Internal Revenue Bulletin 2021-2 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 2021–2
January 11, 2021
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.
ADMINISTRATIVE
T.D. 9940, page 311.
The final regulations describe the procedures used by the IRS
to handle misdirected direct deposits of tax refunds. The pro-
cedures describe the reporting, identification, and recovery
processes used for misdirected direct deposit refunds. The
procedures described in the final regulations may be used by
any taxpayer whose refund was disbursed as a direct deposit
but the taxpayer believes is missing.
EMPLOYEE PLANS
Notice 2021-03, page 316.
This notice provides a 6-month extension of the relief provid-
ed in Notice 2020-42. For the period from January 1, 2021,
through June 30, 2021, this notice extends two types of relief
from the physical presence requirement in § 1.401(a)-21(d)
(6)(i) for participant elections required to be witnessed by a
plan representative or a notary public: (1) temporary relief
from the physical presence requirement for any participant
election witnessed by a notary public in a state that permits
remote notarization (either by law or through an executive
order), and (2) temporary relief from the physical presence
requirement for any participant election witnessed by a plan
representative. This temporary relief is extended in order to
further accommodate local shutdowns and social distancing
practices in response to the Coronavirus Disease 2019 pan-
demic (COVID-19 Emergency). This notice also solicits com-
ments on the relief.
EXCISE TAX
Notice 2021-04, page 319.
Notice 2021-04 provides the final extension of the temporary
dyed fuel relief provided in section 3.02 of Notice 2017-30,
2017-21 I.R.B. 1248. The temporary relief was extended
through December 31, 2018, by section 3 of Notice 2018-
39, 2018-20, I.R.B. 582, then extended through December
31, 2019, by section 3 of Notice 2019-04, 2019-02 I.R.B.
282, and further extended through December 31, 2020, by
section 3 of Notice 2020-04, 2020-04 I.R.B. 380. A claimant
may submit a refund claim for the § 4081(a)(1) tax imposed
on undyed diesel fuel and kerosene for fuel that is (1) re-
moved from a Milwaukee or Madison terminal; (2) entered
into a Green Bay terminal within 24 hours; and (3) subse-
quently dyed and removed from that Green Bay terminal. The
relief provided in this notice takes effect beginning January
1, 2021, and ending December 31, 2021.
REG-130081-19, page 321.
These final rules regarding grandfathered group health plans
and grandfathered group health insurance coverage amend
the current rules to provide greater flexibility for certain
grandfathered health plans to make changes to certain types
of cost-sharing requirements without causing a loss of grand-
father status.
EXEMPT ORGANIZATIONS
Notice 2021-01, page 315.
This notice provides that, while subject to a delay, private
foundations must electronically file Form 4720, Return of
Certain Excise Taxes Under Chapters 41 and 42 of the Inter-
nal Revenue Code, as required by section 3101 of the Tax-
payer First Act of 2019 (Pub. L. No. 116-25) amendments to
section 6033 of the Internal Revenue Code. Private founda-
tions may no longer rely on Treas. Reg. § 53.6011-1(c) as a
result of this electronic filing mandate.
INCOME TAX
Rev. Rul. 2021-01, page 294.
Federal rates; adjusted federal rates; adjusted federal long-
term rate, and the long-term tax exempt rate. For purposes
Finding Lists begin on page ii.

of sections 382, 1274, 1288, 7872 and other sections of
the Code, tables set forth the rates for January 2021.
T.D. 9925, page 296.
These final regulations provide guidance under section
274 of the Internal Revenue Code (Code) regarding cer-
tain amendments made to section 274 by the Tax Cuts and
Jobs Act of 2017 (TCJA). These final regulations address
the elimination of the deduction under section 274 for en-
tertainment expenses paid or incurred in taxable years be-
ginning after December 31, 2017. The final regulations pro-
vide guidance to distinguish entertainment expenses from
meal and beverage expenses and address the application
of certain exceptions under section 274(e) that may allow
such expenses to be deductible. These final regulations
affect taxpayers who pay or incur expenses for meal and
entertainment expenses.
January 11, 2021 2 Bulletin No. 2021–2

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 of-
ficial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying 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,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
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.
January 11, 2021 Bulletin No. 2021–2

January 11, 2021 294 Bulletin No. 2021–2
Part I
Section 1274.—
Determination of Issue
Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7872.)
Rev. Rul. 2021-1
This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 2021 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable feder-
al rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. Howev-
er, under section 42(b)(2), the applicable
percentage for non-federally subsidized
new buildings placed in service after July
30, 2008, shall not be less than 9%. Table
5 contains the federal rate for determining
the present value of an annuity, an interest
for life or for a term of years, or a remain-
der or a reversionary interest for purposes
of section 7520. Finally, Table 6 contains
the deemed rate of return for transfers
made during calendar year 2021 to pooled
income funds described in section 642(c)
(5) that have been in existence for less
than 3 taxable years immediately preced-
ing the taxable year in which the transfer
was made.
REV. RUL. 2021-1 TABLE 1
Applicable Federal Rates (AFR) for January 2021
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR 0.14%0.14%0.14%0.14%
110% AFR 0.15%0.15%0.15%0.15%
120% AFR 0.17%0.17%0.17%0.17%
130% AFR 0.18%0.18%0.18%0.18%
Mid-term
AFR0.52%0.52%0.52%0.52%
110% AFR 0.57%0.57%0.57%0.57%
120% AFR0.62%0.62%0.62%0.62%
130% AFR0.68%0.68%0.68%0.68%
150% AFR0.78%0.78%0.78%0.78%
175% AFR0.91%0.91%0.91%0.91%
Long-term
AFR1.35% 1.35%1.35%1.35%
110% AFR1.50%1.49%1.49%1.49%
120% AFR1.63%1.62%1.62%1.61%
130% AFR1.77%1.76%1.76%1.75%
REV. RUL. 2021-1 TABLE 2
Adjusted AFR for January 2021
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted AFR 0.11% 0.11% 0.11% 0.11%
Mid-term adjusted AFR0.39% 0.39%0.39%0.39%
Long-term adjusted AFR 1.03% 1.03% 1.03%1.03%

REV. RUL. 2021-1 TABLE 3
Rates Under Section 382 for January 2021
Adjusted federal long-term rate for the current month1.03%
Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)
1.03%
REV. RUL. 2021-1 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for January 2021
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.21%
Appropriate percentage for the 30% present value low-income housing credit 3.09%
REV. RUL. 2021-1 TABLE 5
Rate Under Section 7520 for January 2021
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest
.6%
REV. RUL. 2021-1 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 2021
Deemed rate of return for transfers during 2021 to pooled income funds that have been in
existence for less than 3 taxable years
2.2%
Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2021. See Rev. Rul. 2021-1, page 294.
Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2021. See Rev. Rul. 2021-1, page 294.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and
Certain Built-In Losses
Following Ownership
Change
The adjusted applicable federal long-term rate
is set forth for the month of January 2021. See
Rev. Rul. 2021-1, page 294.
Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2021. See Rev. Rul. 2021-1, page 294.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term rates are set
forth for the month of January 2021. See Rev. Rul.
2021-1, page 294.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2021. See Rev. Rul. 2021-1, page 294.

Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2021. See Rev. Rul. 2021-1, page 294.
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
January 2021. See Rev. Rul. 2021-1, page 294.
Section 7520.—Valuation
Tables
The applicable federal mid-term rates are set
forth for the month of January 2021. See Rev. Rul.
2021-1, page 294.
Section 7872.—Treatment
of Loans With Below-
Market Interest Rates
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2021. See Rev. Rul. 2021-1, page 294.

Bulletin No. 2021–2 295 January 11, 2021

January 11, 2021 296 Bulletin No. 2021–2
Announcement Correcting
TD 9925
26 CFR 1.274-11; 26 CFR 1.274-12
T.D. 9925
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Meals and Entertainment
Expenses Under Section
274; Correction
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations; correction.
SUMMARY: This document contains
corrections to the final regulations (Trea-
sury Decision 9925) that published in the
Federal Register on October 9, 2020. The
final regulations provide guidance under
section 274 of the Internal Revenue Code
(Code) regarding certain recent amend-
ments made to that section. Specifically,
the final regulations address the elimina-
tion of the deduction under section 274
for expenditures related to entertainment,
amusement, or recreation activities, and
provide guidance to determine whether an
activity is of a type generally considered
to be entertainment.
DATES: These corrections are effective
on December 18, 2020 and applicable for
taxable years that begin on or after Octo-
ber 9, 2020.
FOR FURTHER INFORMATION CON-
TACT: Patrick Clinton of the Office of the
Associate Chief Counsel (Income Tax and
Accounting), (202) 317–7005 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations (TD 9925) that
are the subject of this correction are issued
under section 274 of the Internal Revenue
Code.
Need for Correction
As published the final regulations (TD
9925) contain errors that need to be cor-
rected.
Correction of Publication
Accordingly, the final regulations (TD
9925), that are the subject of FR Doc.
2020–21990, published on October 9,
2020 (85 FR 64026), are corrected as fol-
lows:
1. On page 64031, third column, the
second line, the language “in Sutherland
Lumber” is corrected to read “in Suther-
land Lumber-Southwest”.
2. On page 64031, third column, the
ninth line of the second full paragraph, the
language “§ 1.274–10(a)(2)(ii)(C)(2)” is
corrected to read “§ 1.274–10(a)(2)(ii)(C)
(2)”.
3. On page 64032, second column, the
second line, the language “or gross in-
come is zero, whether zero is” is correct-
ed to read “or gross income is zero (other
than due to a reimbursement by the recip-
ient), whether zero is”.
4. On page 64032, second column, the
thirteenth line from the top of the page, the
language “(e)(9) do not apply.” is correct-
ed to read “(e)(9) generally do not apply.”.
5. On page 64032, second column, the
thirteenth line from the top of the page,
the language “Similarly, the exceptions
in section 274(e)(2) and (e)(9) do not ap-
ply if” is corrected to read “However, the
exceptions in section 274(e)(2) and (e)
(9) will apply if the recipient reimburs-
es the taxpayer for a portion of the val-
ue of the food or beverages even if the
value exceeding the reimbursed amount
is properly excluded from the recipient’s
compensation and wages or gross in-
come. In this case, however, the taxpayer
must apply the dollar-for-dollar rule as
described in §1.274-12(c)(2)(i)(D). In
cases in which”.
6. On page 64032, second column, the
second and last sentence from the bottom
of the first partial paragraph, remove the
language “. In that case, however,”.
7. On page 64032, third column, the
third line of the second full paragraph, the
language “regulations confirm” is correct-
ed to read “regulations confirmed”.
8. On page 64032, third column, the
twelfth line of the second full paragraph,
the language “demonstrates” is corrected
to read “demonstrated”.
Crystal Pemberton,
Senior Federal Register Liaison,
Publications and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel,
(Procedure and Administration).
(Filed by the Office of the Federal Register on De-
cember 17, 2020, 8:45 a.m., and published in the is-
sue of the Federal Register for December 18, 2020,
85 F.R. 82355)
Section 274. —
Disallowance of Certain
Entertainment, Gift and
Travel Expenses
26 CFR 1.274-1-11, 12: Meals and Entertainment
Expenses.
T.D. 9925
DEPARTMENT OF
TREASURY
Internal Revenue Service
26 CFR Part 1
Meals and Entertainment
Expenses
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final rule.
SUMMARY: This document contains
final regulations that provide guidance
under section 274 of the Internal Reve-
nue Code (Code) regarding certain recent
amendments made to that section. Spe-
cifically, the final regulations address the
elimination of the deduction under section
274 for expenditures related to entertain-
ment, amusement, or recreation activities,
and provide guidance to determine wheth-
er an activity is of a type generally consid-

Bulletin No. 2021–2 297 January 11, 2021
ered to be entertainment. The final regu-
lations also address the limitation on the
deduction of food and beverage expenses
under section 274(k) and (n), including
the applicability of the exceptions under
section 274(e)(2), (3), (4), (7), (8), and (9).
The final regulations affect taxpayers who
pay or incur expenses for meals or enter-
tainment.
DATES: Effective Date: These regulations
are effective on October 9, 2020.
Applicability Date: These regulations ap-
ply for taxable years that begin on or after
October 9, 2020.
FOR FURTHER INFORMATION CON-
TACT: Patrick Clinton of the Office of the
Associate Chief Counsel (Income Tax and
Accounting), (202) 317-7005 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regula-
tions under section 274 of the Code that
amend the Income Tax Regulations (26
CFR part 1). In general, section 274 limits
or disallows deductions for certain meal
and entertainment expenditures that other-
wise would be allowable under chapter 1
of the Code (chapter 1), primarily under
section 162(a), which allows a deduction
for ordinary and necessary expenses paid
or incurred during the taxable year in car-
rying on any trade or business.
On December 22, 2017, section 274
was amended by section 13304 of Public
Law 115-97 (131 Stat. 2054), commonly
referred to as the Tax Cuts and Jobs Act,
(TCJA) to revise the rules for deducting
expenditures for meals and entertainment,
effective for amounts paid or incurred af-
ter December 31, 2017.
On February 26, 2020, the Department
of the Treasury (Treasury Department)
and the IRS published a notice of pro-
posed rulemaking (REG-100814-19) in
the Federal Register (85 FR 11020) con-
taining proposed regulations under section
274 to implement certain of the TCJA’s
amendments to section 274 (proposed reg-
ulations). The proposed regulations would
update existing regulations in §1.274-2
by adding a new section at §1.274-11 for
entertainment expenditures. The proposed
regulations would also add a new section
at §1.274-12 to address the limitations on
food or beverage expenses under section
274(k) and (n), including the application
of the exceptions in section 274(e)(2), (3),
(4), (7), (8), and (9). Pending the issuance
of these final regulations, taxpayers were
permitted to rely upon the proposed reg-
ulations for entertainment and food or
beverage expenses, as applicable, paid or
incurred after December 31, 2017.
The Treasury Department and the IRS
did not receive any requests to speak at
a public hearing on the proposed regu-
lations. Therefore, the scheduled public
hearing was cancelled. The Treasury De-
partment and the IRS received 14 written
and electronic comments in response to
the proposed regulations. All comments
were considered and are available at
https://www.regulations.gov or upon re-
quest. The comments addressing the pro-
posed regulations are summarized in the
Summary of Comments and Explanation
of Revisions section. However, comments
recommending statutory revisions or ad-
dressing issues outside the scope of these
final regulations are not discussed in this
preamble. After full consideration of the
comments, this Treasury decision adopts
the proposed regulations with modifica-
tions in response to certain comments, as
described in the Summary of Comments
and Explanation of Revisions section.
1. Business Meals and Entertainment
Section 274(a)(1)(A) generally dis-
allows a deduction for any item with re-
spect to an activity of a type considered to
constitute entertainment, amusement, or
recreation (entertainment expenditures).
However, prior to the amendment by the
TCJA, section 274(a)(1)(A) provided ex-
ceptions to that disallowance if the tax-
payer established that: (1) the item was
directly related to the active conduct of
the taxpayer’s trade or business (directly
related exception); or (2) in the case of
an item directly preceding or following
a substantial and bona fide business dis-
cussion (including business meetings at
a convention or otherwise), the item was
associated with the active conduct of the
taxpayer’s trade or business (business
discussion exception). Section 274(e)(1)
through (9) also provide exceptions to
the rule in section 274(a) that disallows a
deduction for entertainment expenditures.
The TCJA did not change the application
of the section 274(e) exceptions to enter-
tainment expenditures.
Section 274(a)(1)(B) disallows a de-
duction for any item with respect to a fa-
cility used in connection with an activity
referred to in section 274(a)(1)(A). Sec-
tion 274(a)(2) provides that, for purposes
of applying section 274(a)(1), dues or fees
to any social, athletic, or sporting club or
organization shall be treated as items with
respect to facilities. Section 274(a)(3) dis-
allows a deduction for amounts paid or
incurred for membership in any club orga-
nized for business, pleasure, recreation, or
other social purpose.
Prior to amendment by the TCJA, sec-
tion 274(n)(1) generally limited the de-
duction of food or beverage expenses and
entertainment expenditures to 50 percent
of the amount that otherwise would have
been allowable. Thus, under prior law,
taxpayers could deduct 50 percent of meal
expenses, and 50 percent of entertainment
expenditures that met the directly related
or business discussion exception. Distin-
guishing between meal expenses and en-
tertainment expenditures was unnecessary
for purposes of the 50 percent limitation.
Section 13304(a)(1) of the TCJA re-
pealed the directly related and business
discussion exceptions to the general prohi-
bition on deducting entertainment expen-
ditures in section 274(a)(1)(A). Also, sec-
tion 13304(a)(2)(D) of the TCJA amended
the 50 percent limitation in section 274(n)
(1) to remove the reference to entertain-
ment expenditures. Thus, entertainment
expenditures are no longer deductible un-
less one of the nine exceptions to section
274(a) in section 274(e) applies.
While the TCJA eliminated the deduc-
tion for entertainment expenses, Congress
did not amend the provisions relating to
the deductibility of business meals. Thus,
taxpayers generally may continue to de-
duct 50 percent of the food and bever-
age expenses associated with operating
their trade or business, including meals
consumed by employees on work trav-
el. See H.R. Rep. No. 115-466, at 407
(2017) (Conf. Rep.). However, as before
the TCJA, no deduction is allowed for the

January 11, 2021 298 Bulletin No. 2021–2
expense of any food or beverages unless
(a) the expense is not lavish or extrava-
gant under the circumstances, and (b) the
taxpayer (or an employee of the taxpayer)
is present at the furnishing of the food or
beverages. See section 274(k).
Prior to amendment by the TCJA,
section 274(d) provided substantiation
requirements for deductions under sec-
tion 162 or 212 for any traveling expense
(including meals and lodging while away
from home), and for any item with respect
to an activity of a type considered to con-
stitute entertainment, amusement, or rec-
reation or with respect to a facility used
in connection with such activity. Section
13304(a)(2)(A) of the TCJA repealed the
substantiation requirements for entertain-
ment expenditures. Traveling expenses
(including meals and lodging while away
from home), however, remain subject to
the section 274(d) substantiation require-
ments. Food and beverage expenses are
subject to the substantiation requirements
under section 162 and the requirement to
maintain books and records under section
6001.
On October 15, 2018, the Treasury De-
partment and the IRS published Notice
2018-76, 2018-42 I.R.B. 599, providing
transitional guidance on the deductibility
of expenses for certain business meals and
requesting comments for future guidance
to further clarify the treatment of business
meal expenses and entertainment expen-
ditures under section 274. Under the no-
tice, taxpayers may deduct 50 percent of
an otherwise allowable business meal ex-
pense if: (1) the expense is an ordinary and
necessary expense under section 162(a)
paid or incurred during the taxable year
in carrying on any trade or business; (2)
the expense is not lavish or extravagant
under the circumstances; (3) the taxpayer,
or an employee of the taxpayer, is present
at the furnishing of the food or beverages;
(4) the food and beverages are provided
to a current or potential business custom-
er, client, consultant, or similar business
contact; and (5) in the case of food and
beverages provided at or during an enter-
tainment activity, the food and beverages
are purchased separately from the enter-
tainment, or the cost of the food and bev-
erages is stated separately from the cost
of the entertainment on one or more bills,
invoices, or receipts. The notice provides
that the entertainment disallowance rule
may not be circumvented through inflat-
ing the amount charged for food and bev-
erages.
2. Travel Meals
Section 274(n)(1) generally limits the
deduction of food or beverage expenses,
including expenses for food or beverag-
es consumed while away from home, to
50 percent of the amount that otherwise
would have been allowable, unless one
of the six exceptions to section 274(n) in
section 274(e) applies. However, no de-
duction is allowed for the expense of any
food or beverages unless: (1) the expense
is not lavish or extravagant under the cir-
cumstances; and (2) the taxpayer (or an
employee of the taxpayer) is present at the
furnishing of the food or beverages. See
section 274(k). Section 274(d) provides
substantiation requirements for traveling
expenses, including food and beverage ex-
penses incurred while on business travel
away from home.
Section 274(m) provides additional
limitations on travel expenses, includ-
ing expenses for meals consumed while
away from home. Section 274(m)(1) gen-
erally limits the deduction for luxury wa-
ter transportation expenses to twice the
highest federal per diem rate allowable
at the time of travel, and section 274(m)
(2) generally disallows a deduction for
expenses for travel as a form of educa-
tion. Section 274(m)(3) provides that
no deduction is allowed under chapter
1 (other than section 217) for travel ex-
penses paid or incurred with respect to
a spouse, dependent, or other individual
accompanying the taxpayer (or an officer
or employee of the taxpayer) on business
travel, unless: (1) the spouse, dependent,
or other individual is an employee of the
taxpayer; (2) the travel of the spouse,
dependent, or other individual is for a
bona fide business purpose; and (3) such
expenses would otherwise be deductible
by the spouse, dependent, or other indi-
vidual.
3. Employer-Provided Meals
Prior to amendment by the TCJA,
section 274(n)(1) generally limited the
deduction for food or beverage expenses
to 50 percent of the amount that other-
wise would have been allowable, sub-
ject to an exception in section 274(n)(2)
(B) in the case of an expense for food
or beverages that is excludable from
the gross income of the recipient under
section 132 by reason of section 132(e),
relating to de minimis fringes. Section
132(e)(1) defines “de minimis fringe”
as any property or service the value of
which is, after taking into account the
frequency with which similar fringes are
provided by the employer to its employ-
ees, so small as to make accounting for
it unreasonable or administratively im-
practicable. Section 132(e)(2) provides
that the operation by an employer of any
eating facility for employees is treated as
a de minimis fringe if (1) the facility is
located on or near the business premises
of the employer, and (2) revenue derived
from the facility normally equals or ex-
ceeds the direct operating costs of the fa-
cility. Thus, under prior law, employers
generally were allowed to fully deduct
an expense for food or beverages provid-
ed to their employees if the amount was
excludable from the gross income of the
employee as a de minimis fringe. How-
ever, the TCJA repealed section 274(n)
(2)(B), meaning that expenses for food
or beverages that are de minimis fringes
under section 132(e) are no longer ex-
cepted from section 274(n)(1). As a re-
sult, these expenses, like other food or
beverage expenses generally, are subject
to the 50 percent limitation unless one of
the six exceptions to section 274(n) in
section 274(e) applies.
The TCJA also added section 274(o)
that, effective for amounts paid or in-
curred after December 31, 2025, disal-
lows a deduction for (1) any expense for
the operation of an employer-operated
facility described in section 132(e)(2),
and any expense for food or beverages,
including under section 132(e)(1), asso-
ciated with such facility, or (2) any ex-
pense for meals provided to an employee
for the convenience of the employer, as
described in section 119(a). Thus, be-
ginning with amounts paid or incurred
in 2026, expenses for food or beverages
provided to employees, as well as ex-
penses for the operation of certain eat-
ing facilities for employees, will be fully
nondeductible.

Bulletin No. 2021–2 299 January 11, 2021
4. Section 274(e) Exceptions to Section
274(k) and (n)
Section 274(k)(2)(A) and (n)(2)(A)
provide that the limitations on the de-
duction of food or beverage expenses in
section 274(k)(1) and (n)(1), respectively,
do not apply if the expense is described
in paragraph (2), (3), (4), (7), (8), or (9)
of section 274(e). Expenses described
in paragraph (1), (5), and (6) of section
274(e) are not exceptions to the limita-
tions on the deduction of food or beverage
expenses in section 274(k)(1) and (n)(1).
However, they are exceptions to the disal-
lowance of the deduction of entertainment
expenses in section 274(a).
Section 274(e)(2) applies to expens-
es for goods, services, and facilities to
the extent that the expenses are treated
as compensation to the recipient. Section
274(e)(3) applies to expenses incurred
by a taxpayer in connection with the per-
formance of services for an employer or
other person under a reimbursement or
other expense allowance arrangement.
Section 274(e)(4) applies to expenses for
recreational, social, or similar activities
for employees. Section 274(e)(7) applies
to expenses for goods, services, and facil-
ities made available to the general public.
Section 274(e)(8) applies to expenses for
goods or services that are sold by the tax-
payer in a bona fide transaction for an ad-
equate and full consideration in money or
money’s worth. Section 274(e)(9) applies
to expenses for goods, services, and fa-
cilities to the extent that the expenses are
treated as income to a person other than
an employee.
Summary of Comments and
Explanation of Revisions
1. Entertainment Expenditures
The final regulations restate the statu-
tory rules under section 274(a), at §1.274-
11(a), including the application of the en-
tertainment deduction disallowance rule
to dues or fees to any social, athletic, or
sporting club or organization. The existing
definition of entertainment in §1.274-2(b)
(1), with minor modifications to remove
outdated language, is incorporated into
the final regulations, at §1.274-11(b)(1).
The final regulations provide that for pur-
poses of section 274(a), the term “enter-
tainment” does not include food or bev-
erages unless the food or beverages are
provided at or during an entertainment
activity and the costs of the food or bev-
erages are not separately stated from the
entertainment costs. The final regulations
do not affect the application of the special
rules in §1.274-10 to expenses related to
aircraft used for entertainment.
A. Section 274(e) Exceptions to Section
274(a)
The final regulations, at § 1.274-11(c),
confirm the continued application of the
nine exceptions in section 274(e) to en-
tertainment expenditures otherwise disal-
lowed by section 274(a). The application
of section 274(e) to food or beverage
expenses is discussed in part 2.E. of this
Summary of Comments and Explanation
of Revisions section, which discusses the
exceptions under section 274(e) to section
274(k) and (n).
A commenter on the proposed regula-
tions requested that the Treasury Depart-
ment and the IRS clarify that for purposes
of the section 274(e)(8) exception to the
entertainment deduction limitations in
section 274(a) for goods or services sold
by the taxpayer, the goods or services may
be sold to an employee of the taxpayer in
a bona fide transaction for an adequate
and full consideration in money or mon-
ey’s worth. The Treasury Department and
the IRS decline to adopt this suggestion
because the section 274(e)(8) exception
to the entertainment disallowance is out-
side the scope of these regulations. The
proposed regulations and these final reg-
ulations were initiated in response to the
changes made to section 274 by the TCJA
and generally are limited to addressing
those changes. In particular, with regard
to entertainment expenditures, the final
regulations under §1.274-11 primarily
distinguish between meals and entertain-
ment, as that distinction is now relevant,
for purposes of determining whether the
deduction of a particular expense is disal-
lowed entirely or is limited to 50 percent.
However, the TCJA did not change the
application of the section 274(e) excep-
tions to entertainment expenditures. Thus,
other than confirming that the section
274(e) exceptions continue to apply to
entertainment expenditures, the final reg-
ulations do not provide rules addressing
how the section 274(e) exceptions apply
to entertainment expenditures. Taxpayers
may, however, continue to rely upon the
existing rules and examples in §1.274-2 to
the extent they are not superseded by the
TCJA or other legislation and are not in-
consistent with the final regulations.
B. Separately Stated Food or Beverages
not Entertainment
The final regulations substantially in-
corporate the guidance in Notice 2018-76
to distinguish between entertainment ex-
penditures and food or beverage expenses
in the context of business meals provided
at or during an entertainment activity. In
addition, the final regulations general-
ly apply the guidance in Notice 2018-76
to all food or beverages, including trav-
el meals and employer-provided meals,
provided at or during an entertainment
activity. The final regulations also clarify
the rules applicable to food or beverages
provided at or during an entertainment ac-
tivity.
Notice 2018-76 explains that in the
case of food and beverages provided at
or during an entertainment activity, the
taxpayer may deduct 50 percent of an oth-
erwise allowable business expense if the
food and beverages are purchased sepa-
rately from the entertainment, or if the cost
of the food and beverages is stated sepa-
rately from the cost of the entertainment
on one or more bills, invoices, or receipts.
The notice provides that the entertainment
disallowance rule may not be circumvent-
ed through inflating the amount charged
for food and beverages. The final regula-
tions clarify this requirement by providing
that the amount charged for food or bev-
erages on a bill, invoice, or receipt must
reflect the venue’s usual selling cost for
those items if they were to be purchased
separately from the entertainment, or must
approximate the reasonable value of those
items.
The final regulations provide that in
cases where the food or beverages pro-
vided at or during an entertainment activ-
ity are not purchased separately from the
entertainment, and where the cost of the
food or beverages is not stated separate-
ly from the cost of the entertainment on

January 11, 2021 300 Bulletin No. 2021–2
one or more bills, invoices, or receipts,
no allocation can be made and the entire
amount is a nondeductible entertainment
expenditure. Finally, in accordance with
the TCJA’s amendments to section 274(a)
(1) specifically repealing the “directly
related” and “business discussion” ex-
ceptions to the general disallowance rule
for entertainment expenditures, the final
regulations clarify that the entertainment
disallowance rule applies whether or not
the expenditure for the activity is related
to or associated with the active conduct of
the taxpayer’s trade or business.
A commenter suggested that the final
regulations provide that the consumption
of food and beverages is not entertainment
in the case of both business and nonbusi-
ness activities and include an example of
a specified individual consuming food
and beverages while traveling on an em-
ployer-provided aircraft to visit family
members for nonbusiness purposes. The
specific question presented in this com-
ment relates to whether air travel is an
entertainment activity and is addressed in
the existing rules in §1.274-10. Therefore,
this question is not addressed in the final
regulations. In addition, §1.274-11(b)(1)
(ii) provides that the term entertainment
does not include food or beverages unless
the food or beverages are provided at or
during an entertainment activity and are
not purchased separately from the enter-
tainment.
2. Food or Beverage Expenses
A. Business Meal Expenses
The final regulations substantially in-
corporate the guidance in Notice 2018-76
addressing business meals provided at or
during an entertainment activity. The final
regulations also incorporate other statu-
tory requirements taxpayers must meet
to deduct 50 percent of an otherwise al-
lowable food or beverage expense. Specif-
ically, the expense must not be lavish or
extravagant under the circumstances, and
the taxpayer, or an employee of the tax-
payer, must be present at the furnishing of
the food or beverages.
The final regulations also address the
general requirement in Notice 2018-76
that the food and beverages be provided to
a business contact, which was described in
the notice as a “current or potential busi-
ness customer, client, consultant, or sim-
ilar business contact.” This requirement
is to ensure that the meal expenses are di-
rectly connected with or pertaining to the
taxpayer’s trade or business, as required
under section 162. One commenter on
Notice 2018-76 requested a definition of
“potential business contact,” suggesting
that the term could be interpreted broad-
ly to include almost anyone. In response
to the comment, and to conform the rule
more closely to the trade or business re-
quirement in section 162, the proposed
regulations follow the definition of “busi-
ness associate” as currently provided in
§1.274-2(b)(2)(iii). The final regulations
adopt this definition of “business associ-
ate” in §1.274-12(b)(3). Thus, the final
regulations provide that the food or bev-
erages must be provided to a “person with
whom the taxpayer could reasonably ex-
pect to engage or deal in the active conduct
of the taxpayer’s trade or business such as
the taxpayer’s customer, client, supplier,
employee, agent, partner, or professional
adviser, whether established or prospec-
tive.” Accordingly, the final regulations
apply this definition to employer-provided
food or beverage expenses by considering
employees as a type of business associate
as well as to the deduction for expenses
for meals provided by a taxpayer to both
employees and non-employee business as-
sociates at the same event.
A commenter on the proposed regula-
tions asked whether the Treasury Depart-
ment and the IRS have legal authority to
allow taxpayers to claim deductions for
business meal expenses that have been
considered part of entertainment since the
enactment of section 274. The comment-
er acknowledged that the legislative his-
tory of the TCJA provides that taxpayers
may still generally deduct 50 percent of
the food and beverage expenses associat-
ed with operating their trade or business
(e.g., meals consumed by employees on
work travel). H.R. Rep No. 115-466 at
407. However, the commenter argued that
the legislative history merely recognizes
that travel meals remain 50 percent de-
ductible. The commenter further argued
that the term “entertainment” clearly en-
compasses many business meals and that
the proposed regulations unsettle the long-
standing position that expenditures for the
personal enjoyment of an individual fall
within the ordinary meaning of “entertain-
ment.”
The Treasury Department and the IRS
believe that Congress, in amending sec-
tion 274 in the TCJA, intended that ex-
penses for business meals be considered
food or beverage expenses associated with
operating a taxpayer’s trade or business,
and therefore generally remain 50 percent
deductible. The Treasury Department and
the IRS acknowledge that, prior to the
TCJA, some meals were considered to
be entertainment. However, prior to the
TCJA, neither section 274 nor the regu-
lations under section 274 attempted to de-
fine meal expenses or to distinguish meal
expenses from entertainment expenses. In
considering the comment, the Treasury
Department and the IRS believe that the
proposed regulations are consistent with
the plain reading of section 274 after the
TCJA, which clearly contemplates dif-
ferent treatment for meal expenses and
entertainment expenses. In addition, the
existing regulatory definition of enter-
tainment relies upon an objective test to
determine whether an activity is of a type
generally considered to constitute enter-
tainment. Providing that business meals
are not of a type generally considered to
constitute entertainment results in an ad-
ministrable rule that does not depend on
subjective factors such as whether the tax-
payer enjoys the business meal. Thus, the
final regulations adopt the proposed rule
providing that business meals generally
remain 50 percent deductible. The Trea-
sury Department and the IRS believe that
the final regulations provide a rule that is
legally supportable and that draws a clear
line between meals and entertainment that
taxpayers can understand and the IRS can
administer.
One commenter also asked whether
the proposed regulations were intended
to provide new guidance under section
162(a), specifically as to the definition of
“ordinary and necessary expense.” The
proposed regulations provide guidance
only under section 274 and are not in-
tended to provide guidance under section
162. In response to the comment, the final
regulations modify Examples 1 and 2 in
proposed §1.274-12(a)(3) by removing
any mention of a discussion that takes
place during lunch because the facts al-

Bulletin No. 2021–2 301 January 11, 2021
ready explain that in each example, the
food or beverage expenses are assumed
to be ordinary and necessary expenses
under section 162(a). In addition, the fi-
nal regulations clarify, as necessary, in the
introductory language to the examples in
§1.274-11 and §1.274-12 that the exam-
ples assume that the underlying expenses
are deductible under section 162.
Two commenters requested that the
final regulations add an example address-
ing the treatment of expenses for food
and beverages provided to attendees at
a business meeting, such as a conference
for clients or a training seminar for em-
ployees. In response to these comments,
the final regulations add two new exam-
ples to §1.274-12(a)(3) to address these
scenarios.
A commenter also asked whether under
proposed §1.274-12(a), a taxpayer may
claim a 50 percent deduction for food or
beverages provided to the taxpayer (or an
employee of the taxpayer), as well as food
or beverages provided to a business asso-
ciate. The commenter noted that proposed
§1.274-12(a)(1) refers to “food or bever-
ages provided to a business associate,”
raising a question about whether the rule
applies to food or beverages provided to
the taxpayer or the taxpayer’s employees.
In addition, §1.274-12(a)(1) of the pro-
posed regulations refers to food or bever-
ages provided “to another person or per-
sons.” It was intended that the 50 percent
deduction applies to food and beverages
provided to the taxpayer (or an employee
of the taxpayer), as well as a business as-
sociate or another person. In response to
the comment, the final regulations revise
§1.274-12(a)(1) to remove the reference
to food or beverages being provided “to
another person or persons.” In addition, as
discussed in part 2.A. of this Summary of
Comments and Explanation of Revisions,
the final regulations include employees in
the definition of “business associate” (as
defined in §1.274-12(b)(3)). Finally, to
make clear that the rules in §1.274-12(a)
(1) also apply to food or beverages provid-
ed to a taxpayer such as a sole proprietor
or other business owner, the final regula-
tions revise §1.274-12(a)(1)(iii) to refer
to food or beverages provided “to the tax-
payer or a business associate.”
One commenter asked whether a sole
proprietor can deduct the cost of meals
when working throughout the day. As ex-
plained in the Background section of this
preamble, section 274 limits or disallows
deductions for certain meal and entertain-
ment expenditures that otherwise would
be allowable under chapter 1, primarily
under section 162(a), which allows a de-
duction for ordinary and necessary ex-
penses paid or incurred during the taxable
year in carrying on any trade or business.
The requirements imposed by section 274
are in addition to the requirements for de-
ductibility imposed by other provisions of
the Code. If a taxpayer intends to claim
a deduction for an expenditure for meals
or entertainment, the taxpayer must first
establish that the expenditure is otherwise
allowable as a deduction under chapter 1
before the provisions of section 274 be-
come applicable. Therefore, the sole pro-
prietor must first establish that the food
or beverage expense is deductible under
chapter 1 before section 274 would apply.
For example, if the sole proprietor can es-
tablish that the food or beverage expenses
are ordinary and necessary expenses un-
der section 162(a) that are paid or incurred
during the taxable year in carrying on a
trade or business, the sole proprietor may
deduct 50 percent of the food or beverage
expenses under section 274(k) and (n) and
§1.274-12(a) of the final regulations if: (1)
the expenses are not lavish or extravagant;
(2) the sole proprietor, or an employee of
the sole proprietor, is present at the fur-
nishing of the food or beverages; and (3)
the food or beverages are provided to the
sole proprietor or a business associate (as
defined in §1.274-12(b)(3)).
B. Travel Meal Expenses
Although the TCJA did not specifically
amend the rules for travel expenses, the
final regulations are intended to provide
comprehensive rules for food and bev-
erage expenses and thus, apply the gen-
eral rules for meal expenses from Notice
2018-76 and the proposed regulations, to
travel meals. In addition, the final regu-
lations incorporate the substantiation re-
quirements in section 274(d), unchanged
by the TCJA, to travel meals. Finally, the
final regulations apply the limitations in
section 274(m)(3) to expenses for food or
beverages paid or incurred while on travel
for spouses, dependents or other individ-
uals accompanying the taxpayer (or an
officer or employee of the taxpayer) on
business travel. These limitations do not
apply to deductions for moving expenses
under section 217. However, the TCJA
amended section 217 to suspend the de-
duction for moving expenses for taxable
years beginning after December 31, 2017,
and before January 1, 2026, except with
respect to certain members of the Armed
Forces. Thus, the final regulations revise
the reference to section 217 to reflect that
amendment.
One commenter asked how the pro-
posed regulations affect employees that
are paid a per diem rate for travel expens-
es and are subject to the hours of service
limitations of the Department of Transpor-
tation. The proposed regulations describe
and clarify the statutory requirements of
section 274(a), 274(k), and 274(n) for en-
tertainment and food or beverage expens-
es, as well as the applicability of certain
exceptions under section 274(e) to food
or beverage expenses. The TCJA did not
change the rules for using a per diem rate
to substantiate, under section 274(d), the
amount of ordinary and necessary busi-
ness expenses paid or incurred while trav-
eling away from home. Thus, neither the
proposed regulations nor the final regula-
tions address the substantiation rules.
C. Other Food or Beverage Expenses
The final regulations apply the busi-
ness meal guidance in Notice 2018-76,
as revised in the proposed regulations,
to food or beverage expenses generally.
Under section 274(n)(1), the deduction
for food or beverage expenses general-
ly is limited to 50 percent of the amount
that would otherwise be allowable. Prior
to the TCJA, under section 274(n)(2)(B),
expenses for food or beverages that were
excludable from employee income as
de minimis fringe benefits under section
132(e) were not subject to the 50 per-
cent deduction limitation under section
274(n)(1) and could be fully deducted.
The TCJA repealed section 274(n)(2)(B)
so that expenses for food or beverages
excludable from employee income under
section 132(e) are subject to the section
274(n)(1) deduction limitation unless an-
other exception under section 274(n)(2)
applies.

January 11, 2021 302 Bulletin No. 2021–2
Under section 274(k)(1), in order for
food or beverage expenses to be deduct-
ible the food or beverages must not be
lavish or extravagant under the circum-
stances and the taxpayer or an employee
of the taxpayer must be present at the fur-
nishing of the food or beverages. Howev-
er, as discussed in the Background section
of this preamble, section 274(e) provides
six exceptions to the limitations on the
deduction of food or beverages in section
274(k)(1) and (n)(1). The final regulations
explain how those exceptions apply. The
Background section of this preamble also
explains that the exceptions in section
274(e)(1), (e)(5), and (e)(6) do not apply
to food or beverages expenses. Section
1.274-12(a)(3) of the final regulations
adds an example illustrating that the ex-
ception in section 274(e)(5) does not ap-
ply to food or beverage expenses that are
directly related to business meetings of a
taxpayer’s employees.
In response to comments that the
Treasury Department and the IRS re-
ceived after enactment of the TCJA, the
final regulations address several scenar-
ios involving the deductibility of food
or beverage expenses. For example,
commenters requested guidance on the
deductibility of expenses for: (1) food
or beverages provided to food service
workers who consume the food or bev-
erages while working in a restaurant or
catering business; (2) snacks available
to employees in a pantry, break room, or
copy room; (3) refreshments provided
by a real estate agent at an open house;
(4) food or beverages provided by a sea-
sonal camp to camp counselors; (5) food
or beverages provided to employees at a
company cafeteria; and (6) food or bev-
erages provided at company holiday par-
ties and picnics.
D. Definitions
The final regulations provide that the
deduction limitation rules generally apply
to all food and beverages, whether charac-
terized as meals, snacks, or other types of
food or beverage items. In addition, unless
one of six exceptions under section 274(e)
applies, the deduction limitations apply
regardless of whether the food or beverag-
es are treated as de minimis fringe benefits
under section 132(e).
The final regulations define food or
beverage expenses to mean the cost of
food or beverages, including any deliv-
ery fees, tips, and sales tax. In the case
of employer-provided meals at an eating
facility, food or beverage expense do not
include expenses for the operation of the
eating facility such as salaries of employ-
ees preparing and serving meals and other
overhead costs.
A commenter requested clarification
that the cost of transportation to a meal is
not included in food or beverage expens-
es. The Treasury Department and the IRS
considered this comment and note that
food or beverage expenses under §1.274-
12(b)(2) of the final regulations means the
full cost of food or beverages, including
any delivery fees, tips, and sales tax. Indi-
rect expenses, including the cost of trans-
portation to a meal, are not included in the
definition.
E. Section 274(e) Exceptions to Section
274(k) and (n)
Section 274(k)(2)(A) and (n)(2)(A)
provide that the limitations on deductions
in section 274(k)(1) and (n)(1), respec-
tively, do not apply to any expense de-
scribed in section 274(e)(2), (3), (4), (7),
(8), and (9). Section 1.274-12(c) of the
final regulations, therefore, provides that
the deduction limitations are not appli-
cable to expenditures for business meals,
travel meals, or other food or beverages
that fall within one of these exceptions.
i. Expenses Treated as Compensation
under Section 274(e)(2) or (e)(9)
Pursuant to section 274(e)(2), the final
regulations provide that the limitations in
section 274(k)(1) and (n)(1) do not apply
to expenditures for food or beverages pro-
vided to an employee of the taxpayer to
the extent the taxpayer treats the expenses
as compensation to the employee on the
taxpayer’s income tax return as original-
ly filed, and as wages to the employee for
purposes of withholding under chapter 24
of the Code, relating to collection of in-
come tax at source on wages.
Pursuant to section 274(e)(9), the final
regulations provide that the limitations in
section 274(k)(1) and (n)(1) do not apply
to expenses for food or beverages provid-
ed to a person who is not an employee of
the taxpayer to the extent the expenses are
includible in the gross income of the re-
cipient of the food or beverages as com-
pensation for services rendered or as a
prize or award under section 74.
The exceptions in section 274(e)(2) re-
lated to employees and in section 274(e)
(9) related to non-employees have been
interpreted as allowing a taxpayer to de-
duct the full amount of an expense if the
expense has properly been included in
the compensation and wages of the em-
ployee, or gross income of the recipient,
even if the amount of the expense exceeds
the amount included in compensation or
income. See Sutherland Lumber–South-
west Inc. v. Commissioner, 114 T.C. 197
(2000), affd., 255 F.3d 495 (8th Cir. 2001),
acq., AOD 2002-02 (February 11, 2002).
In 2004, Congress reversed the result in
the Sutherland Lumber-Southwest case by
enacting section 274(e)(2)(B) with regard
to specified individuals. Thus, with regard
to employees or non-employees who are
specified individuals, section 274(e)(2)
(B) provides an exception to the section
274(n) limitation only “to the extent that
the expenses do not exceed the amount of
the expenses which” are treated as com-
pensation and wages to the employee or as
income to a non-employee. This method-
ology is also referred to in this preamble
as the “dollar-for-dollar” methodology.
The Treasury Department and the
IRS are aware that some taxpayers may
attempt to claim a full deduction under
section 274(e)(2) or (e)(9) by including a
value that is less than the amount required
to be included under §1.61-21, which pro-
vides the rules for valuation of fringe ben-
efits, or by purportedly including a value
of zero, as compensation and wages to
the employee, or as includible in gross in-
come by a person who is not an employee
of the taxpayer. As a result, the proposed
regulations provide that expenses for food
or beverages for which the taxpayer cal-
culates a value that is less than the amount
required to be included in gross income
under §1.61-21, or for which the amount
required to be included in gross income
is zero, will not be considered as hav-
ing been treated as compensation and as
wages to the employee, or as includible in
gross income by a recipient of the food or
beverages who is not an employee of the

Bulletin No. 2021–2 303 January 11, 2021
taxpayer, for purposes of section 274(e)
(2) and (e)(9).
Commenters argued that the proposed
rule disallowing the application of section
274(e)(2) and (e)(9) to expenses for which
an improper amount is included in com-
pensation and wages or in gross income,
as applicable, is unduly harsh given the
difficulty in determining the value of food
or beverages under §1.61-21 and the pos-
sibility of good faith errors. In addition, a
commenter noted that neither the “to the
extent that” language in section 274(e)(2)
(A) nor the holding in Sutherland Lum-
ber-Southwest support applying an “all or
nothing” rule against the taxpayer.
The Treasury Department and the IRS
agree that the “all or nothing” rule in-
cluded in the proposed regulations may
lead to unduly harsh results. Therefore,
in response to these comments, the Trea-
sury Department and the IRS revised the
rules in proposed §1.274-12(c)(2)(i) to
allow a taxpayer to apply section 274(e)
(2) and (e)(9), as applicable, in cases
where the taxpayer includes an improp-
er amount in compensation and wages,
or gross income, of the recipient. How-
ever, if a taxpayer includes less than the
proper amount in compensation and wag-
es or gross income, the final regulations
provide that the taxpayer must apply the
dollar-for-dollar methodology that applies
in the case of a specified individual. Un-
der that dollar-for-dollar methodology, the
taxpayer may deduct meal expenses to the
extent that the expenses do not exceed the
amount of the expenses that are treated
as compensation and wages, or gross in-
come, as applicable.
The Treasury Department and the IRS
believe the rules provided in the final reg-
ulations avoid the unduly harsh result that
could arise by prohibiting application of
section 274(e)(2) or (e)(9) in cases where
the taxpayer includes some, but not all, of
the value of a food or beverage expense
in the recipient’s income. In addition, the
rules maintain consistency with the IRS’s
acquiescence in Sutherland Lumber,
which provides that the IRS will no longer
litigate application of section 274(e)(2) in
cases in which a taxpayer demonstrates
that it has “properly” included in com-
pensation and wages the value of an em-
ployee vacation flight in accordance with
§1.61-21(g). See AOD-2002-02. The rules
are also consistent with §1.274-10(a)(2)
(ii)(A), which applies the section 274(e)
(2) exception to entertainment air travel
and provides that a taxpayer must “prop-
erly” treat expenses as compensation and
wages to an employee and treat the proper
amount as compensation under §1.61-21.
For administrability, a commenter sug-
gested that the rule apply to the amounts
included on the employee’s Form W-2 or
other recipient’s Form 1099-MISC instead
of amounts reported as compensation on
the service provider’s return. The lan-
guage in the proposed regulations refers
to the treatment of the amount on the “tax-
payer’s income tax return as originally
filed,” meaning the tax return of the em-
ployer, not the employee or service pro-
vider. However, to further clarify the rule,
§1.274-12(c)(2)(i)(A) of the final regula-
tions no longer references the treatment of
the amount on the taxpayer’s income tax
return, but instead refers to the treatment
of the expense as compensation and wag-
es, consistent with the language in §1.274-
10(a)(2)(ii)(A).
A commenter suggested the final reg-
ulations address the effect of reimburse-
ments by employees, specified individ-
uals, or other recipients of the food or
beverages on the amount excepted from
the limitations under section 274(k)(1)
and (n)(1) by section 274(e)(2) and (e)(9).
The commenter explained that §1.274-
10(a)(2)(ii)(C)(2) treats reimbursements
in the same manner as compensation and
wages for specified individuals, and a sim-
ilar rule should be provided for reimburse-
ments from non-specified individuals. The
commenter pointed out that without a sim-
ilar rule, expenses for food or beverages
provided to specified individuals may be
accorded more favorable treatment than
expenses provided to non-specified indi-
viduals. The Treasury Department and the
IRS agree that in cases in which expen-
ditures for food and beverages are reim-
bursed to the taxpayer, similar treatment
should be provided under section 274, re-
gardless of whether the food or beverages
are provided to a specified or non-speci-
fied individual.
With regard to non-specified individ-
uals, the final regulations provide that a
taxpayer may deduct its food or bever-
age expenses under the exception in sec-
tion 274(e)(2)(A) or section 274(e)(9) if
the taxpayer includes the proper amount
in compensation and wages, or gross in-
come, as applicable. Section 1.61-21(b)
(1) provides rules for the valuation of
fringe benefits and requires that an em-
ployee must include in gross income the
amount by which the fair market value of
the fringe benefit exceeds the sum of the
amount paid for the benefit by or on behalf
of the recipient and the amount, if any,
specifically excluded from gross income
under the Code. Thus, in the case of reim-
bursements by a recipient, the amount of
the reimbursement is taken into account in
determining the amount properly includi-
ble in the recipient’s income and does not
affect the taxpayer’s ability to use the ex-
ception in section 274(e)(2)(A) or section
274(e)(9).
With regard to improper inclusions in
compensation and wages or gross income,
the final regulations provide that the tax-
payer must apply the dollar-for-dollar
methodology as described in §1.274-12(c)
(2)(i)(D). Under that rule, food and bever-
age expenses are deductible to the extent
that the expenses do not exceed the sum of
the amount of the expenses that are treat-
ed as compensation and wages or gross in-
come, and any amount the recipient reim-
burses the taxpayer. This dollar-for-dollar
rule is the same methodology that applies
under section 274(e)(2)(B) for food or
beverages provided to specified individ-
uals.
The final regulations also include a pro-
vision for specified individuals providing
that the exceptions of section 274(e)(2)
and (e)(9) generally apply only to the ex-
tent that the food or beverage expenses do
not exceed the amount of the food or bev-
erage expenses treated as compensation
(under section 274(e)(2)) or as income
(under section 274(e)(9)) to the specified
individual. The final regulations provide,
however, that amounts reimbursed to the
taxpayer by the specified individual, will
reduce the amount subject to the lim-
itations under section 274(k)(1) and (n)
(1). This rule conforms to the statutory
language in section 274(e)(2)(B) and the
regulatory language in §1.274-10. Thus,
the final regulations address the comment
asking for clarification of the effect of re-
imbursements by employees, specified in-
dividuals, and other recipients of the food
or beverages on the amount excepted from

January 11, 2021 304 Bulletin No. 2021–2
the limitations under section 274(k)(1)
and (n)(1) by section 274(e)(2) and (e)(9).
The Treasury Department and the IRS
continue to believe that if the amount to
be included in compensation and wages
or gross income is zero, whether zero is a
proper or improper amount, the exceptions
in section 274(e)(2) and section 274(e)(9)
do not apply because no amount has been
included in compensation and wages or
gross income. For example, if the amount
to be included is zero because the value
of the food or beverages is excluded as a
fringe benefit under section 132, the ex-
ceptions in section 274(e)(2) and (e)(9)
do not apply. Similarly, the exceptions in
section 274(e)(2) and (e)(9) do not apply
if the amount to be included is zero solely
because the recipient has fully reimbursed
the taxpayer for the food or beverages. In
that case, however, the exception in section
274(e)(8) may apply if the food or bever-
ages are sold to the recipient in a bona fide
transaction for an adequate and full consid-
eration in money or money’s worth.
ii. Food or Beverage Expenses Provided
under Reimbursement Arrangements
Pursuant to section 274(e)(3), the final
regulations provide that in the case of ex-
penses for food or beverages paid or in-
curred by one person in connection with
the performance of services for another
person (whether or not the other person
is an employer) under a reimbursement
or other expense allowance arrangement,
the limitations on deductions in section
274(k)(1) and (n)(1) apply either to the
person who makes the expenditure or to
the person who actually bears the expense,
but not to both. Section 274(e)(3)(B) pro-
vides that if the services are performed for
a person other than an employer, such as
by an independent contractor, the excep-
tion in section 274(e)(3) applies only if
the taxpayer, in this case, the independent
contractor, accounts, to the extent provid-
ed by section 274(d), to such person. The
final regulations therefore provide that the
deduction limitations in section 274(k)(1)
and (n)(1) apply to an independent con-
tractor unless, under a reimbursement or
other expense allowance arrangement, the
contractor accounts to its client or custom-
er with substantiation that satisfies the re-
quirements of section 274(d).
iii. Recreational Expenses for Employees
Pursuant to section 274(e)(4), the final
regulations provide that any food or bev-
erage expense paid or incurred by a tax-
payer for a recreational, social, or similar
activity, primarily for the benefit of the
taxpayer’s employees, is not subject to
the deduction limitations in section 274(k)
(1) and (n)(1). However, activities that
discriminate in favor of highly compen-
sated employees, officers, shareholders
or others who own a 10-percent or greater
interest in the business are not considered
paid or incurred primarily for the benefit
of employees.
Many of the comments received after
enactment of the TCJA requested confir-
mation that food or beverage expenses for
company holiday parties and picnics that
do not discriminate in favor of highly com-
pensated employees are not subject to the
deduction limitations in section 274(k)(1)
and (n)(1) because the exception in sec-
tion 274(e)(4) applies. These comments
also suggested that expenses for snacks
and beverages available to all employees
in a pantry, break room, or copy room are
not subject to the deduction limitations in
section 274(k)(1) and (n)(1) because the
exception in section 274(e)(4) applies.
In response to the questions and com-
ments received, the proposed regulations
confirm the rules in the existing regula-
tions at §1.274-2(f)(2)(v) that the excep-
tion in section 274(e)(4) applies to food
or beverage expenses for company hol-
iday parties, annual picnics, or summer
outings that do not discriminate in favor
of highly compensated employees. How-
ever, an example in the proposed regula-
tions demonstrates that the section 274(e)
(4) exception does not apply to free food
or beverages available to all employees in
a pantry, break room, or copy room be-
cause the mere provision or availability
of food or beverages is not a recreational,
social, or similar activity, despite the fact
that employees may incidentally socialize
while they are in the break room. The final
regulations adopt the proposed regulations
with respect to the application of section
274(e)(4) in this context.
In addition, the final regulations pro-
vide that the exception in section 274(e)
(4) does not apply to food or beverage ex-
penses that are excludable from employ-
ees’ income under section 119 as meals
provided for the convenience of the em-
ployer. Because these food or beverages
are, by definition, furnished for the em-
ployer’s convenience, they cannot also be
primarily for the benefit of the employees,
even if some social activity occurs during
the provision of the food or beverages.
iv. Items Available to the Public
Pursuant to section 274(e)(7), the final
regulations provide that food or beverage
expenses of a taxpayer are not subject to
the deduction limitations in section 274(k)
(1) and (n)(1) to the extent the food or
beverages are made available to the gener-
al public. In addition, the final regulations
provide that this exception applies to ex-
penses for food or beverages provided to
employees if similar food or beverages are
provided by the employer to, and are pri-
marily consumed by, the general public.
For this purpose, “primarily consumed”
means greater than 50 percent of actual
or reasonably estimated consumption, and
“general public” includes, but is not limit-
ed to, customers, clients, and visitors. The
final regulations also provide that the gen-
eral public does not include employees,
partners, 2-percent shareholders of S cor-
porations (as defined in section 1372(b)),
or independent contractors of the taxpay-
er. Further, an exclusive list of guests also
is not considered the general public. See
Churchill Downs, Inc. v. Commissioner,
307 F.3d 423 (6th Cir. 2002).
Comments received in response to
Notice 2018-76 requested guidance as to
whether the exception in section 274(e)
(7) for food or beverages made available
by the taxpayer to the general public
applies in various situations. The Trea-
sury Department and the IRS considered
these comments and included examples
in the proposed regulations to illustrate
that the exception in section 274(e)(7)
generally applies to the entire food or
beverage expense if the food or beverag-
es are primarily consumed by the general
public. The final regulations retain these
examples.
v. Goods or Services Sold to Customers
Pursuant to section 274(e)(8), the final
regulations provide that any expense for

Bulletin No. 2021–2 305 January 11, 2021
food or beverages that are sold to custom-
ers in a bona fide transaction for an ade-
quate and full consideration in money or
money’s worth is not subject to the deduc-
tion limitations in section 274(k)(1) and
(n)(1). The final regulations clarify that
money or money’s worth does not include
payment through services provided.
The Treasury Department and the IRS
are aware of concerns raised by comment-
ers that it is a common business practice
for employers of restaurant and food
service workers to provide food or bev-
erages at no cost or at a discount to their
employees. The Joint Committee on Tax-
ation’s Bluebook on the TCJA explains
that amendments made by the TCJA to
limit the deduction for expenses of the
employer associated with providing food
or beverages to employees through an em-
ployer-operated eating facility that meets
the requirements of section 132(e)(2) do
not affect other exceptions to the 50-per-
cent limitation on deductions for food or
beverage expenses. For example, a restau-
rant or catering business may continue to
deduct 100 percent of its costs for food
or beverage items, purchased in connec-
tion with preparing and providing meals
to its paying customers, which are also
consumed at the worksite by employees
who work in the employer’s restaurant
or catering business. Joint Committee on
Taxation, General Explanation of Public
Law 115-97 (JCS-1-18), at 186 n.940 and
at 188 n.956, December 2018. The final
regulations adopt this interpretation of the
exception in section 274(e)(8).
Finally, the final regulations provide
that for purposes of the section 274(e)(8)
exception to the deduction limitations in
section 274(k)(1) and (n)(1), the term “cus-
tomer” includes anyone who is sold food or
beverages in a bona fide transaction for an
adequate and full consideration in money
or money’s worth. For example, employees
of the taxpayer are customers when they
purchase food or beverages from the tax-
payer in a bona fide transaction for arm’s
length, fair market value prices.
Statement of Availability of IRS
Documents
Notices cited in this preamble are pub-
lished in the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the
IRS web site at http://www.irs.gov.
Applicability Date
These regulations apply to taxable years
that begin on or after October 9, 2020.
Special Analyses
These final regulations are not subject
to review under section 6(b) of Executive
Order 12866 pursuant to the Memoran-
dum of Agreement (April 11, 2018) be-
tween the Treasury Department and the
Office of Management and Budget regard-
ing review of tax regulations.
Pursuant to the Regulatory Flexibili-
ty Act (5 U.S.C. chapter 6), it is hereby
certified that this final rule will not have a
significant economic impact on a substan-
tial number of small entities. Although
the rule may affect a substantial number
of small entities, the economic impact of
the regulations is not likely to be signifi-
cant. Data are not readily available about
the number of taxpayers affected, but the
number is likely to be substantial for both
large and small entities because the rule
may affect entities that incur meal and en-
tertainment expenses. The economic im-
pact of these regulations is not likely to be
significant, however, because these final
regulations substantially incorporate prior
guidance and otherwise clarify the appli-
cation of the TCJA changes to section 274
related to meals and entertainment. These
final regulations will assist taxpayers in
understanding the changes to section 274
and make it easier for taxpayers to com-
ply with those changes. Accordingly, the
Secretary of the Treasury’s delegate certi-
fies that the rule will not have a significant
economic impact on a substantial number
of small entities. Notwithstanding this
certification, the Treasury Department and
the IRS welcome comments on the impact
of these regulations on small entities.
Pursuant to section 7805(f), these final
regulations have been submitted to the
Chief Counsel for the Office of Advoca-
cy of the Small Business Administration
for comment on their impact on small
business. No comments on the proposed
regulations were received from the Chief
Counsel for the Office of Advocacy of the
Small Business Administration.
Effect on Other Documents
The following publications are obso-
lete as of October 9, 2020.
Notice 2018-76 (2018-42 I.R.B. 599).
Drafting Information
The principal author of these final reg-
ulations is Patrick Clinton, Office of the
Associate Chief Counsel (Income Tax &
Accounting). Other personnel from the
Treasury Department and the IRS partic-
ipated in their development.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and record-
keeping requirements
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is amend-
ed as follows:
Part 1—INCOME TAX
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read in part as fol-
lows:
Authority: 26 U.S.C. 7805* * *
Section 1.274-11 also issued under 26
U.S.C. 274.
Section 1.274-12 also issued under 26
U.S.C. 274.
Par. 2. Section 1.274-11 is added to
read as follows:
§1.274-11 Disallowance of deductions
for certain entertainment, amusement, or
recreation expenditures paid or incurred
after December 31, 2017.
(a) In general. Except as provided in
this section, no deduction otherwise al-
lowable under chapter 1 of the Internal
Revenue Code (Code) is allowed for any
expenditure with respect to an activity that
is of a type generally considered to be en-
tertainment, or with respect to a facility
used in connection with an entertainment
activity. For this purpose, dues or fees to
any social, athletic, or sporting club or
organization are treated as items with re-
spect to facilities and, thus, are not deduct-
ible. In addition, no deduction otherwise

January 11, 2021 306 Bulletin No. 2021–2
allowable under chapter 1 of the Code is
allowed for amounts paid or incurred for
membership in any club organized for
business, pleasure, recreation, or other so-
cial purpose.
(b) Definitions—(1) Entertainment—
(i) In general. For section 274 purposes,
the term entertainment means any activity
which is of a type generally considered to
constitute entertainment, amusement, or
recreation, such as entertaining at bars,
theaters, country clubs, golf and athletic
clubs, sporting events, and on hunting,
fishing, vacation and similar trips, includ-
ing such activity relating solely to the
taxpayer or the taxpayer’s family. These
activities are treated as entertainment un-
der this section, subject to the objective
test, regardless of whether the expenditure
for the activity is related to or associated
with the active conduct of the taxpayer’s
trade or business. The term entertainment
may include an activity, the cost of which
otherwise is a business expense of the tax-
payer, which satisfies the personal, living,
or family needs of any individual, such as
providing a hotel suite or an automobile
to a business customer or the customer’s
family. The term entertainment does not
include activities which, although satisfy-
ing personal, living, or family needs of an
individual, are clearly not regarded as con-
stituting entertainment, such as the pro-
viding of a hotel room maintained by an
employer for lodging of employees while
in business travel status or an automobile
used in the active conduct of a trade or
business even though used for routine per-
sonal purposes such as commuting to and
from work. On the other hand, the provid-
ing of a hotel room or an automobile by an
employer to an employee who is on vaca-
tion would constitute entertainment of the
employee.
(ii) Food or beverages. Under this
section, the term entertainment does not
include food or beverages unless the food
or beverages are provided at or during
an entertainment activity. Food or bever-
ages provided at or during an entertain-
ment activity generally are treated as part
of the entertainment activity. However,
in the case of food or beverages provid-
ed at or during an entertainment activity,
the food or beverages are not considered
entertainment if the food or beverages
are purchased separately from the enter-
tainment, or the cost of the food or bev-
erages is stated separately from the cost
of the entertainment on one or more bills,
invoices, or receipts. The amount charged
for food or beverages on a bill, invoice,
or receipt must reflect the venue’s usual
selling cost for those items if they were
to be purchased separately from the en-
tertainment or must approximate the rea-
sonable value of those items. If the food
or beverages are not purchased separately
from the entertainment, or the cost of the
food or beverages is not stated separately
from the cost of the entertainment on one
or more bills, invoices, or receipts, no al-
location between entertainment and food
or beverage expenses may be made and,
except as further provided in this section
and section 274(e), the entire amount is a
nondeductible entertainment expenditure
under this section and section 274(a).
(iii) Objective test. An objective test
is used to determine whether an activ-
ity is of a type generally considered to
be entertainment. Thus, if an activity
is generally considered to be entertain-
ment, it will be treated as entertainment
for purposes of this section and section
274(a) regardless of whether the expen-
diture can also be described otherwise,
and even though the expenditure relates
to the taxpayer alone. This objective test
precludes arguments that entertainment
means only entertainment of others or
that an expenditure for entertainment
should be characterized as an expendi-
ture for advertising or public relations.
However, in applying this test the tax-
payer’s trade or business is considered.
Thus, although attending a theatrical per-
formance generally would be considered
entertainment, it would not be so consid-
ered in the case of a professional theater
critic attending in a professional capaci-
ty. Similarly, if a manufacturer of dresses
conducts a fashion show to introduce its
products to a group of store buyers, the
show generally would not be considered
entertainment. However, if an appliance
distributor conducts a fashion show, the
fashion show generally would be consid-
ered to be entertainment.
(2) Expenditure. The term expenditure
as used in this section includes amounts
paid or incurred for goods, services, facili-
ties, and other items, including items such
as losses and depreciation.
(3) Expenditures for production of in-
come. For purposes of this section, any
reference to trade or business includes an
activity described in section 212.
(c) Exceptions. Paragraph (a) of this
section does not apply to any expenditure
described in section 274(e)(1), (2), (3),
(4), (5), (6), (7), (8), or (9).
(d) Examples. The following examples
illustrate the application of paragraphs (a)
and (b) of this section. In each example,
assume that the taxpayer is engaged in a
trade or business for purposes of section
162 and that neither the taxpayer nor any
business associate is engaged in a trade or
business that relates to the entertainment
activity. Also assume that none of the ex-
ceptions under section 274(e) and para-
graph (c) of this section apply.
(1) Example 1. Taxpayer A invites, B, a business
associate, to a baseball game to discuss a proposed
business deal. A purchases tickets for A and B to at-
tend the game. The baseball game is entertainment as
defined in §1.274-11(b)(1) and thus, the cost of the
game tickets is an entertainment expenditure and is
not deductible by A.
(2) Example 2. The facts are the same as in para-
graph (d)(1) of this section (Example 1), except that
A also buys hot dogs and drinks for A and B from
a concession stand. The cost of the hot dogs and
drinks, which are purchased separately from the
game tickets, is not an entertainment expenditure and
is not subject to the disallowance under §1.274-11(a)
and section 274(a)(1). Therefore, A may deduct 50
percent of the expenses associated with the hot dogs
and drinks purchased at the game if the expenses
meet the requirements of section 162 and §1.274-12.
(3) Example 3. Taxpayer C invites D, a business
associate, to a basketball game. C purchases tickets
for C and D to attend the game in a suite, where they
have access to food and beverages. The cost of the
basketball game tickets, as stated on the invoice, in-
cludes the food or beverages. The basketball game
is entertainment as defined in §1.274-11(b)(1), and,
thus, the cost of the game tickets is an entertainment
expenditure and is not deductible by C. The cost of
the food and beverages, which are not purchased
separately from the game tickets, is not stated sepa-
rately on the invoice. Thus, the cost of the food and
beverages is an entertainment expenditure that is
subject to disallowance under section 274(a)(1) and
paragraph (a) of this section, and C may not deduct
the cost of the tickets or the food and beverages as-
sociated with the basketball game.
(4) Example 4. The facts are the same as in
paragraph (d)(3) of this section (Example 3), except
that the invoice for the basketball game tickets sep-
arately states the cost of the food and beverages and
reflects the venue’s usual selling price if purchased
separately. As in paragraph (d)(3) of this section
(Example 3), the basketball game is entertainment
as defined in §1.274-11(b)(1), and, thus, the cost of
the game tickets, other than the cost of the food and
beverages, is an entertainment expenditure and is not
deductible by C. However, the cost of the food and

Bulletin No. 2021–2 307 January 11, 2021
beverages, which is stated separately on the invoice
for the game tickets and reflects the venue’s usual
selling price of the food and beverages if purchased
separately, is not an entertainment expenditure and is
not subject to the disallowance under section 274(a)
(1) and paragraph (a) of this section. Therefore, C
may deduct 50 percent of the expenses associated
with the food and beverages provided at the game
if the expenses meet the requirements of section 162
and §1.274-12.
(e) Applicability date. This section ap-
plies for taxable years that begin on or af-
ter October 9, 2020.
Par. 3. Section 1.274-12 is added to
read as follows:
§1.274-12 Limitation on deductions for
certain food or beverage expenses paid
or incurred after December 31, 2017.
(a) Food or beverage expenses—(1) In
general. Except as provided in this sec-
tion, no deduction is allowed for the ex-
pense of any food or beverages provided
by the taxpayer (or an employee of the
taxpayer) unless—
(i) The expense is not lavish or extrav-
agant under the circumstances;
(ii) The taxpayer, or an employee of
the taxpayer, is present at the furnishing
of such food or beverages; and
(iii) The food or beverages are provid-
ed to the taxpayer or a business associate.
(2) Only 50 percent of food or beverage
expenses allowed as deduction. Except as
provided in this section, the amount al-
lowable as a deduction for any food or
beverage expense described in paragraph
(a)(1) of this section may not exceed 50
percent of the amount of the expense that
otherwise would be allowable.
(3) Examples. The following examples
illustrate the application of paragraph (a)
(1) and (2) of this section. In each example,
assume that the food or beverage expens-
es are ordinary and necessary expenses
under section 162(a) that are paid or in-
curred during the taxable year in carrying
on a trade or business and are not lavish
or extravagant under the circumstances.
Also assume that none of the exceptions
in paragraph (c) of this section apply.
(i) Example 1. Taxpayer A takes client B out to
lunch. Under section 274(k) and (n) and paragraph
(a) of this section, A may deduct 50 percent of the
food or beverage expenses.
(ii) Example 2. Taxpayer C takes employee D out
to lunch. Under section 274(k) and (n) and paragraph
(a) of this section, C may deduct 50 percent of the
food or beverage expenses.
(iii) Example 3. Taxpayer E holds a business
meeting at a hotel during which food and beverages
are provided to attendees. Expenses for the business
meeting, other than the cost of food and beverages,
are not subject to the deduction limitations in section
274 and are deductible if they meet the requirements
for deduction under section 162. Under section
274(k) and (n) and paragraph (a) of this section, E
may deduct 50 percent of the food and beverage ex-
penses.
(iv) Example 4. The facts are the same as in para-
graph (a)(3)(iii) of this section (Example 3), except
that all the attendees of the meeting are employees of
E. Expenses for the business meeting, other than the
cost of food and beverages, are not subject to the de-
duction limitations in section 274 and are deductible
if they meet the requirements for deduction under
section 162. Under section 274(k) and (n) and para-
graph (a) of this section, E may deduct 50 percent
of the food and beverage expenses. The exception in
section 274(e)(5) does not apply to food and bever-
age expenses under section 274(k) and (n).
(4) Special rules for travel meals. (i)
In general. Food or beverage expenses
paid or incurred while traveling away
from home in pursuit of a trade or busi-
ness generally are subject to the deduc-
tion limitations in section 274(k) and
(n) and paragraph (a)(1) and (2) of this
section, as well as the substantiation re-
quirements in section 274(d). In addition,
travel expenses generally are subject to
the limitations in section 274(m)(1), (2),
and (3).
(ii) Substantiation. Except as provided
in this section, no deduction is allowed for
the expense of any food or beverages paid
or incurred while traveling away from
home in pursuit of a trade or business un-
less the taxpayer meets the substantiation
requirements in section 274(d).
(iii) Travel meal expenses of spouse,
dependent or others. No deduction is al-
lowed under chapter 1 of the Internal Rev-
enue Code (Code), except under section
217 for certain members of the Armed
Forces of the United States, for the ex-
pense of any food or beverages paid or
incurred with respect to a spouse, depen-
dent, or other individual accompanying
the taxpayer, or an officer or employee of
the taxpayer, on business travel, unless—
(A) The spouse, dependent, or other in-
dividual is an employee of the taxpayer;
(B) The travel of the spouse, depen-
dent, or other individual is for a bona fide
business purpose of the taxpayer; and
(C) The expenses would otherwise be
deductible by the spouse, dependent or
other individual.
(D) Example. The following example
illustrates the application of paragraph (a)
(4)(iii) of this section:
(1 ) Example. Taxpayer F, a sole proprietor, and
Taxpayer F’s spouse travel from New York to Boston
to attend a series of business meetings related to F’s
trade or business. F’s spouse is not an employee of
F, does not travel to Boston for a bona fide business
purpose of F, and the expenses would not otherwise
be deductible. While in Boston, F and F’s spouse go
out to dinner. Under section 274(m)(3) and para-
graph (a)(4)(iii) of this section, the expenses asso-
ciated with the food and beverages consumed by F’s
spouse are not deductible. Therefore, the cost of F’s
spouse’s dinner is not deductible. F may deduct 50
percent of the expense associated with the food and
beverages F consumed while on business travel if F
meets the requirements in sections 162 and 274, in-
cluding section 274(k) and (d).
(2) [Reserved]
(b) Definitions. Except as otherwise
provided in this section, the following
definitions apply for purposes of section
274(k) and (n), §1.274-11(b)(1)(ii) and
(d), and this section:
(1) Food or beverages. Food or bever-
ages means all food and beverage items,
regardless of whether characterized as
meals, snacks, or other types of food and
beverages, and regardless of whether the
food and beverages are treated as de mini-
mis fringes under section 132(e).
(2) Food or beverage expenses. Food
or beverage expenses mean the full cost
of food or beverages, including any deliv-
ery fees, tips, and sales tax. In the case of
employer-provided meals furnished at an
eating facility on the employer’s business
premises, food or beverage expenses do
not include expenses for the operation of
the eating facility such as salaries of em-
ployees preparing and serving meals and
other overhead costs.
(3) Business associate. Business asso-
ciate means a person with whom the tax-
payer could reasonably expect to engage
or deal in the active conduct of the taxpay-
er’s trade or business such as the taxpay-
er’s customer, client, supplier, employee,
agent, partner, or professional adviser,
whether established or prospective.
(4) Independent contractor. For pur-
poses of the reimbursement or other ex-
pense allowance arrangements described
in paragraph (c)(2)(ii) of this section, in-
dependent contractor means a person who
is not an employee of the payor.
(5) Client or customer. For purposes
of the reimbursement or other expense
allowance arrangements described in

January 11, 2021 308 Bulletin No. 2021–2
paragraph (c)(2)(ii) of this section, client
or customer of an independent contrac-
tor means a person who receives services
from an independent contractor and enters
into a reimbursement or other expense
allowance arrangement with the indepen-
dent contractor.
(6) Payor. For purposes of the reim-
bursement or other expense allowance ar-
rangements described in paragraph (c)(2)
(ii) of this section, payor means a person
that enters into a reimbursement or other
expense allowance arrangement with an
employee and may include an employer,
its agent, or a third party.
(7) Reimbursement or other expense
allowance arrangement. For purposes of
the reimbursement or other expense allow-
ance arrangements described in paragraph
(c)(2)(ii) of this section, reimbursement
or other expense allowance arrangement
means—
(i) For purposes of paragraph (c)(2)(ii)
(B) of this section, an arrangement under
which an employee receives an advance,
allowance, or reimbursement from a payor
for expenses the employee pays or incurs;
and
(ii) For purposes of paragraph (c)(2)(ii)
(C) of this section, an arrangement under
which an independent contractor receives
an advance, allowance, or reimbursement
from a client or customer for expenses the
independent contractor pays or incurs if
either—
(A) A written agreement between the
parties expressly states that the client or
customer will reimburse the independent
contractor for expenses that are subject to
the limitations on deductions described in
paragraph (a) of this section; or
(B) A written agreement between the
parties expressly identifies the party sub-
ject to the limitations.
(8) Primarily consumed. For purposes
of paragraph (c)(2)(iv) of this section, pri-
marily consumed means greater than 50
percent of actual or reasonably estimated
consumption.
(9) General public. For purposes of
paragraph (c)(2)(iv) of this section, the
general public includes, but is not lim-
ited to, customers, clients, and visitors.
The general public does not include em-
ployees, partners, 2-percent shareholders
of S corporations (as defined in section
1372(b)), or independent contractors of
the taxpayer. Also, the guests on an ex-
clusive list of guests are not the general
public.
(c) Exceptions—(1) In general. The
limitations on the deduction of food or
beverage expenses in paragraph (a) of this
section do not apply to any expense de-
scribed in paragraph (c)(2) of this section.
These expenses are deductible to the ex-
tent allowable under chapter 1 of the Code
(chapter 1).
(2) Exceptions—(i) Expenses treated
as compensation—(A) Expenses inclu-
dible in income of persons who are em-
ployees and are not specified individuals.
In accordance with section 274(e)(2)(A),
and except as provided in paragraph (c)(2)
(i)(D) of this section, an expense paid or
incurred by a taxpayer for food or bever-
ages, if an employee who is not a specified
individual is the recipient of the food or
beverages, is not subject to the deduction
limitations in paragraph (a) of this section
to the extent that the taxpayer—
(1) Properly treats the expense relat-
ing to the recipient of food or beverages
as compensation to an employee under
chapter 1 and as wages to the employee
for purposes of chapter 24 of the Code
(chapter 24); and
(2) Treats the proper amount as com-
pensation to the employee under §1.61-21.
(B) Expenses includible in income of
persons who are not employees and are
not specified individuals. In accordance
with section 274(e)(9), and except as pro-
vided in paragraph (c)(2)(i)(D) of this sec-
tion, an expense paid or incurred by a tax-
payer for food or beverages is not subject
to the deduction limitations in paragraph
(a) of this section to the extent that the ex-
penses are properly included in income as
compensation for services rendered by, or
as a prize or award under section 74 to, a
recipient of the expense who is not an em-
ployee of the taxpayer and is not a spec-
ified individual. The preceding sentence
does not apply to any amount paid or
incurred by the taxpayer if the amount is
required to be included, or would be so re-
quired except that the amount is less than
$600, in any information return filed by
such taxpayer under part III of subchapter
A of chapter 61 of the Code and is not so
included.
(C) Specified Individuals. In accor-
dance with section 274(e)(2)(B), in the
case of a specified individual (as defined
in section 274(e)(2)(B)(ii)), the deduction
limitations in paragraph (a) of this sec-
tion do not apply to an expense for food
or beverages of the specified individual to
the extent that the amount of the expense
does not exceed the sum of—
(1) The amount treated as compen-
sation to the specified individual under
chapter 1 and as wages to the specified
individual for purposes of chapter 24 (if
the specified individual is an employee) or
as compensation for services rendered by,
or as a prize or award under section 74 to,
a recipient of the expense (if the specified
individual is not an employee); and
(2) Any amount the specified individu-
al reimburses the taxpayer.
(D) Expenses for which an amount is
excluded from income or is less than the
proper amount. Notwithstanding para-
graphs (c)(2)(i)(A) and (B) of this section,
in the case of an expense paid or incurred
by a taxpayer for food or beverages for
which an amount is wholly or partially
excluded from a recipients’ income under
any section of subtitle A of the Code (oth-
er than because the amount is reimbursed
by the recipient), or for which an amount
included in compensation and wages to an
employee (or as income to a nonemploy-
ee) is less than the amount required to be
included under §1.61-21, the deduction
limitations in paragraph (a) of this section
do not apply to the extent that the amount
of the expense does not exceed the sum
of—
(1) The amount treated as compensa-
tion to the employee under chapter 1 (or
as income to a nonemployee) and as wag-
es to the employee for purposes of chapter
24; and
(2) Any amount the recipient reimburs-
es the taxpayer.
(E) Examples. The following examples
illustrate the application of paragraph (c)
(2)(i) of this section. In each example, as-
sume that the food or beverage expenses
are ordinary and necessary expenses un-
der section 162(a) that are paid or incurred
during the taxable year in carrying on a
trade or business.
(1) Example 1. Employer G provides food and
beverages to its non-specified individual employees
without charge at a company cafeteria on its premis-
es. The food and beverages do not meet the definition
of a de minimis fringe under section 132(e). Thus, G
treats the full fair market value of the food and bever-

Bulletin No. 2021–2 309 January 11, 2021
age expenses as compensation and wages, and prop-
erly determines this amount under §1.61-21. Under
section 274(e)(2) and paragraph (c)(2)(i)(A) of this
section, the expenses associated with the food and
beverages provided to the employees are not subject
to the 50 percent deduction limitation in paragraph
(a) of this section. Thus, G may deduct 100 percent
of the food and beverage expenses.
(2) Example 2. The facts are the same as in (c)(2)
(i)(E)(1) of this section (Example 1), except that each
employee pays $8 per day for the food and beverag-
es. The fair market value of the food and beverages
is $10 per day, per employee. G incurs $9 per day,
per employee for the food and beverages. G treats
the food and beverage expenses as compensation
and wages, and properly determines the amount of
the inclusion under §1.61-21 to be $2 per day, per
employee ($10 fair market value - $8 reimbursed by
the employee = $2). Therefore, under paragraph (c)
(2)(i)(A) of this section, G may deduct 100 percent
of the food and beverage expenses, or $9 per day,
per employee.
(3) Example 3. Employer H provides meals to its
employees without charge. The meals are properly
excluded from the employees’ income under section
119 as meals provided for the convenience of the
employer. Under §1.61-21(b)(1), an employee must
include in gross income the amount by which the
fair market value of a fringe benefit exceeds the sum
of the amount, if any, paid for the benefit by or on
behalf of the recipient, and the amount, if any, spe-
cifically excluded from gross income by some other
section of subtitle A of the Code. Because the entire
value of the employees’ meals is excluded from the
employees’ income under section 119, the fair mar-
ket value of the fringe benefit does not exceed the
amount excluded from gross income under subtitle
A of the Code, so there is nothing to be included in
the employees’ income under §1.61-21. Thus, the
exception in section 274(e)(2) and paragraph (c)(2)
(i) of this section does not apply and, assuming no
other exceptions provided under section 274(n)(2)
and paragraph (c)(2) of this section apply, H may
deduct only 50 percent of the expenses for the food
and beverages provided to employees. In addition,
the limitations in section 274(k)(1) and paragraph (a)
(1) of this section apply because none of the excep-
tions in section 274(k)(2) and paragraph (c)(2) of this
section apply.
(ii) Reimbursed food or beverage ex-
penses—(A) In general. In accordance
with section 274(e)(3), in the case of ex-
penses for food or beverages paid or in-
curred by one person in connection with
the performance of services for another
person, whether or not the other person
is an employer, under a reimbursement or
other expense allowance arrangement, the
deduction limitations in paragraph (a) of
this section apply either to the person who
makes the expenditure or to the person
who actually bears the expense, but not to
both. If an expense of a type described in
paragraph (c)(2)(ii) of this section proper-
ly constitutes a dividend paid to a share-
holder, unreasonable compensation paid
to an employee, a personal expense, or
other nondeductible expense, nothing in
this exception prevents disallowance of
the deduction to the taxpayer under other
provisions of the Code.
(B) Reimbursement arrangements in-
volving employees. In the case of expenses
paid or incurred by an employee for food
or beverages in performing services as an
employee under a reimbursement or oth-
er expense allowance arrangement with
a payor, the limitations on deductions in
paragraph (a) of this section apply—
(1) To the employee to the extent the
employer treats the reimbursement or oth-
er payment of the expense on the employ-
er’s income tax return as originally filed
as compensation paid to the employee and
as wages to the employee for purposes of
withholding under chapter 24 relating to
collection of income tax at source on wag-
es; or
(2) To the payor to the extent the re-
imbursement or other payment of the ex-
pense is not treated as compensation and
wages paid to the employee in the manner
provided in paragraph (c)(2)(ii)(B)(1) of
this section. However, see paragraph (c)
(2)(ii)(C) of this section if the payor re-
ceives a payment from a third party that
may be treated as a reimbursement ar-
rangement under that paragraph.
(C) Reimbursement arrangements in-
volving persons that are not employees. In
the case of expenses for food or beverages
paid or incurred by an independent con-
tractor in connection with the performance
of services for a client or customer under
a reimbursement or other expense allow-
ance arrangement with the independent
contractor, the limitations on deductions
in paragraph (a) of this section apply to
the party expressly identified in an agree-
ment between the parties as subject to the
limitations. If an agreement between the
parties does not expressly identify the
party subject to the limitations, then the
deduction limitations in paragraph (a) of
this section apply—
(1) To the independent contractor
(which may be a payor) to the extent the
independent contractor does not account
to the client or customer within the mean-
ing of section 274(d); or
(2) To the client or customer if the
independent contractor accounts to the
client or customer within the meaning of
section 274(d).
(D) Section 274(d) substantiation. If
the reimbursement or other expense al-
lowance arrangement involves persons
who are not employees and the agreement
between the parties does not expressly
identify the party subject to the limitations
on deductions in paragraph (a) of this sec-
tion, the limitations on deductions in para-
graph (a) of this section apply to the inde-
pendent contractor unless the independent
contractor accounts to the client or cus-
tomer with substantiation that satisfies the
requirements of section 274(d).
(E) Examples. The following examples
illustrate the application of paragraph (c)
(2)(ii) of this section.
(1) Example 1. (i) Employee I performs services
under an arrangement in which J, an employee leas-
ing company, pays I a per diem allowance of $10x
for each day that I performs services for J’s client,
K, while traveling away from home. The per diem
allowance is a reimbursement of travel expenses for
food or beverages that I pays in performing services
as an employee. J enters into a written agreement
with K under which K agrees to reimburse J for any
substantiated reimbursements for travel expenses,
including meal expenses, that J pays to I. The agree-
ment does not expressly identify the party that is
subject to the limitations on deductions in paragraph
(a) of this section. I performs services for K while
traveling away from home for 10 days and provides J
with substantiation that satisfies the requirements of
section 274(d) of $100x of meal expenses incurred
by I while traveling away from home. J pays I $100x
to reimburse those expenses pursuant to their ar-
rangement. J delivers a copy of I’s substantiation to
K. K pays J $300x, which includes $200x compen-
sation for services and $100x as reimbursement of
J’s payment of I’s travel expenses for meals. Neither
J nor K treats the $100x paid to I as compensation
or wages.
(ii) Under paragraph (b)(7)(i) of this section,
I and J have established a reimbursement or other
expense allowance arrangement for purposes of
paragraph (c)(2)(ii)(B) of this section. Because the
reimbursement payment is not treated as compensa-
tion and wages paid to I, under section 274(e)(3)(A)
and paragraph (c)(2)(ii)(B)(1) of this section, I is not
subject to the limitations on deductions in paragraph
(a) of this section. Instead, under paragraph (c)(2)(ii)
(B)(2) of this section, J, the payor, is subject to lim-
itations on deductions in paragraph (a) of this section
unless J can meet the requirements of section 274(e)
(3)(B) and paragraph (c)(2)(ii)(C) of this section.
(iii) Because the agreement between J and K
expressly states that K will reimburse J for sub-
stantiated reimbursements for travel expenses that J
pays to I, under paragraph (b)(7)(ii)(A) of this sec-
tion, J and K have established a reimbursement or
other expense allowance arrangement for purposes
of paragraph (c)(2)(ii)(C) of this section. J accounts
to K for K’s reimbursement in the manner required
by section 274(d) by delivering to K a copy of the

January 11, 2021 310 Bulletin No. 2021–2
substantiation J received from I. Therefore, under
section 274(e)(3)(B) and paragraph (c)(2)(ii)(C)(2)
of this section, K and not J is subject to the deduction
limitations in paragraph (a) of this section.
(2) Example 2. (i) The facts are the same as in
paragraph (c)(2)(ii)(E)(1) of this section (Example 1)
except that, under the arrangements between I and J
and between J and K, I provides the substantiation of
the expenses directly to K, and K pays the per diem
directly to I.
(ii) Under paragraph (b)(7)(i) of this section, I
and K have established a reimbursement or other ex-
pense allowance arrangement for purposes of para-
graph (c)(2)(ii)(C) of this section. Because I substan-
tiates directly to K and the reimbursement payment
was not treated as compensation and wages paid to I,
under section 274(e)(3)(A) and paragraph (c)(2)(ii)
(C)(1) of this section, I is not subject to the limita-
tions on deductions in paragraph (a) of this section.
Under paragraph (c)(2)(ii)(C)(2) of this section, K,
the payor, is subject to the limitations on deductions
in paragraph (a) of this section.
(3) Example 3. (i) The facts are the same as in
paragraph (c)(2)(ii)(E)(1) of this section (Exam-
ple 1), except that the written agreement between J
and K expressly provides that the limitations of this
section will apply to K.
(ii) Under paragraph (b)(7)(ii)(B) of this sec-
tion, J and K have established a reimbursement or
other expense allowance arrangement for purposes
of paragraph (c)(2)(ii)(C) of this section. Because
the agreement provides that the 274 deduction lim-
itations apply to K, under section 274(e)(3)(B) and
paragraph (c)(2)(ii)(C) of this section, K and not J is
subject to the limitations on deductions in paragraph
(a) of this section.
(4) Example 4. (i) The facts are the same as in (c)
(2)(ii)(E)(1) of this section (Example 1), except that
the agreement between J and K does not provide that
K will reimburse J for travel expenses.
(ii) The arrangement between J and K is not a
reimbursement or other expense allowance arrange-
ment within the meaning of section 274(e)(3)(B) and
paragraph (b)(7)(ii) of this section. Therefore, even
though J accounts to K for the expenses, J is subject
to the limitations on deductions in paragraph (a) of
this section.
(iii) Recreational expenses for employ-
ees—(A) In general. In accordance with
section 274(e)(4), any food or beverage
expense paid or incurred by a taxpayer for
a recreational, social, or similar activity,
primarily for the benefit of a taxpayer’s
employees (other than employees who
are highly compensated employees (with-
in the meaning of section 414(q))) is not
subject to the deduction limitations in
paragraph (a) of this section. For purposes
of this paragraph (c)(2)(iii), an employee
owning less than a 10-percent interest in
the taxpayer’s trade or business is not con-
sidered a shareholder or other owner, and
for such purposes an employee is treated
as owning any interest owned by a mem-
ber of the employee’s family (within the
meaning of section 267(c)(4)). Any ex-
pense for food or beverages that is made
under circumstances which discriminate
in favor of highly compensated employ-
ees is not considered to be made primari-
ly for the benefit of employees generally.
An expense for food or beverages is not to
be considered outside of the exception of
this paragraph (c)(2)(iii) merely because,
due to the large number of employees in-
volved, the provision of food or beverages
is intended to benefit only a limited num-
ber of employees at one time, provided the
provision of food or beverages does not
discriminate in favor of highly compen-
sated employees. This exception applies
to expenses paid or incurred for events
such as holiday parties, annual picnics, or
summer outings. This exception does not
apply to expenses for meals the value of
which is excluded from employees’ in-
come under section 119 because the meals
are provided for the convenience of the
employer and are therefore not primarily
for the benefit of the taxpayer’s employ-
ees.
(B) Examples. The following examples
illustrate the application of this paragraph
(c)(2)(iii). In each example, assume that
the food or beverage expenses are ordi-
nary and necessary expenses under sec-
tion 162(a) that are paid or incurred during
the taxable year in carrying on a trade or
business.
(1) Example 1. Employer L invites all employees
to a holiday party in a hotel ballroom that includes a
buffet dinner and an open bar. Under section 274(e)
(4), this paragraph (c)(2)(iii), and §1.274-11(c), the
cost of the party, including food and beverage ex-
penses, is not subject to the deduction limitations
in paragraph (a) of this section because the holiday
party is a recreational, social, or similar activity pri-
marily for the benefit of non-highly compensated
employees. Thus, L may deduct 100 percent of the
cost of the party.
(2) Example 2. The facts are the same as in para-
graph (c)(2)(iii)(B)(1) of this section (Example 1),
except that Employer L invites only highly-compen-
sated employees to the holiday party, and the invoice
provided by the hotel lists the costs for food and bev-
erages separately from the cost of the rental of the
ballroom. The costs reflect the venue’s usual selling
price for food or beverages. The exception in this
paragraph (c)(2)(iii) does not apply to the rental of
the ballroom or the food and beverage expenses be-
cause L invited only highly-compensated employees
to the holiday party. However, under §1.274-11(b)
(1)(ii), the food and beverage expenses are not treat-
ed as entertainment. Therefore, L is not subject to
the full disallowance for its separately stated food
and beverage expense under section 274(a)(1) and
§1.274-11(a). Unless another exception in section
274(n)(2) and paragraph (c)(2) of this section ap-
plies, L may deduct only 50 percent of the food and
beverage costs under paragraph (a)(2) of this section.
In addition, the limitations in section 274(k)(1) and
paragraph (a)(1) of this section apply because none
of the exceptions in section 274(k)(2) and paragraph
(c)(2) of this section apply.
(3) Example 3. Employer M provides free coffee,
soda, bottled water, chips, donuts, and other snacks
in a break room available to all employees. A break
room is not a recreational, social, or similar activity
primarily for the benefit of the employees, even if
some socializing related to the food and beverag-
es provided occurs. Thus, the exception in section
274(e)(4) and this paragraph (c)(2)(iii) does not ap-
ply and unless another exception in section 274(n)
(2) and paragraph (c)(2) of this section applies, M
may deduct only 50 percent of the expenses for food
and beverages provided in the break room under
paragraph (a)(2) of this section. In addition, the lim-
itations in section 274(k)(1) and paragraph (a)(1) of
this section apply because none of the exceptions in
section 274(k)(2) and paragraph (c)(2) of this section
apply.
(4) Example 4. Employer N has a written policy
that employees in a certain medical services-relat-
ed position must be available for emergency calls
due to the nature of the position that requires fre-
quent emergency responses. Because these emer-
gencies can and do occur during meal periods, N
furnishes food and beverages to employees in this
position without charge in a cafeteria on N’s prem-
ises. N excludes food and beverage expenses from
the employees’ income as meals provided for the
convenience of the employer excludable under
section 119. Because these food and beverages
are furnished for the employer’s convenience, and
therefore are not primarily for the benefit of the
employees, the exception in section 274(e)(4) and
this paragraph (c)(2)(iii) does not apply, even if
some socializing related to the food and beverages
provided occurs. Further, the exception in section
274(e)(2) and paragraph (c)(2)(i) of this section
does not apply. Thus, unless another exception in
section 274(n)(2) and paragraph (c)(2) of this sec-
tion applies, N may deduct only 50 percent of the
expenses for food and beverages provided to em-
ployees in the cafeteria under paragraph (a)(2) of
this section. In addition, the limitations in section
274(k)(1) and paragraph (a)(1) of this section apply
because none of the exceptions in section 274(k)(2)
and paragraph (c)(2) of this section apply.
(5) Example 5. Employer O invites an employ-
ee and a client to dinner at a restaurant. Because it
is the birthday of the employee, O orders a special
dessert in celebration. Because the meal is a business
meal, and therefore not primarily for the benefit of
the employee, the exception in section 274(e)(4) and
this paragraph (c)(2)(iii) does not apply, even though
an employee social activity in the form of a birthday
celebration occurred during the meal. Thus, unless
another exception in section 274(n)(2) and paragraph
(c)(2) of this section applies, O may deduct only 50
percent of the meal expense. In addition, the limita-
tions in section 274(k)(1) and paragraph (a)(1) of
this section apply because none of the exceptions in
section 274(k)(2) and paragraph (c)(2) of this section
apply.

Bulletin No. 2021–2 311 January 11, 2021
(iv) Items available to the public—(A)
In general. In accordance with section
274(e)(7), any expense paid or incurred by
a taxpayer for food or beverages to the ex-
tent the food or beverages are made avail-
able to the general public is not subject to
the deduction limitations in paragraph (a)
of this section. If a taxpayer provides food
or beverages to employees, this exception
applies to the entire amount of expenses
for those food or beverages if the same
type of food or beverages is provided to,
and are primarily consumed by, the gen-
eral public.
(B) Examples. The following examples
illustrate the application of this paragraph
(c)(2)(iv). In each example, assume that
the food and beverage expenses are ordi-
nary and necessary expenses under sec-
tion 162(a) that are paid or incurred during
the taxable year in carrying on a trade or
business.
(1) Example 1. Employer P is a real estate agent
and provides refreshments at an open house for a
home available for sale to the public. The refresh-
ments are consumed by P’s employees, potential
buyers of the property, and other real estate agents.
Under section 274(e)(7) and this paragraph (c)(2)
(iv), the expenses associated with the refreshments
are not subject to the deduction limitations in para-
graph (a) of this section if P determines that over 50
percent of the food and beverages are actually or
reasonably estimated to be consumed by potential
buyers and other real estate agents. If more than 50
percent of the food and beverages are not actually or
reasonably estimated to be consumed by the gener-
al public, only the costs attributable to the food and
beverages provided to the general public are except-
ed under section 274(e)(7) and this paragraph (c)(2)
(iv). In addition, the limitations in section 274(k)(1)
and paragraph (a)(1) of this section apply to the ex-
penses associated with the refreshments that are not
excepted under section 274(e)(7) and this paragraph
(c)(2)(iv).
(2) Example 2. Employer Q is an automobile ser-
vice center and provides refreshments in its waiting
area. The refreshments are consumed by Q’s em-
ployees and customers, and Q reasonably estimates
that more than 50 percent of the refreshments are
consumed by customers. Under section 274(e)(7)
and this paragraph (c)(2)(iv), the expenses associated
with the refreshments are not subject to the deduc-
tion limitations provided for in paragraph (a) of this
section because the food and beverages are primarily
consumed by customers. Thus, Q may deduct 100
percent of the food and beverage expenses.
(3) Example 3. Employer R operates a summer
camp open to the general public for children and pro-
vides breakfast and lunch, as part of the fee to attend
camp, both to camp counselors, who are employees,
and to camp attendees, who are customers. There are
20 camp counselors and 100 camp attendees. The
same type of meal is available to each counselor and
attendee, and attendees consume more than 50 per-
cent of the food and beverages. Under section 274(e)
(7) and this paragraph (c)(2)(iv), the expenses asso-
ciated with the food and beverages are not subject
to the deduction limitations in paragraph (a) of this
section, because over 50 percent of the food and bev-
erages are consumed by camp attendees and the food
and beverages are therefore primarily consumed by
the general public. Thus, R may deduct 100 percent
of the food and beverage expenses.
(4) Example 4. Employer S provides food and
beverages to its employees without charge at a com-
pany cafeteria on its premises. Occasionally, custom-
ers or other visitors also eat without charge in the
cafeteria. The occasional consumption of food and
beverages at the company cafeteria by customers and
visitors is less than 50 percent of the total amount
of food and beverages consumed at the cafeteria.
Therefore, the food and beverages are not primarily
consumed by the general public, and only the costs
attributable to the food and beverages provided to
the general public are excepted under section 274(e)
(7) and this paragraph (c)(2)(iv). In addition, the lim-
itations in section 274(k)(1) and paragraph (a)(1) of
this section apply to the expenses associated with the
food and beverages that are not excepted under sec-
tion 274(e)(7) and this paragraph (c)(2)(iv).
(v) Goods or services sold to custom-
ers—(A) In general. In accordance with
section 274(e)(8), an expense paid or in-
curred for food or beverages, to the extent
the food or beverages are sold to custom-
ers in a bona fide transaction for an ad-
equate and full consideration in money
or money’s worth, is not subject to the
deduction limitations in paragraph (a) of
this section. However, money or money’s
worth does not include payment through
services provided. Under this paragraph
(c)(2)(v), a restaurant or catering busi-
ness may deduct 100 percent of its costs
for food or beverage items, purchased in
connection with preparing and providing
meals to its paying customers, which are
also consumed at the worksite by employ-
ees who work in the employer’s restau-
rant or catering business. In addition, for
purposes of this paragraph (c)(2)(v), the
term customer includes anyone, including
an employee of the taxpayer, who is sold
food or beverages in a bona fide transac-
tion for an adequate and full consideration
in money or money’s worth.
(B) Example. The following example
illustrates the application of this para-
graph (c)(2)(v):
Example. Employer T operates a restaurant.
T provides food and beverages to its food service
employees before, during, and after their shifts for
no consideration. Under section 274(e)(8) and this
paragraph (c)(2)(v), the expenses associated with the
food and beverages provided to the employees are
not subject to the 50 percent deduction limitation in
paragraph (a) of this section because the restaurant
sells food and beverages to customers in a bona fide
transaction for an adequate and full consideration in
money or money’s worth. Thus, T may deduct 100
percent of the food and beverage expenses.
(d) Applicability date. This section ap-
plies for taxable years that begin on or af-
ter October 9, 2020.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved September 25, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on Oc-
tober 2, 2020, 4:15 p.m., and published in the issue
of the Federal Register for October 9, 2020, 85 F.R.
64026)
26 CFR 301.6402-2(g)
T.D. 9940
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Misdirected Direct Deposit
Refunds
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: These final regulations pro-
vide the procedures under section 6402(n)
of the Internal Revenue Code (Code) for
identification and recovery of a misdirect-
ed direct deposit refund. The final regula-
tions reflect changes to the law made by
the Taxpayer First Act. The final regula-
tions affect taxpayers who have made a
claim for refund, requested the refund be
issued as a direct deposit, but did not re-
ceive a refund in the account designated
on the claim for refund.
DATES: Effective date: These regulations
are effective on December 22, 2020.

January 11, 2021 312 Bulletin No. 2021–2
Applicability date: These regulations ap-
ply to reports to the IRS made after De-
cember 22, 2020 that a taxpayer never
received a direct deposit refund.
FOR FURTHER INFORMATION
CONTACT: Mary C. King at (202) 317-
5433 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 301 under section 6402(n)
of the Code and provides guidance on the
procedures used to identify and recover tax
refunds issued by electronic funds transfer
(direct deposit) that were not delivered
to the account designated to receive the
direct deposit refund on the federal tax
return or other claim for refund. Section
6402(n) was added to the Code by section
1407 of the Taxpayer First Act, Public
Law 116-25, 133 Stat. 981 (2019) (TFA)
on July 1, 2019. On December 23, 2019,
the Department of the Treasury (Treasury
Department) and the IRS published in the
Federal Register (84 FR 70462) a notice
of proposed rulemaking (REG-116163-
19) providing the procedures under section
6402(n) for reporting, identification, and
recovery of a misdirected direct deposit
refund. The Treasury Department and the
IRS received one comment responding to
the proposed regulations. The comment is
available at www.regulations.gov or upon
request. No public hearing was requested
or held on the proposed regulations.
After consideration of the written com-
ment, this Treasury Decision adopts the
proposed regulations as final regulations
with minor modifications, as described in
the Summary of Comments and Explana-
tion of Provisions. A detailed explanation
of these regulations can be found in the
preamble to the proposed regulations.
Summary of Comments and
Explanation of Provisions
The Treasury Department and the IRS
received one comment regarding the pro-
posed regulations. After consideration of
the comment, the proposed regulations are
adopted as final regulations without any
substantive changes.
I. Applicability Date
A commenter expressed a concern that
the procedures in these regulations would
not apply to claims for refund from tax-
able years before the applicability date
of the final regulations. The commenter
requested that the procedures should be
applied to refund claims for prior years.
Consistent with the comment, the final
regulations clarify that these procedures
apply to any report of a misdirected direct
deposit refund for a current or prior year
submitted after the publication of the final
regulations in the Federal Register.
II. Coordination with Financial
Institutions
Section 301.6402-2(g)(1) of the pro-
posed regulations defines “misdirected
direct deposit refund” as any refund of an
overpayment of tax that is disbursed as
a direct deposit but is not deposited into
the account designated on the claim for
refund to receive the direct deposit re-
fund. The proposed regulations include
in the definition of a misdirected direct
deposit refund only those refunds which
are actually issued as a direct deposit. A
misdirected direct deposit refund does
not include an overpayment that is cred-
ited against another outstanding tax lia-
bility of the taxpayer pursuant to section
6402(a) or that is offset pursuant to the
law. An overpayment that is offset or ap-
plied as mandated by law is not a mis-
directed direct deposit refund because
these actions are mandated by law. Sec-
tion 301.6402-2(g)(1) of the final regula-
tions clarifies this by striking the last sen-
tence from the proposed regulations, as
it is not needed to define a “misdirected
direct deposit refund.” Instead, the final
regulations clarify in section 301.6402-
2(g)(3)(i) that the offset or setoff of an
overpayment occurs prior to the issu-
ance of a direct deposit. The IRS will
determine if a reported missing refund is
setoff or offset as part of the procedure
for the identification of the account that
received the misdirected direct deposit
refund. This reorganization simplifies the
definition of a misdirected direct deposit
refund and more accurately describes the
process of identification of a misdirected
direct deposit refund.
The final regulations reflect this clari-
fication to the definition of a misdirected
direct deposit refund and the identification
procedure, but the proposed regulations
are otherwise adopted without change.
Special Analyses
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding re-
view of tax regulations.
These regulations do not impose any
additional information collection re-
quirements in the form of reporting, re-
cordkeeping requirements, or third-party
disclosure requirements related to tax
compliance. However, because a taxpayer
or a taxpayer’s representative may elect to
report a missing refund using the proce-
dures described in §301.6402-2(g)(2)(ii)
(B), some taxpayers may use a form to
report a missing refund. The collection of
information in §301.6402-2(g)(2)(ii)(B)
is through use of a Form 3911, “Taxpayer
Statement Regarding Refund,” and is the
sole collection of information requirement
established by the final regulations.
For the purposes of the Paperwork
Reduction Act, 44 U.S.C. §§3501-3520,
the reporting burden associated with the
collection of information with respect to
section 6402(n) will be reflected in Paper-
work Reduction Act submissions for IRS
Form 3911 (OMB Control Number 1545-
1384). The estimated average time to com-
plete Form 3911 is five minutes. Howev-
er, use of a form is not required in every
case. There are certain situations in which
a taxpayer may instead elect to investigate
a missing refund over the telephone or in
person at the Office of the Taxpayer Ad-
vocate and, after the IRS identifies the tax
refund and informs the taxpayer that the
refund was issued as a direct deposit, oral-
ly report that the already-identified refund
is missing. An agency may not conduct
or sponsor, and a person is not required
to respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
It is hereby certified that these regula-
tions will not have a significant economic

Bulletin No. 2021–2 313 January 11, 2021
impact on a substantial number of small
entities within the meaning of section
601(6) of the Regulatory Flexibility Act
(5 U.S.C. chapter 6). The certification is
based on the information that follows.
There is no significant impact from these
regulations on any small entity utilizing
the procedures prescribed by these regu-
lations to report a missing refund because
there is no significant cost associated with
reporting a missing refund. There is no
fee charged in connection with reporting a
missing refund, and the estimated time to
complete a Form 3911, “Taxpayer State-
ment Regarding Refund,” is five minutes.
There are no tax consequences associated
with the final rule, as it merely sets forth
the procedures for reporting a missing
refund and describes the process the IRS
uses in locating a missing refund and, in
some instances, issuing a replacement
refund. The process in these regulations
mirrors the existing process and does not
change the reporting burden. According-
ly, the Treasury Department and the IRS
have determined that this Treasury Deci-
sion will not have a significant economic
impact on a substantial number of small
entities. Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
preceding this regulation was submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business enti-
ties, and no comments were received.
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. This regu-
lation does not include any Federal man-
date that may result in expenditures by
state, local, or tribal governments, or by
the private sector in excess of that thresh-
old.
Executive Order 13132 (titled Federal-
ism) prohibits an agency from publishing
any rule that has federalism implications
if the rule either imposes substantial, di-
rect compliance costs on state and local
governments, and is not required by stat-
ute, or preempts state law, unless the agen-
cy meets the consultation and funding re-
quirements of section 6 of the Executive
Order. This rule does not have federalism
implications and does not impose substan-
tial direct compliance costs on state and
local governments or preempt state law,
within the meaning of the Executive Or-
der.
Drafting Information
The principal author of these regula-
tions is Mary C. King of the Office of the
Associate Chief Counsel (Procedure and
Administration). Other personnel from the
Treasury Department and the IRS partic-
ipated in the development of the regula-
tions.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Ex-
cise taxes, Gift taxes, Income taxes, Pen-
alties, Reporting and recordkeeping re-
quirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301 – PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry
in numerical order for § 301.6402-2(g) to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 301.6402-2(g) also issued un-
der 26 U.S.C. 6402(n).
* * * * *
Par. 2. Section 301.6402-2 is amended
by:
1. Redesignating paragraph (g) as para-
graph (h) and adding new paragraph (g).
2. Revising the heading of newly re-
designated paragraph (h) and adding a
sentence at the end of the paragraph.
The additions and revision read as fol-
lows:
§301.6402-2 Claims for credit or refund.
* * * * *
(g) Misdirected direct deposit refund—
(1) Definition. The term misdirected direct
deposit refund includes any refund of an
overpayment of tax that is disbursed as
a direct deposit but is not deposited into
the account designated on the claim for
refund to receive the direct deposit refund.
(2) Procedures for reporting a misdi-
rected direct deposit refund—(i) In gener-
al. A taxpayer or a taxpayer’s authorized
representative may report to the IRS that
the taxpayer never received a direct de-
posit refund and request a replacement
refund. The report must include the name
of the taxpayer who requested the refund,
the taxpayer identification number of the
taxpayer, the taxpayer’s mailing address,
the type of return to which the refund is
related, the account number and routing
number that the taxpayer requested the
refund be directly deposited into, and any
other information necessary to locate the
misdirected direct deposit refund.
(ii) How to report a misdirected direct
deposit refund. A reporting described in
paragraph (g)(2)(i) of this section may be
made in the following ways:
(A) By calling the IRS;
(B) On the form prescribed by the IRS
and in accordance with the applicable
publications, instructions, or other appro-
priate guidance;
(C) By contacting the Office of the
Taxpayer Advocate by telephone, by mail,
facsimile, or in person; or
(D) By submitting the appropriate form
in person at a Taxpayer Assistance Center.
(3) Procedures for coordination with
financial institutions—(i) Identification of
the account that received the misdirected
direct deposit refund. If the IRS receives
a report described in paragraph (g)(2)(ii)
of this section, the IRS will confirm that
the overpayment was issued as a direct
deposit. The IRS will confirm that the
overpayment was not credited or offset
pursuant to the law in effect immediately
prior to the direct deposit being disbursed.
If the direct deposit described in the report
was issued, the IRS will initiate a refund
trace to request the assistance of the De-
partment of the Treasury’s Bureau of the
Fiscal Service. In accordance with its own
procedures, the Bureau of the Fiscal Ser-
vice coordinates with the financial insti-
tution that holds directly or indirectly the
deposit account into which the refund was

January 11, 2021 314 Bulletin No. 2021–2
made, requesting from the financial insti-
tution such information as is necessary to
identify whether the financial institution
received the refund; whether the finan-
cial institution returned, or will return,
the refund to the IRS, or if no funds are
available for return; whether a deposit was
made into the account designated on the
claim for refund; and the identity of the
deposit account owner to whom the de-
posit was disbursed.
(ii) Coordination to recover the
amounts transferred. Recovery of the
misdirected direct deposit refund from a
financial institution shall follow the pro-
cedures established by the Bureau of the
Fiscal Service. The Bureau of the Fiscal
Service shall request the return of the mis-
directed direct deposit refund from the
financial institution that received it. The
IRS may contact the financial institution
directly to recover the misdirected direct
deposit refund.
(4) Issuance of replacement refund.
When the IRS has determined that a
misdirected direct deposit refund has oc-
curred, the IRS will issue a replacement
refund in the full amount of the refund that
was misdirected. The replacement refund
may be issued as a direct deposit or as
a paper check sent to the taxpayer’s last
known address.
(5) Applicability of this paragraph
(g) to missing refunds. The provisions
of paragraphs (g)(2) through (g)(3)(i)
of this section should be used for any
refund that was disbursed as a direct
deposit and that the taxpayer reports as
missing. For example, although a refund
that was deposited into an incorrect bank
account because the taxpayer transposed
two digits in their bank account num-
ber is not considered to be a misdirect-
ed direct deposit refund, the provisions
of paragraphs (g)(2) through (g)(3)(i) of
this section should be used. If the appli-
cation of these procedures results in an
amount recovered by the IRS, the recov-
ered amount will be refunded or credited
as allowed by law.
(h) Applicability dates. * * * Paragraph
(g) of this section applies to reports de-
scribed in paragraph (g)(2)(ii) of this sec-
tion made after December 22, 2020.
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
Approved: December 8, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on De-
cember 18, 2020, 4:15 pm, and published in the issue
of the Federal Register for December 22, 2020, 85
FR 83446)

Bulletin No. 2021–2 315 January 11, 2021
Part III
Mandatory E-filing of
Form 4720 by Private
Foundations
Notice 2021-01
SECTION 1. PURPOSE
This notice provides for the delay, pur-
suant to section 3101(d)(2) of the Taxpay-
er First Act of 2019, Pub. L. No. 116-25,
133 Stat. 981, 1015 (TFA), of the appli-
cation of section 6033(n) of the Internal
Revenue Code (Code) with respect to
the requirement for organizations recog-
nized as tax exempt under section 501(c)
(3) of the Code and classified as private
foundations under section 509(a) of the
Code (private foundations) to electron-
ically file Form 4720, Return of Certain
Excise Taxes Under Chapters 41 and 42
of the Internal Revenue Code.
1
This notice
also announces that the Department of the
Treasury (Treasury Department) and the
Internal Revenue Service (IRS) intend to
remove § 53.6011-1(c) of the Foundation
and Similar Excise Tax Regulations (26
CFR part 53), because the amendments
made to sections 6104 and 6033 by the
TFA have rendered unfeasible the ability
for a private foundation and other persons
to jointly file the same Form 4720 elec-
tronically.
SECTION 2. BACKGROUND
Section 6011(a) of the Code provides
that, when required by regulations pre-
scribed by the Secretary of the Treasury or
his delegate (Secretary), any person made
liable for any tax imposed by the Code,
or with respect to the collection thereof,
must make a return or statement according
to the forms and regulations prescribed by
the Secretary. Every person required to
make a return or statement must include
therein the information required by such
forms or regulations. Under § 53.6011-
1(b), every person (including a govern-
mental entity) liable for tax imposed
by sections 4941(a), 4942(a), 4943(a),
4944(a), 4945(a), 4955(a), 4958(a), 4959,
4960(a), 4965(a), 4966(a), 4967(a), or
4968(a), and every private foundation and
every trust described in section 4947(a)(2)
which has engaged in an act of self-deal-
ing (as defined in section 4941(d)) (other
than an act giving rise to no tax under sec-
tion 4941(a)) must file an annual return on
Form 4720 and must include therein the
information required by such form and the
instructions issued with respect thereto.
Under § 53.6011-1(c), if a Form 4720 is
filed by a private foundation or trust de-
scribed in section 4947(a)(2) with respect
to a transaction as to which other persons
are also required to file under this regu-
lation, and if the other persons’ taxable
years are the same as the foundation’s
or trust’s, then the private foundation or
trust and such other persons can file a joint
Form 4720, and, to the extent applicable,
that form will be considered as the other
persons’ return for purposes of comply-
ing with the filing requirement under §
53.6011-1(b).
Subject to various exceptions, section
6033(a)(1) of the Code requires every
organization exempt from taxation under
section 501(a) (tax-exempt organization)
to file an annual return, stating specifically
the items of gross income, receipts, and
disbursements, and such other informa-
tion for the purpose of carrying out the in-
ternal revenue laws as the Secretary may
by forms or regulations prescribe. Section
6033(b) provides a list of items that are
generally required to be furnished annu-
ally by organizations described in section
501(c)(3), “at such time and in such man-
ner as the Secretary may by forms or reg-
ulations prescribe.”
Consistent with section 6033(a)(1), §
1.6033-2(a)(1) of the Income Tax Regu-
lations (26 CFR part 1) provides that, ex-
cept as provided in section 6033(a)(3) and
§ 1.6033-2(g), every tax-exempt organiza-
tion must file an annual information return
specifically setting forth its items of gross
income, gross receipts and disbursements,
and such other information as may be pre-
scribed in the instructions issued with re-
spect to the return. Section 1.6033-2(a)(2)
(i) provides that every private foundation
must file Form 990-PF, Return of Private
Foundation, as its annual information re-
turn. Although the information to be re-
ported for any particular taxable year is set
forth in the forms and instructions for such
year, § 1.6033-2(a)(2)(ii) also provides a
list of information generally required to be
furnished by a tax-exempt organization on
its annual return, which generally tracks
section 6033(b). The list in the regulations
includes, but is not limited to, in the case
of a private foundation liable for tax im-
posed under chapter 42 of the Code (chap-
ter 42), such information as is required on
Form 4720. See § 1.6033-2(a)(2)(ii)(J).
In general, under section 6104(b) of
the Code, the information required to be
furnished by section 6033, together with
the names and addresses of such organiza-
tions and trusts, must be made available to
the public at such times and in such places
as the Secretary may prescribe. Section
301.6104(b)-1(a)(1) of the Procedure and
Administration Regulations reiterates that
the information required by section 6033
must be made available to the public, ex-
cept as otherwise provided in section 6104
and the regulations thereunder.
In promulgating § 1.6033-2(a)(2)(ii)
(J), the Treasury Department and the IRS
noted the provision clarifies that Form
4720 (relating to certain excise tax liabil-
ities under chapter 42), when filed by a
private foundation, is part of the informa-
tion return required under section 6033
as well as a tax return required under sec-
tion 6011. Accordingly, Form 4720 filed
by a private foundation is information
required by section 6033 and the regula-
tions thereunder and thus is disclosable
under section 6104, whereas Form 4720
filed by a taxpayer other than a private
foundation is not information required by
section 6033 and the regulations there-
under and thus is not disclosable under
section 6104. See TD 7785, 46 FR 38507
(July 28, 1981).
1
Form 4720 is filed by taxpayers reporting tax liabilities under sections 170(f)(10), 664(c)(2), 4911, 4912, 4941, 4942, 4943, 4944, 4945, 4955, 4958, 4959, 4960, 4965, 4966, 4967, and
4968 of the Code.

January 11, 2021 316 Bulletin No. 2021–2
SECTION 3. MANDATORY
ELECTRONIC FILING OF FORM 4720
On July 1, 2019, the TFA was enact-
ed into law. Section 3101 of the TFA is
effective for taxable years beginning on
or after July 2, 2019. Section 3101(a) of
the TFA amends section 6033(n) of the
Code to provide that any exempt orga-
nization required to file a return under
section 6033 of the Code must file such
return in electronic form. Section 3101(c)
of the TFA amends section 6104(b) of the
Code to provide that any annual return
required to be filed electronically under
section 6033(n) must be made available
by the Secretary to the public as soon as
practicable in a machine-readable format.
Section 3101(d)(1) of the TFA provides
that, in general, these amendments apply
to taxable years beginning after the date of
enactment of the TFA. However, section
3101(d)(2) of the TFA gives the Secretary
authority to delay the application of these
amendments if the Secretary determines
the application of the amendments would
cause undue burden without a delay but
the delayed applicability date must not be
later than taxable years beginning on or
after July 1, 2021.
As described in section 2 of this notice,
Form 4720, when filed by a private foun-
dation, is part of the information return
required under section 6033, as well as
a tax return required under section 6011.
Accordingly, Form 4720 filed by a private
foundation as part of the Form 990-PF is
required to be electronically filed as a re-
turn required under section 6033(n). The
IRS is modifying Form 4720 so that pri-
vate foundations can electronically file the
form in accordance with the TFA’s elec-
tronic filing mandate. The modifications to
Form 4720 are also necessary to meet the
TFA’s requirement under section 6104(b)
that the Secretary must make available to
the public in machine readable format any
annual return to be filed electronically un-
der section 6033(n). See section 4 of this
notice for the timing implications of these
modifications.
Currently, under § 53.6011-1(c) a dis-
qualified person may designate the private
foundation’s Form 4720 as the disquali-
fied person’s return for purposes of com-
plying with the filing requirement under §
53.6011-1(b), provided all persons share
the same taxable year. The current reg-
ulation assumes the ability of multiple
taxpayers to sign the same paper copy of
Form 4720. However, that flexibility no
longer exists for private foundations and
their disqualified persons because sec-
tion 6033(n) requires private foundations
to file Forms 4720 electronically and the
IRS system allows for only one taxpayer
per return. Thus, the TFA has rendered
§ 53.6011-1(c), allowing for joint Form
4720 submissions, no longer applica-
ble to private foundations once the Form
4720 is required to be electronically filed
by private foundations. Accordingly, the
Treasury Department and the IRS intend
to propose the removal of § 53.6011-1(c)
in a future notice of proposed rulemaking.
SECTION 4. DELAY OF
APPLICATION OF ELECTRONIC
FILING MANDATE FOR FORMS 4720
The IRS expects that a modified paper
version of the Form 4720 will be available
for use at the beginning of 2021. Under
the authority granted to the Secretary in
section 3101(d)(2) of the TFA, private
foundations may continue to file the paper
version of the Form 4720 until electronic
filing of Form 4720 is available and the
IRS announces that electronic filing of the
Form 4720 is required (expected to be in
early 2021). Once electronic filing is re-
quired, any Forms 4720 filed by private
foundations after such date must be filed
electronically in accordance with the in-
structions to Form 4720 prescribed by the
IRS.
SECTION 5. EFFECTIVE DATE
This notice is effective on January 11,
2021, the publication date of IRB 2021-2.
SECTION 6. DRAFTING
INFORMATION
The principal author of this notice is
William Riker of the Office of Associate
Chief Counsel (Employee Benefits, Ex-
empt Organizations, and Employment
Taxes). For further information regarding
this notice, please contact William Riker
at (202) 317-5800 or Dave Rifkin at (202)
317-4541 (not toll-free numbers).
Extension of Temporary
Relief from the Physical
Presence Requirement for
Spousal Consents Under
Qualified Retirement Plans
Notice 2021-03
I. PURPOSE
In response to the continuing public
health emergency caused by the Corona-
virus Disease 2019 (COVID-19) pandem-
ic, and the related social distancing that
has been implemented, this notice extends
from January 1, 2021, through June 30,
2021, the temporary relief provided in
Notice 2020-42, 2020-26 I.R.B. 986, from
the physical presence requirement in Trea-
sury Regulation § 1.401(a)-21(d)(6) for
participant elections required to be wit-
nessed by a plan representative or a notary
public, including spousal consent required
under § 417 of the Internal Revenue Code,
and solicits comments with respect to the
relief.
II. BACKGROUND
On March 13, 2020, the President de-
termined that the COVID-19 pandemic
was of sufficient severity and magnitude
to warrant an emergency determination
under the Robert T. Stafford Disaster Re-
lief and Emergency Assistance Act, 42
U.S.C. 5121-5207. Providing alternative
procedures for notarization and consent
related to plan distributions that do not re-
quire physical presence is an appropriate
emergency protective measure during this
declared emergency period and is consis-
tent with the physical distancing proce-
dures implemented by the states.
Section 1.401(a)-21 sets forth stan-
dards for the use of an electronic medium
to provide applicable notices to recipients
or to make participant elections with re-
spect to a retirement plan, an employee
benefit arrangement, or an individual
retirement plan. Section 1.401(a)-21(e)
(6) defines a participant election as any
consent, election, request, agreement, or
similar communication made by or from
a participant, beneficiary, alternate pay-
ee, or an individual entitled to benefits

Bulletin No. 2021–2 317 January 11, 2021
under a retirement plan, employee bene-
fit arrangement, or individual retirement
plan. Section 1.401(a)-21(d) sets forth the
following conditions for participant elec-
tions:
(1) The individual must be effectively
able to access the electronic medium used
to make the participant election;
(2) The electronic system must be rea-
sonably designed to preclude any person
other than the appropriate individual from
making the participant election;
(3) The electronic system must pro-
vide the individual making the participant
election with a reasonable opportunity to
review, confirm, modify, or rescind the
terms of the election before it becomes
effective; and
(4) The individual making the partic-
ipant election, within a reasonable time,
must receive confirmation of the election
through either a written paper document
or an electronic medium under a system
that satisfies the applicable notice require-
ments under § 1.401(a)-21.
The participant election rules in
§ 1.401(a)-21(d) apply to plans that are
subject to the qualified joint and survi-
vor (QJSA) requirements of § 417. Ac-
cordingly, for a plan subject to the QJSA
requirements, a participant’s consent to
a distribution may be provided through
the use of electronic media if the plan
complies with the standards described in
§ 1.401(a)-21(d), provided that the partic-
ipant also obtains a valid spousal consent,
if applicable.
Section 417 requires spousal consent to
a waiver of a QJSA, which includes the
waiver of a QJSA as part of a request for
a plan distribution or a plan loan. Section
417 further requires that the spousal con-
sent be witnessed by a plan representative
or a notary public. Section 1.401(a)-21(d)
(6)(i) provides that, in the case of a par-
ticipant election that is required to be
witnessed by a plan representative or a
notary public (such as a spousal consent
to a waiver of a QJSA under § 417), the
signature of the individual making the
participant election must be witnessed in
the physical presence of a plan represen-
tative or a notary public. Section 1.401(a)-
21(d)(6)(ii) provides that, if the signature
is witnessed in the physical presence of a
notary public, an electronic signature ac-
knowledging the signature (in accordance
with section 101(g) of the Electronic Sig-
natures in Global and National Commerce
Act, Pub. L. 106-229, 114 Stat. 464 (2000)
(E-SIGN),
1
and applicable state law for
notaries public) will not be denied legal
effect.
Section 1.401(a)-21(d)(6)(iii) provides
that the Commissioner may provide in
guidance published in the Internal Rev-
enue Bulletin that the use of procedures
under an electronic system is deemed to
satisfy the physical presence requirement,
but only if those procedures with respect
to the electronic system provide the same
safeguards for participant elections as are
provided through the physical presence
requirement.
Section 1.401(a)-21(d) permits elec-
tronic notarization of participant elec-
tions. However, the physical presence
requirement in § 1.401(a)-21(d)(6) would
preclude the use of remote notarizations
of participant elections, including spousal
consents.
Remote electronic notarizations differ
from electronic notarizations in that re-
mote electronic notarizations generally are
conducted remotely over the internet us-
ing digital tools and live audio-video tech-
nologies, whereas electronic notarizations
can be signed electronically but still re-
quire that certain signatures be witnessed
in the physical presence of a notary public
or plan representative. The Department of
the Treasury (Treasury Department) and
the Internal Revenue Service (IRS) re-
ceived several requests from stakeholders
to permit remote electronic notarization of
spousal consents for plan loans and distri-
butions during the COVID-19 pandemic.
These stakeholders stated that due to the
social distancing measures with respect
to the COVID-19 pandemic, the physical
presence requirement in § 1.401(a)-21(d)
(6) makes it difficult, if not impossible, for
a participant to receive a plan distribution
or plan loan (or for a qualified individual
to receive a coronavirus-related distribu-
tion or plan loan) for which spousal con-
sent is required. While recognizing the
need for relief, other stakeholders request-
ed that any relief take into account spousal
protections, including limiting the relief
solely to the physical presence require-
ment and making the relief temporary.
Notice 2020-42 provides temporary
relief from the physical presence require-
ment in § 1.401(a)-21(d)(6) for any partic-
ipant election witnessed by a notary pub-
lic of a state that permits remote electronic
notarization or by a plan representative, if
the requirements of section III of Notice
2020-42 are satisfied. The temporary re-
lief provided in Notice 2020-42 covers
the period from January 1, 2020, through
December 31, 2020. The Treasury Depart-
ment and the IRS have received requests
from stakeholders to make the relief pro-
vided in Notice 2020-42 permanent or,
at a minimum, to extend the temporary
relief period, in light of the continuing
public health emergency caused by the
COVID-19 pandemic.
III. GRANT OF RELIEF
For the period from January 1, 2021,
through June 30, 2021, this notice extends
the temporary relief provided in Notice
2020-42 from the physical presence re-
quirement in § 1.401(a)-21(d)(6), if the
related requirements in subsection A or B
of this section III are satisfied. In particu-
lar, this notice extends the following two
types of temporary relief (under terms that
are identical to the temporary relief pro-
vided in Notice 2020-42):
(1) temporary relief from the physical
presence requirement for any participant
election witnessed by a notary public of a
state that permits remote electronic notari-
zation, and
(2) temporary relief from the physical
presence requirement for any participant
election witnessed by a plan representa-
tive.
During this temporary relief period, a
participant is still able to have a partici-
pant election witnessed in the physical
presence of a notary public and have that
participant election be accepted by a plan
in accordance with § 1.401(a)-21(d)(6)(i).
1
Section 101(g) of E-SIGN provides that “[i]f a statute, regulation, or other rule of law requires a signature or record relating to a transaction in or affecting interstate or foreign commerce
to be notarized, acknowledged, verified, or made under oath, that requirement is satisfied if the electronic signature of the person authorized to perform those acts, together with all other
information required to be included by other applicable statute, regulation, or rule of law, is attached to or logically associated with the signature or record.”

January 11, 2021 318 Bulletin No. 2021–2
A. Temporary Relief from the Physical
Presence Requirement for any
Participant Election Witnessed by a
Notary Public
In the case of a participant election wit-
nessed by a notary public, for the period
from January 1, 2021, through June 30,
2021, the physical presence requirement
in § 1.401(a)-21(d)(6) is deemed satisfied
for an electronic system that uses remote
notarization if executed via live audio-vid-
eo technology that otherwise satisfies the
requirements of participant elections un-
der § 1.401(a)-21(d)(6) and is consistent
with state law requirements that apply to
the notary public.
B. Temporary Relief from the Physical
Presence Requirement for any
Participant Election Witnessed by a
Plan Representative
In the case of a participant election
witnessed by a plan representative, for the
period from January 1, 2021, through June
30, 2021, the physical presence require-
ment in § 1.401(a)-21(d)(6) is deemed
satisfied for an electronic system if the
electronic system using live audio-video
technology satisfies the following require-
ments:
(1) The individual signing the partici-
pant election must present a valid photo
ID to the plan representative during the
live audio-video conference, and may not
merely transmit a copy of the photo ID
prior to or after the witnessing;
(2) The live audio-video conference
must allow for direct interaction between
the individual and the plan representative
(for example, a pre-recorded video of the
person signing is not sufficient);
(3) The individual must transmit by fax
or electronic means a legible copy of the
signed document directly to the plan repre-
sentative on the same date it was signed; and
(4) After receiving the signed docu-
ment, the plan representative must ac-
knowledge that the signature has been
witnessed by the plan representative in
accordance with the requirements of this
notice and transmit the signed document,
including the acknowledgement, back to
the individual under a system that satisfies
the applicable notice requirements under
§ 1.401(a)-21(c).
IV. PAPERWORK REDUCTION ACT
The collection of information con-
tained in this notice has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1632.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information is in
section III.B of this notice. One of the
conditions for receiving temporary relief
from the physical presence requirement
in § 1.401(a)-21(d) is that the plan rep-
resentative acknowledge that he or she
has witnessed the signature and transmit
the signed document, including the ac-
knowledgement, back to the person un-
der a system that satisfies the applicable
notice requirements under § 1.401(a)-21.
This condition is similar to the confirma-
tion requirement for participant elections
in § 1.401(a)-21(d), requiring that the
individual making a participant election,
within a reasonable time, receive a con-
firmation of the election through either a
written paper document or an electron-
ic medium under a system that satisfies
the applicable notice requirements under
§ 1.401(a)-21(c). Notice 2020-42 includ-
ed a statement that it had been determined
that the plan representative’s acknowledg-
ment that he or she witnessed the signature
of the participant election is a minor modi-
fication to the control number 1545–1632
and does not result in any additional pa-
perwork burden. For the same reason, this
extension of the temporary relief from the
physical presence requirement does not
result in any additional paperwork burden.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as re-
quired by § 6103.
V. REQUEST FOR COMMENTS
The Treasury Department and the IRS
invite comments relating to the temporary
relief from the physical presence require-
ment in § 1.401(a)-21(d)(6). In particular,
the Treasury Department and the IRS re-
quest comments on whether relief from
the physical presence requirement should
be made permanent and, if made perma-
nent, what, if any, procedural safeguards
are necessary in order to reduce the risk
of fraud, spousal coercion, or other abuse
in the absence of a physical presence re-
quirement. Any permanent modification
of the physical presence requirement in
§ 1.401(a)-21(d)(6)(i) would be made
through the regulatory process that is sub-
ject to notice and comment. Thus, if the
Treasury Department and IRS decide to
propose modifying the physical presence
requirement on a permanent basis, there
will be additional opportunity for com-
ment.
Comments should be submitted in
writing and should include a reference to
Notice 2021-03. Comments may be sub-
mitted in one of two ways:
(1) Electronically via the Federal
eRulemaking Portal at www.regulations.
gov (type IRS-2020-0049 in the search
field on the regulations.gov homepage to
find this notice and submit comments).
(2) Alternatively, by mail to: Internal
Revenue Service, Attn: CC:PA:LPD:PR
(Notice 2021-03), Room 5203, P.O. Box
7604, Ben Franklin Station, Washington
D.C.20044.
All commenters are strongly encour-
aged to submit public comments electron-
ically. The IRS expects to have limited
personnel available to process public com-
ments that are submitted on paper through
mail. Until further notice, any comments
submitted on paper will be considered to
the extent practicable. The Treasury De-
partment and the IRS will publish for pub-
lic availability any comment submitted
electronically, and to the extent practica-
ble on paper, to its public docket.
VI. EFFECT ON OTHER
DOCUMENTS
Notice 2020-42 is modified.
VII. DRAFTING INFORMATION
The principal authors of this notice are
Arslan Malik and Pamela R. Kinard of
the Office of the Associate Chief Coun-
sel (Employee Benefits, Exempt Orga-

Bulletin No. 2021–2 319 January 11, 2021
nizations, and Employment Taxes). For
further information regarding this notice,
contact Arslan Malik at (202) 317-6700 or
Pamela R. Kinard at (202) 317-6000 (not
toll-free numbers).
Final Extension of
Temporary Relief for
Fuel Removals Destined
for Nontaxable Use Due
to West Shore Pipeline
Shutdown
Notice 2021-04
SECTION 1. PURPOSE
This notice provides the final extension
of the temporary dyed fuel relief initial-
ly provided for the period beginning on
October 31, 2017, and ending on May 3,
2018, in section 3.02 of Notice 2017-30,
2017-21 I.R.B. 1248. The temporary dyed
fuel relief was extended (i) through De-
cember 31, 2018, by section 3 of Notice
2018-39, 2018-20 I.R.B. 582, (ii) through
December 31, 2019, by section 3 of No-
tice 2019-04, 2019-02 I.R.B. 282, and (iii)
through December 31, 2020, by section 3
of Notice 2020-04, 2020-04 I.R.B. 380.
The final extension of the temporary dyed
fuel relief will begin on January 1, 2021,
and end on December 31, 2021. A claim-
ant may submit a refund claim for the In-
ternal Revenue Code § 4081(a)(1) tax im-
posed on undyed diesel fuel and kerosene
for fuel that is (i) removed from a Milwau-
kee or Madison terminal; (ii) entered into
a Green Bay terminal within 24 hours of
removal from the Milwaukee or Madison
terminal; and (iii) subsequently dyed and
removed from that Green Bay terminal.
SECTION 2. BACKGROUND
The West Shore Pipeline is a 650-mile
pipeline system that transported refined
petroleum products to the northeastern
part of Wisconsin for over 50 years. The
West Shore Pipeline was the only pipeline
serving Green Bay and northeastern Wis-
consin. The West Shore Pipeline segment
between Milwaukee and Green Bay closed
on March 10, 2016, for repairs, testing,
and inspections. On June 22, 2016, this
segment of the West Shore Pipeline was
shut down indefinitely after integrity con-
cerns were detected. Due to this unantic-
ipated complete shut down and the then
uncertain future of this section of the pipe-
line, Green Bay and northeast Wisconsin
expected to have material fuel shortages
for a relatively long period of time. In re-
sponse to this shut down and the expected
fuel shortages, the Governor of Wisconsin
issued Executive Orders on May 6, 2016,
September 7, 2016, and November 4,
2016, declaring energy emergencies. On
April 21, 2017, the Wisconsin Department
of Administration issued a statement that
the West Shore Pipeline Company noti-
fied the state that the company would not
replace the aging pipeline that runs from
north of Milwaukee to Green Bay. A Wis-
consin Department of Administration offi-
cial said the state would continue working
with its partners to develop a long-term
solution.
Since the March 2016 shutdown of
this segment of the West Shore Pipeline,
fuel has been transported to Green Bay
via vessel, or has been removed from the
Milwaukee or Madison terminals and
then transported via tank trucks and/or
rail cars to Green Bay terminals. The De-
partment of the Treasury (Treasury De-
partment) and the Internal Revenue Ser-
vice (IRS) recognized in Notice 2017-30
that there is no mechanism under existing
law that permits a refund of the § 4081(a)
(1) tax imposed upon removal of taxable
fuel from a Milwaukee terminal when
that fuel is transported to and entered into
a Green Bay terminal, and then removed
from the Green Bay terminal as dyed fuel
destined for a nontaxable use. Accord-
ingly, the Treasury Department and the
IRS provided administrative relief in the
form of a temporary refund mechanism
for the first tax paid on the taxable fuel
when it is removed from a Milwaukee
terminal, transported to and entered into
a Green Bay Terminal, and later removed
from that Green Bay terminal as dyed
fuel destined for a nontaxable use. This
temporary relief was available for the
period beginning on October 31, 2017,
and ending on May 3, 2018. Section 3 of
Notice 2018-39 extended this temporary
relief for the period beginning on May 4,
2018, and ending on December 31, 2018.
Additionally, Notice 2018-39 expanded
the temporary relief to include refund
claims for fuel that is taxed on removal
from a Madison terminal, transported to
a Green Bay terminal, and then removed
from that Green Bay terminal as dyed
fuel. The expanded temporary dyed fuel
relief was extended through December
31, 2019, by section 3 of Notice 2019-
04, 2019-02 I.R.B. 282, and was further
extended through December 31, 2020,
by section 3 of Notice 2020-04, 2020-04
I.R.B. 380.
The temporary administrative relief
provided during the years following the
permanent shutdown of the segment of
the West Shore Pipeline between Mil-
waukee and Green Bay has provided the
affected position holders time to renego-
tiate relevant contracts, otherwise adopt
business solutions pertaining to the ship-
ment of fuel by vessel to Green Bay or
by truck or rail from the Milwaukee and
Madison terminals to the Green Bay ter-
minals, and pursue legislative solutions.
Accordingly, this is the final extension
of the temporary administrative relief for
fuel that is (i) removed from a Milwau-
kee or Madison terminal; (ii) entered into
a Green Bay terminal within 24 hours of
removal from the Milwaukee or Madison
terminal; and (iii) subsequently dyed and
removed from that Green Bay terminal
for a nontaxable use.
Upon expiration of this temporary
administrative relief, a payment equal
to the aggregate amount of tax imposed
on such fuel under § 4081 may be avail-
able to the ultimate purchaser of the fuel
under § 6427(l)(1). Under § 6427(l)(1),
if any diesel fuel on which tax has been
imposed under § 4081 is used by any
person in a nontaxable use, the Secretary
of the Treasury or his delegate (Secre-
tary) shall pay (without interest) to the
ultimate purchaser of the fuel an amount
equal to the amount of tax imposed. Sec-
tion 48.6427-8(b)(1)(ii) provides that a
claim with respect to diesel fuel under
§ 6427(l)(1) is allowable if, among oth-
er conditions, the claimant produced or
bought the fuel and did not sell it in the
United States.

January 11, 2021 320 Bulletin No. 2021–2
SECTION 3. FINAL EXTENSION OF
TEMPORARY DYED FUEL RELIEF
For the period beginning on January
1, 2021, and ending on December 31,
2021, if any person (that is, the position
holder) that removes diesel fuel or ker-
osene that satisfies the requirements of
§ 4082 from a Green Bay terminal es-
tablishes to the satisfaction of the Sec-
retary that a prior tax was paid with re-
spect to the removal of such fuel from a
Milwaukee or Madison terminal, then an
amount equal to the prior tax paid shall
be allowed as a refund (without interest)
to the position holder in the same man-
ner as if it were an overpayment of tax
imposed by § 4081.
Notice 2017-59, 2017-45 I.R.B. 484,
provides guidance on how persons eligi-
ble for relief under section 3.02 of Notice
2017-30 may submit claims for refund.
Sections 3.02, 3.03, and 3.04 of Notice
2017-59 describe the conditions and pro-
cedures required to make such claims.
The relief described in this section is not
available with respect to any transaction
for which one or more conditions set forth
in section 3.02 of Notice 2017-59 are not
satisfied or for any refund claim that fails
to comply with the procedures set forth in
sections 3.03 and 3.04 of Notice 2017-59.
For purposes of this notice, any reference
in Notice 2017-59 to removals from a Mil-
waukee terminal shall be read to also in-
clude removals from a Madison terminal.
SECTION 4. EFFECTIVE DATE
The temporary dyed fuel relief de-
scribed in section 3 of this notice applies
to removals of dyed diesel fuel and kero-
sene from Green Bay terminals on or after
January 1, 2021, and on or before Decem-
ber 31, 2021.
SECTION 5. DRAFTING
INFORMATION
The principal author of this notice is
Natalie Payne of the Office of Associate
Chief Counsel (Passthroughs & Special
Industries). For further information re-
garding this notice contact Ms. Payne on
(202) 317-6855 (not a toll-free number).

Bulletin No. 2021–2 321 January 11, 2021
Part IV
Notice of Proposed
Rulemaking
Grandfathered Group
Health Plans and
Grandfathered Group
Health Insurance Coverage
REG-130081-19
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 54
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2590
DEPARTMENT OF HEALTH
AND HUMAN SERVICES
45 CFR Part 147
AGENCY: Internal Revenue Service, De-
partment of the Treasury; Employee Ben-
efits Security Administration, Department
of Labor; Centers for Medicare & Med-
icaid Services, Department of Health and
Human Services.
ACTION: Final rules.
SUMMARY: This document includes
final rules regarding grandfathered group
health plans and grandfathered group
health insurance coverage that amend cur-
rent rules to provide greater flexibility for
certain grandfathered health plans to make
changes to certain types of fixed- amount
cost-sharing requirements without causing
a loss of grandfather status under the Pa-
tient Protection and Affordable Care Act.
DATES: Effective Date: These regula-
tions are effective January 14, 2021.
Applicability Date: These regulations are
applicable June 15, 2021.
FOR FURTHER INFORMATION
CONTACT: William Fischer, Internal
Revenue Service, Department of the Trea-
sury, (202) 317-5500.
Matthew Litton and Chelsea Cerio,
Employee Benefits Security Administra-
tion, Department of Labor, (202) 693-
8335.
Cam Clemmons, Centers for Medi-
care & Medicaid Services, Department of
Health and Human Services, (301) 492-
4400.
Customer Service Information:
Individuals interested in obtaining in-
formation from the Department of Labor
(DOL) concerning employment-based
health coverage laws may call the Em-
ployee Benefits Security Administration
(EBSA) Toll-Free Hotline at 1-866-444-
EBSA (3272) or visit the DOL’s web site
(www.dol.gov/ebsa). In addition, informa-
tion from the Department of Health and
Human Services (HHS) regarding private
health insurance coverage and non-feder-
al governmental group health plans can
be found on the Centers for Medicare
& Medicaid Services (CMS) web site
(www.cms.gov/cciio), and information on
healthcare reform can be found at www.
HealthCare.gov.
SUPPLEMENTARY INFORMATION:
I. Background
A. Purpose
On January 20, 2017, the President is-
sued Executive Order 13765, “Minimiz-
ing the Economic Burden of the Patient
Protection and Affordable Care Act Pend-
ing Repeal” (82 FR 8351) “to minimize
the unwarranted economic and regulato-
ry burdens of the [Patient Protection and
Affordable Care Act (Pub. L. 111-148)
and the Health Care and Education Rec-
onciliation Act of 2010 (Pub. L. 111-152)
(collectively, PPACA), as amended].” To
meet these objectives, the President di-
rected that the executive departments and
agencies with authorities and responsibil-
ities under PPACA, “to the maximum ex-
tent permitted by law . . . shall exercise all
authority and discretion available to them
to waive, defer, grant exemptions from, or
delay the implementation of any provision
or requirement of [PPACA] that would
impose a fiscal burden on any state or a
cost, fee, tax, penalty, or regulatory bur-
den on individuals, families, healthcare
providers, health insurers, patients, recip-
ients of healthcare services, purchasers of
health insurance, or makers of medical de-
vices, products, or medications.”
HHS, DOL, and the Department of the
Treasury (collectively, the Departments)
share interpretive jurisdiction over section
1251 of PPACA, which generally provides
that certain group health plans and health
insurance coverage existing as of March
23, 2010, the date of enactment of PPACA
(referred to collectively in the statute as
grandfathered health plans), are subject to
only certain provisions of PPACA. Con-
sistent with the objectives of Executive
Order 13765, on February 25, 2019, the
Departments issued a request for informa-
tion regarding grandfathered group health
plans and grandfathered group health in-
surance coverage (2019 RFI).
1
The pur-
pose of the 2019 RFI was to gather input
from the public in order to better under-
stand the challenges that group health
plans and group health insurance issuers
face in avoiding a loss of grandfather sta-
tus, and to determine whether there are
opportunities for the Departments to assist
such plans and issuers, consistent with the
law, in preserving the grandfather status
of group health plans and group health
insurance coverage in ways that would
benefit plan participants and beneficiaries,
employers, employee organizations, and
other stakeholders.
Based on feedback received from
stakeholders who submitted comments in
response to the 2019 RFI, the Departments
issued a notice of proposed rulemaking
on July 15, 2020 (referred to as the 2020
proposed rules), that would, if finalized,
1
84 FR 5969 (Feb. 25, 2019).

January 11, 2021 322 Bulletin No. 2021–2
amend current rules to provide greater
flexibility for certain grandfathered health
plans to make changes to certain types of
cost-sharing requirements without caus-
ing a loss of grandfather status.
2
After
careful consideration of the comments
received, the Departments are issuing fi-
nal rules that adopt the proposed amend-
ments without substantive change. In the
Departments’ view, these amendments
are appropriate because they will enable
these plans to continue offering affordable
coverage while also enhancing their abili-
ty to respond to rising healthcare costs. In
some cases, the amendments would also
ensure that the plans are able to comply
with minimum cost-sharing requirements
for high deductible health plans (HDHPs)
so enrolled individuals are eligible to con-
tribute to health savings accounts (HSAs).
The final rules only address the re-
quirements for grandfathered group health
plans and grandfathered group health in-
surance coverage and do not apply to or
otherwise change the current requirements
applicable to grandfathered individual
health insurance coverage. With respect
to individual health insurance coverage, it
is the Departments’ understanding that the
number of individuals with grandfathered
individual health insurance coverage has
declined each year since PPACA was
enacted. As one comment received in re-
sponse to the 2019 RFI noted, this decline
in enrollment in grandfathered individual
health insurance coverage will continue
due to natural churn, because most con-
sumers stay in the individual market for
less than 5 years.
3
Moreover, compared
to the number of individuals in grandfa-
thered group health plans and grandfa-
thered group health insurance coverage,
only a small number of individuals are en-
rolled in grandfathered individual health
insurance coverage.
4
The Departments are
therefore of the view that any amendments
to requirements for grandfathered individ-
ual health insurance coverage would be of
limited utility.
B. Grandfathered Group Health Plans
and Grandfathered Group Health
Insurance Coverage
Section 1251 of PPACA provides that
grandfathered health plans are not sub-
ject to certain provisions of PPACA for
as long as they maintain their status as
grandfathered health plans.
5
For exam-
ple, grandfathered health plans are subject
neither to the requirement to cover certain
preventive services without cost sharing
under section 2713 of the Public Health
Service Act (PHS Act), enacted by section
1001 of PPACA, nor to the annual limita-
tion on cost sharing set forth under section
1302(c) of PPACA and section 2707(b) of
the PHS Act, enacted by section 1201 of
PPACA. If a plan were to lose its grandfa-
ther status, it would be required to comply
with both provisions, in addition to sever-
al other requirements.
On June 17, 2010, the Departments
issued interim final rules with request for
comments implementing section 1251
of PPACA.
6
On November 17, 2010, the
Departments issued an amendment to the
interim final rules with request for com-
ments to permit certain changes in poli-
cies, certificates, or contracts of insurance
without a loss of grandfather status.
7
Also,
over the course of 2010 and 2011, the De-
partments released Affordable Care Act
Implementation Frequently Asked Ques-
tions (FAQs) Parts I, II, IV, V, and VI to
answer questions related to maintaining
a plan’s status as a grandfathered health
plan.
8
After consideration of comments
and feedback received from stakehold-
ers, the Departments issued regulations
on November 18, 2015, which finalized
the interim final rules without substantial
change and incorporated the clarifications
that the Departments had previously pro-
vided in other guidance (2015 final rules).
9
In general, under the 2015 final rules,
a group health plan or group health insur-
ance coverage is considered grandfathered
if it was in existence, and has continuously
provided coverage for someone (not nec-
essarily the same person, but at all times
at least one person) since March 23, 2010,
provided the plan (or its sponsor) or issuer
has not taken certain actions resulting in
the plan relinquishing grandfather status.
Under the 2015 final rules, certain
changes to a group health plan or cover-
age do not result in a loss of grandfather
status. For example, new employees and
their families may enroll in a group health
plan or group health insurance coverage
without causing a loss of grandfather sta-
tus. Further, the addition of a new contrib-
uting employer or a new group of employ-
ees of an existing contributing employer
to a grandfathered multiemployer health
plan will not affect the plan’s grandfather
status. Also, grandfather status is deter-
mined separately for each benefit package
option available under a group health plan
2
85 FR 42782 (July 15, 2020)
3
The cause of this churn varies. For example, beginning a new job that offers group health coverage may result in a transition from the individual market to group coverage. Eligibility for
Medicaid or Medicare can also result in a consumer leaving the individual market.
4
HHS estimates that less than seven percent of enrollees in grandfathered plans have individual market coverage. This estimate is based on analysis of enrollment data issuers submitted in
the HHS Health Insurance and Oversight System (HIOS) and the CMS External Data Gathering Environment (EDGE) for the 2018 plan year, as well as Kaiser Family Foundation estimates
regarding the percentage of enrollees with employer-sponsored coverage that are covered by a grandfathered health plan.
5
For a list of the market reform provisions applicable to grandfathered health plans under title XXVII of the PHS Act that PPACA added or amended and that were incorporated into the
Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code), visit https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/laws/
affordable-care-act/for-employers-and-advisers/grandfathered-health-plans-provisions-summary-chart.pdf.
6
75 FR 34538 (June 17, 2010).
7
75 FR 70114 (Nov. 17, 2010).
8
See Affordable Care Act Implementation FAQs Part I, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-i.pdf and https://www.
cms.gov/ CCIIO/ Resources/ Fact-Sheets-and-FAQs/ aca_ implementation_ faqs.html; Affordable Care Act Implementation FAQs Part II, available at https://www.dol.gov/sites/default/files/
ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-ii.pdf and https://www.cms.gov/ CCIIO/ Resources/ Fact-Sheets-and-FAQs/ aca_ implementation_ faqs2.html; Affordable Care
Act Implementation FAQs Part IV, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-iv.pdf and https://www.cms.gov/ CCIIO/
Resources/ Fact-Sheets-and-FAQs/ aca_ implementation_ faqs4.html; Affordable Care Act Implementation FAQs Part V, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/
our-activities/resource-center/faqs/aca-part-v.pdf and https://www.cms.gov/ CCIIO/ Resources/ Fact-Sheets-and-FAQs/ aca_ implementation_ faqs5.html; and Affordable Care Act Implemen-
tation FAQs Part VI, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-vi.pdf and https://www.cms.gov/ CCIIO/ Resources/ Fact-
Sheets-and-FAQs/ aca_ implementation_ faqs6.html.
9
80 FR 72192 (Nov. 18, 2015), codified at 26 CFR 54.9815-1251, 29 CFR 2590.715-1251, and 45 CFR 147.140.

Bulletin No. 2021–2 323 January 11, 2021
or coverage; thus, if any benefit package
under the plan or coverage loses its grand-
father status, it will not affect the grandfa-
ther status of the other benefit packages,
provided that any other changes do not
exceed the other standards that cause a
plan to relinquish grandfather status, as
explained further in this preamble.
The 2015 final rules specify the cir-
cumstances under which changes to the
terms of a plan or coverage cause the
plan or coverage to cease to be a grandfa-
thered health plan. Specifically, the regu-
lations outline certain changes to benefits,
cost-sharing requirements, and contribu-
tion rates that will cause a plan or cov-
erage to relinquish its grandfather status.
There are six types of changes (measured
from March 23, 2010) that will cause a
group health plan or health insurance cov-
erage to cease to be grandfathered:
1. The elimination of all or substantial-
ly all benefits to diagnose or treat a partic-
ular condition;
2. Any increase in a percentage
cost-sharing requirement (such as coin-
surance);
3. Any increase in a fixed-amount
cost-sharing requirement (other than a
copayment) (such as a deductible or out-
of-pocket maximum) that exceeds certain
thresholds;
4. Any increase in a fixed-amount co-
payment that exceeds certain thresholds;
5. A decrease in contribution rate by
an employer or employee organization to-
ward the cost of coverage of any tier of
coverage for any class of similarly situat-
ed individuals by more than five percent-
age points below the rate for the coverage
period that includes March 23, 2010; or
6. The imposition of annual limits on
the dollar value of all benefits for group
health plans and insurance coverage that
did not impose such a limit prior to March
23, 2010.
The 2015 final rules provide different
thresholds for the increases to different
types of cost-sharing requirements that
will cause a loss of grandfather status.
The nominal dollar amount of a coinsur-
ance obligation automatically rises when
the cost of the healthcare benefit subject
to the coinsurance obligation increases, so
changes to the level of coinsurance (such
as modifying a requirement that the patient
pay 20 percent to a requirement that the
patient pay 30 percent of inpatient surgery
costs) can significantly alter the balance of
financial obligations between participants
and beneficiaries and a plan or health
insurance coverage. On the other hand,
fixed-amount cost-sharing requirements
(such as copayments and deductibles) do
not automatically rise when healthcare
costs increase. This means that changes to
fixed-amount cost-sharing requirements
(for example, modifying a $35 copay-
ment to a $40 copayment for outpatient
doctor visits) may be reasonable to keep
pace with the rising cost of medical items
and services. Accordingly, under the 2015
final rules, any increase in a percentage
cost-sharing requirement (such as coin-
surance) causes a plan or health insurance
coverage to cease to be a grandfathered
health plan. With respect to fixed-amount
cost-sharing requirements, however, there
are two standards for permitted increases,
one for fixed-amount cost-sharing require-
ments other than copayments (for exam-
ple, deductibles and out-of-pocket maxi-
mums) and another for copayments.
With respect to fixed-amount cost-shar-
ing requirements other than copayments, a
plan or coverage ceases to be a grandfa-
thered health plan if there is an increase,
since March 23, 2010, that is greater than
the maximum percentage increase. The
2015 final rules define the maximum
percentage increase as medical inflation
(from March 23, 2010) plus 15 percentage
points. For this purpose, medical infla-
tion is defined by reference to the overall
medical care component of the Consumer
Price Index for All Urban Consumers, un-
adjusted (CPI-U), published by the DOL
using the 1982–1984 base of 100.
For fixed-amount copayments, a plan
or coverage ceases to be a grandfathered
health plan if there is an increase, since
March 23, 2010, in the copayment that ex-
ceeds the greater of (1) the maximum per-
centage increase (calculated in the same
manner as for fixed amount cost-sharing
requirements other than copayments) or
(2) five dollars (as increased by medical
inflation).
For any change that causes a loss of
grandfather status under the 2015 final
rules, the plan or coverage will cease to
be a grandfathered plan when the change
becomes effective, regardless of when the
change is adopted.
In addition, the 2015 final rules require
that a grandfathered plan or coverage both
include a statement in any summary of
benefits provided under the plan that it
believes the plan or coverage is a grand-
fathered health plan and provide contact
information for questions and complaints.
Failure to provide this disclosure results in
a loss of grandfather status. The 2015 final
rules further provide that, once grandfa-
ther status is relinquished, there is no op-
portunity to regain it.
C. 2019 Request for Information
It is the Departments’ understanding that
the number of grandfathered group health
plans and grandfathered group health in-
surance policies has declined each year
since the enactment of PPACA, but many
employers continue to maintain grandfa-
thered group health plans and coverage.
That a significant number of grandfathered
group health plans and coverage remain
indicates that some employers and issuers
have found value in preserving grandfather
status. Accordingly, on February 25, 2019,
the Departments published the 2019 RFI
to gather input from the public in order to
better understand the challenges that group
health plans and group health insurance is-
suers face in avoiding the loss of grandfa-
ther status and to determine whether there
are opportunities for the Departments to as-
sist such plans and issuers, consistent with
the law, in preserving the grandfather status
of group health plans and group health in-
surance coverage in ways that would ben-
efit plan participants and beneficiaries, em-
ployers, employee organizations, and other
stakeholders.
Comments submitted in response to
the 2019 RFI provided information re-
garding grandfathered health plans that
helped inform the 2020 proposed rules.
Commenters shared data regarding the
prevalence of grandfathered group health
plans and grandfathered group health in-
surance coverage, insights regarding the
impact that grandfathered plans have had
in terms of delivering benefits to partici-
pants and beneficiaries at a lower cost than
non-grandfathered plans, and suggestions
for potential amendments to the Depart-
ments’ 2015 final rules that would provide
more flexibility for a plan or coverage to
retain grandfather status.

January 11, 2021 324 Bulletin No. 2021–2
Several commenters directed the De-
partments’ attention to a Kaiser Family
Foundation survey, which indicates that
one out of every five firms that offered
health benefits in 2018 offered at least
one grandfathered health plan, and 16
percent of covered workers were enrolled
in a grandfathered group health plan that
year.
10
One commenter indicated the inci-
dence of grandfathered plan status differs
by various types of plan sponsors. Another
commenter cited survey data released in
2018 by the International Foundation of
Employee Benefit Plans, which indicated
that 57 percent of multiemployer plans are
grandfathered, compared to 20 percent of
other private-sector plans and 30 percent
of public-sector plans. However, a pro-
fessional association with members who
work with employer groups on health plan
design and administration commented
that their members have found far fewer
grandfathered plans than survey results
suggest exist and suggested that very
large employers with self-funded plans
may sponsor a disproportionate share of
grandfathered plans, as well as that some
employers that have “grandmothered”
plans or that previously had grandfathered
plans may unintentionally be reporting in-
correctly in surveys that they still sponsor
grandfathered plans.
11
Some commenters stated that grand-
fathered health plans are less compre-
hensive and provide fewer consumer
protections than non-grandfathered plans;
thus, these commenters opined that the
Departments should not amend the 2015
final rules to provide greater flexibility
for a plan or coverage to maintain grand-
father status. Other commenters noted,
however, that grandfathered plans often
have lower premiums and cost-sharing re-
quirements than non-grandfathered plans.
One commenter gave examples of premi-
um increases ranging from 10 percent to
40 percent that grandfathered plan par-
ticipants would experience if they transi-
tioned to non-grandfathered group health
plans. Several commenters also stated that
grandfathered health plans do in fact of-
fer comprehensive benefits and in some
cases are even more generous than certain
non-grandfathered plans that are subject
to all the requirements of PPACA. Some
commenters also stated that their grand-
fathered plans offer more robust provider
networks than other coverage options that
are available to them or that access to a
grandfathered plan ensures that they are
able to keep receiving care from current
in-network providers.
Commenters who supported allowing
greater flexibility for grandfathered health
plans offered a range of suggestions re-
garding how the Departments should
amend the 2015 final rules. For example,
several commenters requested addition-
al flexibility regarding plan or coverage
changes that would constitute an elimina-
tion of substantially all benefits to diag-
nose or treat a condition, stating that it is
often difficult to discern what constitutes
a benefit reduction given that the regula-
tions apply a “facts and circumstances”
standard. Some commenters requested
flexibility to make certain changes so
long as the grandfathered plan or cover-
age’s actuarial value is not affected. Some
commenters also stated that the 2015 final
rules should be amended to permit de-
creases in contribution rates by employers
and employee organizations by more than
five percentage points to account for em-
ployers experiencing a business change or
economic downturn.
Commenters also suggested amend-
ments relating to the permitted changes
in cost-sharing requirements for grandfa-
thered plans. These commenters generally
argued that the 2015 final rules were too
restrictive. Several commenters stated
that relying on the medical care compo-
nent of the CPI-U for purposes of those
rules to account for inflation adjustments
to the maximum percentage increase was
misguided, and the methodology used to
calculate the “premium adjustment per-
centage” (as defined in 45 CFR 156.130)
would be more appropriate because it is
tied to the increase in premiums for health
insurance and, therefore, better reflects
the increase in costs for health coverage.
These commenters also noted that relying
on the premium adjustment percentage
would be consistent with the methodology
used to adjust the annual limitation on cost
sharing under section 1302(c) of PPACA
and section 2707(b) of the PHS Act that
applies to non-grandfathered plans. Addi-
tionally, one commenter articulated a con-
cern that the 2015 final rules eventually
may preclude some grandfathered group
health plans or issuers of grandfathered
group health insurance coverage from be-
ing able to make changes to cost-sharing
requirements that are necessary for a plan
to maintain its status as an HDHP within
the meaning of section 223 of the Code,
which would effectively mean that indi-
viduals covered by those plans would no
longer be eligible to contribute to an HSA.
D. The Premium Adjustment Percentage
Section 1302(c)(4) of PPACA directs
the Secretary of HHS to determine an an-
nual premium adjustment percentage, a
measure of premium growth that is used
to set the rate of increase for three parame-
ters detailed in PPACA: (1) the maximum
annual limitation on cost sharing (defined
at 45 CFR 156.130(a)); (2) the required
contribution percentage used to deter-
mine eligibility for certain exemptions
under section 5000A of the Code (defined
at 45 CFR 155.605(d)(2)); and (3) the
employer shared responsibility payment
amounts under section 4980H(a) and (b)
of the Code (see section 4980H(c)(5) of
the Code). Section 1302(c)(4) of PPACA
10
See 2018 Employer Health Benefits Survey, Kaiser Family Foundation, available at https://www.kff.org/report-section/2018-employer-healthbenefits-survey-section-13-grandfa-
thered-healthplans. On October 8, 2020, the Kaiser Family Foundation issued its 2020 report. According to survey data, 16 percent of offering firms report having at least one grandfathered
plan in 2020, and 14 percent of covered workers were enrolled in a grandfathered health plan in 2020. See 2020 Employer Health Benefits Survey, Kaiser Family Foundation, available at
http://files.kff.org/attachment/Report-Employer-Health-Benefits-2020-Annual-Survey.pdf.
11
“Grandmothered” plans, also known as transitional plans, are certain non-grandfathered health insurance coverage in the small group and individual market that meet certain conditions.
On November 14, 2013, CMS issued a letter to the State Insurance Commissioners outlining a policy under which, if permitted by the state, non-grandfathered small group and individual
market health plans that were in effect on October 1, 2013, could continue and would not be treated as being out of compliance with certain specified PPACA market reforms under certain
conditions. CMS has extended this non-enforcement policy each subsequent year, with the most recent extension in effect until policy years beginning on or before October 1, 2021, provided
that all such coverage comes into compliance by January 1, 2022. See Insurance Standards Bulletin Series – INFORMATION – Extension of Limited Non-Enforcement Policy through 2021
(January 31, 2020), available at https://www.cms.gov/files/document/extension-limited-non-enforcement-policy-through-calendar-year-2021.pdf.

Bulletin No. 2021–2 325 January 11, 2021
and 45 CFR 156.130(e) provide that the
premium adjustment percentage is the
percentage (if any) by which the average
per capita premium for health insurance
coverage for the preceding calendar year
exceeds such average per capita premium
for health insurance for 2013, and 45 CFR
156.130(e) provides that this percentage
will be published annually by HHS.
To calculate the premium adjustment
percentage for a benefit year, HHS calcu-
lates the percentage by which the average
per capita premium for health insurance
coverage for the preceding calendar year
exceeds the average per capita premium
for health insurance for 2013 and rounds
the resulting percentage to 10 significant
digits. The resulting premium index re-
flects cumulative, historic growth in pre-
miums from 2013 through the preceding
year. HHS calculates the premium ad-
justment percentage using as a premium
growth measure the most recently avail-
able National Health Expenditure Ac-
counts (NHEA) projection of per enrollee
premiums for private health insurance (ex-
cluding Medigap and property and casual-
ty insurance) at the time of publication of
the premium adjustment percentage.
12
E. High Deductible Health Plans and
HSA-compatibility
Section 223 of the Code permits eligi-
ble individuals to establish and contribute
to HSAs. HSAs are tax-favored accounts
established for the purpose of accumu-
lating funds to pay for qualified medical
expenses on behalf of the account benefi-
ciary, his or her spouse, and any claimed
dependents. In order for an individual to
qualify as an eligible individual under
section 223(c)(1) of the Code (and thus
to be eligible to make tax-favored contri-
butions to an HSA) the individual must
be covered under an HDHP. An HDHP
is a health plan that satisfies certain re-
quirements with respect to minimum de-
ductibles and maximum out-of-pocket
expenses, which increase annually with
cost-of-living adjustments. Generally, ex-
cept for preventive care, an HDHP may
not provide benefits for any year until the
deductible for that year is met. Pursuant to
section 223(g) of the Code, the minimum
deductible for an HDHP is adjusted annu-
ally for cost of living based on changes in
the Chained Consumer Price Index for All
Urban Consumers (C-CPI-U).
13
F. 2020 Proposed Rules
On July 15, 2020, the Departments is-
sued the 2020 proposed rules that would,
if finalized, amend the 2015 final rules
to provide greater flexibility for grand-
fathered group health plans and issuers
of grandfathered group health insurance
coverage to make certain changes without
causing a loss of grandfather status. How-
ever, there is no authority for non-grand-
fathered plans to become grandfathered.
Therefore, the 2020 proposed rules did
not provide any opportunity for a plan or
coverage that has lost its grandfather sta-
tus under the 2015 final rules to regain that
status.
In issuing the 2020 proposed rules,
the Departments considered comments
submitted in response to the 2019 RFI
regarding ways that the 2015 final rules
could be amended. The Departments did
not include in the 2020 proposed rules
many suggestions outlined in those com-
ments because, in the Departments’ view,
those suggestions would have allowed for
such significant changes that the modified
plan or coverage could not reasonably be
described as being the same plan or cov-
erage that existed on March 23, 2010,
for purposes of grandfather status. The
Departments were persuaded, however,
by commenters’ statements that there are
better means of accounting for inflation in
the standard for the maximum percentage
increase that should be permitted to fixed-
amount cost-sharing requirements. The
Departments also agreed that, as one com-
menter on the 2019 RFI highlighted, there
is an opportunity to specify that changes
to fixed-amount cost-sharing requirements
that are necessary for a plan to maintain its
status as an HDHP should not cause a loss
of grandfather status. Given that the 2015
final rules permit increases that are meant
to account for inflation in healthcare costs
over time, the Departments were of the
view that those suggestions were reason-
ably narrow and consistent with the in-
tent of the 2015 final rules to permit ad-
justments in response to inflation without
causing a loss of grandfather status.
Accordingly, the Departments proposed
to amend the 2015 final rules in two ways.
First, the 2020 proposed rules included
a new paragraph (g)(3), which specified
that grandfathered group health plans
and grandfathered group health insur-
ance coverage that are HDHPs may make
changes to fixed-amount cost-sharing re-
quirements that would otherwise cause a
loss of grandfather status without causing
a loss of grandfather status, but only to
the extent those changes are necessary to
comply with the requirements for HDHPs
under section 223(c)(2)(A) of the Code.
Second, the 2020 proposed rules included
a revised definition of “maximum percent-
age increase” at redesignated paragraph (g)
(4), which provided an alternative method
of determining that amount based on the
premium adjustment percentage. Under
the 2020 proposed rules, this alternative
method would be available only for grand-
fathered group health plans and grandfa-
thered group health insurance coverage
with changes that are effective on or after
the applicability date of a final rule.
The Departments requested comments
on all aspects of the 2020 proposed rules, as
well as on specific issues related to the 2020
proposed rules where stakeholder feedback
would be particularly useful in evaluating
whether to issue final rules, and what the
content of any final rules should be.
The comment period for the 2020 pro-
posed rules closed on August 14, 2020. The
Departments received 13 comments. After
careful consideration of these comments,
for the reasons explained further in the pre-
amble, the Departments are issuing the fi-
nal rules, which finalize the 2020 proposed
rules without substantive change.
12
85 FR 29164, 29228 (May 14, 2020). The series used in the determinations of the adjustment percentages can be found in Table 17 on the CMS web site, which can be accessed by clicking
the “NHE Projections 2018-2027 – Tables” link located in the Downloads section at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHeal-
thExpendData/NationalHealthAccountsProjected.html. A detailed description of the NHE projection methodology is available at https://www.cms.gov/Research-Statistics-Data-and-Systems/
Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ProjectionsMethodology.pdf.
13
The Tax Cuts and Jobs Act, Pub. L. 115-97, 131 Stat. 2054 (Dec. 22, 2017), amended section 1(f)(3) of the Code to use the C-CPI-U rather than CPI-U for certain inflation adjustments for
tax years beginning after December 31, 2017.

January 11, 2021 326 Bulletin No. 2021–2
II. Overview of the Final Rules
A. General Response to Public Comments
on the 2020 Proposed Rules
Some commenters expressed support
for the 2020 proposed rules because the
2020 proposed rules would allow grand-
fathered group health plans and issuers
offering grandfathered group health insur-
ance coverage to make certain key changes
without causing a loss of grandfather sta-
tus. One commenter noted that providing
more flexibility to maintain grandfather
status should help both plan sponsors and
participants. This commenter highlighted
that plan sponsors could continue to avoid
the costs and burdens associated with
compliance with the additional require-
ments applicable to non-grandfathered
plans while plan participants and benefi-
ciaries could retain their current coverage
instead of finding alternate coverage and
potentially experiencing greater increases
in cost sharing or reductions in benefits.
The final rules will allow grandfathered
group health plan sponsors and issuers of
grandfathered group health insurance cov-
erage more flexibility to make changes to
certain types of cost-sharing requirements
without causing a loss of grandfather status.
The Departments view this flexibility as a
way to enable plan sponsors and issuers to
continue to offer quality, affordable cover-
age to their participants and beneficiaries
while appropriately taking into account ris-
ing healthcare costs. The Departments also
are of the view that providing this flexibility
will help participants and beneficiaries in
grandfathered group health plans maintain
their current coverage, including their pro-
vider and service network(s). Further, the
final rules will provide participants and ben-
eficiaries with the ability to maintain access
to affordable coverage options offered by
their employers or unions by ensuring that
employers and other plan sponsors have the
ability to more appropriately account for the
rising costs of healthcare due to inflation.
Several commenters did not support the
2020 proposed rules and urged the Depart-
ments not to finalize them. These comment-
ers generally stated that finalizing the 2020
proposed rules would allow employers to
continue to offer plans that do not provide
comprehensive benefits while placing an in-
creased financial burden on participants and
beneficiaries. The commenters also noted
that grandfathered group health plans lack
certain essential patient protections, and that
the consequences of not having complete
information about grandfathered coverage
will be especially detrimental for patients
with complex medical conditions. These
commenters further asserted that ensuring
access to robust coverage and benefits such
as preventive services and maternity care is
especially important and that, in light of the
ongoing COVID-19 pandemic, now is not
an appropriate time to allow changes that
could shift more costs to consumers.
While the Departments appreciate these
concerns, the Departments are of the view
that finalizing the 2020 proposed rules
strikes a proper balance between preserving
plans’, issuers’, participants’, and beneficia-
ries’ ability to maintain existing coverage
with the goals of expanding access to and
improving the quality of health coverage.
The Departments are also of the view that
the final rules appropriately support the goal
of promoting greater choice in coverage, es-
pecially in light of rising healthcare costs.
While grandfathered health plans are not
required to comply with all PPACA market
reform provisions, there are many PPACA
consumer protections that are applicable to
all group health plans and issuers offering
group health insurance coverage, regardless
of grandfather status, including the prohibi-
tion on preexisting condition exclusions, the
prohibition on waiting periods that exceed
90 days, the prohibition on lifetime or annual
dollar limits, the prohibition on rescissions,
and the requirement for plans and issuers that
offer dependent coverage of children to do
so up to age 26. Further, grandfathered group
health plans and issuers of grandfathered
group health insurance coverage are not pro-
hibited from providing coverage consistent
with any of the PPACA market provisions
that apply to non-grandfathered group health
plans and may add that coverage without
relinquishing grandfather status, provided
these changes are made without exceeding
the standards established by paragraph (g)(1)
of the grandfather regulations.
Several commenters urged the Depart-
ments to not finalize the 2020 proposed
rules due to the ongoing coronavirus
disease of 2019 (COVID-19) pandemic.
These commenters highlighted that the
COVID-19 pandemic has created high
levels of economic uncertainty for mil-
lions of Americans while also posing risks
to their health and safety. The comment-
ers voiced concern that the 2020 proposed
rules could have a harmful impact on ac-
cess to care and affordability during the
ongoing COVID-19 pandemic.
As evidenced by the Administration’s
efforts to address the COVID-19 pandem-
ic, the Departments appreciate that the
COVID-19 pandemic has created a great-
er need for affordable healthcare options
for consumers and, accordingly, have tak-
en a number of actions to provide relief
and promote increased access to benefits
during the COVID-19 pandemic.
14
For
14
The Departments continue to work with employers and individuals to help them understand the new laws and regulatory relief and to benefit from them, as intended. On April 11, 2020, the
Departments issued FAQs Part 42 regarding implementation of the Families First Coronavirus Response Act (FFCRA), and the Coronavirus Aid, Relief, and Economic Security (CARES)
Act, and other health coverage issues related to COVID-19 available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-42.pdf. In this
guidance, the Departments strongly encourage all group health plans and health insurance issuers to promote the use of telehealth and other remote care services. The Departments’ guidance
also provides enforcement relief that allows plans and issuer to make changes to increase telehealth benefits more quickly than is possible under current law. Specifically, the Departments
will not enforce regulations that generally require plans and issuers to provide 60 days’ advance notice of certain changes to plan terms and prohibit issuers from making mid-year modifica-
tions to health insurance products, with respect to any change that adds benefits or reduces or eliminates cost-sharing requirements for telehealth services and other remote care services. On
June 23, 2020, the Departments issued a second round of FAQs, Part 43, providing further guidance regarding requirements of the FFCRA and the CARES Act and related issues available
at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-43.pdf. In light of the critical need to minimize the risk of exposure to and community
spread of COVID-19, the FAQs provide a statement of temporary enforcement relief regarding certain requirements that would otherwise apply in order to allow large employers to offer
stand-alone telehealth benefits to employees who are not eligible for the employer’s primary group health plan. Furthermore, the Departments of Labor and the Treasury published a Joint
Notice – Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries (85 FR 26351) on May 4, 2020, https://www.govinfo.gov/content/pkg/FR-2020-05-04/
pdf/2020-09399.pdf. The Joint Notice extends timeframes for requesting special enrollment in a group health plan, the COBRA election period, and COBRA premium due dates, and certain
timeframes relating to benefit claims appeals. On May 14, 2020, HHS published guidance that announced that HHS concurred with the relief specified in the Joint Notice and would adopt a
temporary policy of relaxed enforcement to extend similar timeframes otherwise applicable to non-Federal governmental group health plans and health insurance issuers offering coverage
in connection with a group health plan, and their participants and beneficiaries, under applicable provisions of title XXVII of the PHS Act, available at https://www.cms.gov/files/document/
Temporary-Relaxed-Enforcement-Of-Group-Market-Timeframes.pdf.

Bulletin No. 2021–2 327 January 11, 2021
example, the Departments have published
regulatory and subregulatory guidance to
assist individuals during the COVID-19
pandemic, including those who have lost
their health coverage, and have extended
a number of deadlines so that participants
and beneficiaries in employee benefit
plans have additional time to make critical
health coverage decisions affecting their
benefits during the COVID-19 pandem-
ic.
15
The Departments highlight that the
final rules provide flexibility to employers
that currently offer health coverage and
have consistently done so since 2010, with
the aim that their employees will have a
greater ability to maintain that coverage,
should they so choose. Accordingly, the
Departments are of the view that the flexi-
bility afforded by the final rules is unlike-
ly to exacerbate any difficulties employ-
ees may experience in obtaining access
to care during the COVID-19 pandemic
and will potentially enable employers and
employees to maintain more affordable
coverage than they may otherwise be able
to maintain. Notwithstanding these con-
siderations, the Departments are delaying
the applicability of the final rules, to be
applicable 6 months after publication in
the Federal Register, as discussed later in
this preamble.
One commenter raised concerns that
the continued availability of grandfathered
plans might contribute to segmentation of
the small-group market, causing adverse
selection and, in turn, higher premiums
for small businesses that offer or want to
offer plans subject to the PPACA market
reforms. This commenter noted that, be-
cause the non-grandfathered small-group
market is subject to modified community
rating and a “single risk pool,” firms with
younger or healthier–than–average em-
ployees have incentives to opt out of the
small group market single risk pool, at the
expense of other firms that may therefore
face higher premiums. Commenters also
claimed that the Departments do not have
sufficient information and data to accu-
rately predict the financial effect that the
2020 proposed rules would have on con-
sumers.
The Departments acknowledge that the
existence of grandfathered group health
plans potentially creates market segmen-
tation and adverse selection in the small
group market. However, the Departments
do not anticipate that the additional flex-
ibilities provided in the final rules will
materially increase market segmentation,
or adverse selection, as the final rules do
not provide a mechanism for non-grand-
fathered plans to become grandfathered.
For this reason, the Departments are of the
view that the changes allowed by the final
rules will not have a measurable impact on
premiums for small businesses that offer
or want to offer non-grandfathered group
health insurance coverage. Moreover, the
Departments do not expect the number of
plans that maintain grandfather status be-
cause of the final rules to be so significant
as to exacerbate any market segmentation
that may already exist.
The Departments also received com-
ments stating that consumers risk being
confused or having difficulty with the
term “grandfathered.” One commenter
noted it may be difficult to know whether
grandfathered plan participants and bene-
ficiaries are actively choosing to remain
in such plans, whether they typically have
other non-grandfathered options that they
could select, whether they even know a
plan is grandfathered, or whether they un-
derstand which PPACA consumer protec-
tions might be missing when they enroll
in grandfathered coverage. Other com-
menters suggested the addition of greater
transparency requirements for employers
that offer grandfathered plans as a means
to avoid confusion.
The Departments note that these con-
cerns relate to grandfathered plans gen-
erally and are not specific to the limited
changes made in the proposed or final
rules. Under the 2015 final rules, to
maintain status as a grandfathered plan,
a group health plan or health insurance
coverage must include a statement in any
summary of benefits that the plan or cov-
erage believes it is a grandfathered plan.
It must also provide contact information
for questions and complaints. The 2015
final rules provide model language that
the plan or coverage can use to satisfy the
disclosure requirement. That language
specifically highlights that grandfathered
plans are subject to some, but not all, of
the PPACA consumer protections that
apply to non-grandfathered plans, such
as not being subject to the requirement
to provide certain preventive health ser-
vices without cost sharing. This required
disclosure of grandfather status is intend-
ed to alleviate confusion consumers may
face regarding the term “grandfathered”
and what benefits and protections are
offered under such coverage. The dis-
closure language is model language, and
plans and issuers may include additional
disclosure elements, such as the entire
list of market reform provisions that do
not apply to the specific grandfathered
health plan.
Moreover, group health plans, includ-
ing grandfathered plans, are subject to a
number of disclosure requirements under
which participants and beneficiaries are
entitled to comprehensive information
about their benefits. For example, group
health plans that are subject to ERISA
are required to distribute a summary plan
description (SPD) to participants and ben-
eficiaries that provides a comprehensive
description of the benefits offered by the
plan.
16
In addition, group health plans and
issuers of group health insurance cover-
age, including grandfathered plans, are
required to provide a summary of benefits
and coverage (SBC) that provides infor-
mation about benefits and cost sharing in
connection with enrollment and renewal.
17

Furthermore, typically, if a plan or issuer
makes a material modification to any term
that affects the content of the SBC and that
is not reflected in the most recently pro-
vided SBC, and that occurs other than in
connection with a renewal or reissuance
of coverage, notice of the change must be
15
See e.g., Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak, 85 FR 26351 (May 4, 2020); FAQs About
First Coronavirus Response Act and Coronavirus Aid, Relief, and Economic Security Act Implementation Part 42 (April 11, 2020) available at https://www.dol.gov/sites/dolgov/files/
ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-42.pdf and https://www.cms.gov/files/document/FFCRA-Part-42-FAQs.pdf; FAQs About Families First Coronavirus Response
Act and Coronavirus Aid, Relief, and Economic Security Act Implementation Part 43 (June 23, 2020), available at https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/
resource-center/faqs/aca-part-43.pdf and https://www.cms.gov/files/document/FFCRA-Part-43-FAQs.pdf.
16
ERISA Section 102.
17
26 CFR 54.9815-2715, 29 CFR 2590.715-2715, 45 CFR 147.200.

January 11, 2021 328 Bulletin No. 2021–2
provided no later than 60 days prior to the
date the modification is effective.
18
The Departments have concluded that
existing disclosure requirements are suf-
ficient to ensure that participants and ben-
eficiaries have access to relevant infor-
mation, including information regarding
cost sharing, to help them understand the
implications of grandfathered coverage.
The information included in the model
grandfather notice – in particular the lan-
guage highlighting that certain consumer
protections under PPACA do not apply to
grandfathered coverage, alongside the in-
formation available to individuals in their
plan’s SPD and SBC – provides ample
disclosure to participants and beneficia-
ries regarding their benefits to help them
decide whether to enroll or remain in such
a plan. Therefore, the Departments are
declining to include any additional disclo-
sure requirements in the final rules.
a. Special Rule for Certain
Grandfathered HDHPs
As explained above, paragraph (g)(1) of
the 2015 final rules identifies certain types
of changes that will cause a plan or cover-
age to cease to be a grandfathered health
plan, including increases in cost-sharing
requirements that exceed certain thresh-
olds. However, cost-sharing requirements
for a grandfathered group health plan or
group health insurance coverage that is an
HDHP must satisfy the minimum annu-
al deductible requirement and maximum
out-of-pocket expenses requirement under
section 223(c)(2)(A) of the Code in order
to remain an HDHP. The Internal Revenue
Service updates these amounts annually to
reflect a cost-of-living adjustment.
The annual cost-of-living adjustment
to the required minimum deductible for an
HDHP has not yet exceeded the maximum
percentage increase that would cause an
HDHP to lose grandfather status.
19
Never-
theless, the Departments are of the view
that there is value in specifying that if a
grandfathered group health plan or group
health insurance coverage that is an HDHP
increases its fixed-amount cost-sharing
requirements to meet a future adjusted
minimum annual deductible requirement
under section 223(c)(2)(A) of the Code
that is greater than the increase that would
be permitted under paragraph (g)(1) of the
2015 final rules, such an increase would
not cause the plan or coverage to relin-
quish its grandfather status. Otherwise,
if such a conflict were to occur, the plan
sponsor or issuer would have to decide
whether to preserve the plan’s grandfather
status or its status as an HDHP, potential-
ly causing participants and beneficiaries
to experience either substantial changes
to their coverage (and likely premium in-
creases) or a loss of eligibility to contrib-
ute to an HSA.
To address this potential conflict, the
2020 proposed rules included a new para-
graph (g)(3), which provided that, with re-
spect to a grandfathered group health plan
or group health insurance coverage that
is an HDHP, increases to fixed-amount
cost-sharing requirements that otherwise
would cause a loss of grandfather status
would not cause the plan or coverage to
relinquish its grandfather status, but only
to the extent the increases are necessary
to maintain its status as an HDHP under
section 223(c)(2)(A) of the Code.
20
Thus,
increases with respect to such a plan or
coverage that would otherwise cause a
loss of grandfather status and that exceed
the amount necessary to satisfy the mini-
mum annual deductible requirement under
section 223(c)(2)(A) of the Code would
still cause a loss of grandfather status. The
2020 proposed rules also added a new ex-
ample 11 under paragraph (g)(5) to illus-
trate how this special rule would apply.
Several commenters supported the
2020 proposed rules to allow a grandfa-
thered HDHP to make changes to fixed-
amount cost-sharing requirements with-
out causing a loss of grandfather status
to the extent the increases are necessary
to maintain the plan’s status as an HDHP.
One commenter highlighted that without
this regulatory change, HDHPs could be
forced out of their grandfather status if
the annual cost-of-living adjustment to
the required minimum deductible for an
HDHP exceeds the maximum percent-
age increase allowed under the 2015 fi-
nal rules. Another commenter articulated
that without this provision, participants
and beneficiaries who are covered under a
grandfathered HDHP and eligible to con-
tribute to an HSA may lose their eligibil-
ity to contribute to an HSA if their plan
chooses to relinquish its HDHP status to
maintain its grandfather status. The com-
menter also raised the concern of facing
substantial premium increases as a result
of having to choose other health coverage
in the event of an HDHP failing to main-
tain its HDHP status.
The Departments agree that the special
rule for grandfathered HDHPs could help
participants and beneficiaries enrolled in
these plans. The Departments are of the
view that there is value in specifying that
grandfathered HDHPs will not be forced
to choose whether to preserve their grand-
father status or their status as an HDHP
and that they can continue to provide the
coverage with which their participants
and beneficiaries are familiar and com-
fortable. The Departments also agree
that this special rule will help ensure that
plans are able to comply with minimum
cost-sharing requirements for HDHPs so
participants and beneficiaries covered un-
der HDHPs can continue to be eligible to
contribute to HSAs. In adopting the final
rules, the Departments specifically intend
to ensure that participants and beneficia-
ries enrolled in HDHPs with grandfather
status are able to maintain their eligibility
to contribute to HSAs.
Other commenters expressed concerns
that allowing grandfathered HDHPs to
preserve both their grandfather status
and HDHP status by implementing fixed
dollar cost-sharing increases that exceed
18
26 CFR 54.9815-2715(b), 29 CFR 2590.715-2715(b), 45 CFR 147.200(b).
19
For calendar year 2020, a “high deductible health plan” is defined under Code section 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,400 for self-only cov-
erage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) for which do not exceed $6,900 for self-only
coverage or $13,800 for family coverage. Rev. Proc. 2019-25 (2019-22 I.R.B. 1261). For calendar year 2021, a “high deductible health plan” is defined under Code section 223(c)(2)(A) as a
health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and
other amounts, but not premiums) for which do not exceed $7,000 for self-only coverage or $14,000 for family coverage. Rev. Proc. 2020-32 (2020-24 I.R.B. 930).
20
Paragraph (g)(3) of the 2015 final rules would be renumbered as paragraph (g)(4), and subsequent paragraphs would be renumbered accordingly. Additionally, the 2020 proposed rules
included conforming amendments to other paragraphs to update all cross-references to those subparagraphs.

Bulletin No. 2021–2 329 January 11, 2021
the standards established under the 2015
final rules might result in increased costs
for consumers enrolled in HDHPs. These
commenters stated that the proposed
changes would further exacerbate existing
affordability issues, in particular by rais-
ing deductibles to potentially unafford-
able levels and subjecting consumers to
increased cost sharing. Several comment-
ers noted that increased cost sharing for
HDHPs may discourage consumers from
seeking medical care or cause consum-
ers to forego treatment if the necessary
services became unaffordable. Moreover,
commenters noted that high out-of-pock-
et costs for medical care related to the
diagnosis and/or treatment of COVID-19
may deter individuals from seeking care,
potentially contributing to increased trans-
mission of COVID-19.
The Departments acknowledge com-
menters’ concerns related to potential in-
creased cost and affordability issues, but
the Departments do not anticipate sig-
nificant cost increases for consumers en-
rolled in grandfathered HDHPs. In addi-
tion, this special rule is narrowly tailored,
as it permits flexibility only to the extent
necessary to maintain a plan’s status as
an HDHP under section 223(c)(2)(A) of
the Code. Without this regulatory change,
grandfathered HDHPs could be forced to
choose between maintaining grandfather
status and remaining HDHPs. The flexi-
bility offered by the special rule for grand-
fathered HDHPs will benefit participants
and beneficiaries covered under these
plans as it balances potential affordability
issues with safeguards. Specifically, the fi-
nal rules allow plan sponsors to continue
offering grandfathered coverage, thereby
enabling participants and beneficiaries to
maintain existing coverage, while only
permitting plan sponsors to make certain
cost-sharing increases to the extent neces-
sary to maintain HDHP status. Moreover,
the Departments expect that the impact of
the special rule will be modest: sponsors
of grandfathered HDHPs will have greater
flexibility to continue offering their plans
as grandfathered, protecting those en-
rolled in these plans from the disruption
and potentially increased out-of-pocket
costs associated with changing to a differ-
ent plan or coverage that may not be an
HDHP or grandfathered. This consider-
ation carries particular weight because of
the COVID-19 pandemic, during which
losing access to a plan or coverage, poten-
tially including losing access to a specific
provider network, could be particularly
disruptive.
b. Definition of Maximum Percentage
Increase
Under the 2015 final rules, medical
inflation means the increase since March
2010 in the overall medical care compo-
nent of the CPI-U published by the DOL
using the 1982-1984 base of 100. The
medical care component of the CPI-U is a
measure of the average change over time
in the prices paid by urban consumers for
medical care. Although the Departments
continue to be of the view that this is an
appropriate measure for medical inflation
in this context, the Departments recognize
that the medical care component of CPI-U
reflects not only changes in price for pri-
vate insurance, but also for self-pay pa-
tients and Medicare, neither of which are
reflected in the underlying costs for grand-
fathered group health plans and grandfa-
thered group health insurance coverage. In
contrast, the premium adjustment percent-
age reflects the cumulative, historic growth
from 2013 through the preceding calendar
year in premiums for only private health
insurance, excluding Medigap and prop-
erty and casualty insurance. Therefore,
the Departments agreed with comments
received in response to the 2019 RFI that
the premium adjustment percentage may
better reflect the increase in underlying
costs for grandfathered group health plans
and grandfathered group health insurance
coverage.
21
Accordingly, the 2020 proposed rules
included an amended definition of the
maximum percentage increase with an
alternative standard that relies on the pre-
mium adjustment percentage, rather than
medical inflation (which continues to be
defined, for purposes of these rules, as the
overall medical care component of the
CPI-U, unadjusted), to account for chang-
es in healthcare costs over time. Under
the 2020 proposed rules, this alternative
standard would not supplant the current
standard; rather, it would be available to
the extent it yields a higher-dollar value
than the current standard, and it would ap-
ply only with respect to increases in fixed-
amount cost-sharing requirements that are
made effective on or after the applicability
date of the final rules. With respect to in-
creases for group health plans and group
health insurance coverage made effective
on or after March 23, 2010, but before
the applicability date of the final rules,
the maximum percentage increase would
still be defined as medical inflation ex-
pressed as a percentage, plus 15 percent-
age points.
22
Thus, under the 2020 proposed rules,
increases to fixed-amount cost-sharing re-
quirements for grandfathered group health
plans and grandfathered group health in-
surance coverage that are made applicable
on or after the applicability date of the
final rules would cause the plan or cover-
age to cease to be a grandfathered health
plan if the total percentage increase in the
cost-sharing requirement measured from
March 23, 2010 exceeds the greater of (1)
medical inflation, expressed as a percent-
age, plus 15 percentage points; or (2) the
portion of the premium adjustment per-
centage, as defined in 45 CFR 156.130(e),
that reflects the relative change between
2013 and the calendar year prior to the
effective date of the increase (that is, the
premium adjustment percentage minus 1),
expressed as a percentage, plus 15 per-
centage points.
23
The 2020 proposed rules
also added a new example 5 under para-
21
The Departments acknowledge that the premium adjustment percentage does not capture premium growth from 2010 to 2013, and that it reflects increases in premiums not only in the group
market, but also in the individual market, which have increased more rapidly than premiums for group health plans and group health insurance. However, the Departments have concluded
that the premium adjustment percentage may be the best alternative existing measure to reflect the increase in underlying costs for grandfathered group health plans and grandfathered group
health insurance coverage. Additionally, the Departments are of the view that using a measure with which plans and issuers are already familiar will promote administrative simplicity.
22
The amendments included in the 2020 proposed rules would apply only with respect to grandfathered group health plans and grandfathered group health insurance coverage. Because HHS
regulations at 45 CFR 147.140 apply to both grandfathered individual and group health coverage, the amended definition of the maximum percentage increase in the HHS proposed rules
would also add a separate provision for individual health insurance coverage to make clear that the definition applicable to individual coverage remains unchanged.
23
Stakeholders should look to official publications from the Bureau of Labor Statistics and HHS to identify the relevant overall medical care component of the CPI-U amount or premium
adjustment percentage with respect to a change being considered by a grandfathered health plan.

January 11, 2021 330 Bulletin No. 2021–2
graph (g)(5) to demonstrate how this alter-
native measure for determining the max-
imum percentage increase might apply
in practice. Similar to other examples in
paragraph (g)(5), the proposed new exam-
ple 5 included hypothetical numbers with
respect to both the overall medical care
component of the CPI-U and the premium
adjustment percentage that do not relate
to any specific time period and are used
for illustrative purposes only. The 2020
proposed rules also renumbered examples
5 through 9 in paragraph (g)(5) to allow
the inclusion of new example 5 and re-
vised examples 3 through 6 to clarify that
these examples involve plan changes that
became effective before the applicability
date of these final rules. These proposed
revisions would ensure that the examples
accurately reflect the other provisions of
the 2015 final rules.
In support of this provision in the 2020
proposed rules, one commenter pointed
out that the ability to use a premium ad-
justment percentage for permitted chang-
es in fixed cost-sharing amounts would be
helpful to multiemployer plan sponsors
wishing to maintain grandfather status.
Another commenter said that the premi-
um adjustment percentage is an amount
very familiar to group health plan spon-
sors, and it is based on factors related to
group plan premiums, making it a natural
complement to the grandfathered plan
cost-sharing requirements.
Some commenters stated that the 2020
proposed rules should have provided even
greater flexibility. One commenter sug-
gested that instead of examining changes
to healthcare costs over cumulative years
since March 23, 2010, the Departments
should consider allowing a set percentage
of allowable increase annually. Anoth-
er commenter urged the Departments to
make additional changes in the final rules
to provide more flexibility, allowing plan
design changes specifically to encourage
cost-effective quality care, such as great-
er ability to change cost sharing for brand
drugs and out-of-network benefits.
One commenter stated that the Depart-
ments’ intent to allow grandfathered plans
to increase out-of-pocket costs at a rate
that is the greater of the medical inflation
adjustment or the premium adjustment
percentage adjustment (plus 15 percent-
age points) would, by design, result in
increased out-of-pocket costs for partici-
pants and beneficiaries. This commenter
stated that using the premium adjustment
percentage for this calculation would
leave patients vulnerable to financial hard-
ship. Another commenter asserted that the
proposed amendment to the definition of
maximum percentage increase would like-
ly result in increased cost sharing, and in
turn, less favorable coverage for individ-
uals enrolled in grandfathered coverage,
to the detriment of many consumers who
rely on employment-based health cover-
age and who may not have an option to
enroll in coverage that complies with the
generally applicable market reforms made
by PPACA.
As stated earlier in this preamble, the
Departments have concluded that the
proposed and final rules strike the right
balance between allowing grandfathered
health plans the flexibility to design their
health plans to meet their changing needs
and ensuring that affordable healthcare
options for participants and beneficiaries
remain available. The Departments are
unpersuaded that the final rules will re-
sult in significant financial hardship due
to the additional permitted increases in
out-of-pocket costs for participants and
beneficiaries. As noted earlier in this pre-
amble, providing an alternative inflation
adjustment for fixed-amount cost-sharing
increases will help plans and issuers better
account for changes in the costs of health
coverage over time, potentially allowing
them to maintain the grandfathered cov-
erage for those participants and benefi-
ciaries. Therefore, the Departments are of
the view that allowing plans and issuers
to use this measure is appropriate and it
may capture changes in healthcare costs at
least as accurately as the medical inflation
standard. Accordingly, the Departments
are finalizing this change, as proposed.
III. Effective Date
In the 2020 proposed rules, the Depart-
ments proposed an effective date of 30
days after publication of the final rules.
The Departments are finalizing as pro-
posed an effective date of 30 days after
publication of the final rules, which would
be January 14, 2021. However, in re-
sponse to comments, the Departments are
including an applicability date which will
make the final rules applicable to grand-
fathered group health plans and grandfa-
thered group health insurance coverage
beginning on June 15, 2021. While the De-
partments did not receive any comments
specifically requesting that the applicabil-
ity date of the final rules be delayed to 6
months after publication, the Departments
did receive a number of comments related
to the COVID-19 pandemic and the tim-
ing of the final rules, as discussed earlier
in this preamble. Commenters expressed
concern that it is not appropriate to po-
tentially place a greater financial burden
related to healthcare on patients while the
COVID-19 pandemic is ongoing.
As explained above, in the Depart-
ments’ view, the final rules will allow
employers to continue to offer affordable
coverage to those who are eligible for
grandfathered employer-sponsored plans.
However, the Departments acknowledge
commenters’ reasonable concerns re-
garding the timing of the final rules and
the uncertainty created by the COVID-19
pandemic. The Departments are therefore
delaying the applicability date of the final
rules to 6 months after publication in the
Federal Register. The Departments are of
the view that this delay is appropriate, as
the Departments do not expect the delay
to have a significant short-term impact on
plans’ and issuers’ ability to make use of
the cost-sharing flexibilities afforded un-
der the final rules; instead, a short delay
will reduce uncertainty by allowing plans,
issuers, and those covered by grandfa-
thered plans more time to understand and
plan for the increased flexibility provided
by the final rules.
IV. Economic Impact Analysis and
Paperwork Burden
A. Summary/Statement of Need
Section 1251 of PPACA generally pro-
vides that certain group health plans and
health insurance coverage existing on
March 23, 2010, are not subject to cer-
tain provisions of PPACA as long as they
maintain grandfather status. On February
25, 2019, the Departments published an
RFI to gather information on grandfa-
thered group health plans and grandfa-
thered group health insurance coverage.
Comments received from stakeholders in

Bulletin No. 2021–2 331 January 11, 2021
response to the 2019 RFI suggested that
issuers and plan sponsors, as well as par-
ticipants and beneficiaries, continue to
value grandfathered group health plan and
grandfathered group health insurance cov-
erage. The Departments issued a notice of
proposed rulemaking on July 15, 2020,
to amend the 2015 final rules to provide
greater flexibility for certain grandfa-
thered health plans to make changes to
certain types of cost-sharing requirements
without causing a loss of grandfather sta-
tus. The Departments are of the view that
these final rules are appropriate to provide
certain grandfathered health plans greater
flexibility while appropriately taking into
account rising healthcare costs. Addition-
ally, the final rules will ensure that grand-
fathered plans are able to make changes
to comply with minimum cost-sharing
requirements for HDHPs without losing
grandfather status, so enrolled individ-
uals continue to be eligible to contribute
to HSAs. These changes will allow cer-
tain grandfathered group health plans
and grandfathered group health insurance
coverage to continue to be exempt from
certain provisions of PPACA and allow
those plans’ participants and beneficiaries
to maintain their current coverage.
In drafting the final rules, the Depart-
ments attempted to balance a number of
competing interests. The Departments
sought to balance providing greater flex-
ibility to grandfathered group health plans
and grandfathered group health insurance
coverage that will enable these plans and
coverage to continue offering quality, af-
fordable coverage to participants and ben-
eficiaries while ensuring that the final rules
will not allow for such significant changes
that the plan or coverage could not reason-
ably be described as being the same plan
or coverage that was offered on March
23, 2010. Additionally, the Departments
sought to allow grandfathered group health
plans and grandfathered group health in-
surance coverage to better account for
rising healthcare costs, including ensuring
that grandfathered group HDHPs are able
to maintain their grandfather status, while
continuing to comply with minimum
cost-sharing requirements for HDHPs, so
that the individuals enrolled in the HDHPs
are eligible to contribute to an HSA. In
previous rulemaking, the Departments
recognized that many group health plans
and issuers make changes to the terms of
plans or health insurance coverage on an
annual basis: premiums fluctuate, provid-
er networks and drug formularies change,
employer and employee contributions
and cost-sharing requirements change,
and covered items and services may vary.
Without some flexibility to make adjust-
ments while retaining grandfather status,
the ability of many individuals to maintain
their current coverage would be frustrated,
because much of the grandfathered group
health plan coverage would quickly cease
to be regarded as the same health plan or
health insurance coverage in existence on
March 23, 2010. At the same time, allow-
ing grandfathered health plans and grand-
fathered group health insurance coverage
to make unfettered changes while retain-
ing grandfather status would be incon-
sistent with Congress’s intent in enacting
PPACA.
24
The final rules amend the 2015 final
rules to provide greater flexibility for
grandfathered group health plans and is-
suers of grandfathered group health in-
surance coverage in two ways. First, the
final rules specify that any grandfathered
group health plan and grandfathered
group health insurance coverage that is an
HDHP may make changes to fixed-amount
cost-sharing requirements that would oth-
erwise cause a loss of grandfather status
without causing a loss of grandfather sta-
tus, but only to the extent those changes
are necessary to comply with the require-
ments for HDHPs under section 223(c)(2)
(A) of the Code. Second, the final rules
include a revised definition of maximum
percentage increase, which provides an
alternative standard that relies on the pre-
mium adjustment percentage, rather than
medical inflation, to account for changes
in healthcare costs over time, providing
for an alternative inflation adjustment for
fixed-amount cost-sharing increases.
B. Overall Impact
The Departments have examined the
impacts of the final rules as required by Ex-
ecutive Order 12866 on Regulatory Plan-
ning and Review (September 30, 1993),
Executive Order 13563 on Improving
Regulation and Regulatory Review (Jan-
uary 18, 2011), the Regulatory Flexibili-
ty Act (RFA) (September 19, 1980, Pub.
L. 96-354), section 1102(b) of the Social
Security Act (SSA), section 202 of the
Unfunded Mandates Reform Act of 1995
(March 22, 1995, Pub. L. 104-4), Exec-
utive Order 13132 on Federalism (Au-
gust 4, 1999), the Congressional Review
Act (5 U.S.C. 804(2)), and Executive Or-
der 13771 on Reducing Regulation and
Controlling Regulatory Costs (January
30, 2017).
Executive Orders 12866 and 13563 di-
rect agencies to assess all costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equi-
ty). Executive Order 13563 emphasizes
the importance of quantifying both costs
and benefits, reducing costs, harmonizing
rules, and promoting flexibility. A regula-
tory impact analysis (RIA) must be pre-
pared for rules with economically signifi-
cant effects ($100 million or more in any
1 year).
Section 3(f) of Executive Order 12866
defines a “significant regulatory action” as
an action that is likely to result in a rule (1)
having an annual effect on the economy
of $100 million or more in any 1 year, or
adversely and materially affecting a sector
of the economy, productivity, competi-
tion, jobs, the environment, public health
or safety, or state, local or tribal govern-
ments or communities (also referred to as
“economically significant”); (2) creating a
serious inconsistency or otherwise inter-
fering with an action taken or planned by
another agency; (3) materially altering the
budgetary 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 Presi-
dent’s priorities, or the principles set forth
in the Executive Order.
An RIA must be prepared for major
rules with economically significant effects
($100 million or more in any one year),
and a “significant” regulatory action is
24
75 FR 34538, 34546 (June 17, 2010).

January 11, 2021 332 Bulletin No. 2021–2
subject to Office of Management and Bud-
get (OMB) review. The final rules are not
likely to have economic impacts of $100
million or more in any 1 year, and there-
fore do not meet the definition of “eco-
nomically significant” within the mean-
ing of section 3(f)(1) of Executive Order
12866. However, OMB has determined
that the actions are significant within the
meaning of section 3(f)(4) of the Execu-
tive Order. Therefore, OMB has reviewed
the final rules, and the Departments have
provided the following assessment of their
impact.
Some commenters stated that the rules
should not be finalized because the De-
partments had insufficient information
and data to estimate the effects of the
2020 proposed rules on grandfathered
group health plans and coverage as well
as those enrolled in such coverage. The
Departments acknowledge that, given the
lack of information and data, the Depart-
ments are not able to precisely estimate
the overall impact of the final rules. As
discussed later in the impact analysis, the
Departments note the inability to predict
what changes each grandfathered group
health plan will make in response to the
final rules. The Departments recognize
that some grandfathered group health
plans may take advantage of flexibilities
provided by the final rules to change cer-
tain types of cost-sharing requirements
in amounts greater than the current rules
allow, potentially increasing out-of-pock-
et costs at a higher rate for some partici-
pants and beneficiaries, while potentially
reducing premiums for others. However,
other grandfathered group health plans
may make relatively minor, or no, chang-
es. As discussed previously in this pre-
amble, the Departments note that the fact
that a significant number of grandfathered
group health plans and coverage remain
indicates that some employers and issuers
have found value in preserving grandfa-
ther status. The Departments are of the
view that preserving grandfather status
will enable participants to retain their
current coverage, including their provider
network(s), maintain access to affordable
coverage options, and ensure that employ-
ers and other grandfathered group health
plan sponsors can more appropriately
account for the rising costs of healthcare
due to inflation. The Departments have
also concluded that the final rules appro-
priately support the goal of promoting
greater choices in coverage, especially in
light of rising healthcare costs.
C. Impact Estimates of Grandfathered
Group Health Plans and Grandfathered
Group Health Insurance Coverage
Provisions and Accounting Table
The final rules amend the 2015 final
rules to provide greater flexibility for
grandfathered group health plan sponsors
and issuers of grandfathered group health
insurance coverage to make certain chang-
es to cost-sharing requirements without
causing a loss of grandfather status. The
final rules specify that issuers or sponsors
of any grandfathered group health plan
and grandfathered group health insur-
ance coverage that is an HDHP may make
changes to fixed-amount cost-sharing re-
quirements that would otherwise cause a
loss of grandfather status without causing
a loss of grandfather status, but only to
the extent those changes are necessary to
comply with the requirements for HDHPs
under section 223(c)(2)(A) of the Code.
The final rules also revise the definition
of maximum percentage increase to pro-
vide an alternative standard that relies on
the premium adjustment percentage, rath-
er than medical inflation, to account for
changes in healthcare costs over time. In
accordance with OMB Circular A-4, Table
1 depicts an accounting statement summa-
rizing the Departments’ assessment of the
benefits, costs, and transfers associated
with this regulatory action.
The Departments are unable to quanti-
fy all benefits, costs, and transfers of the
final rules. The effects in Table 1 reflect
non-quantified impacts and estimated di-
rect monetary costs and transfers resulting
from the provisions of the final rules for
grandfathered group health plans, issuers
of grandfathered group health coverage,
participants, and beneficiaries.
TABLE 1: Accounting Table
Benefits
Non-Quantified:
• Increases flexibility for plan sponsors and issuers of grandfathered group health plans and grandfathered group health insur-
ance coverage to make changes to certain fixed-amount cost-sharing requirements without losing grandfather status.
• If there is uptake of this flexibility:
o Allows participants and beneficiaries in grandfathered group health plans and grandfathered group health insurance cover-
age to maintain coverage they are familiar with and potentially provides continuity of care by not requiring them to change
their health plan to one that may not include their current provider(s).
o Ensures plan sponsors are able to comply with minimum cost-sharing requirements for HDHPs and allows participants
and beneficiaries to maintain their coverage and eligibility to contribute to an HSA.
• Decreases the likelihood that plan sponsors would cease offering health benefits due to a lack of flexibility to make changes to
certain fixed cost-sharing amounts without losing grandfather status.
• Potential reduction in adverse health outcomes if there is a decrease in the uninsured rate if participants and beneficiaries
choose to obtain coverage due to potential premium reductions for grandfathered group health plans and grandfathered group
health insurance coverage and seek needed healthcare.
CostsPrimary EstimateYear DollarDiscount RatePeriod Covered
Annualized Monetized ($/year)
$6.09 million20207 percent2021-2025
$5.67 million20203 percent2021-2025

Bulletin No. 2021–2 333 January 11, 2021
Quantitative:
• Regulatory review costs of $26.73 million, incurred in 2021, by grandfathered group health plan coverage sponsors and issu -
ers.
Non-Quantified:
• Potential increase
in adverse health outcomes if a participant or beneficiary foregoes treatment because the necessary services
became unaffordable due to an increase in cost-sharing.
• Potential increase in adverse health outcomes if there is an increase in the uninsured rate if participants and beneficiaries
choose to cancel their coverage or decline to enroll because of the increases in cost-sharing requirements associated with
grandfathered group health plans and grandfathered group health insurance coverage.
• If an employer would have otherwise switched to a non-grandfathered plan, potential increase in adverse health outcomes if a
participant or beneficiary foregoes treatment for medical conditions that are not covered by their grandfathered group health
plan and grandfathered group health insurance coverage, but that would have been covered by non-grandfathered health plan
coverage subject to all PPACA market reforms.
Transfers
Non-Quantified:
• For
grandfathered group health plans and grandfathered group health insurance coverage that utilize the expanded flexibilities
to
increase fixed-amount cost-sharing requirements, potential transfers occur from participants and beneficiaries with resulting
higher out-of-pocket costs to participants and beneficiaries with no or low out-of-pocket costs and nonparticipants through
potentially lower premiums and correspondingly smaller wage adjustments to pay for the premiums.
• If an employer would have otherwise switched to a non-grandfathered plan with expanded benefits, potential transfers occur
from
participants and beneficiaries who would have benefited from these expanded benefits to others in the plan who would
not have benefited from these expanded benefits through lower premiums and correspondingly smaller wage adjustments.
Table 1 provides the anticipated bene-
fits, costs, and transfers (quantitative and
non-quantified) to sponsors and issuers
of grandfathered health plan coverage,
participants and beneficiaries enrolled in
grandfathered plans, as well as nonpartici-
pants. The following section describes the
benefits, costs, and transfers to grandfa-
thered group health plan sponsors, issuers
of grandfathered group health insurance
coverage, and those individuals enrolled
in such plans.
Economic Impacts of Retaining or
Relinquishing Grandfather Status and
Affected Entities and Individuals
The Departments estimate that there
are 2.5 million ERISA-covered plans of-
fered by private employers that cover an
estimated 136.2 million participants and
beneficiaries in those private employ-
er-sponsored plans.
25
Similarly, the De-
partments estimate that there are 84,087
state and local governments that offer
health coverage to their employees, with
an estimated 32.8 million participants and
beneficiaries in those employer-sponsored
plans.
26
The Kaiser Family Foundation 2020
Employer Health Benefits Survey reports
that 16 percent of firms offering health
benefits have at least one health plan or
benefit package option that is a grandfa-
thered plan, and 14 percent of covered
workers are enrolled in grandfathered
plans.
27
Using this information, the De-
partments estimate that, of those firms
offering health benefits, 400,000 sponsor
ERISA-covered plans (2.5 million * 0.16)
that are grandfathered (or include a grand-
fathered benefit package option) and cover
19.1 million participants and beneficiaries
(136.2 million * 0.14). The Departments
further estimate there are 13,454 state and
local governments (84,087 * 0.16) offer-
ing at least one grandfathered health plan
and 4.6 million participants and benefi-
ciaries (32.8 million * 0.14) covered by
a grandfathered state or local government
plan.
Although the Kaiser Family Foun-
dation 2020 Employer Health Benefits
Survey reports that 20 percent of firms
offering health benefits offered an HDHP
and 24 percent of covered workers were
enrolled in HDHPs, the Departments are
of the view that the 2010 Employer Health
Benefits Survey provides a better esti-
mate of the prevalence of HDHPs in the
grandfathered group market as it provides
an estimate for the number of potential
HDHPs that would have been able to ob-
tain and maintain grandfather status. The
2010 Employer Health Benefits Survey
reported that 12 percent of firms offering
health benefits offered an HDHP, and 6
percent of covered workers were enrolled
in HDHPs.
28
25
U.S. Department of Labor, EBSA calculations using the 2019 Medical Expenditure Panel Survey, Insurance Component (MEPS-IC), the Form 5500 and 2017 Census County Business Pat-
terns; Health Insurance Coverage Bulletin: Abstract of Auxiliary Data for the March 2019 Annual Social and Economic Supplement to the Current Population Survey, Table 3C (forthcoming).
26
2017 Census of Governments, Government Organization Report, available at https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html; 2017 MEPS-IC State and Local
Government data, available for query at https://meps.ahrq.gov/mepsweb/data_stats/MEPSnetIC/startup.; Health Insurance Coverage Bulletin: Abstract of Auxiliary Data for the March 2019
Annual Social and Economic Supplement to the Current Population Survey, Table 3C, (forthcoming).
27
The Departments note that comments received in response to the 2019 RFI and summarized earlier in this preamble described data obtained from Kaiser Family Foundation 2018 Employer
Health Benefits Survey. See supra note 9. For the purposes of this RIA, the Departments used more recent data from the same survey. See Kaiser Family Foundation, “2020 Employer Health
Benefits Survey,” available at https://www.kff.org/health-costs/report/2020-employer-health-benefits-survey/.
28
Kaiser Family Foundation, “2010 Employer Health Benefits Survey,” (Sept. 2010), available at: https://www.kff.org/wp-content/uploads/2013/04/8085.pdf.

January 11, 2021 334 Bulletin No. 2021–2
Benefits
The Departments are of the view that
the economic effects of the final rules will
ultimately depend on decisions made by
grandfathered plan sponsors (including
sponsors of grandfathered HDHPs) and
the preferences of plan participants and
beneficiaries. To determine the value of
retaining a health plan’s grandfather sta-
tus, each group plan sponsor must deter-
mine whether the plan, under the rules
applicable to grandfathered health plan
coverage, will continue to be more or less
favorable than the plan as it would exist
under the rules applicable to non-grandfa-
thered group health plans. This determi-
nation will depend on such factors as the
respective prices of grandfathered group
health plan and non-grandfathered group
health plans, the willingness of grandfa-
thered group health plans’ covered popu-
lations to pay for benefits and protections
available under non-grandfathered group
health plans, and the participants’ and
beneficiaries’ willingness to accept any
increases in out-of-pocket costs due to
changes to certain types of cost-sharing
requirements. The Departments have con-
cluded that providing flexibilities to make
changes to certain types of cost-sharing
requirements in grandfathered group
health plans and grandfathered group
health insurance coverage without caus-
ing a loss of grandfather status will enable
plan sponsors and issuers to continue to
offer quality, affordable coverage to their
participants and beneficiaries while taking
into account rising healthcare costs.
The Departments anticipate that the
premium adjustment percentage index
will continue to experience faster growth
than medical CPI-U, and therefore are of
the view that providing the alternative
method of determining the maximum
percentage increase will, over time, give
grandfathered group health plans and
grandfathered group health insurance cov-
erage the flexibility to make changes to the
plans’ fixed-amount cost-sharing require-
ments (such as copayments, deductibles,
and out-of-pocket limits) that would have
previously resulted in the loss of grand-
father status. Thus, the Departments are
of the view that the final rules will allow
sponsors of those grandfathered group
health plans and coverage to continue to
provide the coverage with which their
participants and beneficiaries are famil-
iar and comfortable, without the unnec-
essary burden of finding other coverage.
Additionally, if the flexibilities provided
for in the final rules result in a reduction
in grandfathered group health plan and
grandfathered group health insurance cov-
erage premiums, there could potentially
be a reduction in adverse health outcomes
if participants and beneficiaries chose to
obtain coverage they may have previously
foregone and seek needed healthcare.
29
As noted previously in this preamble,
in response to the 2019 RFI, some com-
menters suggested that their grandfathered
plans offer more robust provider networks
than other coverage options available to
them or that they want to ensure that par-
ticipants and beneficiaries are able to keep
receiving care from current in-network
providers. The Departments are of the
view that providing the flexibilities in the
final rules will help participants and ben-
eficiaries maintain their current provider
and service networks. If providers con-
tinue participating in the grandfathered
plans’ networks, this continuity offers
participants and beneficiaries the ability to
continue current and future care through
those providers with whom they have
built relationships.
As discussed previously in this pream-
ble, one commenter on the 2019 RFI artic-
ulated a concern that the 2015 final rules
may eventually preclude some sponsors
and issuers of grandfathered group health
plans and grandfathered group health in-
surance coverage from being able to make
changes to fixed-amount cost-sharing re-
quirements necessary to maintain a plan’s
HDHP status. For participants and benefi-
ciaries, this would mean they could expe-
rience either substantial changes to their
coverage (and likely premium increases)
or a loss of eligibility to contribute to
an HSA. The Departments expect that,
under the 2015 final rules, there may be
limited circumstances in which a grandfa-
thered group health plan or grandfathered
group health insurance coverage that is an
HDHP (grandfathered HDHP) is unable
to simultaneously maintain its grandfa-
ther status and satisfy the requirements for
HDHPs under section 223(c)(2)(A) of the
Code. Nonetheless, to avoid this scenario
and provide assurance to grandfathered
group health plan sponsors and issuers
of grandfathered HDHPs, the final rules
allow a grandfathered HDHP to make
changes to fixed-amount cost-sharing re-
quirements that otherwise could cause a
loss of grandfather status without causing
a loss of grandfather status, but only to
the extent the increases are necessary to
comply with the requirements for HDHPs
under section 223(c)(2)(A) of the Code.
The Departments have concluded that
providing this flexibility to grandfathered
HDHPs will allow them to preserve their
grandfather status even if they increase
their cost-sharing requirements to meet a
future adjusted minimum annual deduct-
ible requirement under section 223(c)(2)
(A) of the Code beyond the increase that
would be permitted under paragraph (g)
(1) of the 2015 final rules. Under section
223(g) of the Code, the required mini-
mum deductible for an HDHP is adjusted
for cost-of-living based on changes in the
overall economy. Historically, the allowed
increases under the 2015 final rules, which
are based on changes in medical care costs
(medical CPI-U), have exceeded increases
based on changes in the overall economy
(CPI-U or, for tax years beginning after
December 31, 2017, C-CPI-U). Using 10
years of projections from the President’s
FY 2021 Budget, medical-CPI-U is ex-
pected to grow faster than CPI-U. Further,
because the allowed increases under the
2015 final rules are based on the cumu-
lative effect over a period of years, it is
unlikely that using medical-CPI-U to in-
dex deductibles would result in lower de-
ductibles than using C-CPI-U as required
under section 223(g) of the Code.
30
There-
fore, the Departments note that, to the ex-
tent these trends continue, it is unlikely
that an increase required under section
223 of the Code for a plan to remain an
HDHP would exceed the allowed increas-
29
To the extent that utilization and health expenditures are relatively stable, the Departments expect that higher cost sharing may lead to lower premiums, both because higher cost sharing will
reduce issuers’ share of the costs of care and because of medical loss ratio (MLR) requirements, which encourage issuers to pass these savings to consumers in the form of lower premiums.
30
As noted earlier in this preamble, the Tax Cuts and Jobs Act amended section 1(f)(3) of the Code, cross-referenced in section 223(g) of the Code, to refer to C-CPI-U, instead of CPI-U, for
tax years beginning after December 31, 2017.

Bulletin No. 2021–2 335 January 11, 2021
es under the 2015 final rules. Furthermore,
to the extent that the revised definition of
maximum percentage increase in the final
rules will allow the deductible to grow
as fast, or faster, than under the 2015 fi-
nal rules, grandfathered HDHPs may not
need to avail themselves of the addition-
al flexibility provided in the final rules.
Nevertheless, the Departments are of the
view that affording this flexibility will
make the rules more transparent to spon-
sors of grandfathered HDHPs. Thus, the
final regulations will allow participants
and beneficiaries enrolled in those plans
to maintain their current coverage, con-
tinue contributing to any existing HSA,
and potentially realize any reduction in
premiums that may result from changes in
cost-sharing requirements.
Costs and Transfers
The Departments recognize there are
costs associated with the final rules that
are difficult to quantify given the lack of
information and data. For example, the
Departments do not have data related to
the current annual out-of-pocket costs for
participants and beneficiaries in grand-
fathered group HDHPs or other grand-
fathered group health plans and grandfa-
thered group health insurance coverage.
The Departments recognize that as med-
ical care costs increase, some participants
and beneficiaries in grandfathered health
plans could face higher out-of-pocket
costs for services that may be excluded by
such plans, but that would be required to
be covered by non-grandfathered group
health plans and group health insurance
coverage subject to PPACA market re-
forms. As noted earlier in this analysis,
it is possible that lower premiums, com-
pared to the likely premiums if these rules
are not finalized, could partially offset
these increased costs. Further, participants
and beneficiaries who would otherwise
be covered by a non-grandfathered plan
could potentially face increases in adverse
health outcomes if they forego treatment
because certain services are not covered
by their grandfathered plan or coverage.
The Departments cannot precisely pre-
dict the number of group health plans and
group health insurance coverage that will
retain their grandfather status as a result
of the final rules. According to the annu-
al Kaiser Family Foundation Employer
Health Benefits Survey, the percentage of
employers offering health coverage that
offered at least one grandfathered plan be-
tween 2016 and 2019 has been relatively
stable (23 percent in 2016 to 22 percent in
2019).
31
The Departments are of the view
that a large change over that time period
would have indicated that the 2015 final
rules were too restrictive and that a relax-
ation of those rules would have a large
effect. The actual small change suggests
the opposite. Therefore, the Departments
do not expect a significant impact on the
number of grandfathered group health
plans or grandfathered group health insur-
ance coverage as a result of the final rules.
For those plans and coverages that con-
tinue to maintain their grandfather status
as a result of the flexibilities in the final
rules, the participants and beneficiaries
will continue to have coverage and may
experience lower premiums when com-
pared to non-grandfathered group health
plans. Although some participants and
beneficiaries will pay higher cost-sharing
amounts, these increased costs may be
partially offset by reduced employee pre-
miums, and indirectly through potential
wage adjustments that reflect reduced em-
ployer contributions due to any resulting
lower premiums. In contrast, individuals
who have low or no medical expenses,
along with nonparticipants, will be unlike-
ly to experience increased cost-sharing
amounts and may benefit from lower em-
ployee premiums, and indirectly through
potential wage adjustments.
The Departments recognize there will
be transfers associated with the final rules
that are difficult to quantify given the
lack of information and data. The Depart-
ments realize that if plan sponsors avail
themselves of the flexibilities in the final
rules, some participants and beneficia-
ries of grandfathered group health plans
and grandfathered group health insurance
coverage will potentially see increases
in out-of-pocket costs depending on the
changes made to their plans. Additionally,
participants and beneficiaries in a grand-
fathered HDHP could face increases in the
plan’s deductible if plans increase their
fixed-amount cost-sharing requirements
to meet a future adjusted minimum an-
nual deductible requirement beyond the
increase that is permitted under the 2015
final rules. Changes in costs associated
with increased deductibles or other cost
sharing will be a transfer from participants
and beneficiaries with higher out-of-pock-
et costs to participants and beneficiaries
with lower or no out-of-pocket costs and
to nonparticipants, as the related premium
reductions could affect wages.
Due to the overall lack of information
and data related to what grandfathered
group plan sponsors will choose to do,
the Departments are unable to precisely
estimate the overall economic impact, but
the Departments anticipate that the overall
impact will be minimal. However, there is
a large degree of uncertainty regarding the
effect of the final rules on any potential
changes to cost sharing at the plan level so
actual experience could differ.
Commenters suggested that the provi-
sions of the 2020 proposed rules would
disadvantage consumers with pre-existing
conditions. Specifically, commenters sug-
gested that those individuals most likely
to shoulder the burden of increased out-
of- pocket costs are those who already
have higher medical expenses and out-
of-pocket costs (for example, those with
blood cancer). Another commenter noted
that the 2020 proposed rules suggested
that the resulting increases in out-of-pock-
et expenditures for participants and bene-
ficiaries of grandfathered plans could be
31
See Kaiser Family Foundation, “2016 Employer Health Benefits Survey,” available at https://www.kff.org/health-costs/report/2016-employer-health-benefits-survey/; Kaiser Family Foun-
dation, “2017 Employer Health Benefits Survey,” available at https://www.kff.org/health-costs/report/2017-employer-health-benefits-survey/; Kaiser Family Foundation, “2018 Employer
Health Benefits Survey,” available at https://www.kff.org/health-costs/report/2018-employer-health-benefits-survey/; and Kaiser Family Foundation, “2019 Employer Health Benefits Sur-
vey,” available at https://www.kff.org/health-costs/report/2019-employer-health-benefits-survey/. Despite the relative stability between 2016 and 2019, the 2020 Employer Health Benefits
Survey reported that the number of firms offering health coverage that offered at least one grandfathered plan in 2020 decreased to 16 percent. The Departments are of the view that this
change may largely be attributable to issues with employer survey reporting during the COVID-19 pandemic, rather than to the 2015 final rules. The Kaiser Family Foundation reported a
diminished response to the 2020 survey compared to previous years and attributed that lower response rate to a combination of factors including changing data collection firms, disruptions
from the COVID-19 pandemic, and starting the fielding period later. Kaiser Family Foundation, “2020 Employer Health Benefits Survey,” available at https://www.kff.org/health-costs/
report/2020-employer-health-benefits-survey/.

January 11, 2021 336 Bulletin No. 2021–2
offset by decreases in premiums or wage
adjustments; however, according to this
commenter, those potential benefits are
minimal and uncertain, while participants
and beneficiaries will likely be paying
more for substandard health coverage.
Another commenter suggested that the
Departments should fully evaluate and
publicly report on whether increased cost
sharing will lead to decreased utilization
of necessary medical care.
The Departments appreciate these con-
cerns. Nevertheless, the Departments are
of the view that finalizing the 2020 pro-
posed rules is important to help grandfa-
thered group health plans and grandfa-
thered group health insurance coverage
maintain grandfather status and supports
the goal of promoting greater choice in
coverage, especially in light of rising
healthcare costs. The Departments rec-
ognize that should a grandfathered group
health plan or grandfathered group health
insurance coverage avail itself of the flex-
ibilities in the final rules, some partici-
pants and beneficiaries could incur higher
out-of-pocket costs for ongoing or future
healthcare needs. However, as discussed
previously in this preamble, participants
and beneficiaries would continue to ben-
efit from many PPACA consumer pro-
tections that are applicable to all group
health plans and group health insurance
coverage, regardless of grandfather status,
including the prohibition on preexisting
condition exclusions, the prohibition on
waiting periods that exceed 90 days, and
the prohibition on lifetime or annual dollar
limits. Additionally, grandfathered group
health plans and issuers of grandfathered
group health insurance coverage are not
prohibited from providing coverage con-
sistent with any of PPACA market pro-
visions that apply to non-grandfathered
group health plans and may add coverage
consistent with such market provisions
without relinquishing grandfather status.
As discussed later in the impact anal-
ysis, some participants and beneficiaries
could experience savings in reduced pre-
miums, wage adjustments, and contin-
ued access to tax-advantaged HSAs due
to changes made as a result of the final
rules. The Departments recognize that
any increases in cost sharing, changes in
premiums, or wage adjustments are at the
discretion of the issuer or grandfathered
group plan sponsor. The Departments are
of the view that providing the flexibilities
in the final rules could allow participants
to retain their current coverage instead
of finding alternate coverage, which may
result in greater increases in cost-sharing
or reduced benefits for those individuals.
As noted later in the impact analysis, the
Departments are of the view that because
individuals with significant healthcare
needs generally exceed the out-of-pocket
limit for the plan year, they are only mod-
estly affected by increases in cost-sharing
requirements, while individuals with few-
er healthcare needs are more likely to be
affected by an increase in fixed-amount
cost-sharing, but that they incur a small
portion of the overall costs.
The Departments have concluded that
the final rules strike a proper balance be-
tween preserving the ability to maintain
existing coverage with the goals of ex-
panding access to and improving the qual-
ity of health coverage.
Revenue Impact of Final Rules
This section of the preamble discuss-
es the revenue impact of the final rules,
considers a variety of approaches that em-
ployers offering grandfathered health plan
coverage might have taken if the 2015 fi-
nal rules were not amended, and compares
the revenue impact of each approach un-
der the 2015 final rules with the revenue
impact under the final rules.
a. Employees who would have Remained
in Grandfathered Plans and Coverage
without the Final Rules
If the 2015 final rules were not amend-
ed, some employers might have chosen to
continue to maintain their grandfathered
health plan coverage. This subsection dis-
cusses the revenue impact that the final
rules may have on this group of employers
and employees.
Under the final rules, grandfathered
group health plans and grandfathered
group health insurance coverage will
be allowed to increase fixed-amount
cost-sharing requirements (such as copay-
ments, deductibles, and out-of-pocket lim-
its) at a somewhat higher rate than under
the 2015 final rules without losing grand-
father status, which may result in a pre-
mium reduction (or similar cost reduction
for a self-insured plan). Specifically, for
increases in fixed-amount cost-sharing on
or after the applicability date of the final
rules, grandfathered group health plans
and grandfathered group health insurance
coverage may use an alternative standard
for determining the maximum percentage
increase that relies on the premium adjust-
ment percentage, rather than medical in-
flation, to the extent that it yields a greater
result than the standard under the 2015
final rules.
The premium adjustment percentage
is estimated to be about three percentage
points higher than medical inflation in
2026, using FY2021 President’s Budget
projections of medical CPI and National
Health Expenditures premium projec-
tions. Therefore, as of that year, fixed-
amount copayments, deductibles, and
out-of-pocket limits could be three per-
centage points higher under the final rules
than under the 2015 final rules. However,
a grandfathered group plan that increases
fixed-amount cost-sharing to the maxi-
mum amount allowed under the final rules
is likely to realize only a small reduction
in premiums. This is because plans incur
most of their costs for a relatively small
fraction of participants–that is, from high-
cost individuals. Because high-cost indi-
viduals generally exceed the out-of-pocket
limit for the year, they are only modestly
affected by higher out-of-pocket limits.
Low-cost individuals are more likely to
be affected by an increase in fixed-amount
cost-sharing, but they incur a small portion
of the overall costs. Therefore, the impact
of the final rules for a particular grandfa-
thered group health plan will depend on
the parameters of covered benefits under
the plan, as well as the distribution of ex-
penditures for the plan participants. In ad-
dition, increased cost sharing could result
in participants and beneficiaries making
fewer visits to providers (that is, lower
utilization), which could result in lower
medical costs for some individuals, but
higher costs for others who delay need-
ed medical care. If individuals generally
forgo unnecessary care, but continue to go
to providers when necessary, premiums
could decline even more, but this outcome
is uncertain.
Because of the Federal tax exclu-
sion for employer-sponsored coverage,

Bulletin No. 2021–2 337 January 11, 2021
a premium reduction would increase
tax revenues due to reduced employ-
er contributions and employee pre-tax
contributions made through a cafeteria
plan. However, some employees might
partially offset their increases in out-
of-pocket payments through increased
pre-tax contributions to health flexible
spending arrangements (FSAs) or HSAs.
Those potential increases in pre-tax
contributions to health FSAs and HSAs
would reduce tax revenues. Nonetheless,
to the extent that employers would have
continued to offer a grandfathered group
health plan without changes to the 2015
final rules, under these final rules, the
Departments expect tax revenues may
increase slightly on net as a result of
potential premium reductions. Further,
there would be additional revenue gains
to the extent that higher out-of-pocket
payments discourage employees from
continuing participation in the employ-
er’s group health plan. This increase
may be offset by a reduction in revenue,
however, if a reduction in premiums en-
courages non-participant employees to
obtain coverage.
b. Employees who would no Longer have
been Covered by Grandfathered Group
Health Plans or Coverage without the
Final Rules
If the 2015 final rules were not amend-
ed, some employers might have chosen to
change their insured grandfathered group
health plans to self-insured, non-grandfa-
thered group health plans, rather than con-
tinue to comply with the 2015 final rules,
which would result in little, if any, reve-
nue change. Thus, with respect to these
employers, the adoption of the final rules
will have little, if any, revenue effect.
Alternatively, assuming the 2015 fi-
nal rules were not amended, an employer
might switch to a fully insured non-grand-
fathered non-HDHP group health plan.
With respect to small employers, employ-
ees who would transfer to the non-grand-
fathered group health plan could improve
the small group market risk pool or make
it worse. An employer with a healthy pop-
ulation might be more likely to self-in-
sure, whereas a small employer with a less
healthy population might be more likely
to join an insurance pool.
One commenter stated that because the
non-grandfathered small group market
is subject to modified community rating
and single risk pool requirements, mak-
ing it easier for small-group health plans
to preserve their grandfather status would
encourage firms with younger or healthier
employees to find ways to opt out of the
non-grandfathered small group market, at
the expense of other firms that then would
face higher premiums. The commenter
noted that because premiums and medi-
cal claims costs in the small group market
are higher for plans that are subject to all
PPACA market reforms than for plans that
are not, and because PPACA’s changes to
plan standards in the small group market
were more significant than in the large
group market, employees at small busi-
nesses have more to lose when employers
avoid most PPACA market reforms. The
commenter suggested that further extend-
ing grandfather status would only con-
tribute to market segmentation that harms
the non-grandfathered small-group mar-
ket, rather than channeling younger and
healthier groups into the insurance mar-
kets that generally are subject to PPACA
market reforms, which would serve to bol-
ster stability in those markets.
The Departments acknowledge that the
existence of grandfathered group health
plans potentially creates market segmen-
tation in the small group market. Howev-
er, to the extent such market segmentation
exists, the Departments do not anticipate
that the additional flexibilities provided in
the final rules will increase segmentation
since the final rules do not provide any
mechanism for non-grandfathered plans
to become grandfathered. Moreover, the
Departments do not expect the number of
plans that maintain grandfather status be-
cause of the final rules to be so significant
as to exacerbate any market segmentation
that may already exist.
Although the type of benefits covered
in new, non-grandfathered plans (whether
self-insured or fully insured) would like-
ly be broader in some ways, such as for
preventive care, the share of costs covered
by the plan would likely decrease due to
higher cost-sharing. Presumably, if the
2015 final rules were not amended, most
employers would not make the switch
from a grandfathered group health plan
to a non-grandfathered group health plan
unless the overall cost of providing ben-
efits would decrease, which would cause
some revenue gain. (Again, though, the
revenue gain could be partially offset by
increases in the employees’ pre-tax con-
tributions to health FSAs or HSAs.) On
the other hand, if the final rules enable an
employer that otherwise might switch to
a non-grandfathered group health plan to
retain its grandfather plan, this revenue
gain would not occur, resulting in a reve-
nue loss compared to the status quo under
the 2015 final rules.
Without the change to the 2015 final
rules, some employers might replace their
grandfathered group health plan with an
individual coverage health reimbursement
arrangement (individual coverage HRA).
If the employer contributes a similar dollar
amount to the individual coverage HRA
as it currently does to the grandfathered
group health plan, the employees’ tax ex-
clusion would be at least roughly the same
as for the grandfathered group health plan.
Moreover, the employees offered the indi-
vidual coverage HRA would be as likely
to be “firewalled” from obtaining a pre-
mium tax credit as if they had continued
to participate in the grandfathered group
health plan. Thus, under this scenario,
there would be very little revenue effect
from the final rules.
c. Termination of Employer-Sponsored
Coverage
If the 2015 final rules were not amend-
ed, some employers might drop grandfa-
thered group health coverage altogether
and opt instead to make an employer
shared responsibility payment, if required
under section 4980H of the Code, which
may result in an increase in federal rev-
enue. In this case, all affected employees
would qualify for a special enrollment pe-
riod to enroll in other group coverage, if
available, or individual health insurance
coverage on or off the Exchange. Many
of those employees with household in-
comes between 100-400 percent of the
federal poverty level might qualify for
financial assistance to help pay for their
Exchange coverage and related healthcare
expenses, which would increase federal
outlays, as discussed further later in this
section. Others might have household in-
comes too high to be eligible for a premi-

January 11, 2021 338 Bulletin No. 2021–2
um tax credit or might receive a smaller
tax subsidy through the income-related
premium tax credit than through an em-
ployer-sponsored health insurance tax ex-
clusion. Accordingly, if these employers
continue their grandfathered group health
plan under the final rules, there may be an
associated revenue loss. Other employees
could purchase individual health insur-
ance coverage but receive a premium tax
credit that is greater than the value of the
tax exclusion for their current employer
plans. For this population, the final rules
may result in a revenue gain. However,
the employees for which there would be a
revenue gain are likely a small population
for an employer that is currently offering a
grandfathered group health plan.
Despite the availability of a special en-
rollment period, some affected employees
might forgo enrolling in alternative health
coverage and become uninsured or might
opt instead to purchase short-term, limit-
ed-duration insurance. In this case, these
employees would no longer receive a tax
exclusion for the grandfathered group
health plan, which, along with an em-
ployer shared responsibility payment, if
any, may result in an increase in federal
tax revenue. However, if these employees
were to remain covered under a grandfa-
thered group health plan as a result of the
final rule, there may be a loss in federal
revenue for this group.
Overall, there are a number of potential
revenue effects of the final rules, some of
which could offset each other. Addition-
ally, there is a large degree of uncertain-
ty, including uncertainty regarding how
many group health plans would have con-
tinued as grandfathered plans absent the
final rules and what alternatives would
have been chosen by employers who
would not have kept grandfathered group
health plans absent the final rules, as well
as how many grandfathered group health
plans will make plan design changes as a
result of the final rules. As a result, it is
unclear whether these effects in the aggre-
gate would result in a revenue gain or rev-
enue loss. Because the employer market is
so large, even a small percentage change
to aggregate premiums can result in large
revenue changes. Nevertheless, the De-
partments are of the view that overall net
effects are likely to be relatively small.
Regulatory Review Costs
Affected entities will need to under-
stand the requirements of the final rules
before they can avail themselves of any
of the flexibilities in the final rules. Spon-
sors and issuers of grandfathered group
health plan coverage will be responsible
for ensuring compliance with the final
rules should they seek to make changes
to their grandfathered group health plans’
cost-sharing requirements.
If regulations impose administrative
costs on private entities, such as the time
needed to read and interpret the final rules,
the Departments seek to estimate the cost
associated with regulatory review. Due to
the uncertainty involved with accurately
quantifying the number of entities that
will review and interpret the final rules,
the Departments assume that the total
number of grandfathered group health
plan coverage sponsors and issuers that
will be able to avail themselves of the
flexibilities provided by the final rules is a
fair estimate of the number of entities af-
fected. The Departments estimate 414,288
grandfathered plan sponsors and issuers
of grandfathered group health insurance
coverage will incur burdens related to re-
viewing the final rules.
The Departments acknowledge that
this assumption may understate or over-
state the costs of reviewing the final rules.
It is possible that not all affected entities
will review the final rules in detail and that
others may seek the assistance of outside
counsel to read and interpret the final rules.
For example, firms providing or sponsor-
ing a grandfathered group health plan may
not read the final rules and might rely upon
an issuer or a third-party administrator, if
self-funded, to read and interpret the final
rules. For these reasons, the Departments
are of the view that the number of grand-
fathered group health plan coverage spon-
sors and issuers is a fair estimate of the
number of reviewers of the final rules. The
Departments sought, but did not receive,
comments on the approach to estimating
the number of affected entities that will
review and interpret the final rules.
Using the wage information from the
Bureau of Labor and Statistics (BLS) for
a Compensation and Benefits Manager
(Code 11-3111), the Departments estimate
that the cost of reviewing the final rules is
$129.04 per hour, including overhead and
fringe benefits.
32
Assuming an average
reading speed, the Departments estimate
that it would take approximately 0.5 hour
for the staff to review and interpret the final
rules; therefore, the Departments estimate
that the cost of reviewing and interpret-
ing the final rules for each grandfathered
group health plan coverage sponsor and
issuer is approximately $64.52. Thus, the
Departments estimate that the overall cost
for the estimated 414,288 grandfathered
group health plan coverage sponsors and
issuers will be $26,729,861.76 ($64.52 *
414,288 total number of estimated grand-
fathered plan sponsors and issuers).
33
D. Regulatory Alternatives Considered
In developing the policies contained in
the final rules, the Departments consid-
ered alternatives to the final rules. In the
following paragraphs, the Departments
discuss the key regulatory alternatives
considered.
The Departments considered whether
to modify each of the six types of chang-
es, measured from March 23, 2010, that
cause a group health plan or group health
insurance coverage to cease to be grand-
fathered. To provide more flexibility re-
garding changes to fixed cost-sharing re-
quirements, the Departments considered
revising the definition of maximum per-
centage increase to increase the allowed
percentage points that are added to med-
ical inflation. However, the Departments
are of the view that the final rules allow
for the desired flexibility, while better
32
Wage information is available at https://www.bls.gov/oes/current/oes_nat.htm. Hourly wage rate is determining by multiplying the mean hourly wage by 100 percent to account for over-
head and fringe benefits. The mean hourly wage for a Compensation and Benefit Manager (Code 11-3111) is $64.52, when multiplied by 100 percent results in a total adjusted hourly wage
of $129.04.
33
The total number of grandfathered plan sponsors and issuers of grandfathered group health insurance coverage, discussed earlier in the preamble, was derived from the total number of ERI-
SA covered plan sponsors multiplied by the percentage of entities offering grandfathered health plans (2.5 million * 0.16 = 400,000), the number of state and local governments multiplied by
the percentage of entities offering grandfathered health plans (84,087 * 0.16 = 13,454), and the 834 issuers offering at least one grandfathered health plan (400,000 + 13,454 + 843 = 414,288).

Bulletin No. 2021–2 339 January 11, 2021
reflecting underlying costs for grandfa-
thered group health plans and grandfa-
thered group health insurance coverage.
The Departments acknowledge that the
premium adjustment percentage, which
the Departments incorporate into the defi-
nition of maximum percentage increase,
reflects the changes in premiums in both
the individual and group market, and that
individual market premiums have in-
creased faster than premiums in the group
market. Due to the comparative sizes of
the individual and group markets, howev-
er, the historically faster growth in the in-
dividual market has had a minimal impact
on the premium adjustment percentage
index. Therefore, the Departments are of
the view that the premium adjustment per-
centage is an appropriate measure to in-
corporate into the definition of maximum
percentage increase.
Another option the Departments con-
sidered was allowing a decrease in contri-
bution rates by an employer or employee
organization without triggering a loss of
grandfather status. Under the 2015 final
rules, an employer or employee organi-
zation cannot decrease contribution rates
based on cost of coverage toward the
cost of any tier of coverage for any class
of similarly situated individuals by more
than five percentage points below the
contribution rate for the coverage period
that included March 23, 2010 without los-
ing grandfather status. The Departments
considered permitting group health plans
and group health insurance coverage with
grandfather status to decrease the contri-
bution rates by more than five percent-
age points. This change would increase
employer flexibility, but the Departments
were concerned that a decrease in the
contribution rate could change the plan or
coverage to such an extent that the plan
or coverage could not reasonably be de-
scribed as being the same plan or coverage
that was offered on March 23, 2010. As a
result, this option was not included in the
final rules.
Another option the Departments con-
sidered was allowing a change to annual
dollar limits for a group health plan or
health insurance coverage without trig-
gering a loss of grandfather status. Under
the 2015 final rules, a group health plan or
group health insurance coverage that did
not have an annual dollar limit on March
23, 2010, may not establish an annual dol-
lar limit for any individual, whether pro-
vided in-network or out-of-network, with-
out relinquishing grandfather status. If the
plan or coverage had an annual dollar lim-
it on March 23, 2010, it may not decrease
the limit. Although for plan years begin-
ning on or after January 1, 2014, group
health plans and health insurance issuers
generally may no longer impose annual or
lifetime dollar limits on essential health
benefits, permitting changes to annual
dollar limits on benefits that are not es-
sential health benefits may still represent
a significant change to participants and
beneficiaries who rely upon the benefits
to which a limit is applied. Therefore, this
option was not included in the final rules.
The Departments considered options
to offset cost-sharing requirement chang-
es by allowing sponsors of grandfathered
group health plans and issuers of grandfa-
thered group health insurance coverage to
increase different types of cost-sharing re-
quirements as long as any increase is offset
by lowering another cost-sharing require-
ment to preserve the plan’s or coverage’s
actuarial value. As discussed in previous
rulemaking, however, an actuarial equiv-
alency standard would allow a plan or
coverage to make fundamental changes to
the benefit design and still retain grandfa-
ther status, potentially conflicting with the
goal of allowing participants and benefi-
ciaries to retain health plans they like.
34

There would also be significant complex-
ity involved in defining and determining
actuarial value for these purposes, as well
as significant burdens associated with ad-
ministering and ensuring compliance with
such rules. Therefore, the Departments did
not include this option in the final rules.
The Departments considered changing
the date of measurement for calculating
whether changes to group health plans
or health insurance coverage will cause
a loss of grandfather status. For exam-
ple, instead of looking at the cumulative
change from March 23, 2010, the rules
could measure the annual increases, start-
ing from the applicability date of the final
rules. However, the Departments conclud-
ed that this option could limit flexibility
for some employers. For example, some
employers might want to keep the terms
of the grandfathered group health plan
the same for a few years and then make a
more significant change later.
The Departments also considered mak-
ing changes to the 2015 final rules to en-
courage more cost-effective care. One
option the Departments considered was al-
lowing unlimited changes to cost-sharing
for out-of-network benefits. However, the
Departments are concerned that unlimited
discretion to change cost-sharing require-
ments for out-of-network benefits could
result in changes to grandfathered group
health plans or coverages so extensive that
these plans or coverages could not reason-
ably be described as being the same plans
or coverages that were offered on March
23, 2010. Additionally, the Departments
decided that the change in the applicable
index for medical inflation provides suf-
ficient flexibility for fixed cost-sharing
requirements. This option will give flexi-
bility to grandfathered group health plans
and grandfathered group health insurance
coverage with respect to all fixed-amount
cost-sharing requirements, including for
out-of-network benefits.
E. Collection of Information
Requirements
The final rules do not impose new in-
formation collection requirements; that is,
reporting, recordkeeping, or third-party
disclosure requirements. Consequently,
there is no need for OMB review under
the authority of the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501, et seq.).
Though the final rules do not contain any
new information collection requirements,
the Departments are maintaining the
current requirements that grandfathered
plans maintain records documenting the
terms of the plan in effect on March 23,
2010, include a statement in any summa-
ry of benefits that the plan or coverage
believes it is grandfathered health plan
coverage and that plans and coverag-
es must provide contact information for
participants to direct questions and com-
plaints. Additionally, the Departments
are maintaining the requirement that a
grandfathered group health plan that is
34
75 FR 34538, 34547 (June 17, 2010).

January 11, 2021 340 Bulletin No. 2021–2
changing health insurance issuers must
provide the succeeding health insurance
issuer documentation of plan terms under
the prior health insurance coverage suffi-
cient to determine whether the standards
of paragraph 26 CFR 54.9815-1251(g)
(1), 29 CFR 2590.715-1251(g)(1) and
45 CFR 147.140(g)(1) are met, and that
insured group health plans (or multiem-
ployer plans) that are grandfathered plans
are required to notify the issuer (or mul-
tiemployer plan) if the contribution rate
changes at any point during the plan year.
The Departments do not anticipate that
the final rules will make a substantive or
material modification to the collections
currently approved under the collection of
information OMB control number 0938-
1093 (CMS-10325), OMB control num-
ber 1210-0140 (DOL), and OMB control
number 1545-2178 (Department of the
Treasury).
F. Regulatory Flexibility Act
The Regulatory Flexibility Act, (5
U.S.C. 601, et seq.), requires agencies
to prepare an initial regulatory flexibility
analysis to describe the impact of final
rules on small entities, unless the head of
the agency can certify that the rules would
not have a significant economic impact
on a substantial number of small enti-
ties. The RFA generally defines a “small
entity” as (1) a proprietary firm meeting
the size standards of the Small Business
Administration (SBA), (2) a not-for-prof-
it organization that is not dominant in its
field, or (3) a small government jurisdic-
tion with a population of less than 50,000.
States and individuals are not included in
the definition of “small entity.” HHS uses
a change in revenues of more than three to
five percent as its measure of significant
economic impact on a substantial number
of small entities.
The final rules amend the 2015 final
rules to allow greater flexibility for grand-
fathered group health plans and issuers of
grandfathered group health insurance cov-
erage. Specifically, the final rules specify
that grandfathered group health plans that
are HDHPs may make changes to fixed-
amount cost-sharing requirements that
would otherwise cause a loss of grandfa-
ther status without causing a loss of grand-
father status, but only to the extent those
changes are necessary to comply with the
requirements for being HDHPs under sec-
tion 223(c)(2)(A) of the Code. The final
rules also include a revised definition of
maximum percentage increase that will
provide an alternative method of deter-
mining the maximum percentage increase
that is based on the premium adjustment
percentage.
G. Impact of Regulations on Small
Business – Department of Health and
Human Services and the Department of
Labor
The Departments are of the view that
health insurance issuers would be classi-
fied under the North American Industry
Classification System code 524114 (Di-
rect Health and Medical Insurance Car-
riers). According to SBA size standards,
entities with average annual receipts of
$41.5 million or less would be considered
small entities for these North American
Industry Classification System codes.
Issuers could possibly be classified in
621491 (Health Maintenance Organiza-
tion (HMO) Medical Centers) and, if this
is the case, the SBA size standard would
be $35 million or less.
35
Few, if any, insur-
ance companies underwriting comprehen-
sive health insurance policies (in contrast,
for example, to travel insurance policies
or dental discount policies) fall below
these size thresholds. Based on data from
MLR annual report submissions for the
2019 MLR reporting year, approximately
74 out of 483 issuers of health insurance
coverage nationwide had total premium
revenue of $41.5 million or less.
36
This
estimate may overstate the actual number
of small health insurance companies that
may be affected, since over 68 percent of
these small companies belong to larger
holding groups. Most, if not all, of these
small companies are likely to have non-
health lines of business that will result in
their revenues exceeding $41.5 million,
and it is likely not all of these companies
offer grandfathered group health plans or
grandfathered group health coverage. The
Departments do not expect any of these 74
potentially small entities to experience a
change in revenues of more than three to
five percent as a result of the final rules.
Therefore, the Departments do not expect
the provisions of the final rules to affect a
substantial number of small entities. Due
to the lack of knowledge regarding what
small entities may decide to do with re-
gard to the provisions in the final rules,
the Departments are not able to precisely
ascertain the economic effects on small
entities. However, the Departments are of
the view that the flexibilities provided for
in the final rules will result in overall ben-
efits for small entities by allowing them
to make changes to certain cost-sharing
requirements within limits and maintain
their current grandfathered group health
plans. The Departments sought, but did
not receive, comments on ways that the
2020 proposed rules may impose addi-
tional costs and burdens on small entities.
For purposes of analysis under the
RFA, the Employee Benefits Security Ad-
ministration (EBSA) continues to consid-
er a small entity to be an employee benefit
plan with fewer than 100 participants.
37

The basis of this definition is found in sec-
tion 104(a)(2) of ERISA, which permits
the Secretary of Labor to prescribe simpli-
fied annual reports for pension plans that
cover fewer than 100 participants. Under
section 104(a)(3), the Secretary of Labor
may also provide for exemptions or sim-
plified annual reporting and disclosure for
welfare benefit plans. Pursuant to the au-
thority of section 104(a)(3), the DOL has
previously issued at 29 CFR 2520.104–20,
2520.104–21, 2520.104–41, 2520.104–46
and 2520.104b–10 certain simplified re-
porting provisions and limited exemptions
from reporting and disclosure require-
ments for small plans, including unfunded
or insured welfare plans covering fewer
than 100 participants and satisfying certain
other requirements. Further, while some
large employers may have small plans, in
general small employers maintain most
small plans. Thus, EBSA believes that
assessing the impact of the final rules on
35
“Table of Small Business Size Standards Matched to North American Industry Classification System Codes.” U.S. Small Business Administration, available at https://www.sba.gov/sites/
default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
36
“Medical Loss Ratio Data and System Resources.” CCIIO, available at https://www.cms.gov/CCIIO/Resources/Data-Resources/mlr.html.
37
The DOL consulted with the SBA in making this determination as required by 5 U.S.C. 603(c) and 13 CFR 121.903(c).

Bulletin No. 2021–2 341 January 11, 2021
small plans is an appropriate substitute for
evaluating the effect on small entities. The
definition of small entity considered ap-
propriate for this purpose differs, howev-
er, from a definition of small business that
is based on size standards promulgated by
the SBA (13 CFR 121.201) pursuant to
the Small Business Act (15 U.S.C. 631 et
seq.). Therefore, EBSA requested, but did
not receive, comments on the appropriate-
ness of the size standard used in evaluat-
ing the impact of the final rules on small
entities.
H. Impact of Regulations on Small
Business – Department of the Treasury
Pursuant to section 7805(f) of the
Code, the proposed rules that preceded
these final rules were submitted to the
Chief Counsel for Advocacy of the SBA
for comment on their impact on small
business, and no comments were received.
I. Effects on small rural hospitals
Section 1102(b) of the SSA (42 U.S.C.
1302) requires agencies to prepare an RIA
if a rule may have a significant impact on
the operations of a substantial number of
small rural hospitals. This analysis must
conform to the provisions of section 604 of
the RFA. For purposes of section 1102(b)
of the SSA, HHS defines a small rural hos-
pital as a hospital that is located outside
of a metropolitan statistical area and has
fewer than 100 beds. The final rules would
not materially affect small rural hospitals.
Therefore, while the final rules are not
subject to section 1102(b) of the SSA, the
Departments have determined that the fi-
nal rules will not have a significant impact
on the operations of a substantial number
of small rural hospitals.
J. Unfunded Mandates
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain actions before is-
suing a final rule that includes any federal
mandate that may result in expenditures
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 annually for inflation.
In 2020, that threshold is approximately
$156 million.
While the Departments recognize that
some state, local, and tribal governments
may sponsor grandfathered health plan
coverage, the Departments do not expect
any state, local, or tribal government to
incur any additional costs associated with
the final rules. The Departments estimate
that any costs associated with the final
rules will not exceed the $156 million
threshold. Thus, the Departments con-
clude that the final rules will not impose
an unfunded mandate on state, local, or
tribal governments or the private sector.
K. Federalism
Executive Order 13132 establishes
certain requirements that an agency must
meet when it issues a proposed rule that
imposes substantial direct costs on state
and local governments, preempts state
law, or otherwise has federalism implica-
tions. Federal agencies promulgating reg-
ulations that have federalism implications
must consult with state and local officials
and describe the extent of their consulta-
tion and the nature of the concerns of state
and local officials in the preamble to the
regulation.
In the Departments’ view, the final
rules do not have any federalism implica-
tions. They simply provide grandfathered
group health plan sponsors and issuers
more flexibility to increase fixed-amount
cost-sharing requirements and to make
changes to fixed-amount cost-sharing re-
quirements in grandfathered group health
plans and grandfathered group health in-
surance coverage that are HDHPs to the
extent those changes are necessary to
comply with the requirements for HDHPs
under section 223(c)(2)(A) of the Code,
without causing the plan or coverage to
relinquish its grandfather status. The De-
partments recognize that some state, lo-
cal, and tribal governments may sponsor
grandfathered health plan coverage. The
final rules will provide these entities with
additional flexibility.
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 regulating a
plan as an insurance or investment com-
pany or bank, the preemption provisions
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)) ap-
ply so that the requirements in title XXVII
of the PHS Act (including those enacted
by PPACA) are not to be “construed to su-
persede any provision of state law which
establishes, implements, or continues in
effect any standard or requirement sole-
ly relating to health insurance issuers in
connection with group health insurance
coverage except to the extent that such
standard or requirement prevents the ap-
plication of a ‘requirement of a federal
standard.’” The conference report accom-
panying HIPAA indicates that this is in-
tended to be the “narrowest” preemption
of states’ laws (see House Conf. Rep. No.
104–736, at 205, reprinted in 1996 U.S.
Code Cong. & Admin. News 2018). States
may continue to apply state law require-
ments to health insurance issuers except to
the extent that such requirements prevent
the application of PHS Act requirements
that are the subject of this rulemaking. Ac-
cordingly, states have significant latitude
to impose requirements on health insur-
ance issuers that are more restrictive than
the federal law.
In compliance with the requirement
of Executive Order 13132 that agencies
examine closely any policies that may
have federalism implications or limit the
policy making discretion of the states, the
Departments have engaged in efforts to
consult with and work cooperatively with
affected states, including participating in
conference calls with and attending con-
ferences of the National Association of
Insurance Commissioners, and consult-
ing with state insurance officials on an
individual basis. While developing the
final rules, the Departments attempted to
balance the states’ interests in regulating
health insurance issuers with Congress’
intent to provide uniform minimum pro-
tections to consumers in every state. By
doing so, it is the Departments’ view that
they have complied with the requirements
of Executive Order 13132.
Pursuant to the requirements set forth
in section 8(a) of Executive Order 13132,
and by the signatures affixed to the final
rules, the Departments certify that the
Department of the Treasury, EBSA, and

January 11, 2021 342 Bulletin No. 2021–2
CMS have complied with the require-
ments of Executive Order 13132 for the
attached final rules in a meaningful and
timely manner.
L. Reducing Regulation and Controlling
Regulatory Costs
Executive Order 13771, entitled “Re-
ducing Regulation and Controlling Reg-
ulatory Costs,” was issued on January
30, 2017, and requires that the costs as-
sociated with significant new regulations
“shall, to the extent permitted by law, be
offset by the elimination of existing costs
associated with at least two prior regu-
lations.” It has been determined that the
final rules are an action that primarily
results in transfers and does not impose
more than de minimis costs as described
above and thus is not a regulatory or de-
regulatory action for the purposes of Ex-
ecutive Order 13771.
V. 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 regula-
tions are adopted pursuant to the author-
ity contained in 29 U.S.C. 1027, 1059,
1135, 1161-1168, 1169, 1181-1183, 1181
note, 1185, 1185a, 1185b, 1191, 1191a,
1191b, and 1191c; section 101(g), Pub-
lic Law 104-191, 110 Stat. 1936; section
401(b), Public Law 105-200, 112 Stat. 645
(42 U.S.C. 651 note); section 512(d), Pub-
lic Law 110-343, 122 Stat. 3881; section
1001, 1201, and 1562(e), Public Law 111-
148, 124 Stat. 119, as amended by Public
Law 111-152, 124 Stat. 1029; Secretary of
Labor’s Order 6-2009, 74 FR 21524 (May
7, 2009).
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 U.S.C. 300gg through 300gg-63,
300gg-91, and 300gg-92), as amended.
List of Subjects
26 CFR Part 54
Excise taxes, Health care, Health in-
surance, Pensions, Reporting and record-
keeping requirements.
29 CFR Part 2590
Employee benefit plans, Health care,
Health insurance, Penalties, Pensions,
Privacy, Reporting and recordkeeping re-
quirements.
45 CFR Part 147
Age discrimination, Citizenship and
naturalization, Civil rights, Health care,
Health insurance, Individuals with dis-
abilities, Intergovernmental relations, Re-
porting and recordkeeping requirements,
Sex discrimination.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement,
Internal Revenue Service.
Approved: December 7, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
Jeanne Klinefelter Wilson,
Acting Assistant Secretary,
Employee Benefits Security Adminis-
tration,
U.S. Department of Labor.
Dated: December 9, 2020.
Seema Verma,
Administrator,
Centers for Medicare & Medicaid
Services.
Dated: November 30, 2020.
Alex M. Azar II,
Secretary,
Department of Health and Human
Services.
Dated: December 2, 2020.

Bulletin No. 2021–2 343 January 11, 2021
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
Amendments to the
Regulations
Accordingly, the Internal Revenue Ser-
vice, Department of the Treasury, amends
26 CFR part 54 as follows:
PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation
for part 54 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805, unless oth-
erwise noted.
* * * * *
Par. 2. Section 54.9815-1251 is as
amended:
a. By revising the first sentence of para-
graph (g)(1) introductory text;
b. By revising paragraphs (g)(1)(iii),
(g)(1)(iv)(A) and (B), and (g)(1)(v);
c. By redesignating paragraphs (g)(3)
and (4) as paragraphs (g)(4) and (5);
d. By adding a new paragraph (g)(3);
e. By revising newly redesignated
paragraphs (g)(4)(i) and (ii); and
f. In newly redesignated paragraph (g)
(5):
i. By revising Examples 3 and 4;
ii. By redesignating Examples 5
through 9 as Examples 6 through 10;
iii. By adding a new Example 5;
iv. By revising newly redesignated Ex-
amples 6 through 10; and
v. By adding Example 11.
The revisions and additions read as fol-
lows:
§ 54.9815-1251 Preservation of right to
maintain existing coverage.
* * * * *
(g) * * *
(1) * * * Subject to paragraphs (g)(2)
and (3) of this section, the rules of this
paragraph (g)(1) describe situations in
which a group health plan or health in-
surance coverage ceases to be a grandfa-
thered health plan. * * *
* * * * *
(iii) Increase in a fixed-amount
cost-sharing requirement other than a co-
payment. Any increase in a fixed-amount
cost-sharing requirement other than a
copayment (for example, deductible or
out-of-pocket limit), determined as of the
effective date of the increase, causes a
group health plan or health insurance cov-
erage to cease to be a grandfathered health
plan, if the total percentage increase in the
cost-sharing requirement measured from
March 23, 2010 exceeds the maximum
percentage increase (as defined in para-
graph (g)(4)(ii) of this section).
(iv) * * *
(A) An amount equal to $5 increased
by medical inflation, as defined in para-
graph (g)(4)(i) of this section (that is, $5
times medical inflation, plus $5); or
(B) The maximum percentage increase
(as defined in paragraph (g)(4)(ii) of this
section), determined by expressing the
total increase in the copayment as a per-
centage.
(v) Decrease in contribution rate by
employers and employee organizations—
(A) Contribution rate based on cost of
coverage. A group health plan or group
health insurance coverage ceases to be a
grandfathered health plan if the employ-
er or employee organization decreases its
contribution rate based on cost of cover-
age (as defined in paragraph (g)(4)(iii)
(A) of this section) towards the cost of
any tier of coverage for any class of simi-
larly situated individuals (as described in
§54.9802(d)) by more than 5 percentage
points below the contribution rate for the
coverage period that includes March 23,
2010.
(B) Contribution rate based on a for-
mula. A group health plan or group health
insurance coverage ceases to be a grandfa-
thered health plan if the employer or em-
ployee organization decreases its contri-
bution rate based on a formula (as defined
in paragraph (g)(4)(iii)(B) of this section)
towards the cost of any tier of coverage
for any class of similarly situated indi-
viduals (as described in §54.9802(d)) by
more than 5 percent below the contribu-
tion rate for the coverage period that in-
cludes March 23, 2010.
* * * * *
(3) Special rule for certain grandfa-
thered high deductible health plans. With
respect to a grandfathered group health
plan or group health insurance coverage
that is a high deductible health plan within
the meaning of section 223(c)(2), increas-
es to fixed-amount cost-sharing require-
ments made effective on or after June 15,
2021 that otherwise would cause a loss of
grandfather status will not cause the plan
or coverage to relinquish its grandfather
status, but only to the extent such increas-
es are necessary to maintain its status as a
high deductible health plan under section
223(c)(2)(A).
(4) * * *
(i) Medical inflation defined. For pur-
poses of this paragraph (g), the term med-
ical inflation means the increase since
March 2010 in the overall medical care
component of the Consumer Price Index
for All Urban Consumers (CPI-U) (unad-
justed) published by the Department of
Labor using the 1982-1984 base of 100.
For purposes of this paragraph (g)(4)(i),
the increase in the overall medical care
component is computed by subtracting
387.142 (the overall medical care compo-
nent of the CPI-U (unadjusted) published
by the Department of Labor for March
2010, using the 1982-1984 base of 100)
from the index amount for any month in
the 12 months before the new change is to
take effect and then dividing that amount
by 387.142.
(ii) Maximum percentage increase de-
fined. For purposes of this paragraph (g),
the term maximum percentage increase
means:
(A) With respect to increases for a
group health plan and group health insur-
ance coverage made effective on or after
March 23, 2010, and before June 15, 2021,
medical inflation (as defined in paragraph
(g)(4)(i) of this section), expressed as a
percentage, plus 15 percentage points; and
(B) With respect to increases for a
group health plan and group health insur-
ance coverage made effective on or after
June 15, 2021, the greater of:
(1) Medical inflation (as defined in
paragraph (g)(4)(i) of this section), ex-
pressed as a percentage, plus 15 percent-
age points; or
(2) The portion of the premium ad-
justment percentage, as defined in 45
CFR 156.130(e), that reflects the relative
change between 2013 and the calendar
year prior to the effective date of the in-
crease (that is, the premium adjustment

January 11, 2021 344 Bulletin No. 2021–2
percentage minus 1), expressed as a per-
centage, plus 15 percentage points.
* * * * *
(5) * * *
Example 3. (i) Facts. On March 23, 2010, a
grandfathered group health plan has a copayment re-
quirement of $30 per office visit for specialists. The
plan is subsequently amended to increase the copay-
ment requirement to $40, effective before June 15,
2021. Within the 12-month period before the $40 co-
payment takes effect, the greatest value of the overall
medical care component of the CPI-U (unadjusted)
is 475.
(ii) Conclusion. In this Example 3, the increase in
the copayment from $30 to $40, expressed as a per-
centage, is 33.33% (40−30 = 10; 10 ÷ 30 = 0.3333;
0.3333 = 33.33%). Medical inflation (as defined in
paragraph (g)(4)(i) of this section) from March 2010
is 0.2269 (475−387.142 = 87.858; 87.858 ÷ 387.142
= 0.2269). The maximum percentage increase per-
mitted is 37.69% (0.2269 = 22.69%; 22.69% +
15% = 37.69%). Because 33.33% does not exceed
37.69%, the change in the copayment requirement
at that time does not cause the plan to cease to be a
grandfathered health plan.
Example 4. (i) Facts. Same facts as Example 3
of this paragraph (g)(5), except the grandfathered
group health plan subsequently increases the $40
copayment requirement to $45 for a later plan year,
effective before June 15, 2021. Within the 12-month
period before the $45 copayment takes effect, the
greatest value of the overall medical care component
of the CPI-U (unadjusted) is 485.
(ii) Conclusion. In this Example 4, the increase
in the copayment from $30 (the copayment that was
in effect on March 23, 2010) to $45, expressed as
a percentage, is 50% (45−30 = 15; 15 ÷ 30 = 0.5;
0.5 = 50%). Medical inflation (as defined in para-
graph (g)(4)(i) of this section) from March 2010 is
0.2527 (485−387.142 = 97.858; 97.858 ÷ 387.142
= 0.2527). The increase that would cause a plan to
cease to be a grandfathered health plan under para-
graph (g)(1)(iv) of this section is the greater of the
maximum percentage increase of 40.27% (0.2527 =
25.27%; 25.27% + 15% = 40.27%), or $6.26 (5 ×
0.2527 = $1.26; $1.26 + $5 = $6.26). Because 50%
exceeds 40.27% and $15 exceeds $6.26, the change
in the copayment requirement at that time causes the
plan to cease to be a grandfathered health plan.
Example 5. (i) Facts. Same facts as Example 4 of
this paragraph (g)(5), except the grandfathered group
health plan increases the copayment requirement to
$45, effective after June 15, 2021. The greatest value
of the overall medical care component of the CPI-U
(unadjusted) in the preceding 12-month period is still
485. In the calendar year that includes the effective
date of the increase, the applicable portion of the pre-
mium adjustment percentage is 36%.
(ii) Conclusion. In this Example 5, the grand-
fathered health plan may increase the copayment
by the greater of: medical inflation, expressed as a
percentage, plus 15 percentage points; or the appli-
cable portion of the premium adjustment percentage
for the calendar year that includes the effective date
of the increase, plus 15 percentage points. The latter
amount is greater because it results in a 51% maxi-
mum percentage increase (36% + 15% = 51%) and,
as demonstrated in Example 4 of this paragraph (g)
(5), determining the maximum percentage increase
using medical inflation yields a result of 40.27%.
The increase in the copayment, expressed as a per-
centage, is 50% (45−30 = 15; 15 ÷ 30 = 0.5; 0.5 =
50%). Because the 50% increase in the copayment
is less than the 51% maximum percentage increase,
the change in the copayment requirement at that time
does not cause the plan to cease to be a grandfathered
health plan.
Example 6. (i) Facts. On March 23, 2010, a
grandfathered group health plan has a copayment of
$10 per office visit for primary care providers. The
plan is subsequently amended to increase the copay-
ment requirement to $15, effective before June 15,
2021. Within the 12-month period before the $15 co-
payment takes effect, the greatest value of the overall
medical care component of the CPI-U (unadjusted)
is 415.
(ii) Conclusion. In this Example 6, the increase
in the copayment, expressed as a percentage, is 50%
(15−10 = 5; 5 ÷ 10 = 0.5; 0.5 = 50%). Medical in-
flation (as defined in paragraph (g)(4)(i) of this sec-
tion) from March 2010 is 0.0720 (415.0−387.142 =
27.858; 27.858 ÷ 387.142 = 0.0720). The increase
that would cause a group plan to cease to be a grand-
fathered health plan under paragraph (g)(1)(iv) of
this section is the greater of the maximum percentage
increase of 22.20% (0.0720 = 7.20%; 7.20% + 15%
= 22.20%), or $5.36 ($5 × 0.0720 = $0.36; $0.36 +
$5 = $5.36). The $5 increase in copayment in this
Example 6 would not cause the plan to cease to be
a grandfathered health plan pursuant to paragraph
(g)(1)(iv) of this section, which would permit an in-
crease in the copayment of up to $5.36.
Example 7. (i) Facts. Same facts as Example 6
of this paragraph (g)(5), except on March 23, 2010,
the grandfathered health plan has no copayment ($0)
for office visits for primary care providers. The plan
is subsequently, amended to increase the copayment
requirement to $5, effective before June 15, 2021.
(ii) Conclusion. In this Example 7, medical in-
flation (as defined in paragraph (g)(4)(i) of this sec-
tion) from March 2010 is 0.0720 (415.0−387.142 =
27.858; 27.858 ÷ 387.142 = 0.0720). The increase
that would cause a plan to cease to be a grandfa-
thered health plan under paragraph (g)(1)(iv)(A) of
this section is $5.36 ($5 × 0.0720 = $0.36; $0.36 +
$5 = $5.36). The $5 increase in copayment in this Ex-
ample 7 is less than the amount calculated pursuant
to paragraph (g)(1)(iv)(A) of this section of $5.36.
Thus, the $5 increase in copayment does not cause
the plan to cease to be a grandfathered health plan.
Example 8. (i) Facts. On March 23, 2010, a
self-insured group health plan provides two tiers of
coverage—self-only and family. The employer con-
tributes 80% of the total cost of coverage for self-on-
ly and 60% of the total cost of coverage for family.
Subsequently, the employer reduces the contribution
to 50% for family coverage, but keeps the same con-
tribution rate for self-only coverage.
(ii) Conclusion. In this Example 8, the decrease
of 10 percentage points for family coverage in the
contribution rate based on cost of coverage causes
the plan to cease to be a grandfathered health plan.
The fact that the contribution rate for self-only cov-
erage remains the same does not change the result.
Example 9. (i) Facts. On March 23, 2010, a
self-insured grandfathered health plan has a COBRA
premium for the 2010 plan year of $5,000 for self-on-
ly coverage and $12,000 for family coverage. The
required employee contribution for the coverage is
$1,000 for self-only coverage and $4,000 for family
coverage. Thus, the contribution rate based on cost of
coverage for 2010 is 80% ((5,000−1,000)/5,000) for
self-only coverage and 67% ((12,000−4,000)/12,000)
for family coverage. For a subsequent plan year, the
COBRA premium is $6,000 for self-only coverage
and $15,000 for family coverage. The employee con-
tributions for that plan year are $1,200 for self-only
coverage and $5,000 for family coverage. Thus, the
contribution rate based on cost of coverage is 80%
((6,000−1,200)/6,000) for self-only coverage and
67% ((15,000−5,000)/15,000) for family coverage.
(ii) Conclusion. In this Example 9, because there
is no change in the contribution rate based on cost
of coverage, the plan retains its status as a grandfa-
thered health plan. The result would be the same if
all or part of the employee contribution was made
pre-tax through a cafeteria plan under section 125.
Example 10. (i) Facts. A group health plan not
maintained pursuant to a collective bargaining agree-
ment offers three benefit packages on March 23,
2010. Option F is a self-insured option. Options G
and H are insured options. Beginning July 1, 2013,
the plan increases coinsurance under Option H from
10% to 15%.
(ii) Conclusion. In this Example 10, the cover-
age under Option H is not grandfathered health plan
coverage as of July 1, 2013, consistent with the rule
in paragraph (g)(1)(ii) of this section. Whether the
coverage under Options F and G is grandfathered
health plan coverage is determined separately under
the rules of this paragraph (g).
Example 11. (i) Facts. A group health plan that is
a grandfathered health plan and also a high deduct-
ible health plan within the meaning of section 223(c)
(2) had a $2,400 deductible for family coverage on
March 23, 2010. The plan is subsequently amended
after June 15, 2021 to increase the deductible limit
by the amount that is necessary to comply with the
requirements for a plan to qualify as a high deduct-
ible health plan under section 223(c)(2)(A), but that
exceeds the maximum percentage increase.
(ii) Conclusion. In this Example 11, the increase
in the deductible at that time does not cause the plan
to cease to be a grandfathered health plan because
the increase was necessary for the plan to continue to
satisfy the definition of a high deductible health plan
under section 223(c)(2)(A).
(Filed by the Office of the Federal Register on De-
cember 11, 2020, 8:45 am., and published in the is-
sue of the Federal Register for December 15, 2020,
85 F.R. 81097)

Bulletin No. 2021–2 i January 11, 2021
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 be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing 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 transactions.
This term is most commonly used in a ruling
that lists previously published rulings 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
period 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 previous-
ly 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 cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

January 11, 2021 ii Bulletin No. 2021–2
Numerical Finding List
1
Bulletin 2021–2
Notices:
2021-01, 2021-02 I.R.B. 315
2021-03, 2021-02 I.R.B. 316
2021-04, 2021-02 I.R.B. 319
Proposed Regulations:
REG-130081-19, 2021-02 I.R.B. 321
Revenue Procedures:
2021-1, 2020-01 I.R.B. 1
2021-2, 2020-01 I.R.B. 116
2021-3, 2020-01 I.R.B. 140
2021-4, 2020-01 I.R.B. 157
2021-5, 2020-01 I.R.B. 250
2021-7, 2020-01 I.R.B. 290
Revenue Rulings:
2021-01, 2021-02 I.R.B. 294
Treasury Decisions:
9925, 2021-02 I.R.B. 296
9940, 2021-02 I.R.B. 311
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2020–27 through 2020–52 is in Internal Revenue Bulletin
2020–52, dated December 27, 2020.

Bulletin No. 2021–2 iii January 11, 2021
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2021–2
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2020–27 through 2020–52 is in Internal Revenue Bulletin
2020–52, dated December 27, 2020.

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