Exception to the HIPAA Nondiscrimination
Requirements for Certain Landfathered Church Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 54 [REG-114083-00] RIN 1545-
AY33

TITLE: Exception to the HIPAA Nondiscrimination Requirements for
Certain Grandfathered Church Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that provide
guidance under section 9802(c) of the Internal Revenue Code relating
to the exception for certain grandfathered church plans from the
nondiscrimination requirements applicable to group health plans
under section 9802(a) and (b). Final, temporary, and proposed
regulations relating to the nondiscrimination requirements under
section 9802(a) and (b) are being published elsewhere in this issue
of the Federal Register. The regulations will generally affect
sponsors of and participants in certain self-funded church plans
that are group health plans, and the regulations provide plan
sponsors and plan administrators with guidance necessary to comply
with the law.

DATES: Written or electronic comments and requests for a public
hearing must be received by April 9, 2001.

ADDRESSES: Send Submissions to: CC:M&SP:RU (REG-114083-00), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may behand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-114083-00), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the "Tax Regs" option
on the IRS Home Page, or by submitting comments directly to the IRS
Internet site at: http://www.irs.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Russ
Weightier at 202-622-6080; concerning submissions of comments or
requests for a hearing, Sonya Cruse at 202-622-7190 (not toll-free
numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Miscellaneous
Excise Tax Regulations (26 CFR part 54) relating to the exception
for certain grand fathered church plans from the nondiscrimination
requirements applicable to group health plans. The nondiscrimination
requirements applicable to group health plans were added to the
Internal Revenue Code (Code), in section 9802, by the Health
Insurance Portability and Accountability Act of 1996 (HIPAA), Public
Law 104-191. HIPAA also added similar nondiscrimination provisions
applicable to group health plans and health insurance issuers (such
as health insurance companies and health maintenance organizations)
under the Employee Retirement Income Security Act of 1974 (ERISA),
administered by the U.S. Department of Labor, and the Public Health
Service Act (PHS Act), administered by the U.S. Department of Health
and Human Services. However, church plans are not subject to the
similar requirements in Part 7 of Subtitle B 1 of Title I of ERISA
or to the similar requirements in Title XXVII of the PHS Act (except
for health insurance coverage in connection with a church plan, as
discussed below).

Final and temporary regulations relating to the HIPAA
nondiscrimination requirements in paragraphs (a) and (b) of section
9802 of the Code are being published elsewhere in this issue of the
Federal Register. Those regulations are similar to, and have been
developed in coordination with, interim final regulations also being
published today by the Departments of Labor and Health and Human
Services. Guidance under the HIPAA nondiscrimination requirements is
summarized in a joint preamble to the final, interim final, and
temporary regulations. The exception for certain grand fathered
church plans was added to section 9802, in a new subsection (c), by
section 1532 of the Taxpayer Relief Act of 1997, Public Law 105-34.
These proposed regulations would provide guidance for this
exception. The guidance is summarized in the explanation below.

Explanation of Provisions

Church plans that are group health plans are generally subject to
the Code provisions in Chapter 100 relating to access, portability,
and renew ability. However, under section 9802(c), 1 church plans
satisfying certain requirements continuously since July 15, 1997 are
not treated as failing to meet the section 9802 prohibitions against
discrimination based on any health factor solely because the plan
requires evidence of good health for the coverage of certain
individuals. The grandfather rule in section 9802(c) applies to a
church plan for a plan year only if, on July 15, 1997 and at all
times after that date before the beginning of the plan year, the
church plan had provisions satisfying one of two alternative
conditions. The first alternative condition is that the plan contain
provisions requiring evidence of good health of two sets of
individuals, that is, both (1) any employee of an employer with 10
or fewer employees and (2) any self-employed individual. The
proposed regulations specify that this condition is not satisfied if
the plan requires evidence of good health of only one of these sets
of individuals. The proposed regulations also clarify that the plan
provision for the first set of individuals must be exactly 10 or
fewer. Thus, a plan provision requiring evidence of good health for
employees of an employer of fewer than 10, or of greater than 10,
employees does not satisfy this condition. For example, a plan
provision requiring evidence of good health of any employee of an
employer of five or fewer employees does not satisfy this condition.

The second alternative condition is that the plan contain provisions
requiring evidence of good health of any individual who enrolls
after the first 90 days of initial eligibility. The proposed
regulations clarify that the period for these plan provisions must
be exactly 90 days. Thus, a plan provision requiring evidence of
good health of any individual who enrolls after the first 120 days
of initial eligibility does not satisfy this condition.

The grandfather rule in section 9802(c) of the Code is not by its
terms limited in its application to self-funded church plans.
Section 2702 of the Public Health Service Act (PHS Act) imposes
nondiscrimination requirements on health insurance issuers offering
group health insurance coverage, and those nondiscrimination
requirements are generally similar to the nondiscrimination
requirements imposed on group health plans (including church plans)
under paragraphs (a) and (b) of section 9802 of the Code. However,
section 2702 of the PHS Act does not include an exception for health
insurance issuers offering group health insurance coverage to church
plans comparable to the exception for church plans in section
9802(c) of the Code. Thus, if a church plan providing benefits
through group health insurance coverage were to require evidence of
good health of certain individuals as permitted under section
9802(c) of the Code, the requirement of evidence of good health
would cause the health insurance issuer providing the coverage to
violate the nondiscrimination requirements of the PHS Act. In such a
case, the sanctions under the PHS Act would apply to the issuer, but
those under the Code would not apply to the church plan. Thus,
assuming that group health insurance coverage complies with the
nondiscrimination requirements of the PHS Act, the rule in section
9802(c) of the Code is, in effect, available only to church plans
that are not funded through group health insurance because only such
church plans do not include insurance coverage that is subject to
Title XXVII of the PHS Act. Accordingly, the examples in the
proposed regulations illustrating situations where section 9802(c)
is available are limited to group health plans that are not funded
through group health insurance in order to avoid misleading insured
church plans about the availability of the grandfather rule in
section 9802(c).

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also
has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations, and because the regulations do not impose a collection
of information requirement on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of proposed rulemaking will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are
submitted timely (a signed original and eight (8) copies) to the
IRS. Comments are specifically requested on the clarity of the
proposed regulations and how they may be made easier to understand.
All comments will be available for public inspection and copying. A
public hearing may be scheduled if requested in writing by a person
that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the hearing will
be published in the Federal Register.

Drafting Information

The principal author of these proposed regulations is Russ
Weightier, Office of the Operating Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other
personnel from the IRS and Treasury Department participated in their
development.

List of Subjects in 26 CFR Part 54

Excise taxes, Health care, Health insurance, Pensions, Reporting and
record keeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 54 is proposed to be amended as follows:

PART 54 -- PENSION EXCISE TAXES

Paragraph 1. The authority citation for part 54 is amended in part
by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * Section 54.9802-2 also issued under 26
U.S.C. 9802. * * *

Par. 2. Section 54.9802-2 is added to read as follows:
§54.9802-2 Special rules for certain church plans.

(a) Exception for certain church plans--(1) Church plans in general.
A church plan described in paragraph (b) of this section is not
treated as failing to meet the requirements of section 9802 or
§§54.9802-1 and 54.9802-1T solely because the plan
requires evidence of good health for coverage of individuals under
plan provisions described in paragraph (b)(2) or (3) of this
section.

(2) Health insurance issuers. See sections 2702 and 2721(b)(1)(B) of
the Public Health Service Act (42 U.S.C. 300gg-2 and 300gg-21(b)(1)
(B)) and 45 CFR 146.121, which require health insurance issuers
providing health insurance coverage under a church plan that is a
group health plan to comply with nondiscrimination requirements
similar to those that church plans are required to comply with under
section 9802 and §§54.9802-1 and 54.9802-1T except that
those nondiscrimination requirements do not include an exception for
health insurance issuers comparable to the exception for church
plans under section 9802(c) and this section.

(b) Church plans to which this section applies--(1) Church plans
with certain coverage provisions in effect on July 15, 1997. This
section applies to any church plan (as defined in section 414(e))
for a plan year if, on July 15, 1997 and at all times thereafter
before the beginning of the plan year, the plan contains either the
provisions described in paragraph (b)(2) of this section or the
provisions described in paragraph (b)(3) of this section

 (2) Plan provisions applicable to individuals employed by employers
of 10 or fewer employees and self-employed individuals--

(i) A plan contains the provisions described in this paragraph (b)
(2) if it requires evidence of good health of both --

(A) Any employee of an employer of 10 or fewer employees (determined
without regard to section 414(e)(3)(C), under which a church or
convention or association of churches is treated as the employer);
and

(B) Any self-employed individual.

(ii) A plan does not contain the provisions described in this
paragraph (b)(2) if the plan contains only one of the provisions
described in this paragraph (b)(2). Thus, for example, a plan that
requires evidence of good health of any self-employed individual,
but not of any employee of an employer with 10 or fewer employees,
does not contain the provisions described in this paragraph (b)(2).
Moreover, a plan does not contain the provision described in
paragraph (b)(2)(i)(A) of this section if the plan requires evidence
of good health of any employee of an employer of fewer than 10 (or
greater than 10) employees. Thus, for example, a plan does not
contain the provision described in paragraph (b)(2)(i)(A) of this
section if the plan requires evidence of good health of any employee
of an employer with five or fewer employees.

(3) Plan provisions applicable to individuals who enroll after the
first 90 days of initial eligibility--

(i) A plan contains the provisions described in this paragraph (b)
(3) if it requires evidence of good health of any individual who
enrolls after the first 90 days of initial eligibility under the
plan.

(ii) A plan does not contain the provisions described in this
paragraph (b)(3) if it provides for a longer (or shorter) period
than 90 days. Thus, for example, a plan requiring evidence of good
health of any individual who enrolls after the first 120 days of
initial eligibility under the plan does not contain the provisions
described in this paragraph (b)(3).

(c) Examples. The rules of this section are illustrated by the
following examples: Example 1.

      (i) Facts.

A church organization maintains two church plans for entities
affiliated with the church. One plan is a group health plan that
provides health coverage to all employees (including ministers and
lay workers) of any affiliated church entity that has more than 10
employees. The other plan is Plan O, which is a group health plan
that is not funded through insurance coverage and that provides
health coverage to any employee (including ministers and lay
workers) of any affiliated church entity that has 10 or fewer
employees and any self-employed individual affiliated with the
church (including a self-employed minister of the church). Plan O
requires evidence of good health in order for any individual of a
church entity that has 10 or fewer employees to be covered and in
order for any self-employed individual to be covered. On July 15,
1997 and at all times thereafter before the beginning of the plan
year, Plan O has contained all the preceding provisions.

(ii) Conclusion. In this Example 1, because Plan O contains the plan
provisions described in paragraph (b)(2) of this section and because
those provisions were in the plan on July 15, 1997 and at all times
thereafter before the beginning of the plan year, Plan O will not be
treated as failing to meet the requirements of section 9802,
§54.9802-1, or §54.9802-1T for the plan year solely
because the plan requires evidence of good health for coverage of
the individuals described in those plan provisions.

Example 2.

(i) Facts. A church organization maintains Plan P, which is a church
plan that is not funded through insurance coverage and that is a
group health plan providing health coverage to individuals employed
by entities affiliated with the church and self-employed individuals
affiliated with the church (such as ministers). On July 15, 1997 and
at all times thereafter before the beginning of the plan year, Plan
P has required evidence of good health for coverage of any
individual who enrolls after the first 90 days of initial
eligibility under the plan.

(ii) Conclusion. In this Example 2, because Plan P contains the plan
provisions described in paragraph (b)(3) of this section and because
those provisions were in the plan on July 15, 1997 and at all times
thereafter before the beginning of the plan year, Plan P will not be
treated as failing to meet the requirements of section 9802,
§54.9802-1, or §54.9802-1T for the plan year solely
because the plan requires evidence of good health for coverage of
individuals enrolling after the first 90 days of initial eligibility
under the plan

(d) Effective date.

[Reserved]

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

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