health plans
shows that substance use disorder spend-
ing remained a relatively constant share of
all health spending, comprising about 0.4
percent of all health spending in 2009.
This low share of overall spending means that
even large increases in utilization of sub-
stance use disorder treatment are unlikely to
have a significant impact on premiums.98

Although most State parity laws are
more limited than MHPAEA, some are
comparable, and studies on the impact of
these more comparable laws provide a fair
indication of the effect of MHPAEA. For
example, Oregon's State parity law en-
acted in 2007 is quite comparable in that it
applies to treatment limits (including
NQTLs) and financial requirements for
mental health and substance use disorder
benefits. A study of the Oregon parity law
found that plans removed coverage limits

and used management techniques more
consistently but did not significantly in-
crease spending on mental health and sub-
stance use disorder care.99 Vermont's par-
ity law also applies to both mental health
and substance use disorder services. A
study of this State parity law also did not
find significant increases in spending. 100

b. Costs (and Transfers) Attributable to
the Final Regulations

The Departments do not expect the
clarification that plans should classify in-
termediate services consistently for men-
tal health and substance use disorders and
medical/surgical benefits will result in a
significant increase in costs. Nor do the
Departments expect the clarification that
the NQTL rules apply to these types of
services to cause a substantial increase in
plan spending. Analyses of claims data for
large group health plans conducted by two
different contractors for HHS indicate that
most plans cover intermediate behavioral
health services, particularly partial hospi-
talization and intensive outpatient ser-
vices, but intermediate services account
for less than one percent of total health
plan spending.101 Internal research and
analysis by HHS indicates that the number
of enrollees who use intermediate services
for mental health and substance use dis-
orders is very small. Furthermore, those
who used intermediate services did so at
modest rates. In addition, the number of
enrollees who used intermediate services
for medical/surgical benefits was similarly
small. Available data suggest that inter-
mediate behavioral health services ac-
count for between eight percent and
eleven percent of total behavioral health
spending in private insurance. This means
that since behavioral health care accounts
for about 5.5 percent of health plan spend-

ing, intermediate behavioral health spend-
ing amounts to between 0.4 and 0.6 per-
cent of total health plan spending. In light
of the small number of enrollees that utilize
this intermediate level of care and the small
percentage of total costs that intermediate
mental health and substance use disorder
services comprise, the Departments expect
that any increase in coverage would be very
unlikely to have any significant effect on
total health plan spending.

Moreover, the Departments investi-
gated the patterns of classification of in-
termediate services and found that they
are generally covered in the six classifica-
tions set out in the interim final regula-
tions. Behavioral health intermediate ser-
vices are generally categorized in a
similar fashion as analogous medical ser-
vices; for example, residential treatment
tends to be categorized in the same way as
skilled nursing facility care in the inpa-
tient classification. Thus, the Departments
do not expect much change in how most
plans consider intermediate behavioral
health care in terms of the six existing
benefit classifications.

Tiered provider networks are expand-
ing in private health insurance. The in-
terim final regulations made no allowance
for such insurance innovations. The final
regulations clarify how the parity require-
ments apply to multi-tiered provider net-
works. The evidence on the impact of
these networks is beginning to emerge.102
There is some evidence that points to
small reductions in health spending asso-
ciated with tiered provider networks.
There are also studies showing little to no
savings associated with these network de-
signs. Some modest impact on quality has
been observed in some cases and none in

95Ibid at page xi.

96Mark, TL, Vandivort-Warren, R, Miller, K, Mental health spending by private insurance: Implications for the Mental Health Parity and Addiction Equity Act, Psych Services, 2012; 63(4):
313-318.

97Ibid.

98Ibid.

99Ibid.

100Mark, TL, Vandivort-Warren, R, Spending trends on substance abuse treatment under private employer-sponsored insurance, 2001-2009, Drug and Alcohol Dependence, 2012;
125:203-207.

101Short-Term Analysis to Support Mental Health and Substance Use Disorder Parity Implementation. RAND Corporation for the Office of the Assistant Secretary for Planning and
Evaluation. February 8, 2012 (http://aspe.hhs.gov/daltcp/reports/2012/mhsud.shtml); internal analysis of claims data for large self-insured employers and health plans.

102Thomas JM, G Nalli AF Cockburn. What we know and don't know about tiered provider networks, Journal of Health Care Finance 33(4), 53-67, 2007; Sinaiko AD, Tiered provider
Networks as a Strategy to Improve Health Care Quality and Efficiency, NICHM Foundation February 2012.

others.103 The Departments are therefore
assuming no cost impact of this provision.

There is limited data on spending for
mental health and substance use disorder
treatment under individual health insur-
ance plans. The Departments therefore
rely on some recent tabulations from the
Medical Expenditure Panel Survey
(MEPS) and a recent report on premiums
and coverage in the individual health in-
surance market along with information
from several other sources to make pro-
jections of the likely impact of applying
MHPAEA to the individual market.104
The Departments began by estimating
baseline spending in the individual mar-
ket. The Departments calculate the
weighted average premium for the indi-
vidual insurance market from the paper by
Whitmore and colleagues that was re-
ported in 2007 dollars and inflate it to
2012 dollars using the GDP deflator. Be-
cause premiums report more than just
health care costs, the Departments convert
the premium into plan payments for ser-
vices by applying the medical loss ratio of
0.70 reported in the technical appendix to
the Medical Loss Ratio interim final
rule.105 The resulting estimate is $2437 in
2012 dollars. That figure represents total
health spending by plans per member per
year. The Departments obtain an estimate
of the behavioral health costs by assuming
that about four percent of those expendi-
tures are for behavioral health. That figure
is obtained by recognizing that coverage
for behavioral health in the individual
market is more limited than in the em-
ployer sponsored insurance market where
mental health and substance use disorder
care accounts for about 5.5 percent of
spending overall.106 Applying the four
percent figure to the plan spending esti-
mates results in an estimate of $98 per
member per year in plan spending for
mental health and substance use disorder

benefits. The Departments then calculate
the share of spending paid out-of-pocket
by using the MEPS data to obtain an es-
timate of outpatient mental health and
substance use disorder out-of-pocket
spending, because outpatient services
generally carry higher cost sharing than
inpatient care and because overall non-
inpatient care accounts for about 65 to 70
percent of behavioral health care. The
MEPS data indicate that out-of-pocket
costs for mental health and substance use
disorder care accounts for 47 percent of
total spending. This contrasts with an es-
timate of 26 percent for medical/surgical
care. The implication of this is a total
(plan and out-of-pocket) spending esti-
mate for mental health and substance use
disorder benefits of $185 per member per
year in 2012. It is important to recognize
that roughly 40 percent of total behavioral
health spending in private insurance is
accounted for by spending on psychotro-
pic drugs and drug benefits will remain
relatively unchanged, to the extent pre-
scription drug tiers are based on neutral
factors independent of whether a particu-
lar drug is prescribed to treat a medical/
surgical condition, or a mental health con-
dition or substance use disorder. This is
because psychotropic drugs are typically
under the same benefit design and formu-
lary rules as all other drugs in private
health insurance. Thus the baseline spend-
ing that would be affected by MHPAEA is
estimated to be $111 per member per year.

To obtain the impact of extending
MHPAEA to the individual market, the
Departments assume that a primary im-
pact of MHPAEA is to equalize cost
sharing arrangements between mental
health and substance use disorder bene-
fits and medical/surgical benefits. The
Departments therefore assume that the
out-of-pocket share for mental health
and substance use disorder services cov-

ered in the individual insurance market
will decline from 47 percent to 26 per-
cent. The Departments apply an estimate
of the price elasticity of demand to the
total spending level for mental health
and substance use disorder for people
covered in the individual market. Two
recent studies have shown that the price
elasticity of demand for mental health
and substance use disorder care has de-
clined significantly in the era of man-
aged care.107 They show that the elas-
ticity of demand for ambulatory care fell
between -0.16 and -0.26. This is rel-
evant because the Whitmore paper re-
ports that roughly 95 percent of individ-
ual policies are either under managed
care arrangements of some form or are
part of a Health Savings Account policy
(17.5 percent). The Departments there-
fore apply an elasticity of -0.21 to the
45 percent reduction in out-of-pocket
costs for people using mental health and
substance use disorder care. That yields
a projected 9.5 percent increase in total
spending for mental health and sub-
stance use disorder care for people in
the individual market. Applying the 9.5
percent estimate to the $111 baseline
subject to MHPAEA provisions results
in an impact estimate of $10.55 per cov-
ered person in 2012 or a 5.7 percent
increase in total mental health and sub-
stance use disorder spending and a 0.04
percent change in total plan spending.
The Departments apply the per insured
person cost of mental health and sub-
stance use disorder care in the individ-
ual market estimate to an estimate of the
population that would be covered under
individual coverage after January of
2014. Based on the Congressional Bud-
get Office estimates of the impact of the
Affordable Care Act, the Departments
expect enrollment in the individual mar-
ket to be approximately 18 million peo-

103Ibid.

104Whitmore H, JR Gabel, J Pickreign R McDevitt, The Individual Insurance Market Before Reform: Low Premiums and Low Benefits, Medical Care Research and Review 68(5): 594-606,
2011.

105Technical Appendix to the Regulatory Impact Analysis for the Interim Final Rule for Health Insurance Issuers Implementing the Medical Loss Ratio Requirements under the Patient
Protection and Affordable Care Act, Office of Consumer Information and Insurance Oversight, Department of Health and Human Services, November 22, 2010, available at
http://www.cms.gov/CCIIO/Resources/Files/Downloads/mlr_20101122_technical_appendix.pdf.

106Substance Abuse and Mental Health Services Administration. National Expenditures for Mental Health Services and Substance Abuse Treatment, 1986-2009. HHS Publication No.
SMA-13-4740. Rockville, MD: Substance Abuse and Mental Health Services Administration, 2013.

107Meyerhoefer CD and Zuvekas, S, "New Estimates of the Demand for Physical and Mental Health Treatment", Health Economics 19(3): 297-315 2010 ;. Lu C, Frank, RG and McGuire
TG. "Demand Response of Mental Health Services to Cost Sharing Under Managed Care." Journal of Mental Health Policy and Economics 11(3):113-126 2008.

ple as of 2014.108 Applying the $10.55
estimate to the 18 million people109 sug-
gests a total spending increase of about
$189.9 million in 2012 dollars. The De-
partments project that, by 2018, the 25
million-enrollee estimate shown in
CBO's report will capture all individual
plan coverage. Assuming a constant rate
of growth in enrollment, the five-year
cost will be $1.13 billion. This estimate
reflects increased spending on mental
health and substance use disorder ser-
vices resulting from coverage expansion
that is attributable to MHPAEA above
and beyond historical levels in the small
group and individual markets and be-
yond the EHB coverage requirements
for mental health and substance use dis-
order coverage.

MHPAEA can be expected to affect
coverage in the small group market
through the provisions governing EHBs.
The Departments estimate that there are
currently approximately 27 million people
insured under small group benefits. The
Congressional Budget Office (CBO) and
HHS projections are in agreement that
there will be little change in the size of
this market in the coming years. Thus for
the purposes of this analysis the Depart-
ments assume that the market will remain
stable at 27.3 million insured (including
26.1 million in ERISA plans and 1.2 mil-
lion in public plans).110 In examining cov-
erage in the small group market using data
from 2012, the Departments find that
plans used comparable levels of manage-
ment to large group plans in that less than
1 percent of either small group or large
group enrollees are covered by indemnity
insurance arrangements. HMOs account
for 15 percent of small group and 16 per-
cent of large group enrollees. PPOs/POS
plans account for 61 percent of small
group and 67 percent of large group en-
rollees. High deductible plans make up 17
percent of small group and 24 percent of

large group enrollees.111 In addition, other
recent analyses show that the actuarial
value of health insurance benefits in large
and small group plans are largely identi-
cal.112 Data from recent studies of parity
implementation in Oregon that focused in
great part on small group coverage shows
that parity had the effect of reducing out-
of-pocket spending. Yet because it was
done in the context of managed care ar-
rangements (including regulations of
management practices) there was no sta-
tistically significant impact on total spend-
ing on mental health and substance use
disorder services attributable to parity.113
For this reason, the Departments assume
that virtually all the impact of MHPAEA
on the small group market involves a shift
of final responsibility for payment from
households to insurers. The Oregon parity
results (McConnell et al., 2012) are con-
sistent with a shift of roughly 0.5 percent
of spending. This shift in cost constitutes
a transfer (see additional analysis in sec-
tion III.D.4 below).

The final regulations retain the disclo-
sure provisions for group health plans and
health insurance coverage offered in con-
nection with a group health plan. In addi-
tion, these disclosure provisions are ex-
tended to non-grandfathered insurance
coverage in the small group market through
the EHB requirements and to the individual
market as a result of the amendments to
the PHS Act under the Affordable Care
Act as discussed in section II.F and II.H.1
of this preamble. The burden and cost
related to these disclosure requirements
are discussed in detail in the Paperwork
Reduction Act section below and are es-
timated to be approximately $4.3 million
per year.

#### 4. Transfers

The application of MHPAEA to the
individual market will also shift responsi-
bility for some existing payments from
individuals to health plans by reducing

cost sharing from 47 percent to 26 per-
cent, or $336 million in the first year in-
creasing to $467 million by 2018 reflect-
ing increases in the number of individual
enrollees. The Departments estimate that
this shift in cost-sharing to plans com-
bined with the increase in spending due to
increased utilization discussed above
could be expected to lead to an increase of
0.8% in premiums in the individual mar-
ket. The small group plan average pre-
mium in 2012 was $5588. Applying the
0.5 percent estimated shift in spending
derived above in section III.E.3 to the
average premium as a proxy for plan
spending, the Departments obtain a figure
of $27.94. Multiplying that figure by 13
million enrollees in small group plans
yields an estimated transfer amount of
$363 million per year. Likewise, premi-
ums in the small group market may be
expected to increase by 0.5%.

##### F. Regulatory Alternatives

In addition to the regulatory approach
outlined in these final regulations, the De-
partments considered several alternatives
when developing policy regarding
NQTLs, disclosure requirements, multi-
tier provider networks, and how parity
applies to intermediate services.

Multiple stakeholders requested clari-
fication regarding the application of the
parity requirements to NQTLs. The De-
partments considered narrowing the clin-
ically appropriate standard of care excep-
tion instead of eliminating it. However,
this approach could result in even more
confusion regarding how to apply the par-
ity standard for NQTLs. Moreover, a tech-
nical expert panel comprised of individu-
als with clinical expertise in mental health
and substance use disorder treatment as
well as general medical treatment, and
experience developing and using
evidence-based practice guidelines, could
not identify situations in which the excep-
tion allowing a clinically appropriate stan-

108"Effects on Health Insurance and the Federal Budget for the Insurance Coverage Provisions in the Affordable Care Act-May 2013 Baseline," Congressional Budget Office, May 14,
2013.

109The figure of 11 million enrollees based on the 2012 MLR filings data discussed earlier in this preamble is added to the CBO estimate of enrollees in the individual market in 2014.

110Congressional Budget Office, Letter to the Honorable Paul Ryan: Analysis of the Administration's Announced delay of certain Requirements Under the Affordable Care Act, July 30,
2013; and CBO's May 2013 Estimates of the Effects of the Affordable Care Act on Health Insurance Coverage, May 14, 2013.

111Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits-2012 Annual Survey.

112McDevitt R, J Gabel, R Lore et al, Group Insurance: A Better Deal for Most People than Individual Plans, Health Affairs 29(1): 156-164, 2010.

113McConnell KJ, SHN Gast, MS Ridgely et al. Behavioral Health Insurance Parity: Does Oregon's Experience Presage the National Experience with the Mental Health Parity and Addiction
Equity Act?, American Journal of Psychiatry 2012; 169(1): 31-38.

dard of care to justify a different use of
NQTLs would be needed.114 Thus, the
Departments believe that clarification in
paragraph (c)(4) of the regulations will
not reduce the flexibility afforded to plans
and issuers by the underlying rule.

As stated earlier, concerns have also
been raised regarding disclosure and
transparency. The Departments consid-
ered whether participants and beneficia-
ries have adequate access to information
regarding the processes, strategies, evi-
dentiary standards, or other factors used to
apply the NQTL and also comparable in-
formation regarding medical/surgical ben-
efits to ensure compliance with MH-
PAEA. These final regulations make clear
that plans and issuers are required to make
this information available in accordance
with MHPAEA and other applicable law,
such as ERISA and the Affordable Care
Act, more generally. The Departments
also are publishing contemporaneously
with publication of these final regulations,
another set of FAQs.115 Among other
things, these FAQs solicit comments on
whether more should be done, and how, to
ensure transparency and compliance.

The Departments are aware of the in-
creasing use of multi-tier provider networks
and commenters have asked how parity re-
quirements should apply to those arrange-
ments. The Departments considered as an
alternative requiring plans to collapse their
provider tiers in conducting an assessment
of compliance with parity. However, this
would have negated a primary reason to
have provider tiers which is to offer incen-
tives for providers to accept lower reim-
bursement in exchange for lower copays for
their services and presumably greater pa-
tient volume. The Departments considered
this alternative to be interfering unreason-
ably with legitimate plan cost-management
techniques. The approach in the final regu-
lations strikes a reasonable balance between
allowing plans to use provider tiers to effec-
tively manage costs and the policy princi-
ples of MHPAEA.

As described earlier in this preamble,
many commenters to the interim final reg-

ulations requested that the Departments
clarify how MHPAEA affects the scope of
coverage for intermediate services (such
as residential treatment for substance use
disorders or mental health conditions, par-
tial hospitalization, and intensive outpa-
tient treatment) and how these services fit
within the six classifications set forth by
the interim final regulations. Some stake-
holders recommended establishing a sep-
arate classification for this intermediate
level of care. The Departments considered
this approach but determined that whereas
the existing classifications - inpatient, in-
network; inpatient, out-of-network; outpa-
tient, in-network; outpatient, out-of-net-
work; emergency care, and prescription
medications - are classifications com-
monly used by health plans and issuers, a
separate classification for intermediate
care is not commonly used by plans and
issuers. The Departments believe that a
clearer, more reasonable approach is to
incorporate the principles of parity into
existing benefit designs and care manage-
ment strategies. Thus, the final regulations
provide examples of intermediate services
and clarify that plans and issuers must
assign covered intermediate level mental
health and substance use disorder benefits
to the existing six benefit classifications in
the same way that they assign comparable
intermediate medical/surgical benefits to
these classifications.

G. Regulatory Flexibility Act- Depart-
ment of Labor and Department of Health
and Human Services

The Regulatory Flexibility Act (RFA)
requires agencies that issue a rule to ana-
lyze options for regulatory relief of small
businesses if a rule has a significant im-
pact on a substantial number of small en-
tities. The RFA generally defines a "small
entity" as-(1) a proprietary firm meeting
the size standards of the Small Business
Administration (SBA), (2) a nonprofit or-
ganization that is not dominant in its field,
or (3) a small government jurisdiction
with a population of less than 50,000
(States and individuals are not included in
the definition of "small entity"). A change

in revenues of more than 3 percent to 5
percent is often used by the Departments
of Labor and HHS as the measure of sig-
nificant economic impact on a substantial
number of small entities.

As discussed in the Web Portal interim
final rule with comment period published
on May 5, 2010 (75 FR 24481), HHS
examined the health insurance industry in
depth in the Regulatory Impact Analysis
for the proposed rule on establishment of
the Medicare Advantage program (69 FR
46866, August 3, 2004). In that analysis it
was determined that there were few, if
any, insurance firms underwriting com-
prehensive health insurance policies (in
contrast, for example, to travel insurance
policies or dental discount policies) that
fell below the size thresholds for "small"
business (currently $35.5 million in an-
nual receipts for health insurance issu-
ers).116 HHS also used the data from Med-
ical Loss Ratio annual report submissions
for the 2012 reporting year to develop an
estimate of the number of small entities
that offer comprehensive major medical
coverage. These estimates may overstate
the actual number of small health insur-
ance issuers that would be affected by
these regulations, since they do not in-
clude receipts from these companies'
other lines of business. It is estimated that
there are 58 small entities with less than
$35.5 million each in earned premiums
that offer individual or group health insur-
ance coverage and would therefore be
subject to the requirements of these regu-
lations. Forty-three percent of these small
issuers belong to larger holding groups,
and many, if not all, of these small issuers
are likely to have other lines of business
that would result in their revenues exceed-
ing $35.5 million. For these reasons, the
Departments expect that these final regu-
lations will not significantly affect a sub-
stantial number of small issuers.

As noted previously, MHPAEA provi-
sions are extended to non-grandfathered
insurance coverage in the small group
market through the EHB requirements.
Group health plans and health insurance

114Short-Term Analysis to Support Mental Health and Substance Use Disorder Parity Implementation. RAND Corporation for the Office of the Assistant Secretary for Planning and
Evaluation. February 8, 2012 (http://aspe.hhs.gov/daltcp/reports/2012/mhsud.shtml).

115 Available at: http://www.dol.gov/ebsa/healthreform/ and http://www.cms.gov/cciio/Resources/Fact-Sheets-and-FAQs/index.html.

116"Table of Small Business Size Standards Matched To North American Industry Classification System Codes," effective July 23, 2013, U.S. Small Business Administration, available at
http://www.sba.gov.

coverage offered by small employers will
incur costs to comply with the provisions
of these final regulations. There are an
estimated 837,000 ERISA-covered non-
grandfathered employer group health
plans with 50 or fewer participants, and an
estimated 59,000 non-grandfathered pub-
lic, non-Federal employer group health
plans with 50 or fewer participants spon-
sored by State and local governments
which were previously exempt from MH-
PAEA. Approximately 13 million partici-
pants of these plans will benefit from the
provisions of these regulations. As ex-
plained earlier in this impact analysis, vir-
tually all the impact of MHPAEA on the
small group market will involve a shift of
final responsibility for payment from
households to insurers, resulting in an es-
timated increase of 0.5 percent in spend-
ing. The cost related to the disclosure
requirements is estimated to be approxi-
mately $2.4 million for non-grandfathered
small group plans that were previously
exempt from MHPAEA. The Depart-
ments expect the rules to reduce the com-
pliance burden imposed on plans and in-
surers by the statute and the implementing
interim final regulations by clarifying
definitions and terms contained in the stat-
ute and providing examples of acceptable

methods to comply with specific provi-
sions.

H. Special Analyses-Department of the
Treasury

For purposes of the Department of the
Treasury, it has been determined that this
Treasury decision is not a significant reg-
ulatory action for purposes of Executive
Order 12866, as supplemented by Execu-
tive Order 13563. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. It is hereby certified that the collec-
tions of information contained in these
final regulations will not have a significant
impact on a substantial number of small
entities. Accordingly, a regulatory flexi-
bility analysis is not required.

The final regulations generally apply to
employers who provide health coverage
through group health plans to employees
that include benefits for mental health or
substance use disorder conditions. The
IRS expects the final regulations to reduce
the compliance burden imposed on plans
and issuers by clarifying definitions and
terms contained in the statute and provid-
ing examples of acceptable methods to
comply with specific provisions. MH-
PAEA and the regulations under it do not

apply to employers with 50 or fewer em-
ployees (although, separately, the EHB
regulations adopt MHPAEA). Moreover,
small employers subject to the rule that
have more than 50 employees will gener-
ally provide any health coverage through
insurance or a third-party administrator.
The issuers of insurance or other third-
party administrators of the health plans,
rather than the small employers, will as a
practical matter, satisfy the requirements
of the regulations in order to provide a
marketable product. For this reason, the
burden imposed by the reporting require-
ment of the statute and these final regula-
tions on small entities is expected to be
near zero. Pursuant to section 7805(f) of
the Code, the notice of proposed rulemak-
ing preceding these final regulations was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
businesses.

###### I. Paperwork Reduction Act

The table below summarizes the hour
burden and costs related to the disclosure
requirements in these regulations. For
plans that use issuers or third party admin-
istrators, the costs are reported as cost
burden while for plans that administer
claims in-house, the burden is reported as
hour burden.

Plan Type

Number of Respondents

Labor Hours

Cost Burden

ERISA-Covered Employer Group Health Plans

1,258,000

11,976

$2,989,000

Public, Non-Federal Employer Group Health Plans

82,324

2,517

$1,375,312

Individual Market Health Plans

418

25,465

$ 51,066

1\. Departments of Labor and the Treasury
In accordance with the requirements of
the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3506(c)(2)), the interim
final regulations solicited comments on
the information collections included
therein. The Departments submitted an in-
formation collection request (ICR) to
OMB in accordance with 44 U.S.C.
3507(d), contemporaneously with the
publication of the interim final regulations
for OMB's review. OMB approved the
ICR on April 27, 2010, under OMB Con-
trol Numbers 1210-0138 (Department of
Labor) and 1545-2165 (Department of the
Treasury/IRS). The Departments also sub-
mitted an ICR to OMB in accordance with

44 U.S.C. 3507(d) for the ICR as revised
by the final regulations. OMB approved
the ICR under OMB control numbers
1210-0138 and 1545-2165, which will ex-
pire on November 30, 2016.

As discussed earlier in this preamble,
the final regulations retain the disclosure
provisions for group health plans and
health insurance coverage offered in con-
nection with a group health plan. (In ad-
dition, these disclosure provisions are ex-
tended to non-grandfathered insurance
coverage in the small group market
through the EHB requirements and to the
individual market as a result of the
amendments to the PHS Act under the

Affordable Care Act, as discussed in sec-
tion II.F and II.H.1 of this preamble.)

The MHPAEA disclosures are infor-
mation collection requests (ICRs) subject
to the PRA. The final regulations (29 CFR
2590.712(d)(2)) require a Claims Denial
Disclosure to be made available upon re-
quest or as otherwise required by the plan
administrator (or the health insurance is-
suer offering such coverage) to a partici-
pant or beneficiary that provides the rea-
son for any denial under a group health
plan (or health insurance coverage) of re-
imbursement or payment for services with
respect to mental health or substance use
disorder benefits.

The Departments did not submit an
IRC to OMB for the Claims Denial Dis-
closure, because the Department of La-
bor's ERISA claims procedure regulation
(29 CFR 2560.503-1) and disclosure reg-
ulation (29 CFR 2520.104b-1) already re-
quire such disclosure. The same third-
party administrators and insurers are hired
by ERISA and non-ERISA covered plans,
so both types of plans were likely to al-
ready be in compliance with the Depart-
ment of Labor rules. Therefore, the hour
and cost burden associated with the claims
denial notice already is accounted in the
ICR for the ERISA claims procedure reg-
ulation that was approved under OMB
Control Number 1210-0053.

The final regulations (29 CFR
2590.712(d)(1)) also require plan admin-
istrators to make the plan's medical ne-
cessity determination criteria available
upon request to potential participants,
beneficiaries, or contracting providers.
The Departments are unable to estimate
with certainty the number of requests for
medical necessity criteria disclosures that
will be received by plan administrators;
however, the Departments have assumed
that, on average, each plan affected by the
rule will receive one request. The Depart-
ments estimate that there are about
1,258,000 ERISA covered health plans af-
fected by the regulations. The Depart-
ments estimate that approximately seven
percent of large plans and all small plans
administer claims using service providers;
therefore, about 11 percent of the medical
necessity criteria disclosures will be done
in-house. For PRA purposes, plans using
service providers will report the costs as a
cost burden, while plans administering
claims in-house will report the burden as
an hour burden.

The Departments assume that it will
take a medically trained clerical staff
member five minutes to respond to each
request at a wage rate of $26.85117 per
hour. This results in an annual hour bur-

den of nearly 12,000 hours and an associ-
ated equivalent cost of nearly $322,000
for the approximately 144,000 requests
done in-house by plans. The remaining
1,114,000 medical necessity criteria dis-
closures will be provided through service
providers resulting in a cost burden of
approximately $2,493,000.

The Departments also calculated the
cost to deliver the requested medical ne-
cessity criteria disclosures. Many insurers
and plans already may have the informa-
tion prepared in electronic form, and the
Departments assume that 38 percent of
requests will be delivered electronically
resulting in a de minimis cost. The Depart-
ments estimate that the cost burden asso-
ciated with distributing the approximately
780,000 medical necessity criteria disclo-
sures sent by paper will be approximately
$496,000.118 The Departments note that
persons are not required to respond to, and
generally are not subject to any penalty
for failing to comply with, an ICR unless
the ICR has a valid OMB control num-
ber.119 The Departments will provide no-
tice of OMB approval via a Federal Reg-
ister notice.

These paperwork burden estimates are
summarized as follows:

Type of Review: Ongoing.

Agencies: Employee Benefits Security
Administration, Department of Labor; In-
ternal Revenue Service, U.S. Department
of the Treasury,

Title: Notice of Medical Necessity Cri-
teria under the Mental Health Parity and
Addition Equity Act of 2008.

OMB Number: 1210-0138; 1545-2165.
Affected Public: Business or other for-
profit; not-for-profit institutions.

Total Respondents: 1,258,000.
Total Responses: 1,258,000.

Frequency of Response: Occasionally.

Estimated Total Annual Burden Hours:
5,988 hours (Employee Benefits Security
Administration); 5,988 hours (Internal
Revenue Service).

Estimated Total Annual Burden Cost:
$1,494,000 (Employee Benefits Security
Administration); $1,494,000 (Internal
Revenue Service).

2\. Department of Health and Human Ser-
vices

In addition, as described earlier in this
preamble, the final regulations reiterate
that, in addition to MHPAEA's disclosure
requirements, provisions of other applica-
ble law require disclosure of information
relevant to medical/surgical, mental
health, and substance use disorder bene-
fits. For example, the Departments' claims
and appeals regulations under the Afford-
able Care Act (applicable to non-
grandfathered group health plans (includ-
ing non-ERISA plans) and non-
grandfathered health insurance issuers in
the group and individual markets),120 set
forth rules regarding claims and appeals,
including the right of claimants (or their
authorized representative) upon appeal of
an adverse benefit determination (or a fi-
nal internal adverse benefit determination)
to be provided, upon request and free of
charge, reasonable access to and copies of
all documents, records, and other informa-
tion relevant to the claimant's claim for
benefits.121

The burden associated with this disclo-
sure is accounted for in the ICR approved
under OMB control number 0938-1099.

117EBSA estimates based on the National Occupational Employment Survey (June 2012, Bureau of Labor Statistics) and the Employment Cost Index (September 2012, Bureau of Labor
Statistics)

118This estimate is based on an average document size of four pages, $.05 cents per page material and printing costs, $.44 cent postage costs.
1195 CFR 1320.1 through 1320.18.

12029 CFR 2560.503-1. See also 26 CFR 54.9815-2719T(b)(2)(i), 29 CFR 2590.715-2719(b)(2)(i), and 45 CFR 147.136(b)(2)(i), requiring non-grandfathered plans and issuers to incorporate
the internal claims and appeals processes set forth in 29 CFR 2560.503-1.

121 As described earlier in this preamble, this includes documents with information on medical necessity criteria for both medical/surgical benefits and mental health and substance use disorder
benefits, as well as the processes, strategies, evidentiary standards, and other factors used to apply a nonquantitative treatment limitation with respect to medical/surgical benefits and mental
health or substance use disorder benefits under the plan.

Medical Necessity Disclosure

HHS estimates that there are about
30.2 million participants covered by ap-
proximately 82,0004 State and local pub-
lic plans that are subject to the MHPAEA
disclosure requirements.122 HHS is unable
to estimate with certainty the number of
requests for medical necessity criteria dis-
closures that will be received by plan ad-
ministrators; however, HHS has assumed
that, on average, each plan affected by the
rule will receive one request. HHS esti-
mates that approximately 93 percent of
large plans administer claims using third
party administrators. Furthermore the vast
majority of all smaller employers usually
are fully insured such that issuers will be
administering their claims. Therefore 5.1
percent of claims are administered in-
house. For plans that use issuers or third
party administrators, the costs are reported
as cost burden while for plans that admin-
ister claims in-house, the burden is re-
ported as hour burden. For purposes of
this estimate, HHS assumes that it will
take a medically trained clerical staff
member five minutes to respond to each
request at a wage rate of $26.85123 per
hour. This results in an annual hour bur-
den of 350 hours and an associated equiv-
alent cost of about $9,000 for the approx-
imately 4,200 requests handled by plans.
The remaining 78,000 claims (94.9 per-
cent) are provided through a third-party
administrator or an issuer and results in a
cost burden of approximately $175,000.

In the individual market there will be
an estimated 18 million enrollees124 en-
rolled in plans offered by 418 issuers of-
fering coverage in multiple states. Assum-
ing that, on average, each issuer will
receive one request in each State that it
offers coverage in, there will be a total of
about 2,600 requests in each year. The
annual burden to issuers for sending the
medical necessity disclosures is estimated
to be 220 hours with an associated equiv-
alent cost of approximately $6,000.

Claims Denial Disclosure

As described earlier in this preamble, the
Department of Labor's ERISA claims pro-
cedure regulation (29 CFR 2560.503-1) al-
ready requires such disclosures. Although
non-ERISA covered plans, such as plans
sponsored by State and local governments
and individual plans that are subject to the
PHS Act, are not required to comply with
the ERISA claims procedure regulation, the
final regulations provide that these plans
(and health insurance coverage offered in
connection with such plans) will be deemed
to satisfy the MHPAEA claims denial dis-
closure requirement if they comply with the
ERISA claims procedure regulation.

Using assumptions similar to those
used for the ERISA claims procedure reg-
ulation, HHS estimates that for State and
local public plans, there will be approxi-
mately 30.9 million claims for mental
health or substance use disorder benefits
with approximately 4.6 million denials
that could result in a request for the reason
for denial. HHS has no data on the percent
of denials that will result in a request for
an explanation, but assumed that ten per-
cent of denials will result in a request for
an explanation (464,000 requests). HHS
estimates that a medically trained clerical
staff member may require five minutes to
respond to each request at a labor rate of
$26.85 per hour. This results in an annual
burden of nearly 2,000 hours and an as-
sociated equivalent cost of nearly $53,000
for the approximately 24,000 requests
completed by plans. The remaining
440,000 are provided through an issuer or
a third-party administrator, which results
in a cost burden of approximately
$984,000. In the individual market, under
similar assumptions, HHS estimates that
there will be approximately18.4 million
claims for mental health or substance use
disorder benefits with approximately 2.75
million denials that could result in a re-
quest for explanation of denial. Assuming
ten percent of denials result in such a re-

quest, it is estimated that there will be about
275,000 requests for an explanation of rea-
son for denial, which will be completed with
a burden of 23,000 hours and equivalent
cost of approximately $616,000.

In association with the explanation of
denial, participants may request a copy of
the medical necessity criteria. While HHS
does not know how many notices of de-
nial will result in a request for the criteria
of medical necessity, HHS assumes that
ten percent of those requesting an expla-
nation of the reason for denial will also
request the criteria of medical necessity,
resulting in about 46,000 requests, 2,400
of which will be completed in-house with
a burden of 200 hours and equivalent cost
of approximately $5,000 and about 44,000
requests handled by issuers or third-party
providers with a cost burden of approxi-
mately $98,000. In the individual market,
under similar assumptions, HHS estimates
that there will be about 27,500 requests
for medical necessity criteria, which will
be completed with a burden of 2,295
hours and equivalent cost of approxi-
mately $62,000.

HHS also calculated the cost to deliver
the requested information. Many insurers
or plans may already have the information
prepared in electronic format, and HHS
assumes that requests will be delivered
electronically resulting in a de minimis
cost.125 HHS estimates that the cost bur-
den associated with distributing the ap-
proximately 256,000 disclosures sent by
paper will be approximately $169,000.126

The ICRs associated with the medical
necessity and claims denial disclosures
are currently approved under OMB con-
trol number 0938-1080. The Department
will seek OMB approval for revised ICRs
that will include the burden to small group
health plans and individual market plans
related to the disclosure requirements in
the final regulations. A Federal Register
notice will be published, providing the

122Non-Federal governmental plans may opt-out of MHPAEA and certain other requirements under section 2721 of the PHS Act. Since past experience has shown that the number of
non-Federal governmental plans that opt-out is small, the impact of the opt-out election should be immaterial on the Department's estimates.

123EBSA estimates based on the National Occupational Employment Survey (June 2012, Bureau of Labor Statistics) and the Employment Cost Index (September 2012, Bureau of Labor
Statistics).

124Estimate based on medical loss ratio reports submitted by issuers for 2012 reporting year and from the study "Effects on Health Insurance and the Federal Budget for the Insurance
Coverage Provisions in the Affordable Care Act-May 2013 Baseline," by Congressional Budget Office, May 14, 2013.

125Following the assumption in the ERISA claims regulation, it was assumed 75 percent of the explanation of denials disclosures would be delivered electronically, while it was assumed
that 38 percent of non-denial related requests for the medical necessity criteria would be delivered electronically.

126This estimate is based on an average document size of four pages, $.05 cents per page material and printing costs, $.46 cent postage costs.

public with an opportunity to comment on
the ICRs.

#### J. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates
Reform Act (UMRA) of 1995 requires
that agencies assess anticipated costs and
benefits before issuing any final rule that
includes a Federal mandate that could re-
sult in expenditure in any one year by
State, local or tribal governments, in the
aggregate, or by the private sector, of
$100 million in 1995 dollars, updated an-
nually for inflation. In 2013, that threshold
level is approximately $141 million.
These regulations are not subject to the
UMRA because they were not preceded
by a notice of proposed rulemaking. How-
ever, consistent with policy embodied in
the UMRA, these regulations have been
designed to be a low-burden alternative
for State, local and tribal governments,
and the private sector while achieving the
objectives of MHPAEA.

K. Federalism Statement-Department of
Labor and Department of Health and Hu-
man Services

Executive Order 13132 establishes cer-
tain requirements that an agency must
meet when it promulgates a final rule that
imposes substantial direct requirement
costs on State and local governments, pre-
empts State law, or otherwise has Feder-
alism implications.

In the Departments' view, these regu-
lations have Federalism implications, be-
cause they have direct effects on the
States, the relationship between the Fed-
eral government and States, or on the dis-
tribution of power and responsibilities
among various levels of government.
However, in the Departments' view, the
Federalism implications of these regula-
tions are substantially mitigated because,
with respect to health insurance issuers,
the Departments expect that the majority
of States have enacted or will enact laws
or take other appropriate action resulting
in their meeting or exceeding the Federal
MHPAEA standards.

In general, through section 514,
ERISA supersedes State laws to the extent
that they relate to any covered employee
benefit plan, and preserves State laws that
regulate insurance, banking, or securities.
While ERISA prohibits States from regu-
lating a plan as an insurance or investment
company or bank, the preemption provi-

sions of section 731 of ERISA and section
2724 of the PHS Act (implemented in 29
CFR 2590.731(a) and 45 CFR 146.143(a))
apply so that the MHPAEA requirements
are not to be "construed to supersede any
provision of State law which establishes,
implements, or continues in effect any
standard or requirement solely relating to
health insurance issuers in connection
with group health insurance coverage ex-
cept to the extent that such standard or
requirement prevents the application of a
requirement" of MHPAEA. The confer-
ence report accompanying HIPAA indi-
cates that this is intended to be the "nar-
rowest" preemption of State laws. (See
House Conf. Rep. No. 104-736, at 205,
reprinted in 1996 U.S. Code Cong. & Ad-
min. News 2018.)

States may continue to apply State law
requirements except to the extent that
such requirements prevent the application
of the MHPAEA requirements that are the
subject of this rulemaking. State insurance
laws that are more stringent than the Fed-
eral requirements are unlikely to "prevent
the application of" MHPAEA, and be
preempted. Accordingly, States have sig-
nificant latitude to impose requirements
on health insurance issuers that are more
restrictive than the Federal law.

In compliance with the requirement of
Executive Order 13132 that agencies ex-
amine closely any policies that may have
Federalism implications or limit the pol-
icy making discretion of the States, the
Departments have engaged in numerous
efforts to consult with and work coopera-
tively with affected State and local offi-
cials. For example, HHS has provided
training on MHPAEA for state regulators
though the National Association Insur-
ance Commissioners (NAIC) and has
been available to State regulators to ad-
dress any issues that arise. HHS has also
collaborated with regulators in a number
of States on MHPAEA enforcement strat-
egies with the goal of maintaining state
regulator involvement in the implementa-
tion and enforcement of MHPAEA in
their States. It is expected that the Depart-
ments will continue to act in a similar
fashion in enforcing the MHPAEA re-
quirements.

Throughout the process of developing
these regulations, to the extent feasible
within the specific preemption provisions

of HIPAA as it applies to MHPAEA, the
Departments have attempted to balance
the States' interests in regulating health
insurance issuers, and Congress' intent to
provide uniform minimum protections to
consumers in every State. By doing so, it
is the Departments' view that they have
complied with the requirements of Exec-
utive Order 13132.

Pursuant to the requirements set forth
in section 8(a) of Executive Order 13132,
and by the signatures affixed to these reg-
ulations, the Departments certify that the
Employee Benefits Security Administra-
tion and the Centers for Medicare & Med-
icaid Services have complied with the re-
quirements of Executive Order 13132 for
the attached regulations in a meaningful
and timely manner.

##### L. Congressional Review Act

These final regulations are subject to
the Congressional Review Act provisions
of the Small Business Regulatory En-
forcement Fairness Act of 1996 (5 U.S.C.
801 et seq.), which specifies that before a
rule can take effect, the Federal agency
promulgating the rule shall submit to each
House of the Congress and to the Comp-
troller General a report containing a copy
of the rule along with other specified in-
formation, and have been transmitted to
Congress and the Comptroller General for
review.

### IV. Statutory Authority

The Department of the Treasury regu-
lations are adopted pursuant to the author-
ity contained in sections 7805 and 9833 of
the Code.

The Department of Labor regulations
are adopted pursuant to the authority con-
tained in 29 U.S.C. 1027, 1059, 1135,
1161-1168, 1169, 1181-1183, 1181 note,
1185, 1185a, 1185b, 1191, 1191a, 1191b,
and 1191c; sec. 101(g), Public Law 104-
191, 110 Stat. 1936; sec. 401(b), Public
Law 105-200, 112 Stat. 645 (42 U.S.C.
651 note); sec. 512(d), Public Law 110-
343, 122 Stat. 3765; Public Law 110-
460, 122 Stat. 5123; Secretary of Labor's
Order 1-2011, 77 FR 1088 (January 9,
2012).

The Department of Health and Human
Services regulations are adopted pursuant
to the authority contained in sections 2701
through 2763, 2791, and 2792 of the PHS

Act (42 USC 300gg through 300gg-63,
300gg-91, and 300gg-92), as amended.
* * * * *

John Dalrymple,
Deputy Commissioner for
Services and Enforcement,
Internal Revenue Service.

Approved November 6, 2013

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

### DEPARTMENT OF THE TREASURY

#### Internal Revenue Service

26 CFR Chapter I

Accordingly, 26 CFR Part 54 is
amended as follows:

##### PART 54-PENSION EXCISE TAXES

Paragraph 1. The authority citation for
part 54 is amended by removing the entry
for §54.9812-1T and by adding an entry
in numerical order to read as follows:

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

Section 54.9812-1 also issued under 26
U.S.C. 9833. * * *

Par. 2. Section 54.9812-1T is removed.

Par. 3. Section 54.9812-1 is added to
read as follows:

§54.9812-1 Parity in mental health and
substance use disorder benefits.

(a) Meaning of terms. For purposes of
this section, except where the context
clearly indicates otherwise, the following
terms have the meanings indicated:

Aggregate lifetime dollar limit means a
dollar limitation on the total amount of
specified benefits that may be paid under a
group health plan (or health insurance
coverage offered in connection with such
a plan) for any coverage unit.

Annual dollar limit means a dollar limi-
tation on the total amount of specified ben-
efits that may be paid in a 12-month period
under a group health plan (or health insur-
ance coverage offered in connection with
such a plan) for any coverage unit.

Coverage unit means coverage unit as
described in paragraph (c)(1)(iv) of this
section.

Cumulative financial requirements are
financial requirements that determine
whether or to what extent benefits are
provided based on accumulated amounts
and include deductibles and out-of-pocket
maximums. (However, cumulative finan-
cial requirements do not include aggregate
lifetime or annual dollar limits because
these two terms are excluded from the
meaning of financial requirements.)

Cumulative quantitative treatment limi-
tations are treatment limitations that deter-
mine whether or to what extent benefits are
provided based on accumulated amounts,
such as annual or lifetime day or visit limits.

Financial requirements include de-
ductibles, copayments, coinsurance, or
out-of-pocket maximums. Financial re-
quirements do not include aggregate life-
time or annual dollar limits.

Medical/surgical benefits means bene-
fits with respect to items or services for
medical conditions or surgical procedures,
as defined under the terms of the plan or
health insurance coverage and in accor-
dance with applicable Federal and State
law, but does not include mental health or
substance use disorder benefits. Any con-
dition defined by the plan or coverage as
being or as not being a medical/surgical
condition must be defined to be consistent
with generally recognized independent
standards of current medical practice (for
example, the most current version of the
International Classification of Diseases
(ICD) or State guidelines).

Mental health benefits means benefits
with respect to items or services for men-
tal health conditions, as defined under the
terms of the plan or health insurance cov-
erage and in accordance with applicable
Federal and State law. Any condition de-
fined by the plan or coverage as being or
as not being a mental health condition
must be defined to be consistent with gen-
erally recognized independent standards
of current medical practice (for example,
the most current version of the Diagnostic
and Statistical Manual of Mental Disor-
ders (DSM), the most current version of
the ICD, or State guidelines).

Substance use disorder benefits means
benefits with respect to items or services for
substance use disorders, as defined under
the terms of the plan or health insurance
coverage and in accordance with applicable
Federal and State law. Any disorder defined

by the plan as being or as not being a sub-
stance use disorder must be defined to be
consistent with generally recognized inde-
pendent standards of current medical prac-
tice (for example, the most current version
of the DSM, the most current version of the
ICD, or State guidelines).

Treatment limitations include limits on
benefits based on the frequency of treat-
ment, number of visits, days of coverage,
days in a waiting period, or other similar
limits on the scope or duration of treat-
ment. Treatment limitations include both
quantitative treatment limitations, which
are expressed numerically (such as 50 out-
patient visits per year), and nonquantita-
tive treatment limitations, which other-
wise limit the scope or duration of benefits
for treatment under a plan or coverage.
(See paragraph (c)(4)(ii) of this section for
an illustrative list of nonquantitative treat-
ment limitations.) A permanent exclusion
of all benefits for a particular condition or
disorder, however, is not a treatment lim-
itation for purposes of this definition.

(b) Parity requirements with respect to
aggregate lifetime and annual dollar limits.
This paragraph (b) details the application of
the parity requirements with respect to ag-
gregate lifetime and annual dollar limits.
This paragraph (b) does not address the pro-
visions of PHS Act section 2711, as incor-
porated in ERISA section 715 and Code
section 9815, which prohibit imposing life-
time and annual limits on the dollar value of
essential health benefits.

(1) General-(i) General parity re-
quirement. A group health plan (or health
insurance coverage offered by an issuer in
connection with a group health plan) that
provides both medical/surgical benefits
and mental health or substance use disor-
der benefits must comply with paragraph
(b)(2), (b)(3), or (b)(5) of this section.

(ii) Exception. The rule in paragraph
(b)(1)(i) of this section does not apply if a
plan (or health insurance coverage) satisfies
the requirements of paragraph (f) or (g) of
this section (relating to exemptions for small
employers and for increased cost).

(2) Plan with no limit or limits on less
than one-third of all medical/surgical
benefits. If a plan (or health insurance
coverage) does not include an aggregate
lifetime or annual dollar limit on any med-
ical/surgical benefits or includes an aggre-
gate lifetime or annual dollar limit that

applies to less than one-third of all medi-
cal/surgical benefits, it may not impose an
aggregate lifetime or annual dollar limit,
respectively, on mental health or sub-
stance use disorder benefits.

(3) Plan with a limit on at least two-
thirds of all medical/surgical benefits. If a
plan (or health insurance coverage) in-
cludes an aggregate lifetime or annual
dollar limit on at least two-thirds of all
medical/surgical benefits, it must either-

(i) Apply the aggregate lifetime or an-
nual dollar limit both to the medical/sur-
gical benefits to which the limit would
otherwise apply and to mental health or
substance use disorder benefits in a man-
ner that does not distinguish between the
medical/surgical benefits and mental
health or substance use disorder benefits;
or

(ii) Not include an aggregate lifetime
or annual dollar limit on mental health or
substance use disorder benefits that is less
than the aggregate lifetime or annual dol-
lar limit, respectively, on medical/surgical
benefits. (For cumulative limits other than
aggregate lifetime or annual dollar limits,
see paragraph (c)(3)(v) of this section pro-
hibiting separately accumulating cumula-
tive financial requirements or cumulative
quantitative treatment limitations.)

(4) Determining one-third and two-
thirds of all medical/surgical benefits. For
purposes of this paragraph (b), the deter-
mination of whether the portion of medi-
cal/surgical benefits subject to an aggre-
gate lifetime or annual dollar limit
represents one-third or two-thirds of all
medical/surgical benefits is based on the
dollar amount of all plan payments for
medical/surgical benefits expected to be
paid under the plan for the plan year (or
for the portion of the plan year after a
change in plan benefits that affects the
applicability of the aggregate lifetime or
annual dollar limits). Any reasonable
method may be used to determine whether
the dollar amount expected to be paid
under the plan will constitute one-third or
two-thirds of the dollar amount of all plan
payments for medical/surgical benefits.

(5) Plan not described in paragraph
(b)(2) or (b)(3) of this section-(i) In gen-
eral. A group health plan (or health insur-
ance coverage) that is not described in
paragraph (b)(2) or (b)(3) of this section
with respect to aggregate lifetime or an-

nual dollar limits on medical/surgical ben-
efits, must either-

(A) Impose no aggregate lifetime or
annual dollar limit, as appropriate, on
mental health or substance use disorder
benefits; or

(B) Impose an aggregate lifetime or
annual dollar limit on mental health or
substance use disorder benefits that is no
less than an average limit calculated for
medical/surgical benefits in the following
manner. The average limit is calculated by
taking into account the weighted average
of the aggregate lifetime or annual dollar
limits, as appropriate, that are applicable
to the categories of medical/surgical ben-
efits. Limits based on delivery systems,
such as inpatient/outpatient treatment or
normal treatment of common, low-cost
conditions (such as treatment of normal
births), do not constitute categories for
purposes of this paragraph (b)(5)(i)(B). In
addition, for purposes of determining
weighted averages, any benefits that are
not within a category that is subject to a
separately-designated dollar limit under
the plan are taken into account as a single
separate category by using an estimate of
the upper limit on the dollar amount that a
plan may reasonably be expected to incur
with respect to such benefits, taking into
account any other applicable restrictions
under the plan.

(ii) Weighting. For purposes of this
paragraph (b)(5), the weighting applicable
to any category of medical/surgical bene-
fits is determined in the manner set forth
in paragraph (b)(4) of this section for de-
termining one-third or two-thirds of all
medical/surgical benefits.

(c) Parity requirements with respect to
financial requirements and treatment lim-
itations - (1) Clarification of terms - (i)
Classification of benefits. When reference
is made in this paragraph (c) to a classi-
fication of benefits, the term "classifica-
tion" means a classification as described
in paragraph (c)(2)(ii) of this section.

(ii) Type of financial requirement or
treatment limitation. When reference is
made in this paragraph (c) to a type of
financial requirement or treatment limita-
tion, the reference to type means its na-
ture. Different types of financial require-
ments include deductibles, copayments,
coinsurance, and out-of-pocket maxi-
mums. Different types of quantitative

treatment limitations include annual, epi-
sode, and lifetime day and visit limits. See
paragraph (c)(4)(ii) of this section for an
illustrative list of nonquantitative treat-
ment limitations.

(iii) Level of a type of financial require-
ment or treatment limitation. When refer-
ence is made in this paragraph (c) to a
level of a type of financial requirement or
treatment limitation, level refers to the
magnitude of the type of financial require-
ment or treatment limitation. For example,
different levels of coinsurance include 20
percent and 30 percent; different levels of
a copayment include $15 and $20; differ-
ent levels of a deductible include $250
and $500; and different levels of an epi-
sode limit include 21 inpatient days per
episode and 30 inpatient days per episode.

(iv) Coverage unit. When reference is
made in this paragraph (c) to a coverage
unit, coverage unit refers to the way in
which a plan (or health insurance cover-
age) groups individuals for purposes of
determining benefits, or premiums or con-
tributions. For example, different cover-
age units include self-only, family, and
employee-plus-spouse.

(2) General parity requirement - (i)
General rule. A group health plan (or
health insurance coverage offered by an
issuer in connection with a group health
plan) that provides both medical/surgical
benefits and mental health or substance
use disorder benefits may not apply any
financial requirement or treatment limita-
tion to mental health or substance use
disorder benefits in any classification that
is more restrictive than the predominant
financial requirement or treatment limita-
tion of that type applied to substantially
all medical/surgical benefits in the same
classification. Whether a financial require-
ment or treatment limitation is a predom-
inant financial requirement or treatment
limitation that applies to substantially all
medical/surgical benefits in a classifica-
tion is determined separately for each type
of financial requirement or treatment lim-
itation. The application of the rules of this
paragraph (c)(2) to financial requirements
and quantitative treatment limitations is
addressed in paragraph (c)(3) of this sec-
tion; the application of the rules of this
paragraph (c)(2) to nonquantitative treat-
ment limitations is addressed in paragraph
(c)(4) of this section.

(ii) Classifications of benefits used for
applying rules - (A) In general. If a plan
(or health insurance coverage) provides
mental health or substance use disorder
benefits in any classification of benefits
described in this paragraph (c)(2)(ii),
mental health or substance use disorder
benefits must be provided in every classi-
fication in which medical/surgical benefits
are provided. In determining the classifi-
cation in which a particular benefit be-
longs, a plan (or health insurance issuer)
must apply the same standards to medical/
surgical benefits and to mental health or
substance use disorder benefits. To the
extent that a plan (or health insurance
coverage) provides benefits in a classifi-
cation and imposes any separate financial
requirement or treatment limitation (or
separate level of a financial requirement
or treatment limitation) for benefits in the
classification, the rules of this paragraph
(c) apply separately with respect to that
classification for all financial require-
ments or treatment limitations (illustrated
in examples in paragraph (c)(2)(ii)(C) of
this section). The following classifications
of benefits are the only classifications
used in applying the rules of this para-
graph (c):

(1) Inpatient, in-network. Benefits fur-
nished on an inpatient basis and within a
network of providers established or recog-
nized under a plan or health insurance
coverage. See special rules for plans with
multiple network tiers in paragraph
(c)(3)(iii) of this section.

(2) Inpatient, out-of-network. Benefits
furnished on an inpatient basis and outside
any network of providers established or
recognized under a plan or health insur-
ance coverage. This classification includes
inpatient benefits under a plan (or health
insurance coverage) that has no network
of providers.

(3) Outpatient, in-network. Benefits
furnished on an outpatient basis and
within a network of providers established
or recognized under a plan or health in-
surance coverage. See special rules for
office visits and plans with multiple net-
work tiers in paragraph (c)(3)(iii) of this
section.

(4) Outpatient, out-of-network. Bene-
fits furnished on an outpatient basis and
outside any network of providers estab-
lished or recognized under a plan or health

insurance coverage. This classification in-
cludes outpatient benefits under a plan (or
health insurance coverage) that has no
network of providers. See special rules for
office visits in paragraph (c)(3)(iii) of this
section.

(5) Emergency care. Benefits for emer-
gency care.

(6) Prescription drugs. Benefits for
prescription drugs. See special rules for
multi-tiered prescription drug benefits in
paragraph (c)(3)(iii) of this section.

(B) Application to out-of-network pro-
viders. See paragraph (c)(2)(ii)(A) of this
section, under which a plan (or health
insurance coverage) that provides mental
health or substance use disorder benefits
in any classification of benefits must pro-
vide mental health or substance use disor-
der benefits in every classification in
which medical/surgical benefits are pro-
vided, including out-of-network classifi-
cations.

(C) Examples. The rules of this para-
graph (c)(2)(ii) are illustrated by the fol-
lowing examples. In each example, the
group health plan is subject to the require-
ments of this section and provides both
medical/surgical benefits and mental
health and substance use disorder benefits.

Example 1. (i) Facts. A group health plan offers
inpatient and outpatient benefits and does not con-
tract with a network of providers. The plan imposes
a $500 deductible on all benefits. For inpatient med-
ical/surgical benefits, the plan imposes a coinsurance
requirement. For outpatient medical/surgical bene-
fits, the plan imposes copayments. The plan imposes
no other financial requirements or treatment limita-
tions.

(ii) Conclusion. In this Example 1, because the
plan has no network of providers, all benefits pro-
vided are out-of-network. Because inpatient, out-of-
network medical/surgical benefits are subject to sep-
arate financial requirements from outpatient, out-of-
network medical/surgical benefits, the rules of this
paragraph (c) apply separately with respect to any
financial requirements and treatment limitations, in-
cluding the deductible, in each classification.

Example 2. (i) Facts. A plan imposes a $500
deductible on all benefits. The plan has no network
of providers. The plan generally imposes a 20-
percent coinsurance requirement with respect to all
benefits, without distinguishing among inpatient,
outpatient, emergency care, or prescription drug ben-
efits. The plan imposes no other financial require-
ments or treatment limitations.

(ii) Conclusion. In this Example 2, because the
plan does not impose separate financial requirements
(or treatment limitations) based on classification, the
rules of this paragraph (c) apply with respect to the
deductible and the coinsurance across all benefits.

Example 3. (i) Facts. Same facts as Example 2,
except the plan exempts emergency care benefits
from the 20-percent coinsurance requirement. The
plan imposes no other financial requirements or
treatment limitations.

(ii) Conclusion. In this Example 3, because the
plan imposes separate financial requirements based
on classifications, the rules of this paragraph (c)
apply with respect to the deductible and the coinsur-
ance separately for -

(A) Benefits in the emergency care classification;
and

(B) All other benefits.

Example 4. (i) Facts. Same facts as Example 2,
except the plan also imposes a preauthorization re-
quirement for all inpatient treatment in order for
benefits to be paid. No such requirement applies to
outpatient treatment.

(ii) Conclusion. In this Example 4, because the
plan has no network of providers, all benefits pro-
vided are out-of-network. Because the plan imposes
a separate treatment limitation based on classifica-
tions, the rules of this paragraph (c) apply with
respect to the deductible and coinsurance separately
for -

(A) Inpatient, out-of-network benefits; and

(B) All other benefits.

(3) Financial requirements and quan-
titative treatment limitations - (i) Deter-
mining "substantially all" and "predom-
inant" - (A) Substantially all. For
purposes of this paragraph (c), a type of
financial requirement or quantitative treat-
ment limitation is considered to apply to
substantially all medical/surgical benefits
in a classification of benefits if it applies
to at least two-thirds of all medical/surgi-
cal benefits in that classification. (For this
purpose, benefits expressed as subject to a
zero level of a type of financial require-
ment are treated as benefits not subject to
that type of financial requirement, and
benefits expressed as subject to a quanti-
tative treatment limitation that is unlim-
ited are treated as benefits not subject to
that type of quantitative treatment limita-
tion.) If a type of financial requirement or
quantitative treatment limitation does not
apply to at least two-thirds of all medical/
surgical benefits in a classification, then
that type cannot be applied to mental
health or substance use disorder benefits
in that classification.

(B) Predominant - (1) If a type of
financial requirement or quantitative treat-
ment limitation applies to at least two-
thirds of all medical/surgical benefits in a
classification as determined under para-
graph (c)(3)(i)(A) of this section, the level
of the financial requirement or quantita-
tive treatment limitation that is considered
the predominant level of that type in a

classification of benefits is the level that
applies to more than one-half of medical/
surgical benefits in that classification sub-
ject to the financial requirement or quan-
titative treatment limitation.

(2) If, with respect to a type of financial
requirement or quantitative treatment lim-
itation that applies to at least two-thirds of
all medical/surgical benefits in a classifi-
cation, there is no single level that applies
to more than one-half of medical/surgical
benefits in the classification subject to the
financial requirement or quantitative treat-
ment limitation, the plan (or health insur-
ance issuer) may combine levels until the
combination of levels applies to more than
one-half of medical/surgical benefits sub-
ject to the financial requirement or quan-
titative treatment limitation in the classi-
fication. The least restrictive level within
the combination is considered the pre-
dominant level of that type in the classi-
fication. (For this purpose, a plan may
combine the most restrictive levels first,
with each less restrictive level added to
the combination until the combination ap-
plies to more than one-half of the benefits
subject to the financial requirement or
treatment limitation.)

(C) Portion based on plan payments.
For purposes of this paragraph (c), the
determination of the portion of medical/
surgical benefits in a classification of ben-
efits subject to a financial requirement or
quantitative treatment limitation (or sub-
ject to any level of a financial requirement
or quantitative treatment limitation) is
based on the dollar amount of all plan
payments for medical/surgical benefits in
the classification expected to be paid un-
der the plan for the plan year (or for the
portion of the plan year after a change in
plan benefits that affects the applicability
of the financial requirement or quantita-
tive treatment limitation).

(D) Clarifications for certain threshold
requirements. For any deductible, the dol-
lar amount of plan payments includes all
plan payments with respect to claims that
would be subject to the deductible if it had
not been satisfied. For any out-of-pocket
maximum, the dollar amount of plan pay-
ments includes all plan payments associ-
ated with out-of-pocket payments that are
taken into account towards the out-of-
pocket maximum as well as all plan pay-
ments associated with out-of-pocket pay-

ments that would have been made towards
the out-of-pocket maximum if it had not
been satisfied. Similar rules apply for any
other thresholds at which the rate of plan
payment changes. (See also PHS Act sec-
tion 2707(b) and Affordable Care Act sec-
tion 1302(c), which establish limitations
on annual deductibles for non-
grandfathered health plans in the small
group market and annual limitations on
out-of-pocket maximums for all non-
grandfathered health plans.)

(E) Determining the dollar amount of
plan payments. Subject to paragraph
(c)(3)(i)(D) of this section, any reasonable
method may be used to determine the dol-
lar amount expected to be paid under a
plan for medical/surgical benefits subject
to a financial requirement or quantitative
treatment limitation (or subject to any
level of a financial requirement or quanti-
tative treatment limitation).

(ii) Application to different coverage
units. If a plan (or health insurance cov-
erage) applies different levels of a finan-
cial requirement or quantitative treatment
limitation to different coverage units in a
classification of medical/surgical benefits,
the predominant level that applies to sub-
stantially all medical/surgical benefits in
the classification is determined separately
for each coverage unit.

(iii) Special rules - (A) Multi-tiered
prescription drug benefits. If a plan (or
health insurance coverage) applies differ-
ent levels of financial requirements to dif-
ferent tiers of prescription drug benefits
based on reasonable factors determined in
accordance with the rules in paragraph
(c)(4)(i) of this section (relating to re-
quirements for nonquantitative treatment
limitations) and without regard to whether
a drug is generally prescribed with respect
to medical/surgical benefits or with re-
spect to mental health or substance use
disorder benefits, the plan (or health in-
surance coverage) satisfies the parity re-
quirements of this paragraph (c) with re-
spect to prescription drug benefits.
Reasonable factors include cost, efficacy,
generic versus brand name, and mail order
versus pharmacy pick-up.

(B) Multiple network tiers. If a plan (or
health insurance coverage) provides ben-
efits through multiple tiers of in-network
providers (such as an in-network tier of
preferred providers with more generous

cost-sharing to participants than a separate
in-network tier of participating providers),
the plan may divide its benefits furnished
on an in-network basis into sub-
classifications that reflect network tiers, if
the tiering is based on reasonable factors
determined in accordance with the rules in
paragraph (c)(4)(i) of this section (such as
quality, performance, and market stan-
dards) and without regard to whether a
provider provides services with respect to
medical/surgical benefits or mental health
or substance use disorder benefits. After
the sub-classifications are established, the
plan or issuer may not impose any finan-
cial requirement or treatment limitation on
mental health or substance use disorder
benefits in any sub-classification that is
more restrictive than the predominant fi-
nancial requirement or treatment limita-
tion that applies to substantially all med-
ical/surgical benefits in the sub-
classification using the methodology set
forth in paragraph (c)(3)(i) of this section.

(C) Sub-classifications permitted for
office visits, separate from other outpa-
tient services. For purposes of applying
the financial requirement and treatment
limitation rules of this paragraph (c), a
plan or issuer may divide its benefits fur-
nished on an outpatient basis into the two
sub-classifications described in this para-
graph (c)(3)(iii)(C). After the sub-
classifications are established, the plan or
issuer may not impose any financial re-
quirement or quantitative treatment limi-
tation on mental health or substance use
disorder benefits in any sub-classification
that is more restrictive than the predomi-
nant financial requirement or quantitative
treatment limitation that applies to sub-
stantially all medical/surgical benefits in
the sub-classification using the methodol-
ogy set forth in paragraph (c)(3)(i) of this
section. Sub-classifications other than
these special rules, such as separate sub-
classifications for generalists and special-
ists, are not permitted. The two sub-
classifications permitted under this
paragraph (c)(3)(iii)(C) are:

(1) Office visits (such as physician vis-
its), and

(2) All other outpatient items and ser-
vices (such as outpatient surgery, facility
charges for day treatment centers, labora-
tory charges, or other medical items).

(iv) Examples. The rules of paragraphs
(c)(3)(i), (c)(3)(ii), and (c)(3)(iii) of this
section are illustrated by the following
examples. In each example, the group
health plan is subject to the requirements

of this section and provides both medical/
surgical benefits and mental health and
substance use disorder benefits.

Example 1. (i) Facts. For inpatient, out-of-
network medical/surgical benefits, a group health

plan imposes five levels of coinsurance. Using a
reasonable method, the plan projects its payments for
the upcoming year as follows:

Coinsurance rate

10%

15%

20%

30%

Total

Projected payments

$200x

$100x

$450x

$100x

$150x

$1,000x

Percent of total plan costs

20%

10%

45%

10%

15%

Percent subject to coinsurance level

N/A

12.5% (100x/800x)

56.25% (450x/800x)

12.5% (100x/800x)

18.75%

(150x/800x)

The plan projects plan costs of $800x to be
subject to coinsurance ($100x + $450x + $100x +
$150x = $800x). Thus, 80 percent ($800x/$1,000x)
of the benefits are projected to be subject to coinsur-
ance, and 56.25 percent of the benefits subject to
coinsurance are projected to be subject to the 15-
percent coinsurance level.

(ii) Conclusion. In this Example 1, the two-thirds
threshold of the substantially all standard is met for

coinsurance because 80 percent of all inpatient, out-
of-network medical/surgical benefits are subject to
coinsurance. Moreover, the 15-percent coinsurance
is the predominant level because it is applicable to
more than one-half of inpatient, out-of-network med-
ical/surgical benefits subject to the coinsurance re-
quirement. The plan may not impose any level of
coinsurance with respect to inpatient, out-of-network
mental health or substance use disorder benefits that

is more restrictive than the 15-percent level of coin-
surance.

Example 2. (i) Facts. For outpatient, in-network
medical/surgical benefits, a plan imposes five differ-
ent copayment levels. Using a reasonable method,
the plan projects payments for the upcoming year as
follows:

Copayment amount

$10

$15

$20

$50

Total

Projected payments

$200x

$300x

$100x

$1,000x

Percent of total plan costs

20%

30%

10%

Percent subject to copayments

N/A

25%

37.5%

12.5%

(200x/800x)

(300x/800x)

(100x/800x)

The plan projects plan costs of $800x to be
subject to copayments ($200x + $200x +$300x +
$100x = $800x). Thus, 80 percent ($800x/$1,000x)
of the benefits are projected to be subject to a co-
payment.

(ii) Conclusion. In this Example 2, the two-thirds
threshold of the substantially all standard is met for
copayments because 80 percent of all outpatient,
in-network medical/surgical benefits are subject to a
copayment. Moreover, there is no single level that
applies to more than one-half of medical/surgical
benefits in the classification subject to a copayment
(for the $10 copayment, 25%; for the $15 copay-
ment, 25%; for the $20 copayment, 37.5%; and for
the $50 copayment, 12.5%). The plan can combine
any levels of copayment, including the highest lev-
els, to determine the predominant level that can be
applied to mental health or substance use disorder
benefits. If the plan combines the highest levels of
copayment, the combined projected payments for the
two highest copayment levels, the $50 copayment
and the $20 copayment, are not more than one-half
of the outpatient, in-network medical/surgical bene-
fits subject to a copayment because they are exactly

one-half ($300x + $100x = $400x; $400x/$800x =
50%). The combined projected payments for the
three highest copayment levels - the $50 copayment,
the $20 copayment, and the $15 copayment - are
more than one-half of the outpatient, in-network
medical/surgical benefits subject to the copayments
($100x + $300x + $200x = $600x; $600x/$800x =
75%). Thus, the plan may not impose any copayment
on outpatient, in-network mental health or substance
use disorder benefits that is more restrictive than the
least restrictive copayment in the combination, the
$15 copayment.

Example 3. (i) Facts. A plan imposes a $250
deductible on all medical/surgical benefits for self-
only coverage and a $500 deductible on all medical/
surgical benefits for family coverage. The plan has
no network of providers. For all medical/surgical
benefits, the plan imposes a coinsurance require-
ment. The plan imposes no other financial require-
ments or treatment limitations.

(ii) Conclusion. In this Example 3, because the
plan has no network of providers, all benefits are
provided out-of-network. Because self-only and
family coverage are subject to different deductibles,

whether the deductible applies to substantially all
medical/surgical benefits is determined separately
for self-only medical/surgical benefits and family
medical/surgical benefits. Because the coinsurance is
applied without regard to coverage units, the pre-
dominant coinsurance that applies to substantially all
medical/surgical benefits is determined without re-
gard to coverage units.

Example 4. (i) Facts. A plan applies the follow-
ing financial requirements for prescription drug ben-
efits. The requirements are applied without regard to
whether a drug is generally prescribed with respect
to medical/surgical benefits or with respect to mental
health or substance use disorder benefits. Moreover,
the process for certifying a particular drug as "ge-
neric," "preferred brand name," "non-preferred
brand name," or "specialty" complies with the rules
of paragraph (c)(4)(i) of this section (relating to
requirements for nonquantitative treatment limita-
tions).

Tier description

Tier 1 Generic drugs

Tier 2 Preferred brand name drugs

Tier 3 Non-preferred brand name drugs (which may have Tier 1 or Tier 2 alternatives)

Tier 4 Specialty drugs

Percent paid by plan

90%

80%

60%

50%

(ii) Conclusion. In this Example 4, the financial
requirements that apply to prescription drug benefits
are applied without regard to whether a drug is
generally prescribed with respect to medical/surgical
benefits or with respect to mental health or substance
use disorder benefits; the process for certifying drugs
in different tiers complies with paragraph (c)(4) of
this section; and the bases for establishing different
levels or types of financial requirements are reason-
able. The financial requirements applied to prescrip-
tion drug benefits do not violate the parity require-
ments of this paragraph (c)(3).

Example 5. (i) Facts. A plan has two-tiers of
network of providers: a preferred provider tier and a
participating provider tier. Providers are placed in
either the preferred tier or participating tier based on
reasonable factors determined in accordance with the
rules in paragraph (c)(4)(i) of this section, such as
accreditation, quality and performance measures (in-
cluding customer feedback), and relative reimburse-
ment rates. Furthermore, provider tier placement is
determined without regard to whether a provider
specializes in the treatment of mental health condi-
tions or substance use disorders, or medical/surgical
conditions. The plan divides the in-network classifi-
cations into two sub-classifications (in-network/pre-
ferred and in-network/participating). The plan does
not impose any financial requirement or treatment
limitation on mental health or substance use disorder
benefits in either of these sub-classifications that is
more restrictive than the predominant financial re-
quirement or treatment limitation that applies to sub-
stantially all medical/surgical benefits in each sub-
classification.

(ii) Conclusion. In this Example 5, the division of
in-network benefits into sub-classifications that re-
flect the preferred and participating provider tiers
does not violate the parity requirements of this para-
graph (c)(3).

Example 6. (i) Facts. With respect to outpatient,
in-network benefits, a plan imposes a $25 copayment

for office visits and a 20-percent coinsurance require-
ment for outpatient surgery. The plan divides the
outpatient, in-network classification into two sub-
classifications (in-network office visits and all other
outpatient, in-network items and services). The plan
or issuer does not impose any financial requirement
or quantitative treatment limitation on mental health
or substance use disorder benefits in either of these
sub-classifications that is more restrictive than the
predominant financial requirement or quantitative
treatment limitation that applies to substantially all
medical/surgical benefits in each sub-classification.

(ii) Conclusion. In this Example 6, the division of
outpatient, in-network benefits into sub-classifications
for office visits and all other outpatient, in-network
items and services does not violate the parity require-
ments of this paragraph (c)(3).

Example 7. (i) Facts. Same facts as Example 6,
but for purposes of determining parity, the plan
divides the outpatient, in-network classification into
outpatient, in-network generalists and outpatient, in-
network specialists.

(ii) Conclusion. In this Example 7, the division of
outpatient, in-network benefits into any sub-
classifications other than office visits and all other
outpatient items and services violates the require-
ments of paragraph (c)(3)(iii)(C) of this section.

(v) No separate cumulative financial
requirements or cumulative quantitative
treatment limitations- (A) A group health
plan (or health insurance coverage offered
in connection with a group health plan)
may not apply any cumulative financial
requirement or cumulative quantitative
treatment limitation for mental health or
substance use disorder benefits in a clas-
sification that accumulates separately
from any established for medical/surgical
benefits in the same classification.

(B) The rules of this paragraph
(c)(3)(v) are illustrated by the following
examples:

Example 1. (i) Facts. A group health plan im-
poses a combined annual $500 deductible on all
medical/surgical, mental health, and substance use
disorder benefits.

(ii) Conclusion. In this Example 1, the combined
annual deductible complies with the requirements of
this paragraph (c)(3)(v).

Example 2. (i) Facts. A plan imposes an annual
$250 deductible on all medical/surgical benefits and
a separate annual $250 deductible on all mental
health and substance use disorder benefits.

(ii) Conclusion. In this Example 2, the separate
annual deductible on mental health and substance
use disorder benefits violates the requirements of this
paragraph (c)(3)(v).

Example 3. (i) Facts. A plan imposes an annual
$300 deductible on all medical/surgical benefits and
a separate annual $100 deductible on all mental
health or substance use disorder benefits.

(ii) Conclusion. In this Example 3, the separate
annual deductible on mental health and substance
use disorder benefits violates the requirements of this
paragraph (c)(3)(v).

Example 4. (i) Facts. A plan generally imposes a
combined annual $500 deductible on all benefits
(both medical/surgical benefits and mental health
and substance use disorder benefits) except prescrip-
tion drugs. Certain benefits, such as preventive care,
are provided without regard to the deductible. The
imposition of other types of financial requirements
or treatment limitations varies with each classifica-
tion. Using reasonable methods, the plan projects its
payments for medical/surgical benefits in each clas-
sification for the upcoming year as follows:

Classification

Benefits Subject to Deductible

Total Benefits

Percent Subject to Deductible

Inpatient, in-network

$1,800x

$2,000x

90%

Inpatient, out-of-network

$1,000x

100%

Outpatient, in-network

$1,400x

$2,000x

70%

Outpatient, out-of-network

$1,880x

$2,000x

94%

Emergency care

$ 300x

$ 500x

60%

(ii) Conclusion. In this Example 4, the two-thirds
threshold of the substantially all standard is met with
respect to each classification except emergency care
because in each of those other classifications at least
two-thirds of medical/surgical benefits are subject to
the $500 deductible. Moreover, the $500 deductible
is the predominant level in each of those other clas-
sifications because it is the only level. However,
emergency care mental health and substance use
disorder benefits cannot be subject to the $500 de-
ductible because it does not apply to substantially all
emergency care medical/surgical benefits.

(4) Nonquantitative treatment limita-
tions - (i) General rule. A group health
plan (or health insurance coverage) may
not impose a nonquantitative treatment
limitation with respect to mental health or
substance use disorder benefits in any
classification unless, under the terms of
the plan (or health insurance coverage) as
written and in operation, any processes,
strategies, evidentiary standards, or other
factors used in applying the nonquantita-

tive treatment limitation to mental health
or substance use disorder benefits in the
classification are comparable to, and are
applied no more stringently than, the pro-
cesses, strategies, evidentiary standards,
or other factors used in applying the lim-
itation with respect to medical/surgical
benefits in the classification.

(ii) Illustrative list of nonquantitative
treatment limitations. Nonquantitative
treatment limitations include -

(A) Medical management standards
limiting or excluding benefits based on
medical necessity or medical appropriate-
ness, or based on whether the treatment is
experimental or investigative;

(B) Formulary design for prescription
drugs;

(C) For plans with multiple network
tiers (such as preferred providers and par-
ticipating providers), network tier design;

(D) Standards for provider admission
to participate in a network, including re-
imbursement rates;

(E) Plan methods for determining
usual, customary, and reasonable charges;

(F) Refusal to pay for higher-cost ther-
apies until it can be shown that a lower-
cost therapy is not effective (also known
as fail-first policies or step therapy proto-
cols);

(G) Exclusions based on failure to
complete a course of treatment; and

(H) Restrictions based on geographic
location, facility type, provider specialty,
and other criteria that limit the scope or
duration of benefits for services provided
under the plan or coverage.

(iii) Examples. The rules of this para-
graph (c)(4) are illustrated by the follow-
ing examples. In each example, the group
health plan is subject to the requirements
of this section and provides both medical/
surgical benefits and mental health and
substance use disorder benefits.

Example 1. (i) Facts. A plan requires prior au-
thorization from the plan's utilization reviewer that a
treatment is medically necessary for all inpatient
medical/surgical benefits and for all inpatient mental
health and substance use disorder benefits. In prac-
tice, inpatient benefits for medical/surgical condi-
tions are routinely approved for seven days, after
which a treatment plan must be submitted by the
patient's attending provider and approved by the
plan. On the other hand, for inpatient mental health
and substance use disorder benefits, routine approval
is given only for one day, after which a treatment
plan must be submitted by the patient's attending
provider and approved by the plan.

(ii) Conclusion. In this Example 1, the plan vio-
lates the rules of this paragraph (c)(4) because it is
applying a stricter nonquantitative treatment limita-
tion in practice to mental health and substance use
disorder benefits than is applied to medical/surgical
benefits.

Example 2. (i) Facts. A plan applies concurrent
review to inpatient care where there are high levels
of variation in length of stay (as measured by a
coefficient of variation exceeding 0.8). In practice,
the application of this standard affects 60 percent of
mental health conditions and substance use disor-
ders, but only 30 percent of medical/surgical condi-
tions.

(ii) Conclusion. In this Example 2, the plan com-
plies with the rules of this paragraph (c)(4) because
the evidentiary standard used by the plan is applied
no more stringently for mental health and substance
use disorder benefits than for medical/surgical ben-
efits, even though it results in an overall difference in
the application of concurrent review for mental
health conditions or substance use disorders than for
medical/surgical conditions.

Example 3. (i) Facts. A plan requires prior ap-
proval that a course of treatment is medically nec-
essary for outpatient, in-network medical/surgical,
mental health, and substance use disorder benefits
and uses comparable criteria in determining whether
a course of treatment is medically necessary. For
mental health and substance use disorder treatments
that do not have prior approval, no benefits will be
paid; for medical/surgical treatments that do not
have prior approval, there will only be a 25-percent
reduction in the benefits the plan would otherwise
pay.

(ii) Conclusion. In this Example 3, the plan vio-
lates the rules of this paragraph (c)(4). Although the
same nonquantitative treatment limitation - medical
necessity - is applied both to mental health and
substance use disorder benefits and to medical/sur-
gical benefits for outpatient, in-network services, it is
not applied in a comparable way. The penalty for
failure to obtain prior approval for mental health and
substance use disorder benefits is not comparable to
the penalty for failure to obtain prior approval for
medical/surgical benefits.

Example 4. (i) Facts. A plan generally covers
medically appropriate treatments. For both medical/
surgical benefits and mental health and substance use
disorder benefits, evidentiary standards used in de-
termining whether a treatment is medically appropri-
ate (such as the number of visits or days of coverage)
are based on recommendations made by panels of
experts with appropriate training and experience in
the fields of medicine involved. The evidentiary
standards are applied in a manner that is based on
clinically appropriate standards of care for a condi-
tion.

(ii) Conclusion. In this Example 4, the plan com-
plies with the rules of this paragraph (c)(4) because
the processes for developing the evidentiary stan-
dards used to determine medical appropriateness and
the application of these standards to mental health
and substance use disorder benefits are comparable
to and are applied no more stringently than for
medical/surgical benefits. This is the result even if
the application of the evidentiary standards does not
result in similar numbers of visits, days of coverage,
or other benefits utilized for mental health conditions
or substance use disorders as it does for any partic-
ular medical/surgical condition.

Example 5. (i) Facts. A plan generally covers
medically appropriate treatments. In determining
whether prescription drugs are medically appropri-
ate, the plan automatically excludes coverage for
antidepressant drugs that are given a black box warn-
ing label by the Food and Drug Administration (in-
dicating the drug carries a significant risk of serious
adverse effects). For other drugs with a black box
warning (including those prescribed for other mental
health conditions and substance use disorders, as
well as for medical/surgical conditions), the plan will

provide coverage if the prescribing physician obtains
authorization from the plan that the drug is medically
appropriate for the individual, based on clinically
appropriate standards of care.

(ii) Conclusion. In this Example 5, the plan vio-
lates the rules of this paragraph (c)(4). Although the
standard for applying a nonquantitative treatment
limitation is the same for both mental health and
substance use disorder benefits and medical/surgical
benefits - whether a drug has a black box warning -
it is not applied in a comparable manner. The plan's
unconditional exclusion of antidepressant drugs
given a black box warning is not comparable to the
conditional exclusion for other drugs with a black
box warning.

Example 6. (i) Facts. An employer maintains
both a major medical plan and an employee assis-
tance program (EAP). The EAP provides, among
other benefits, a limited number of mental health or
substance use disorder counseling sessions. Partici-
pants are eligible for mental health or substance use
disorder benefits under the major medical plan only
after exhausting the counseling sessions provided by
the EAP. No similar exhaustion requirement applies
with respect to medical/surgical benefits provided
under the major medical plan.

(ii) Conclusion. In this Example 6, limiting eli-
gibility for mental health and substance use disorder
benefits only after EAP benefits are exhausted is a
nonquantitative treatment limitation subject to the
parity requirements of this paragraph (c). Because no
comparable requirement applies to medical/surgical
benefits, the requirement may not be applied to men-
tal health or substance use disorder benefits.

Example 7. (i) Facts. Training and State licens-
ing requirements often vary among types of provid-
ers. A plan applies a general standard that any pro-
vider must meet the highest licensing requirement
related to supervised clinical experience under ap-
plicable State law in order to participate in the plan's
provider network. Therefore, the plan requires
master's-level mental health therapists to have post-
degree, supervised clinical experience but does not
impose this requirement on master's-level general
medical providers because the scope of their licen-
sure under applicable State law does require clinical
experience. In addition, the plan does not require
post-degree, supervised clinical experience for psy-
chiatrists or PhD level psychologists since their li-
censing already requires supervised training.

(ii) Conclusion. In this Example 7, the plan com-
plies with the rules of this paragraph (c)(4). The
requirement that master's-level mental health thera-
pists must have supervised clinical experience to join
the network is permissible, as long as the plan con-
sistently applies the same standard to all providers
even though it may have a disparate impact on
certain mental health providers.

Example 8. (i) Facts. A plan considers a wide
array of factors in designing medical management
techniques for both mental health and substance use
disorder benefits and medical/surgical benefits, such
as cost of treatment; high cost growth; variability in
cost and quality; elasticity of demand; provider dis-
cretion in determining diagnosis, or type or length of
treatment; clinical efficacy of any proposed treat-
ment or service; licensing and accreditation of pro-
viders; and claim types with a high percentage of

fraud. Based on application of these factors in a
comparable fashion, prior authorization is required
for some (but not all) mental health and substance
use disorder benefits, as well as for some medical/
surgical benefits, but not for others. For example, the
plan requires prior authorization for: outpatient sur-
gery; speech, occupational, physical, cognitive and
behavioral therapy extending for more than six
months; durable medical equipment; diagnostic im-
aging; skilled nursing visits; home infusion therapy;
coordinated home care; pain management; high-risk
prenatal care; delivery by cesarean section; mastec-
tomy; prostate cancer treatment; narcotics prescribed
for more than seven days; and all inpatient services
beyond 30 days. The evidence considered in devel-
oping its medical management techniques includes
consideration of a wide array of recognized medical
literature and professional standards and protocols
(including comparative effectiveness studies and
clinical trials). This evidence and how it was used to
develop these medical management techniques is
also well documented by the plan.

(ii) Conclusion. In this Example 8, the plan com-
plies with the rules of this paragraph (c)(4). Under
the terms of the plan as written and in operation, the
processes, strategies, evidentiary standards, and
other factors considered by the plan in implementing
its prior authorization requirement with respect to
mental health and substance use disorder benefits are
comparable to, and applied no more stringently than,
those applied with respect to medical/surgical bene-
fits.

Example 9. (i) Facts. A plan generally covers
medically appropriate treatments. The plan automat-
ically excludes coverage for inpatient substance use
disorder treatment in any setting outside of a hospital
(such as a freestanding or residential treatment cen-
ter). For inpatient treatment outside of a hospital for
other conditions (including freestanding or residen-
tial treatment centers prescribed for mental health
conditions, as well as for medical/surgical condi-
tions), the plan will provide coverage if the prescrib-
ing physician obtains authorization from the plan
that the inpatient treatment is medically appropriate
for the individual, based on clinically appropriate
standards of care.

(ii) Conclusion. In this Example 9, the plan vio-
lates the rules of this paragraph (c)(4). Although the
same nonquantitative treatment limitation - medical
appropriateness - is applied to both mental health
and substance use disorder benefits and medical/
surgical benefits, the plan's unconditional exclusion
of substance use disorder treatment in any setting
outside of a hospital is not comparable to the condi-
tional exclusion of inpatient treatment outside of a
hospital for other conditions.

Example 10. (i) Facts. A plan generally provides
coverage for medically appropriate medical/surgical
benefits as well as mental health and substance use
disorder benefits. The plan excludes coverage for
inpatient, out-of-network treatment of chemical de-
pendency when obtained outside of the State where
the policy is written. There is no similar exclusion
for medical/surgical benefits within the same classi-
fication.

(ii) Conclusion. In this Example 10, the plan
violates the rules of this paragraph (c)(4). The plan is
imposing a nonquantitative treatment limitation that

restricts benefits based on geographic location. Be-
cause there is no comparable exclusion that applies
to medical/surgical benefits, this exclusion may not
be applied to mental health or substance use disorder
benefits.

Example 11. (i) Facts. A plan requires prior
authorization for all outpatient mental health and
substance use disorder services after the ninth visit
and will only approve up to five additional visits per
authorization. With respect to outpatient medical/
surgical benefits, the plan allows an initial visit with-
out prior authorization. After the initial visit, the plan
pre-approves benefits based on the individual treat-
ment plan recommended by the attending provider
based on that individual's specific medical condition.
There is no explicit, predetermined cap on the
amount of additional visits approved per authoriza-
tion.

(ii) Conclusion. In this Example 11, the plan
violates the rules of this paragraph (c)(4). Although
the same nonquantitative treatment limitation - prior
authorization to determine medical appropriateness -
is applied to both mental health and substance use
disorder benefits and medical/surgical benefits for
outpatient services, it is not applied in a comparable
way. While the plan is more generous with respect to
the number of visits initially provided without pre-
authorization for mental health benefits, treating all
mental health conditions and substance use disorders
in the same manner, while providing for individual-
ized treatment of medical conditions, is not a com-
parable application of this nonquantitative treatment
limitation.

(5) Exemptions. The rules of this para-
graph (c) do not apply if a group health
plan (or health insurance coverage) satis-
fies the requirements of paragraph (f) or
(g) of this section (relating to exemptions
for small employers and for increased
cost).

(d) Availability of plan information -
(1) Criteria for medical necessity determi-
nations. The criteria for medical necessity
determinations made under a group health
plan with respect to mental health or sub-
stance use disorder benefits (or health in-
surance coverage offered in connection
with the plan with respect to such bene-
fits) must be made available by the plan
administrator (or the health insurance is-
suer offering such coverage) to any cur-
rent or potential participant, beneficiary,
or contracting provider upon request.

(2) Reason for any denial. The reason
for any denial under a group health plan
(or health insurance coverage offered in
connection with such plan) of reimburse-
ment or payment for services with respect
to mental health or substance use disorder
benefits in the case of any participant or
beneficiary must be made available by the
plan administrator (or the health insurance
issuer offering such coverage) to the par-

ticipant or beneficiary in accordance with
this paragraph (d)(2).

(i) Plans subject to ERISA. If a plan is
subject to ERISA, it must provide the
reason for the claim denial in a form and
manner consistent with the requirements
of 29 CFR 2560.503-1 for group health
plans.

(ii) Plans not subject to ERISA. If a
plan is not subject to ERISA, upon the
request of a participant or beneficiary the
reason for the claim denial must be pro-
vided within a reasonable time and in a
reasonable manner. For this purpose, a
plan that follows the requirements of 29
CFR 2560.503-1 for group health plans
complies with the requirements of this
paragraph (d)(2)(ii).

(3) Provisions of other law. Compli-
ance with the disclosure requirements in
paragraphs (d)(1) and (d)(2) of this sec-
tion is not determinative of compliance
with any other provision of applicable
Federal or State law. In particular, in ad-
dition to those disclosure requirements,
provisions of other applicable law require
disclosure of information relevant to med-
ical/surgical, mental health, and substance
use disorder benefits. For example,
ERISA section 104 and 29 CFR
2520.104b-1 provide that, for plans sub-
ject to ERISA, instruments under which
the plan is established or operated must
generally be furnished to plan participants
within 30 days of request. Instruments
under which the plan is established or
operated include documents with informa-
tion on medical necessity criteria for both
medical/surgical benefits and mental
health and substance use disorder benefits,
as well as the processes, strategies, evi-
dentiary standards, and other factors used
to apply a nonquantitative treatment lim-
itation with respect to medical/surgical
benefits and mental health or substance
use disorder benefits under the plan. In
addition, 29 CFR 2560.503-1 and 29 CFR
2590.715-2719 set forth rules regarding
claims and appeals, including the right of
claimants (or their authorized representa-
tive) upon appeal of an adverse benefit
determination (or a final internal adverse
benefit determination) to be provided
upon request and free of charge, reason-
able access to and copies of all docu-
ments, records, and other information rel-
evant to the claimant's claim for benefits.

This includes documents with information
on medical necessity criteria for both
medical/surgical benefits and mental
health and substance use disorder benefits,
as well as the processes, strategies, evi-
dentiary standards, and other factors used
to apply a nonquantitative treatment lim-
itation with respect to medical/surgical
benefits and mental health or substance
use disorder benefits under the plan.

(e) Applicability - (1) Group health
plans. The requirements of this section
apply to a group health plan offering med-
ical/surgical benefits and mental health or
substance use disorder benefits. If, under
an arrangement or arrangements to pro-
vide medical care benefits by an employer
or employee organization (including for
this purpose a joint board of trustees of a
multiemployer trust affiliated with one or
more multiemployer plans), any partici-
pant (or beneficiary) can simultaneously
receive coverage for medical/surgical
benefits and coverage for mental health or
substance use disorder benefits, then the
requirements of this section (including the
exemption provisions in paragraph (g) of
this section) apply separately with respect
to each combination of medical/surgical
benefits and of mental health or substance
use disorder benefits that any participant
(or beneficiary) can simultaneously re-
ceive from that employer's or employee
organization's arrangement or arrange-
ments to provide medical care benefits,
and all such combinations are considered
for purposes of this section to be a single
group health plan.

(2) Health insurance issuers. The re-
quirements of this section apply to a
health insurance issuer offering health in-
surance coverage for mental health or sub-
stance use disorder benefits in connection
with a group health plan subject to para-
graph (e)(1) of this section.

(3) Scope. This section does not -

(i) Require a group health plan (or
health insurance issuer offering coverage
in connection with a group health plan) to
provide any mental health benefits or sub-
stance use disorder benefits, and the pro-
vision of benefits by a plan (or health
insurance coverage) for one or more men-
tal health conditions or substance use dis-
orders does not require the plan or health
insurance coverage under this section to
provide benefits for any other mental

health condition or substance use disor-
der;

(ii) Require a group health plan (or
health insurance issuer offering coverage
in connection with a group health plan)
that provides coverage for mental health
or substance use disorder benefits only to
the extent required under PHS Act section
2713 to provide additional mental health
or substance use disorder benefits in any
classification in accordance with this sec-
tion; or

(iii) Affect the terms and conditions
relating to the amount, duration, or scope
of mental health or substance use disorder
benefits under the plan (or health insur-
ance coverage) except as specifically pro-
vided in paragraphs (b) and (c) of this
section.

(4) Coordination with EHB require-
ments. Nothing in paragraph (f) or (g) of
this section changes the requirements of
45 CFR 147.150 and 45 CFR 156.115,
providing that a health insurance issuer
offering non-grandfathered health insur-
ance coverage in the individual or small
group market providing mental health and
substance use disorder services, including
behavioral health treatment services, as
part of essential health benefits required
under 45 CFR 156.110(a)(5) and
156.115(a), must comply with the provi-
sions of 45 CFR 146.136 to satisfy the
requirement to provide essential health
benefits.

(f) Small employer exemption-(1) In
general. The requirements of this section
do not apply to a group health plan (or
health insurance issuer offering coverage
in connection with a group health plan)
for a plan year of a small employer. For
purposes of this paragraph (f), the term
small employer means, in connection with
a group health plan with respect to a cal-
endar year and a plan year, an employer
who employed an average of at least two
(or one in the case of an employer residing
in a State that permits small groups to
include a single individual) but not more
than 50 employees on business days dur-
ing the preceding calendar year. See sec-
tion 9831(a) and §54.9831-1(b), which
provide that this section (and certain other
sections) does not apply to any group
health plan for any plan year if, on the first
day of the plan year, the plan has fewer

than two participants who are current em-
ployees.

(2) Rules in determining employer size.
For purposes of paragraph (f)(1) of this
section-

(i) All persons treated as a single em-
ployer under subsections (b), (c), (m), and
(o) of section 414 are treated as one em-
ployer;

(ii) If an employer was not in existence
throughout the preceding calendar year,
whether it is a small employer is deter-
mined based on the average number of
employees the employer reasonably ex-
pects to employ on business days during
the current calendar year; and

(iii) Any reference to an employer for
purposes of the small employer exemption
includes a reference to a predecessor of
the employer.

(g) Increased cost exemption-(1) In
general. If the application of this section
to a group health plan (or health insurance
coverage offered in connection with such
plans) results in an increase for the plan
year involved of the actual total cost of
coverage with respect to medical/surgical
benefits and mental health and substance
use disorder benefits as determined and
certified under paragraph (g)(3) of this
section by an amount that exceeds the
applicable percentage described in para-
graph (g)(2) of this section of the actual
total plan costs, the provisions of this sec-
tion shall not apply to such plan (or cov-
erage) during the following plan year, and
such exemption shall apply to the plan (or
coverage) for one plan year. An employer
or issuer may elect to continue to provide
mental health and substance use disorder
benefits in compliance with this section
with respect to the plan or coverage in-
volved regardless of any increase in total
costs.

(2) Applicable percentage. With re-
spect to a plan or coverage, the applicable
percentage described in this paragraph (g)
is-

(i) 2 percent in the case of the first plan
year in which this section is applied to the
plan or coverage; and

(ii) 1 percent in the case of each sub-
sequent plan year.

(3) Determinations by actuaries-(i)
Determinations as to increases in actual
costs under a plan or coverage that are
attributable to implementation of the re-

quirements of this section shall be made
and certified by a qualified and licensed
actuary who is a member in good standing
of the American Academy of Actuaries.
All such determinations must be based on
the formula specified in paragraph (g)(4)
of this section and shall be in a written
report prepared by the actuary.

(ii) The written report described in
paragraph (g)(3)(i) of this section shall be
maintained by the group health plan or
health insurance issuer, along with all sup-
porting documentation relied upon by the
actuary, for a period of six years following
the notification made under paragraph
(g)(6) of this section.

(4) Formula. The formula to be used to
make the determination under paragraph
(g)(3)(i) of this section is expressed math-
ematically as follows:

[(E1 - E0)/To] -D > k

(i) E1 is the actual total cost of cover-
age with respect to mental health and sub-
stance use disorder benefits for the base
period, including claims paid by the plan
or issuer with respect to mental health and
substance use disorder benefits and ad-
ministrative costs (amortized over time)
attributable to providing these benefits
consistent with the requirements of this
section.

(ii) E0 is the actual total cost of cover-
age with respect to mental health and sub-
stance use disorder benefits for the length
of time immediately before the base pe-
riod (and that is equal in length to the base
period), including claims paid by the plan
or issuer with respect to mental health and
substance use disorder benefits and ad-
ministrative costs (amortized over time)
attributable to providing these benefits.

(iii) T0 is the actual total cost of cov-
erage with respect to all benefits during
the base period.

(iv) k is the applicable percentage of
increased cost specified in paragraph
(g)(2) of this section that will be ex-
pressed as a fraction for purposes of this
formula.

(v) D is the average change in spending
that is calculated by applying the formula
(E1 - E()/T, to mental health and sub-
stance use disorder spending in each of
the five prior years and then calculating
the average change in spending.

(5) Six month determination. If a group
health plan or health insurance issuer

seeks an exemption under this paragraph
(g), determinations under paragraph (g)(3)
of this section shall be made after such
plan or coverage has complied with this
section for at least the first 6 months of the
plan year involved.

(6) Notification. A group health plan or
health insurance issuer that, based on the
certification described under paragraph
(g)(3) of this section, qualifies for an ex-
emption under this paragraph (g), and
elects to implement the exemption, must
notify participants and beneficiaries cov-
ered under the plan, the Secretary, and the
appropriate State agencies of such elec-
tion.

(i) Participants and beneficiaries-(A)
Content of notice. The notice to partici-
pants and beneficiaries must include the
following information:

(1) A statement that the plan or issuer
is exempt from the requirements of this
section and a description of the basis for
the exemption.

(2) The name and telephone number of
the individual to contact for further infor-
mation.

(3) The plan or issuer name and plan
number (PN).

(4) The plan administrator's name, ad-
dress, and telephone number.

(5) For single-employer plans, the plan
sponsor's name, address, and telephone
number (if different from paragraph
(g)(6)(i)(A)(3) of this section) and the
plan sponsor's employer identification
number (EIN).

(6) The effective date of such exemp-
tion.

(7) A statement regarding the ability of
participants and beneficiaries to contact
the plan administrator or health insurance
issuer to see how benefits may be affected
as a result of the plan's or issuer's election
of the exemption.

(8) A statement regarding the availabil-
ity, upon request and free of charge, of a
summary of the information on which the
exemption is based (as required under
paragraph (g)(6)(i)(D) of this section).

(B) Use of summary of material reduc-
tions in covered services or benefits. A
plan or issuer may satisfy the require-
ments of paragraph (g)(6)(i)(A) of this
section by providing participants and ben-
eficiaries (in accordance with paragraph
(g)(6)(i)(C) of this section) with a sum-

mary of material reductions in covered
services or benefits consistent with 29
CFR 2520.104b-3(d) that also includes
the information specified in paragraph
(g)(6)(i)(A) of this section. However, in
all cases, the exemption is not effective
until 30 days after notice has been sent.

(C) Delivery. The notice described in
this paragraph (g)(6)(i) is required to be
provided to all participants and beneficia-
ries. The notice may be furnished by any
method of delivery that satisfies the re-
quirements of section 104(b)(1) of ERISA
(29 U.S.C. 1024(b)(1)) and its implement-
ing regulations (for example, first-class
mail). If the notice is provided to the par-
ticipant and any beneficiaries at the par-
ticipant's last known address, then the re-
quirements of this paragraph (g)(6)(i) are
satisfied with respect to the participant
and all beneficiaries residing at that ad-
dress. If a beneficiary's last known ad-
dress is different from the participant's
last known address, a separate notice is
required to be provided to the beneficiary
at the beneficiary's last known address.

(D) Availability of documentation. The
plan or issuer must make available to par-
ticipants and beneficiaries (or their repre-
sentatives), on request and at no charge, a
summary of the information on which the
exemption was based. (For purposes of
this paragraph (g), an individual who is
not a participant or beneficiary and who
presents a notice described in paragraph
(g)(6)(i) of this section is considered to
be a representative. A representative
may request the summary of informa-
tion by providing the plan a copy of the
notice provided to the participant under
paragraph (g)(6)(i) of this section with
any personally identifiable information re-
dacted.) The summary of information
must include the incurred expenditures,
the base period, the dollar amount of
claims incurred during the base period
that would have been denied under the
terms of the plan or coverage absent
amendments required to comply with
paragraphs (b) and (c) of this section, the
administrative costs related to those
claims, and other administrative costs at-
tributable to complying with the require-
ments of this section. In no event should
the summary of information include any
personally identifiable information.

(ii) Federal agencies-(A) Content of
notice. The notice to the Secretary must
include the following information:

(1) A description of the number of cov-
ered lives under the plan (or coverage)
involved at the time of the notification,
and as applicable, at the time of any prior
election of the cost exemption under this
paragraph (g) by such plan (or coverage);

(2) For both the plan year upon which
a cost exemption is sought and the year
prior, a description of the actual total costs
of coverage with respect to medical/surgi-
cal benefits and mental health and sub-
stance use disorder benefits; and

(3) For both the plan year upon which a
cost exemption is sought and the year prior,
the actual total costs of coverage with re-
spect to mental health and substance use
disorder benefits under the plan.

(B) Reporting with respect to church
plans. A church plan (as defined in section
414(e)) claiming the exemption of this
paragraph (g) for any benefit package,
must provide notice to the Department of
the Treasury. This requirement is satisfied
if the plan sends a copy, to the address
designated by the Secretary in generally
applicable guidance, of the notice de-
scribed in paragraph (g)(6)(ii)(A) of this
section identifying the benefit package to
which the exemption applies.

(iii) Confidentiality. A notification to the
Secretary under this paragraph (g)(6) shall
be confidential. The Secretary shall make
available, upon request and not more than
on an annual basis, an anonymous itemiza-
tion of each notification that includes-

(A) A breakdown of States by the size
and type of employers submitting such
notification; and

(B) A summary of the data received
under paragraph (g)(6)(ii) of this section.

(iv) Audits. The Secretary may audit
the books and records of a group health
plan or a health insurance issuer relating
to an exemption, including any actuarial
reports, during the 6-year period follow-
ing notification of such exemption under
paragraph (g)(6) of this section. A State
agency receiving a notification under
paragraph (g)(6) of this section may also
conduct such an audit with respect to an
exemption covered by such notification.

(h) Sale of nonparity health insurance
coverage. A health insurance issuer may
not sell a policy, certificate, or contract of
insurance that fails to comply with para-
graph (b) or (c) of this section, except to a
plan for a year for which the plan is ex-
empt from the requirements of this section
because the plan meets the requirements
of paragraph (f) or (g) of this section.

(i) Applicability dates-(1) In general.
Except as provided in paragraph (i)(2) of
this section, this section applies to group
health plans and health insurance issuers
offering group health insurance coverage
on the first day of the first plan year be-
ginning on or after July 1, 2014.

(2) Special effective date for certain
collectively-bargained plans. For a group
health plan maintained pursuant to one or
more collective bargaining agreements
ratified before October 3, 2008, the re-
quirements of this section do not apply to
the plan (or health insurance coverage of-
fered in connection with the plan) for plan
years beginning before the date on which
the last of the collective bargaining agree-
ments terminates (determined without re-
gard to any extension agreed to after Oc-
tober 3, 2008).

(Filed by the Office of the Federal Register on November 8,
2013, 11:15 a.m., and published in the issue of the Federal
Register for November 13, 2013, 78 F.R. 68240)

Section 1001 .-
Determination of Amount of
and Recognition of Gain or
Loss

T.D. 9639

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

###### Modifications of Certain Derivative Contracts

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations relating to the transfer or

assignment of certain derivative contracts.
The final regulations provide guidance to
the nonassigning counterparty to a deriv-
ative contract and an assignee on certain
notional principal contracts that are deriv-
ative contracts. The final regulations pro-
vide that the nonassigning counterparty
does not have an exchange for purposes of
§1.1001-1(a) when certain derivative
contracts are transferred or assigned and
clarify that the embedded loan rules of
§1.446-3(g)(4) do not apply to such
transactions.

DATES: Effective Date: These regula-
tions are effective on November 6, 2013.

Applicability Date: For the date of ap-
plicability, see §1.1001-4(d).

FOR FURTHER INFORMATION
CONTACT: Andrea M. Hoffenson, (202)
622-3920 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

###### Background

This document contains amendments
to 26 CFR part 1. On July 22, 2011, tem-
porary regulations (TD 9538) relating to
the effect of the transfer or assignment of
certain derivative contracts under section
1001 of the Internal Revenue Code (Code)
were published in the Federal Register
(76 FR 43892). A notice of proposed rule-
making (REG-109006-11) cross-
referencing the temporary regulations was
published in the Federal Register for the
same day (76 FR 43957). A correction to
the temporary regulations was published
on August 19, 2011, in the Federal Reg-
ister (76 FR 51878). No public hearing
was requested or held. No written or elec-
tronic comments responding to the notice
of proposed rulemaking were received.
The proposed regulations are adopted as
amended by this Treasury decision, and
the corresponding temporary regulations
are removed.

Section 1001 provides rules for the
computation and recognition of gain or
loss from a sale or other disposition of
property. For purposes of section 1001,
§1.1001-1(a) of the Income Tax Regula-
tions generally provides that gain or loss
is realized upon an exchange of property
for other property differing materially ei-
ther in kind or in extent. As a general
matter, the assignment of a derivative con-

tract is treated as a taxable disposition to a
nonassigning counterparty if the resulting
contract differs materially either in kind or
in extent. See Cottage Savings Associa-
tion v. Commissioner, 499 U.S. 554, 566
(1991) [1991-2 C.B. 34, 38] ("Under [the
Court's] interpretation of [section]
1001(a), an exchange of property gives
rise to a realization event so long as the
exchanged properties are 'materially dif-
ferent'-that is, so long as they embody
legally distinct entitlements."). The tem-
porary regulations provide, however, that
the transfer or assignment of a derivative
contract by a dealer or clearinghouse to
another dealer or clearinghouse is not
treated as a deemed exchange of the con-
tract by the nonassigning counterparty for
purposes of §1.1001-1(a) provided that
the transfer or assignment is permitted by
the terms of the contract and the terms of
the contract are not otherwise modified.

###### Explanation of Revisions

The final regulations adopt the general
rule in the temporary regulations providing
that a transfer or assignment of a derivative
contract that satisfies the conditions speci-
fied in the regulations is generally not
treated by the nonassigning counterparty as
a deemed exchange of the original contract
under §1.1001-1(a). As explained below, a
sentence has been added to the final regula-
tions to clarify that a loan is not created
when a notional principal contract (NPC) is
transferred or assigned under the conditions
specified in these final regulations.

In general, §1.446-3(h) provides rules
that prescribe the treatment of a termination
payment made or received by the assignor
or assignee pursuant to an assignment of an
NPC, while the consequences to the nonas-
signing counterparty are governed by sec-
tion 1001. A termination payment made or
received on an NPC is treated by the as-
signee as a nonperiodic payment under
§1.446-3(h)(3). See §1.446-3(h)(5), Exam-
ple 2. In addition, §1.446-3(h)(3) makes the
special rules of §1.446-3(g)(4) applicable
to a termination payment made pursuant to
an NPC. Section 1.446-3(g)(4) generally
provides that a swap with significant non-
periodic payments is treated as two transac-
tions, an on-market, level payment swap
and a loan.

These final regulations expressly provide
that a payment between the party transfer-

ring or assigning its rights and obligations
under the contract and the party to which the
rights and obligations are transferred or as-
signed pursuant to the transfer or assign-
ment of an NPC that meets the conditions
specified in these regulations is not subject
to the embedded loan rules in §1.446-
3(g)(4). Thus, neither the assignee nor the
nonassigning counterparty is treated as hav-
ing an embedded loan under §1.446-
3(g)(4) as a result of a payment made be-
tween the assignor and the assignee of an
NPC pursuant to a transfer or assignment
that satisfies the requirements of §1.1001-
4(a). The Treasury Department and the IRS
believe that it would be inconsistent for an
embedded loan to result from such a pay-
ment in circumstances in which the general
rule in §1.1001-4(a) treats the transfer or
assignment of an NPC as not creating a
taxable event for the nonassigning counter-
party.

###### Special Analyses

It has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in Executive Order 12866, as
supplemented by Executive Order 13563.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Proce-
dure Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the regu-
lations do not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Code, these regulations have been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business, and no
comments were received.

###### Drafting Information

The principal author of these regulations
is Andrea M. Hoffenson, Office of Associ-
ate Chief Counsel (Financial Institutions
and Products). However, other personnel
from the IRS and the Treasury Department
participated in their development.

* * * * *

###### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is or 475(e)(2)(D); or
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 1.1001-4 is revised to
read as follows:

§1.1001-4 Modifications of certain
derivative contracts.

(a) Certain assignments. For purposes
of §1.1001-1(a), the transfer or assign-
ment of a derivative contract is not treated
by the nonassigning counterparty as a
deemed exchange of the original contract
for a modified contract that differs mate-
rially either in kind or in extent if-

(1) Both the party transferring or as-
signing its rights and obligations under the
derivative contract and the party to which
the rights and obligations are transferred
or assigned are either a dealer or a clear-
inghouse;

(2) The terms of the derivative contract
permit the transfer or assignment of the con-
tract, whether or not the consent of the non-
assigning counterparty is required for the
transfer or assignment to be effective; and

(3) The terms of the derivative contract
are not otherwise modified in a manner
that results in a taxable exchange under
section 1001.

(b) Definitions-(1) Dealer. For pur-
poses of this section, a dealer is a taxpayer
who meets the definition of a dealer in se-
curities in section 475(c)(1) or is a dealer in
commodities derivative contracts.

(2) Clearinghouse. For purposes of this
section, a clearinghouse is a derivatives
clearing organization (as such term is de-
fined in section 1a of the Commodity Ex-
change Act (7 U.S.C. 1a)) or a clearing
agency (as such term is defined in section
3 of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a))) that is registered, or
exempt from registration, under each re-
spective Act.

(3) Derivative contract. For purposes
of this section, a derivative contract is a
contract described in-

(i) Section 475(c)(2)(D), 475(c)(2)(E),
or 475(c)(2)(F) without regard to the last
sentence of section 475(c)(2) referencing
section 1256;

(ii) Section 475(e)(2)(B), 475(e)(2)(C),

(iii) Section 1.446-3(c)(1).

(c) Consideration for the assignment.
Any payment between a party transferring
or assigning its rights and obligations under
the contract and the party to which the rights
and obligations are transferred or assigned
pursuant to a transfer or assignment de-
scribed in paragraph (a) of this section will
not affect the treatment of the nonassigning
counterparty for purposes of this section. A
payment described in the preceding sen-
tence made or received to transfer or assign
rights and obligations under a notional prin-
cipal contract (as defined in §1.446-
3(c)(1)) is not subject to §1.446-3(g)(4).

(d) Effective/applicability date. This sec-
tion applies to transfers or assignments of de-
rivative contracts on or after July 22, 2011.

### §1.1001-4T [Removed]

Par. 3. Section 1.1001-4T is removed.

Heather C. Maloy,
Acting Deputy Commissioner
for Services and Enforcement.

Approved October 29, 2013

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

(Filed by the Office of the Federal Register on November 5,
2013, 8:45 a.m., and published in the issue of the Federal
Register for November 6, 2013, 78 F.R. 66639)

# Section 1274 .- Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

This ruling provides the dollar amounts, in-
creased by the 2014 inflation adjustment, for section
1274A of the Code. Rev. Rul. 2012-33 supple-
mented and superseded. See Rev. Rul. 2013-23,
page 590.

## Section 1274A .- Special Rules for Certain Transactions Where Stated Principal Amount Does Not Exceed $2,800,000

26 CFR 1.1274A-1: Special rules for certain trans-
actions where stated principal amount does not ex-
ceed $2,800,000.
(Also §§ 483, 1274.)

Section 1274A - inflation adjusted numbers for
2014. This ruling provides the dollar amounts, in-
creased by the 2014 inflation adjustment, for section
1274A of the Code. Rev. Rul. 2012-33 supple-
mented and superseded.

### Rev. Rul. 2013-23

This revenue ruling provides the dollar
amounts, increased by the 2014 inflation
adjustment, for § 1274A of the Internal
Revenue Code.

### BACKGROUND

In general, §§ 483 and 1274 determine
the principal amount of a debt instrument
given in consideration for the sale or ex-
change of nonpublicly traded property. In
addition, any interest on a debt instrument
subject to § 1274 is taken into account
under the original issue discount provi-
sions of the Code. Section 1274A, how-
ever, modifies the rules under §§ 483 and
1274 for certain types of debt instruments.

In the case of a "qualified debt instru-
ment," the discount rate used for purposes
of §§ 483 and 1274 may not exceed nine
percent, compounded semiannually. Sec-
tion 1274A(b) defines a qualified debt in-
strument as any debt instrument given in
consideration for the sale or exchange of
property (other than new § 38 property
within the meaning of § 48(b), as in effect
on the day before the date of enactment of
the Revenue Reconciliation Act of 1990)
if the stated principal amount of the in-
strument does not exceed the amount
specified in § 1274A(b). For debt instru-
ments arising out of sales or exchanges
before January 1, 1990, this amount is
$2,800,000.

In the case of a "cash method debt
instrument," as defined in § 1274A(c), the
borrower and lender may elect to use the

cash receipts and disbursements method
of accounting. In particular, for any cash
method debt instrument, § 1274 does not
apply, and interest on the instrument is
accounted for by both the borrower and
the lender under the cash method of ac-
counting. A cash method debt instrument
is a qualified debt instrument that meets
the following additional requirements: (A)
In the case of instruments arising out of
sales or exchanges before January 1,
1990, the stated principal amount does not
exceed $2,000,000; (B) the lender does
not use an accrual method of accounting
and is not a dealer with respect to the
property sold or exchanged; (C) § 1274
would have applied to the debt instrument
but for an election under § 1274A(c); and
(D) an election under § 1274A(c) is
jointly made with respect to the debt in-
strument by the borrower and the lender.
Section 1.1274A-1(c)(1) of the Income
Tax Regulations provides rules concern-
ing the time for, and manner of, making
this election.

Section 1274A(d)(2) provides that, for
any debt instrument arising out of a sale or
exchange during any calendar year after
1989, the dollar amounts stated in
§ 1274A(b) and § 1274A(c)(2)(A) are in-
creased by the inflation adjustment for the
calendar year. Any increase due to the
inflation adjustment is rounded to the
nearest multiple of $100 (or, if the in-
crease is a multiple of $50 and not of
$100, the increase is increased to the near-
est multiple of $100). The inflation adjust-
ment for any calendar year is the percent-
age (if any) by which the CPI for the
preceding calendar year exceeds the CPI
for calendar year 1988. Section
1274A(d)(2)(B) defines the CPI for any
calendar year as the average of the Con-
sumer Price Index as of the close of the
12-month period ending on September 30
of that calendar year.

### INFLATION-ADJUSTED AMOUNTS UNDER § 1274A

For debt instruments arising out of
sales or exchanges after December 31,
1989, the inflation-adjusted amounts un-
der § 1274A are shown in Table 1.

Rev. Rul. 2013-23 Table 1 Inflation-Adjusted Amounts Under Section 1274A

Calendar Year of Sale or Exchange

1274A(b) Amount (qualified debt instrument)

1274A(c)(2)(A) Amount (cash method debt instrument)

1990

$2,933,200

$2,095,100

1991

$3,079,600

$2,199,700

1992

$3,234,900

$2,310,600

1993

$3,332,400

$2,380,300

1994

$3,433,500

$2,452,500

1995

$3,523,600

$2,516,900

1996

$3,622,500

$2,587,500

1997

$3,723,800

$2,659,900

1998

$3,823,100

$2,730,800

1999

$3,885,500

$2,775,400

2000

$3,960,100

$2,828,700

2001

$4,085,900

$2,918,500

2002

$4,217,500

$3,012,500

2003

$4,280,800

$3,057,700

2004

$4,381,300

$3,129,500

2005

$4,483,000

$3,202,100

2006

$4,630,300

$3,307,400

2007

$4,800,800

$3,429,100

2008

$4,913,400

$3,509,600

2009

$5,131,700

$3,665,500

2010

$5,115,100

$3,653,600

2011

$5,201,300

$3,715,200

2012

$5,339,300

$3,813,800

2013

$5,468,200

$3,905,900

2014

$5,557,200

$3,969,500

Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982-1984 base, published by
the Bureau of Labor Statistics.

### EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2012-33, 2012-51 I.R.B.
710, is supplemented and superseded.

### DRAFTING INFORMATION

The author of this revenue ruling is
Steven Harrison of the Office of Associate

Chief Counsel (Financial Institutions &
Products). For further information regarding
this revenue ruling, contact Mr. Harrison at
(202) 622-3930 (not a toll-free call).

# Part III. Administrative, Procedural, and Miscellaneous

## Social Security Contribution and Benefit Base for 2014

### Notice 2013-72

Under authority contained in the Social
Security Act (Act), the Commissioner,
Social Security Administration, has deter-
mined and announced (78 F.R. 66413,
dated November 5, 2013) that the contri-
bution and benefit base for remuneration
paid in 2014, and self-employment in-
come earned in taxable years beginning in
2014 is $117,000.

#### "Old-Law" Contribution and Benefit Base

##### General

The "old-law" contribution and benefit
base for 2014 is $87,000.

Domestic Employee Coverage
Threshold

## General

The minimum amount a domestic
worker must earn so that such earnings are
covered under Social Security or Medi-
care is the domestic employee coverage
threshold. For 2014, this threshold is
$1,900. Section 3121(x) of the Internal
Revenue Code provides the formula for
increasing the threshold.

## Computation

Under the formula, the domestic em-
ployee coverage threshold amount for
2014 is equal to the 1995 amount of
$1,000 multiplied by the ratio of the na-
tional average wage index for 2012 to that

for 1993. If the resulting amount is not a
multiple of $100, it is rounded to the next
lower multiple of $100.

Domestic Employee Coverage Threshold
Amount

Multiplying the 1995 domestic em-
ployee coverage threshold amount
($1,000) by the ratio of the national aver-
age wage index for 2012 ($44,321.67) to
that for 1993 ($23,132.67) produces the
amount of $1,915.98. We then round this
amount to $1,900. Accordingly, the do-
mestic employee coverage threshold
amount is $1,900 for 2014.

(Filed by the Office of the Federal Register on November 1,
2013, 4:15 p.m., and published in the issue of the Federal
Register for November 5, 2013, 78 F.R. 66413)

# Part IV. Items of General Interest

Correction to Revenue

2011-37 I.R.B. 318, regarding the use and

Rev. Proc. 2002-55, 2002-2 C.B. 435

Procedure 2011-42

evaluation of statistical samples and sam- pling estimates.

(permits external auditors of qualified in- termediaries to use statistical sampling);

Announcement 2013-46

In Section 2. BACKGROUND, the fol- lowing reference should be added after the

This announcement contains a correc-

reference to Rev. Proc. 2007-35, and be- fore the reference to Rev. Proc. 72-36:

tion to Revenue Procedure 2011-42,

# 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.

## Numerical Finding List1

Bulletins 2013-27 through 2013-48

### Announcements

2013-35, 2013-27 I.R.B. 46
2013-36, 2013-33 I.R.B. 142
2013-37, 2013-34 I.R.B. 155
2013-38, 2013-36 I.R.B. 185
2013-39, 2013-35 I.R.B. 167
2013-40, 2013-38 I.R.B. 226
2013-41, 2013-40 I.R.B. 322
2013-42, 2013-44 I.R.B. 464
2013-43, 2013-46 I.R.B. 524
2013-44, 2013-47 I.R.B. 545
2013-45, 2013-47 I.R.B. 546
2013-46, 2013-48 I.R.B. 593

### Notices

2013-41, 2013-29 I.R.B. 60
2013-42, 2013-29 I.R.B. 61
2013-43, 2013-31 I.R.B. 113
2013-44, 2013-29 I.R.B. 62
2013-45, 2013-31 I.R.B. 116
2013-46, 2013-31 I.R.B. 117
2013-47, 2013-31 I.R.B. 120
2013-48, 2013-31 I.R.B. 120
2013-49, 2013-32 I.R.B. 127
2013-50, 2013-32 I.R.B. 133
2013-51, 2013-34 I.R.B. 153
2013-52, 2013-35 I.R.B. 159
2013-53, 2013-36 I.R.B. 173
2013-54, 2013-40 I.R.B. 287
2013-55, 2013-38 I.R.B. 207
2013-56, 2013-39 I.R.B. 262
2013-57, 2013-40 I.R.B. 293
2013-58, 2013-40 I.R.B. 294
2013-59, 2013-40 I.R.B. 297
2013-60, 2013-44 I.R.B. 431
2013-61, 2013-44 I.R.B. 432
2013-62, 2013-45 I.R.B. 466
2013-63, 2013-44 I.R.B. 436
2013-64, 2013-44 I.R.B. 438
2013-65, 2013-44 I.R.B. 440
2013-66, 2013-46 I.R.B. 498
2013-67, 2013-45 I.R.B. 470
2013-68, 2013-46 I.R.B. 501
2013-69, 2013-46 I.R.B. 503
2013-70, 2013-47 I.R.B. 528
2013-71, 2013-47 I.R.B. 532
2013-72, 2013-48 I.R.B. 592

## Proposed Regulations

REG-124148-05, 2013-44 I.R.B. 444
REG-161948-05, 2013-44 I.R.B. 449
REG-148659-07, 2013-45 I.R.B. 473

REG-132251-11, 2013-37 I.R.B. 191
REG-148812-11, 2013-45 I.R.B. 484

REG-111753-12, 2013-40

I.R.B. 302

REG-112815-12, 2013-35

I.R.B. 162

REG-114122-12, 2013-35

I.R.B. 163

REG-136630-12, 2013-40

I.R.B. 303

REG-140789-12, 2013-32

I.R.B. 136

REG-144990-12, 2013-39

I.R.B. 264

REG-110732-13, 2013-43

I.R.B. 405

REG-111837-13, 2013-39

I.R.B. 266

REG-113792-13, 2013-38

I.R.B. 211

REG-115300-13, 2013-37

I.R.B. 197

## Revenue Procedures

2013-28, 2013-27 I.R.B. 28

2013-29, 2013-33 I.R.B. 141

2013-30, 2013-36 I.R.B. 173

2013-31, 2013-38 I.R.B. 208

2013-32, 2013-28

I.R.B. 55

2013-33, 2013-38 I.R.B. 209

2013-34, 2013-43 I.R.B. 398

2013-35, 2013-47 I.R.B. 537

## Revenue Rulings

2013-13, 2013-32 I.R.B. 124
2013-15, 2013-28 I.R.B. 47
2013-16, 2013-40 I.R.B. 275
2013-17, 2013-38 I.R.B. 201
2013-18, 2013-37 I.R.B. 186
2013-19, 2013-39 I.R.B. 240
2013-20, 2013-40 I.R.B. 272
2013-21, 2013-43 I.R.B. 396
2013-22, 2013-46 I.R.B. 496
2013-23, 2013-48 I.R.B. 590

## Treasury Decisions

9620, 2013-27 I.R.B. 1

9621, 2013-28 I.R.B. 49

9622, 2013-30 I.R.B. 64

9623, 2013-30 I.R.B. 73
9624, 2013-31 I.R.B. 86
9625, 2013-34 I.R.B. 147
9626, 2013-34 I.R.B. 149
9627, 2013-35 I.R.B. 156
9628, 2013-36 I.R.B. 169
9629, 2013-37 I.R.B. 188
9630, 2013-38 I.R.B. 199
9631, 2013-38 I.R.B. 205
9632, 2013-39 I.R.B. 241
9633, 2013-39 I.R.B. 227
9634, 2013-40 I.R.B. 272
9635, 2013-40 I.R.B. 273
9636, 2013-43 I.R.B. 331
9637, 2013-44 I.R.B. 427
9638, 2013-46 I.R.B. 487
9639, 2013-48 I.R.B. 588
9640, 2013-48 I.R.B. 548

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2013-1 through 2013-26 is in Internal Revenue Bulletin
2013-26, dated June 24, 2013.

Finding List of Current Actions on

90-52 Modified by Rev. Proc. 2013-32, 2013-28 I.R.B. 55

2013-3 Amplified and modified by Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Previously Published Items1

Bulletins 2013-27 through 2013-48

96-30

2003-61

Notices:

Modified by

Superseded by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Rev. Proc. 2013-34, 2013-43 I.R.B. 398

2004-23

Proposed Regulations:

Clarified by

97-48

Notice 2013-57, 2013-40 I.R.B. 293

Situation 1 superseded, Situation 2 obsoleted by Rev. Proc. 2013-30, 2013-36 I.R.B. 173

112815-12 Corrected by

2004-50

Ann. 2013-45, 2013-47 I.R.B. 546

Clarified by

2003-43

Notice 2013-57, 2013-40 I.R.B. 293

Modified and superseded by Rev. Proc. 2013-30, 2013-36 I.R.B. 173

Revenue Rulings:

2005-70

58-66

Obsoleted by

2003-48

Amplified and clarified by

T.D. 9633 2013-39 I.R.B. 227

Obsoleted in part and superseded in part by Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Rev. Rul. 2013-17, 2013-38 I.R.B. 201

2006-40

2013-17

Superseded by

2004-34

Supplemented by

Notice 2013-68, 2013-46 I.R.B. 501

Modified and clarified by

Notice 2013-61, 2013-44 I.R.B. 432

Rev. Proc. 2013-29, 2013-33 I.R.B. 141

2012-74

2012-33

Obsoleted by

2004-48

Supplemented and superseded by

Notice 2013-51, 2013-34 I.R.B. 153

Modified and superseded by

Rev. Rul. 2013-23, 2013-48 I.R.B. 590

Rev. Proc. 2013-30, 2013-36 I.R.B. 173

2013-16

Treasury Decisions:

Superseded by

Notice 2013-55, 2013-38 I.R.B. 207

2004-49

Sections 4.01 &amp; 4.02 modified and superseded,

9610

2013-29

Section 4.03 obsoleted by

Corrected by Ann. 2013-41, 2013-40 I.R.B. 322

Clarified by

Rev. Proc. 2013-30, 2013-36 I.R.B. 173

Notice 2013-60, 2013-44 I.R.B. 431

2007-44

9612

2013-36

Modified by

Corrected by Ann. 2013-35, 2013-27 I.R.B. 46

Appendix updated by

Ann. 2013-37, 2013-34 I.R.B. 155

Notice 2013-55, 2013-38 I.R.B. 207

2007-62

9622

Corrected by

Superseded by

Modified and superseded by

Ann. 2013-39, 2013-35 I.R.B. 167

Notice 2013-55, 2013-38 I.R.B. 207

Rev. Proc. 2013-30, 2013-36 I.R.B. 173

9627

2013-39

2009-25

Corrected by

Amplified by

Pilot program discontinued by

Ann. 2013-44, 2013-37 I.R.B. 545

Notice 2013-47, 2013-31 I.R.B. 120

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

2013-40

2011-18

Amplified by

Modified and clarified by

Notice 2013-47, 2013-31 I.R.B. 120

Rev. Proc. 2013-29, 2013-33 I.R.B. 141

Revenue Procedures:

2011-49

Modified by

81-60

Ann. 2013-37, 2013-34 I.R.B. 155

Modified by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

2012-25

Obsoleted in part by

83-59

Rev. Proc. 2013-28, 2013-27 I.R.B. 28

Modified by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

2013-1

86-42

Amplified and modified by

Modified by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2013-1 through 2013-26 is in Internal Revenue Bulletin 2013-26, dated June 24, 2013.

# INDEX

## Internal Revenue Bulletins 27 through 48

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

## EMPLOYEE PLANS

Accommodations for nonprofit organizations with religious ob-
jections to providing contraceptive services (TD 9624) 31, 86
Credit for employee health insurance expenses of small employ-
ers (REG-113792-13) 38, 211

Employee retirement benefit plan returns required on magnetic
media (REG-111837-13) 39, 266

Exemption for religious employers from the requirement to pro-
vide coverage for contraceptive services (TD 9624) 31, 86
Proposed Regulations:

26 CFR 1.45R-1 through 1.45R-5 added (tax credit for em-
ployee health insurance expenses of small employers)
(REG-113792-13) 38, 211

26 CFR 301.6057-3 added; 301.6058-2 added; 301.6059-2
added (employee retirement benefit plan returns required
on magnetic media) (REG-111837-13) 39, 266

Qualified plans, determination letters (Ann 37) 34, 155
Qualified plans, mortality tables (Notice 49) 32, 127
Regulations:

26 CFR 54.9815-2713 added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 54.9815-2713A added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 301.6103 amended (disclosure of return information)
(TD 9628) 36, 169

Update to Revenue Ruling 58-66 (RR 17) 38, 201
Weighted average interest rates:

Segment rates for:

July 2013 (Notice 46) 31, 117

August 2013 (Notice 52) 35, 159

September 2013 (Notice 58) 40, 294
October 2013 (Notice 66) 46, 498

Wellness regulations related to rewards, plan design, and alter-
natives to avoid prohibited discrimination (TD 9620) 27, 1

# EMPLOYMENT TAX

Disclosure of return information (TD 9628) 36, 169
Disclosure of return information reflected on returns to officers
and employees of the Department of Commerce for certain
statistical purposes and related activities (TD 9631) 38, 205
Domestic employee coverage threshold amount for 2014 (Notice
72) 48, 592

Regulations:

26 CFR part 301 amended; section 301.6103(j)(1) amended;
section 301.6103(j)(1)1-T amended; revising paras.
(b)(3)(xxix), (b)(3)(xxx) and (e) (TD 9631) 38, 205

Social Security contribution and benefit base for 2014 (Notice
72) 48, 592

Special administrative procedures for claims for refund and
adjustments of overpayments of employment tax with respect
to same-sex spouse benefits (Notice 61) 44, 432

Update to Revenue Ruling 58-66 (RR 17) 38, 201

# ESTATE TAX

Disclosure of return information (TD 9628) 36, 169

Update to Revenue Ruling 58-66 (RR 17) 38, 201

Valuation of certain farm, etc., real property (RR 19) 39, 240

# EXCISE TAX

Accommodations for nonprofit organizations with religious ob-
jections to providing contraceptive services (TD 9624) 31, 86
Branded prescription drugs (Notice 51) 34, 153

Disclosure of return information (TD 9628) 36, 169

Disclosure of return information reflected on returns to officers
and employees of the Department of Commerce for certain
statistical purposes and related activities (TD 9631) 38, 205
Exemption for religious employers from the requirement to pro-
vide coverage for contraceptive services (TD 9624) 31, 86
Indoor tanning services; excise taxes (TD 9621) 28, 49
Information reporting by applicable large employers on health
insurance coverage (REG-136630-12) 40, 303

Regulations:

26 CFR 40.0-1 amended; 40.6302(c)-1 amended (indoor
tanning services) (TD 9621) 28, 49

26 CFR 1.150-1 amended; 1.150-1T removed; 1.171-1
amended; 1.171-1T removed; 1.197-2 amended;
1.197-2T removed; 1.249-1 amended; 1.249-1T re-
moved; 1.475(a)-4 amended; 1.475(a)-4T removed;
1.860G-2 amended; 1.860G-2T removed; 1.1001-3
amended; 1.1001-3T removed; 48.4101-1 amended;
48.4101-1T removed (removal of regulatory references to
credit ratings pursuant to section 939A of the Dodd-Frank
Act (TD 9637) 44, 427

26 CFR 54.9815-2713 added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 54.9815-2713A added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 301.6103 amended (disclosure of return information)
(TD 9628) 36, 169

# EXCISE TAX-Cont.

Removal of regulatory references to credit ratings pursuant to
section 939A of the Dodd-Frank Act (TD 9637) 44, 427
Transition relief for 2014 under sections 6055, 6056, and 4980H
(information reporting and employer shared responsibility pro-
visions) (Notice 45) 31, 116

Wellness regulations related to rewards, plan design, and alter-
natives to avoid prohibited discrimination (TD 9620) 27, 1

# EXEMPT ORGANIZATIONS

Proposed Regulations:

53 CFR 6011-1 amended; 53.6011-1T added; 53.6071-1
amended; 53.6071-1T added (requirement of a section
4959 excise tax return and time for filing the return)
(REG-115300-13) 37, 197

Requirement of a section 4959 excise tax return and time for
filing the return (REG-115300-13) 37, 197

Requirement of a section 4959 excise tax return and time for
filing the return (TD 9629) 37, 188

Revocations (Ann 42) 44, 464

# GIFT TAX

Disclosure of return information (TD 9628) 36, 169
Update to Revenue Ruling 58-66 (RR 17) 38, 201

# INCOME TAX

Action on Decision (AOD):

Media Space v. Commissioner 32
Wilson v. Commissioner 32

Advance payments, taxable year of inclusion (RP 29) 33, 141

Application of market reforms to certain healthcare arrangements
and guidance on EAPs and section 125(f)(3) (Notice 54) 40,
287

Application of section 108(i) to partnerships and S corporations
(TD 9623) 30, 73

Average area purchase price safe-harbor guidance for 2013 (RP
28) 27, 28

Capitalization of amounts paid to acquire, produce, or improve
tangible property (TD 9636) 43, 331

Certain transfers of property to Regulated Investment Companies
(RICs) and Real Estate Investment Trusts (REITs) (TD 9626)
34, 149

Clarification regarding 2013-2014 non-calendar year salary re-
duction elections under section 125 cafeteria plans (Notice 71)
47, 532

Consumer Price Index (CPI) adjustments, certain loans under
section 1274A, 2014 (RR 23) 48, 590

Cost of living adjustments for inflation for 2014 (RP 35) 47, 537
Credit for employee health insurance expenses of small employ-
ers (REG-113792-13) 38, 211

Croatian per se entity (Notice 44) 29, 62

Debt that is a position in personal property that is part of a
straddle (TD 9635) 40, 273

Debt that is a position in personal property that is part of a
straddle (REG-111753-12) 40, 302

# INCOME TAX-Cont.

Deduction for section 179 expense, qualified real property (No-
tice 59) 40, 297

Deferred discharge of indebtedness income of corporations (TD
9622) 30, 64

Deferred original issue discount deductions (TD 9622) 30, 64
Determining the amount of taxes paid for purposes of the foreign
tax credit (TD 9634) 40, 272

Disallowance of deductions, exception for reimbursed expenses
(TD 9625) 34, 147

Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents, and enrolled actuaries (Ann 36) 33, 142
Disclosure of return information (TD 9628) 36, 169

Dispositions of property subject to depreciation under section
168 (REG-110732-13) 43, 404

Energy investment tax credit (Notice 60) 44, 431

Energy production tax credit (Notice 60) 44, 431

FFI agreement for participating FFI and reporting Model 2 FFI
(Notice 69) 46, 503

Gift cards (RP 29) 33, 141

Guidance for seeking equitable relief under section 66(c) or
section 6015(f) (RP 34) 43, 397

Guidance regarding deferred discharge of indebtedness income
of corporations and deferred original issue discount deduc-
tions; correcting TD 9622 (Ann 39) 35, 167

Information reporting by foreign financial institutions and with-
holding on certain payments to foreign financial institutions
and other foreign entities; correcting TD 9610 (Ann 41) 40,
322

Installment agreements and offer in compromise user fees
(REG-144990-12) 39, 264

Insurance, effectively connected income (RP 33) 38, 209
Interest:

Investment:

Federal short-term, mid-term, and long-term rates for:
July 2013 (RR 15) 28, 47

August 2013 (RR 13) 32, 124

September 2013 (RR 18) 37, 186

October 2013 (RR 21) 43, 394

November 2013 (RR 22) 46, 496

Involuntary conversions, livestock sold of account of drought,
extension of replacement period, list of affected counties (No-
tice 62) 45, 466

Letter rulings that address issues presented in transactions de-
scribed in sections 332, 351, 355, 368, and 1036 (RP 32) 28,
55

Limitations on duplication of net built-in losses (TD 9633) 39,
227

Limitations on importation of net built-in losses (REG-161948-
05) 44, 449

Low-income housing tax credit (Notice 47) 31, 120

Low-income housing tax credit (RP 31) 38, 208

Low-income housing tax credit (Notice 63) 44, 436

Low-income housing tax credit (Notice 64) 44, 438

Modification of certain derivative contracts (TD 9639) 48, 588

Modification of "use-or-lose" rule for health flexible spending
arrangements (health FSAs) (Notice 71) 47, 532

# INCOME TAX-Cont.

Mixed straddles; straddle-by-straddle identification under section
1092(b)(2)(A)(i)(I) (TD 9627) 35, 156; Correction (Ann 44)
47, 545

Mixed straddles; straddle-by-straddle identification under section
1092(b)(2)(A)(i)(I) (REG-112815-12) 35, 162; Correction
(Ann 45) 47, 546

Noncompensatory partnership options; correcting TD 9612 (Ann
35) 27, 46

Nuclear energy, tax credits (Notice 68) 46, 501

Per capita payments from proceeds of settlements of Indian tribal
trust cases (Notice 55) 38, 207

Premium tax credit (REG-140789-12) 32, 136

Premium tax credit, minimum essential coverage (Notice 41) 29, 60
Proposed Regulations:

26 CFR 1.36B-0 amended (premium tax credit) (REG-
140789-12) 32, 136

26 CFR 1.36B-5 amended (premium tax credit) (REG-
140789-12) 32, 136

26 CFR 1.45R-1 through 1.45R-5 added (tax credit for em-
ployee health insurance expenses of small employers)
(REG-113792-13) 38, 211

26 CFR 1.148-0 revised; 1.148-1 revised; 1.148-2 revised;
1.148-4 revised; 1.148-5 revised; 1.148-6 revised;
1.148-10 revised; 1.148-11 revised; 1.148-15 revised;
1.150-1 revised (arbitrage restrictions on tax-exempt
bonds) (REG-148659-07) 45, 473

26 CFR 1.148-0 revised; 1.148-3 revised; 1.148-11 revised
(arbitrage rebate overpayment) (REG-148812-11) 45, 484

26 CFR 1.168(i)-0; 1.168(i)-1, 1.168(i)-7 amended (dispo-
sitions of property subject to depreciation under section
168) (REG-110732-13) 43, 404

26 CFR 1.332-6 amended; 1.332-7 amended; 1.334-1
amended; 1.337-1 added; 1.351-3 amended; 1.358-6
amended; 1.362-3 added; 1.362-4 amended; 1.368-3
amended (limitations on the importation of net built-in
losses (REG-161948-05) 44, 449

26 CFR 1.851-5 amended (Regulated Investment Company con-
trolled group regulation examples) (REG-114122-12) 35, 163

26 CFR 1.1092-1 revised (debt that is a position in personal
property that is part of a straddle) (REG-111753-12) 40, 302

26 CFR 1.1092(b)-6 added (mixed straddles; straddle-by-
straddle identification under section 1092(b)(2)(A)(i)(I))
(REG-112815-12) 35, 162

26 CFR 1.6015-5 amended (relief from joint and several
liability) (REG-132251-11) 37, 191

26 CFR 300.1 amended; 26 CFR 300.2 amended; 26 CFR
300.3 amended (installment agreements and offer in com-
promise user fees) (REG-144990-12) 39, 264

Qualified exempt facility bonds (Notice 47) 31, 120

Qualified exempt facility bonds (Notice 63) 44, 436

Qualified residential rental projects (Notice 47) 31, 120

Qualified residential rental projects (Notice 63) 44, 436

Qualifying advanced coal project program, section 48A (Ann 43)
46, 524

Regulated Investment Company controlled group regulation ex-
amples (REG-114122-12) 35, 163

# INCOME TAX-Cont.

Regulations:

26 CFR 1.108(i)-0, 26 CFR 1.108(i)-1, and 26 CFR
1.108(i)-3 added (deferred discharge of indebtedness in-
come of corporations and deferred original issue discount
deductions) (TD 9622) 30, 64

26 CFR 1.108(i)-2 added; 1.108(i)-2T removed (application
of section 108(i) to partnerships and S corporations) (TD
9623) 30, 73

26 CFR 1.150-1 amended; 1.150-1T removed; 1.171-1 amend-
ed; 1.171-1T removed; 1.197-2 amended; 1.197-2T re-
moved; 1.249-1 amended; 1.249-1T removed; 1.475(a)-4
amended; 1.475(a)-4T removed; 1.860G-2 amended;
1.860G-2T removed; 1.1001-3 amended; 1.1001-3T re-
moved; 48.4101-1 amended; 48.4101-1T removed (removal
of regulatory references to credit ratings pursuant to section
939A of the Dodd-Frank Act (TD 9637) 44, 427

26 CFR 1.168(i)-7, and 1.263(a)-6 added; 1.162-11,
1.165-2, 1.167(a)-7, 1.167(a)-8, 1.263(a)-0, 1.263A-0,
1.263A-1, 1.1016-3, and 602.101 amended; 1.162-3T,
1.162-4T, 1.162-11T, 1.165-2T, 1.167(a)-4T, 1.167(a)-
7T, 1.167(a)-8T, 1.168(i)-7T, 1.263(a)-0T, 1.263(a)-1T,
1.263(a)-2T, 1.263(a)-3T, 1.263(a)-6T, 1.263A-1T, and
1.1016-3 removed; 1.162-3, 1.162-4, 1.167(a)-4,
1.263(a)-1, 1.263(a)-2, and 1.263(a)-3 revised (guidance
regarding deduction and capitalization of expenditures re-
lated to tangible property) (TD 9636) 43, 331

26 CFR 1.358-2 amended; 1.362-4 amended; 1.705-1 amend-
ed; 1.1367-1 amended; 602.101 amended (limitations on
duplication of net built-in losses) (TD 9633) 39, 227

26 CFR 1.382-3 amended (segregation rules for public groups
of shareholders) (TD 9638) 46, 487

26 CFR 1.482-7 amended; 1.482-7T removed (use of differ-
ential income stream as an application of the income
method) (TD 9630) 38, 199

26 CFR 1.1001-4 added; 1.1001-4T removed (modifications
of certain derivative contracts) (TD 9639) 48, 588

26 CFR 1.901-2 amended; 1.901-2T removed (determining
the amount of taxes paid for purposes of the foreign tax
credit) (TD 9634) 40, 272

26 CFR 1.1092-1 revised (debt that is a position in personal
property that is part of a straddle) (TD 9635) 40, 273

26 CFR 1.1092(b)-6T added (mixed straddles; straddle-by-
straddle identification under section 1092(b)(2)(A)(i)(I))
(TD 9627) 35, 156

26 CFR 1.1471-1 (scope of chapter 4 and definitions) (Ann
41) 40, 322

26 CFR 1.5000A-0, 1.5000A-1, 1.5000A-2, 1.5000A-3,
1.5000A-4 added; 26 CFR 602.101 amended (shared re-
sponsibility payment for not maintaining minimum essen-
tial coverage) (TD 9632) 39, 241

26 CFR 54.9812-1 added (Mental Health Parity and Addic-
tion Equity Act of 2008) (TD 9640) 48, 548

26 CFR 301.6103 amended (disclosure of return information)
(TD 9628) 36, 169

Relief from joint and several liability (REG-132251-11) 37, 191

# INCOME TAX-Cont.

Removal of regulatory references to credit ratings pursuant to
section 939A of the Dodd-Frank Act (TD 9637) 44, 427

Research expenditures (REG-124148-05) 44, 444

S corporation elections (RP 30) 36, 173

Section 5000A transition relief for employees eligible to enroll in
non-calendar year health plans (Notice 42) 29, 61

Segregation rules for public groups of shareholders (TD 9638)
46, 487

Shared responsibility payment for not maintaining minimum
essential coverage (TD 9632) 39, 241

Standard Industry Fare Level (SIFL) (RR 20) 40, 272

Tax credits, vehicles (Notice 67) 45, 470

Tax credits for sections 25C and 25D (Notice 70) 47, 528

Tax-exempt bonds, arbitrage, hedge, identification requirement
(REG-148659-07) 45, 473

Tax-exempt bonds, arbitrage, rebate, overpayment (REG-
148812-11) 45, 484

Timeline for implementation of the requirements under sections
1471-1474, commonly known as FATCA (Notice 43) 31, 113
Transitional penalty relief and schedule for notices of incorrect
name/TIN combinations for information returns relating to
payment card and third party network transactions (Notice 56)
39, 262

2013 marginal production rates (Notice 53) 36, 173

2013 section 43 inflation adjustment (Notice 50) 32, 134

2013-2014 special per diem rates (Notice 65) 44, 440

Underpayments and overpayments, quarter beginning October 1,
2013 (RR 16) 40, 275

Update to Revenue Ruling 58-66 (RR 17) 38, 201

Use of differential income stream as an application of the income
method and as a consideration in assessing the best method
(TD 9630) 38, 199

Wash sales, money market fund shares (Notice 48) 31, 120

# SELF-EMPLOYMENT TAX

Update to Revenue Ruling 58-66 (RR 17) 38, 201

# TAX CONVENTION

U.S .- Belgium agreement regarding OECD report on the attribu-
tion of profits to permanent establishments (Ann 38) 36, 185

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# CUMULATIVE BULLETINS

The contents of the weekly Bulletins were consolidated semiannually into permanent, indexed, Cumulative Bulletins through the
2008-2 edition.

# INTERNAL REVENUE BULLETINS ON CD-ROM

Internal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

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would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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Internal Revenue Bulletin 2013-48 (PDF rendition): IRS Announcements

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