Federal Register Vol. 81, No.120,

Federal Register Volume 81, Issue 120 (June 22, 2016)

Page Range40473-40774
FR Document

81_FR_120
Current View
Page and SubjectPDF
81 FR 40475 - Proposed Agreement for Cooperation Between the Government of the United States of America and the Government of the Kingdom of Norway Concerning Peaceful Uses of Nuclear EnergyPDF
81 FR 40473 - Father's Day, 2016PDF
81 FR 40741 - Privacy Act; System of Records: Legal Case Management Records, State-21.PDF
81 FR 40684 - Agency Information Collection Activities; Submission to the Office of Management and Budget for Review and Approval; Comment Request; Direct Loan, FFEL, Perkins and TEACH Grant Total and Permanent Disability Discharge Application and Related FormsPDF
81 FR 40708 - Submission for OMB Review; 30-Day Comment Request; NLM PEOPLE LOCATOR® SystemPDF
81 FR 40722 - Advisory Board on Toxic Substances and Worker Health: Subcommittee on Medical Advice re: Weighing Medical EvidencePDF
81 FR 40723 - Advisory Board on Toxic Substances and Worker Health: Subcommittee on the Site Exposure Matrices (SEM)PDF
81 FR 40720 - Agency Information Collection Activities; Submission for OMB Review; Comment Request; New Collection; National Evaluation of Round 4 of the Trade Adjustment Assistance Community College Career Training (TAACCCT) Grants ProgramPDF
81 FR 40721 - Proposed Collection of Information; Comment RequestPDF
81 FR 40521 - Safety Zone; Detroit River Days Air Show, Detroit River, Detroit, MIPDF
81 FR 40594 - Receipt of Several Pesticide Petitions Filed for Residues of Pesticide Chemicals in or on Various CommoditiesPDF
81 FR 40650 - Fisheries of the Northeastern United States; Spiny Dogfish Fishery; Proposed 2016-2018 SpecificationsPDF
81 FR 40697 - Notice of Agreements FiledPDF
81 FR 40695 - Pyridate; Receipt of Applications for Emergency Exemption, Solicitation of Public CommentPDF
81 FR 40670 - Stainless Steel Bar From Brazil: Final Results of Antidumping Duty Administrative Review; 2014-2015PDF
81 FR 40671 - Certain Frozen Warmwater Shrimp From Thailand: Final Results of Antidumping Duty Administrative Review and Final Determination of No Shipments; 2014-2015PDF
81 FR 40724 - Aerospace Safety Advisory Panel; MeetingPDF
81 FR 40527 - Low Power Television Digital RulesPDF
81 FR 40742 - Public Notice for Waiver of Aeronautical Land-Use AssurancePDF
81 FR 40705 - Delegation of AuthorityPDF
81 FR 40495 - IFR Altitudes; Miscellaneous AmendmentsPDF
81 FR 40718 - HEARTH Act Approval of Oneida Nation of New York RegulationsPDF
81 FR 40719 - Proclaiming Certain Lands as Reservation for the Shakopee Mdewakanton Sioux Community of MinnesotaPDF
81 FR 40717 - HEARTH Act Approval of Twenty-Nine Palms Band of Mission Indians of California RegulationsPDF
81 FR 40696 - Information Collection Being Reviewed by the Federal Communications Commission Under Delegated AuthorityPDF
81 FR 40617 - Revisions to Public Inspection File Requirements-Broadcaster Correspondence File and Cable Principal Headend LocationPDF
81 FR 40729 - Advisory Committee on Reactor Safeguards; Notice of MeetingPDF
81 FR 40589 - Changes in Requirements for Affidavits or Declarations of Use, Continued Use, or Excusable Nonuse in Trademark CasesPDF
81 FR 40726 - Advisory Committee on Reactor Safeguards (ACRS) Meeting of the ACRS Subcommittee on Future Plant Designs; Notice of MeetingPDF
81 FR 40483 - Airworthiness Directives; BRP-Powertrain GmbH & Co KG Reciprocating EnginesPDF
81 FR 40703 - Healthcare Infection Control Practices Advisory Committee (HICPAC)PDF
81 FR 40701 - Advisory Committee on Immunization Practices (ACIP)PDF
81 FR 40680 - Access to Healthcare Under the TRICARE Program for Beneficiaries of TRICARE PrimePDF
81 FR 40653 - Office of Administration; Commerce Alternative Personnel SystemPDF
81 FR 40518 - Modification of Treatment of Certain Health OrganizationsPDF
81 FR 40731 - Submission for Review: 3206-0034, Annuitant's Report of Earned Income, (RI 30-2)PDF
81 FR 40689 - International Energy Agency MeetingPDF
81 FR 40731 - Submission for Review: 3206-0254, Request for Case Review for Enhanced Disability Annuity Benefit, RI 20-123PDF
81 FR 40709 - National Institute of Neurological Disorders and Stroke; Notice of Closed MeetingsPDF
81 FR 40708 - National Institute on Drug Abuse; Notice of Closed MeetingsPDF
81 FR 40732 - Submission for Review: Request to Disability Annuitant for Information on Physical Condition and Employment, (RI 30-1), 3206-0143PDF
81 FR 40685 - Production of Tritium in Commercial Light Water ReactorsPDF
81 FR 40732 - Submission for Review: 3206-0138, Reinstatement of Disability Annuity Previously Terminated Because of Restoration to Earning Capacity, RI 30-9PDF
81 FR 40690 - Environmental Management Site-Specific Advisory Board, Savannah River SitePDF
81 FR 40730 - Submission for Review: 3206-0099, Initial Certification of Full-Time School Attendance, RI 25-41PDF
81 FR 40689 - Application To Export Electric Energy; ReEnergy Fort Fairfield LLCPDF
81 FR 40499 - Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement CasesPDF
81 FR 40690 - Bison Solar LLC; Supplemental Notice That Initial Market-Based Rate Filing Includes Request for Blanket Section 204 AuthorizationPDF
81 FR 40695 - Boulder Solar Power, LLC; Supplemental Notice That Initial Market-Based Rate Filing Includes Request for Blanket Section 204 AuthorizationPDF
81 FR 40691 - NRG Power Midwest, LP; Notice of Institution of Section 206 Proceeding and Refund Effective DatePDF
81 FR 40695 - Midcontinent Independent System Operator, Inc.; Notice of Institution of Section 206 Proceeding and Refund Effective DatePDF
81 FR 40692 - Combined Notice of Filings #2PDF
81 FR 40694 - Combined Notice of Filings #1PDF
81 FR 40693 - Three Sisters Irrigation District; Notice of Preliminary Determination of a Qualifying Conduit Hydropower Facility and Soliciting Comments and Motions To IntervenePDF
81 FR 40691 - Alabama Power Company; Notice of Application Accepted for Filing and Soliciting Comments, Motions To Intervene, and ProtestsPDF
81 FR 40691 - San Isabel Solar LLC; Supplemental Notice That Initial Market-Based Rate Filing Includes Request for Blanket Section 204 AuthorizationPDF
81 FR 40694 - Pavant Solar II LLC; Supplemental Notice That Initial Market-Based Rate Filing Includes Request for Blanket Section 204 AuthorizationPDF
81 FR 40767 - Minority Depository Institutions Advisory CommitteePDF
81 FR 40745 - Qualification of Drivers; Exemption Applications; DiabetesPDF
81 FR 40743 - Qualification of Drivers; Exemption Applications; Diabetes MellitusPDF
81 FR 40676 - Proposed Information Collection; Comment Request; West Coast Saltwater Fishing SurveyPDF
81 FR 40698 - Formations of, Acquisitions by, and Mergers of Bank Holding CompaniesPDF
81 FR 40655 - Ribway Airlines Company Limited, 54 Kairaba Avenue, Kanifing Municipality, WCR, The Gambia; John Edward Meadows, 50 St. Leonards Road, Bexhill on Sea, East Sussex, TN40 1JB, United Kingdom, Jeffrey John James Ashfield, 50 St. Leonards Road, Bexhill on Sea, East Sussex, TN40 1JB, United Kingdom; AC AVIATIE UK Limited, f/k/a Bin Vali Aviation Limited, 50 St. Leonard's Road, Bexhill on Sea, East Sussex, TN40 1JB, United Kingdom, Respondents; Modification of March 1, 2016 Amended Temporary Denial OrderPDF
81 FR 40746 - Qualification of Drivers; Exemption Applications; Diabetes MellitusPDF
81 FR 40654 - In the Matter of: Jose Orence Cocchiola, Register Number: 02247-104, McRae Correctional Institution, P.O. Drawer 55030, McRae Helena, GA 31055; Order Denying Export PrivilegesPDF
81 FR 40658 - In the Matter of: Ismael Reta, Register Number: 78795-379, Federal Correctional Institution, P.O. Box 4200, Three Rivers, TX 78071; Order Denying Export PrivilegesPDF
81 FR 40657 - In the Matter of: Dennis Haag, 3940 County Line Road, Lenox, MI 48050; Order Denying Export PrivilegesPDF
81 FR 40716 - Endangered Species; Receipt of Applications for PermitPDF
81 FR 40707 - Request for Information on the Availability of Biological Samples to Evaluate the Technical Performance of Inflammatory MarkersPDF
81 FR 40712 - Submission for OMB Review; 30-Day Comment Request; Evaluation of the Enhancing Diversity of the NIH-Funded Workforce Program (NIGMS)PDF
81 FR 40713 - Submission for OMB Review; 30-Day Comment Request: NEXT Generation Health StudyPDF
81 FR 40698 - Change in Bank Control Notices; Acquisitions of Shares of a Bank or Bank Holding CompanyPDF
81 FR 40477 - Common Crop Insurance Regulations, Basic ProvisionsPDF
81 FR 40679 - Charter Renewal of Department of Defense Federal Advisory CommitteesPDF
81 FR 40682 - Agency Information Collection Activities; Comment Request; FFEL/Direct Loan/Perkins Military Service Deferment/Post-Active Duty Student Deferment RequestPDF
81 FR 40683 - Agency Information Collection Activities; Comment Request; Ronald E. McNair Postbaccalaureate Achievement Program Annual Performance ReportPDF
81 FR 40511 - Asset-Backed Securities Disclosure and RegistrationPDF
81 FR 40677 - Collection of Information; Proposed Extension of Approval; Comment Request-Follow-Up Activities for Product-Related InjuriesPDF
81 FR 40700 - Proposed Data Collection Submitted for Public Comment and RecommendationsPDF
81 FR 40698 - Proposed Data Collection Submitted for Public Comment and RecommendationsPDF
81 FR 40702 - Agency Forms Undergoing Paperwork Reduction Act ReviewPDF
81 FR 40703 - Agency Forms Undergoing Paperwork Reduction Act ReviewPDF
81 FR 40704 - Agency Information Collection Activities; Submission for Office of Management and Budget Review; Comment Request; Guidance for Industry on Nonproprietary Naming of Biological Products; WithdrawalPDF
81 FR 40512 - Revisions to Exceptions Applicable to Certain Human Cells, Tissues, and Cellular and Tissue-Based ProductsPDF
81 FR 40683 - List of Correspondence From October 1, 2014, Through December 31, 2014PDF
81 FR 40716 - Agency Information Collection Activities: 287(g) Candidate Questionnaire, Form No. 70-009; Extension, Without Change; Comment Request; OMB Control No. 1653-0047PDF
81 FR 40734 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Make Clarifying Amendments to and Remove Obsolete Language From Rules 1053 and 1056PDF
81 FR 40739 - Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule To Amend the Fees SchedulePDF
81 FR 40736 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rules 7018(a) and 7014(h)PDF
81 FR 40757 - Pipeline Safety: Request for Revision of a Previously Approved Information Information Collection: National Pipeline Mapping System ProgramPDF
81 FR 40714 - Agency Information Collection Activities: Proposed Collection; Comment RequestPDF
81 FR 40715 - Agency Information Collection Activities: Proposed Collection; Comment RequestPDF
81 FR 40733 - New Postal ProductsPDF
81 FR 40755 - Notice of Intent To Grant a Buy America Waiver to Palmetto Railways, a Division of the South Carolina Department of Commerce, To Use Wide-Span, Electric, Rail-Mounted Gantry CranesPDF
81 FR 40725 - Information Collection: NRC Forms 542 and 542A, Uniform Low-Level Radioactive Waste Manifest Index and Regional Compact Tabulation, and Continuation PagePDF
81 FR 40728 - Information Collection: NRC Forms 540 and 540A, Uniform Low-Level Radioactive Waste Manifest (Shipping Paper) and Continuation PagePDF
81 FR 40727 - Information Collection: NRC Forms 541 and 541A, Uniform Low-Level Radioactive Waste Manifest, Container and Waste Description, and Continuation PagePDF
81 FR 40720 - Statement of Findings: Crow Tribe Water Rights Settlement Act of 2010PDF
81 FR 40624 - Competitive Passenger Rail Service Pilot ProgramPDF
81 FR 40584 - Proposed Revisions to Wine Labeling and Recordkeeping RequirementsPDF
81 FR 40681 - Public Notice of Intent for Studies and Initial Scoping Meeting for Gulf Intracoastal Waterway Brazos River Floodgates and Colorado River Locks Feasibility StudyPDF
81 FR 40710 - National Institute of Mental Health (NIMH); Notice of MeetingPDF
81 FR 40705 - Center for Scientific Review; Notice of Closed MeetingsPDF
81 FR 40707 - Center for Scientific Review; Notice of Closed MeetingsPDF
81 FR 40706 - Center for Scientific Review; Notice of Closed MeetingsPDF
81 FR 40711 - Center for Scientific Review; Notice of Closed MeetingsPDF
81 FR 40682 - Withdrawal of Notice of Intent for the Environmental Impact Statement Process for the Compass Minerals-Ogden's Solar Evaporation Pond Expansion Project Within the Great Salt Lake, Box Elder County, UTPDF
81 FR 40773 - Proposed Information Collection (Acquisition Regulation (VAAR) Provision 852.214-70, Caution to Bidder-Bid Envelopes) Activity: Comment RequestPDF
81 FR 40772 - Proposed Information Collection (Acquisition Regulation (VAAR) Clause 852.270-3, Purchase of Shellfish) Activity: Comment RequestPDF
81 FR 40768 - Proposed Information Collection (Acquisition Regulation (VAAR) Provision 852.211-71, Special Notice) Activity: Comment RequestPDF
81 FR 40771 - Proposed Information Collection (Brand Name or Equal) Activities Under OMB Review; Activity: Comment RequestPDF
81 FR 40768 - Proposed Information Collection (Brand Name or Equal) Activities Under OMB Review Activity: Comment RequestPDF
81 FR 40771 - Proposed Information Collection (VA Form Letter 5-127, Inquiry Concerning Applicant for Employment)PDF
81 FR 40770 - Proposed Information Collection (Transfer of Scholastic Credit (Schools) (FL-315)) Activity: Comment RequestPDF
81 FR 40773 - Proposed Information Collection (Certificate of Delivery of Advance Payment and Enrollment) Activity: Comment RequestPDF
81 FR 40767 - Proposed Information Collection (Application for Residential Care Home Program Sponsor Application, VA Form 10-2407) Activity: Comment RequestPDF
81 FR 40769 - Proposed Information Collection; Comment Request (Reconsideration of Denied Claims)PDF
81 FR 40769 - Proposed Information Collection (Agent Orange Registry Code Sheet; VA Form 10-9009) Activity: Comment RequestPDF
81 FR 40772 - Agency Information Collection (Authorization To Disclose Personal Information to a Third Party) Activity Under OMB ReviewPDF
81 FR 40765 - Agency Information Collection Activities: Information Collection Renewal; Submission for OMB Review; Minimum Security Devices and Procedures, Reports of Suspicious Activities, and Bank Secrecy Act Compliance ProgramPDF
81 FR 40659 - Certain Pasta From Italy: Initiation and Preliminary Results of Antidumping and Countervailing Duty Changed Circumstances ReviewsPDF
81 FR 40661 - Ammonium Sulfate From the People's Republic of China: Initiation of Countervailing Duty InvestigationPDF
81 FR 40525 - Limited Disapproval of Air Plan Revisions; Arizona; New Source Review; PM2.5PDF
81 FR 40665 - Ammonium Sulfate From the People's Republic of China: Initiation of Less-Than-Fair-Value InvestigationPDF
81 FR 40697 - Notice to All Interested Parties of the Termination of the Receivership of 10498, AztecAmerica Bank, Berwyn, IllinoisPDF
81 FR 40725 - Advisory Committee for International Science and Engineering; Notice of MeetingPDF
81 FR 40704 - Agency Information Collection Activities: Proposed Collection: Public Comment RequestPDF
81 FR 40756 - Requested Administrative Waiver of the Coastwise Trade Laws: Vessel PHOTOBOAT; Invitation for Public CommentsPDF
81 FR 40676 - Evaluations of National Estuarine Research Reserves and Coastal Management ProgramsPDF
81 FR 40523 - Federal Civil Penalties Adjustment Act AmendmentsPDF
81 FR 40490 - Airworthiness Directives; Bombardier, Inc. AirplanesPDF
81 FR 40488 - Airworthiness Directives; Bombardier, Inc. AirplanesPDF
81 FR 40528 - Lighting and Marking on Agricultural EquipmentPDF
81 FR 40534 - Endangered and Threatened Wildlife and Plants; Threatened Species Status for the Elfin-Woods Warbler With 4(d) RulePDF
81 FR 40632 - Endangered and Threatened Wildlife and Plants; Designation of Critical Habitat for Elfin-Woods WarblerPDF
81 FR 40596 - Medicaid/CHIP Program; Medicaid Program and Children's Health Insurance Program (CHIP); Changes to the Medicaid Eligibility Quality Control and Payment Error Rate Measurement Programs in Response to the Affordable Care ActPDF
81 FR 40492 - Airworthiness Directives; Airbus Helicopters (Previously Eurocopter France) HelicoptersPDF
81 FR 40569 - Application of Section 409A to Nonqualified Deferred Compensation PlansPDF
81 FR 40548 - Deferred Compensation Plans of State and Local Governments and Tax-Exempt EntitiesPDF
81 FR 40480 - Airworthiness Directives; Embraer S.A. AirplanesPDF
81 FR 40485 - Airworthiness Directives; The Boeing Company AirplanesPDF

Issue

81 120 Wednesday, June 22, 2016 Contents Agriculture Agriculture Department See

Federal Crop Insurance Corporation

Alcohol Tobacco Tax Alcohol and Tobacco Tax and Trade Bureau PROPOSED RULES Wine Labeling and Recordkeeping Requirements, 40584-40589 2016-14696 Centers Disease Centers for Disease Control and Prevention NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 40698-40704 2016-14724 2016-14725 2016-14726 2016-14727 Meetings: Advisory Committee on Immunization Practices, 40701 2016-14787 Healthcare Infection Control Practices Advisory Committee, 40703 2016-14788 Centers Medicare Centers for Medicare & Medicaid Services PROPOSED RULES Medicaid/CHIP Program; Medicaid Program and Children's Health Insurance Program: Changes to the Medicaid Eligibility Quality Control and Payment Error Rate Measurement Programs in Response to the Affordable Care Act, 40596-40617 2016-14536 Coast Guard Coast Guard RULES Safety Zones: Detroit River Days Air Show, Detroit River, Detroit, MI, 40521-40523 2016-14817 Commerce Commerce Department See

Industry and Security Bureau

See

International Trade Administration

See

National Oceanic and Atmospheric Administration

See

Patent and Trademark Office

NOTICES Commerce Alternative Personnel System, 40653-40654 2016-14785
Comptroller Comptroller of the Currency NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Minimum Security Devices and Procedures, Reports of Suspicious Activities, and Bank Secrecy Act Compliance Program, 40765-40766 2016-14674 Meetings: Minority Depository Institutions Advisory Committee, 40767 2016-14755 Consumer Product Consumer Product Safety Commission NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Follow-Up Activities for Product-Related Injuries, 40677-40679 2016-14729 Defense Department Defense Department See

Engineers Corps

NOTICES Access to Healthcare under the TRICARE Program for Beneficiaries of TRICARE Prime, 40680-40681 2016-14786 Charter Renewals: Federal Advisory Committees, 40679 2016-14733
Education Department Education Department NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Direct Loan, FFEL, Perkins and TEACH Grant Total and Permanent Disability Discharge Application and Related Forms, 40684-40685 2016-14826 FFEL/Direct Loan/Perkins Military Service Deferment/Post-Active Duty Student Deferment Request, 40682 2016-14732 Ronald E. McNair Postbaccalaureate Achievement Program Annual Performance Report, 40683 2016-14731 List of Correspondence from October 1, 2014, through December 31, 2014, 40683-40684 2016-14720 Energy Department Energy Department See

Federal Energy Regulatory Commission

NOTICES Applications to Export Electric Energy: ReEnergy Fort Fairfield, LLC, 40689 2016-14771 Meetings: Environmental Management Site-Specific Advisory Board, Savannah River Site, 40690 2016-14773 International Energy Agency, 40689-40690 2016-14780 Records of Decisions: Production of Tritium in Commercial Light Water Reactors, 40685-40689 2016-14775
Engineers Engineers Corps NOTICES Environmental Impact Statements; Availability, etc.: Compass Minerals: Ogden's Solar Evaporation Pond Expansion Project, Great Salt Lake, Box Elder County, UT; Withdrawal, 40682 2016-14688 Meetings: Gulf Intracoastal Waterway Brazos River Floodgates and Colorado River Locks Feasibility Study, 40681 2016-14694 Environmental Protection Environmental Protection Agency RULES Air Quality State Implementation Plans; Approvals and Promulgations: Arizona; Limited Disapproval of Air Plan Revisions; New Source Review; PM2.5, 40525-40527 2016-14669 PROPOSED RULES Pesticide Petitions Filed for Residues of Pesticide Chemicals in or on Various Commodities, 40594-40596 2016-14816 NOTICES Emergency Exemptions; Applications: Pyridate, 40695-40696 2016-14813 Federal Aviation Federal Aviation Administration RULES Airworthiness Directives: Airbus Helicopters (Previously Eurocopter France) Helicopters, 40492-40495 2016-14467 Bombardier, Inc. Airplanes, 40488-40492 2016-14578 2016-14579 BRP-Powertrain GmbH and Co KG Reciprocating Engines, 40483-40485 2016-14789 Embraer S.A. Airplanes, 40480-40483 2016-14305 The Boeing Company Airplanes, 40485-40487 2016-14198 IFR Altitudes, 40495-40499 2016-14799 NOTICES Aeronautical Land-Use Assurances; Waivers: Minneapolis-St. Paul International Airport, Minneapolis, MN, 40742-40743 2016-14803 Federal Communications Federal Communications Commission RULES Low Power Television Digital Rules, 40527 2016-14804 PROPOSED RULES Public Inspection File Requirements: Broadcaster Correspondence File and Cable Principal Headend Location, 40617-40624 2016-14793 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 40696-40697 2016-14794 Federal Crop Federal Crop Insurance Corporation RULES Common Crop Insurance Regulations: Basic Provisions, 40477-40480 2016-14735 Federal Deposit Federal Deposit Insurance Corporation NOTICES Receiverships; Terminations: AztecAmerica Bank, Berwyn, IL, 40697 2016-14661 Federal Energy Federal Energy Regulatory Commission NOTICES Applications: Alabama Power Co., 40691-40692 2016-14758 Combined Filings, 40692-40695 2016-14763 2016-14765 Initial Market-Based Rate Filings Including Requests for Blanket Section 204 Authorizations: Bison Solar, LLC, 40690-40691 2016-14769 Boulder Solar Power, LLC, 40695 2016-14768 Pavant Solar II, LLC, 40694 2016-14756 San Isabel Solar, LLC, 40691 2016-14757 Institution of Section 206 Proceeding and Refund Effective Date: NRG Power Midwest, LP, 40691 2016-14767 Institutions of Section 206 Proceedings and Refund Effective Dates: Midcontinent Independent System Operator, Inc., 40695 2016-14766 Qualifying Conduit Hydropower Facilities: Three Sisters Irrigation District, 40693-40694 2016-14762 Federal Maritime Federal Maritime Commission NOTICES Agreements Filed, 40697-40698 2016-14814 Federal Motor Federal Motor Carrier Safety Administration NOTICES Qualification of Drivers; Exemption Applications: Diabetes, 40745-40746 2016-14753 Diabetes Mellitus, 40743-40755 2016-14747 2016-14751 Federal Railroad Federal Railroad Administration PROPOSED RULES Competitive Passenger Rail Service Pilot Program, 40624-40631 2016-14698 NOTICES Buy American Waivers: Palmetto Railways for Use of Wide-Span, Electric, Rail-Mounted Gantry Cranes, 40755-40756 2016-14708 Federal Reserve Federal Reserve System NOTICES Changes in Bank Control: Acquisitions of Shares of a Bank or Bank Holding Company, 40698 2016-14737 Formations of, Acquisitions by, and Mergers of Bank Holding Companies, 40698 2016-14749 Fish Fish and Wildlife Service RULES Endangered and Threatened Wildlife and Plants: Elfin-woods Warbler, 40534-40547 2016-14540 PROPOSED RULES Endangered and Threatened Wildlife and Plants: Designation of Critical Habitat for Elfin-woods Warbler, 40632-40650 2016-14539 NOTICES Endangered Species Permit Applications, 40716-40717 2016-14741 Food and Drug Food and Drug Administration RULES Exceptions Applicable to Certain Human Cells, Tissues, and Cellular and Tissue-Based Products, 40512-40518 2016-14721 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Guidance for Industry on Nonproprietary Naming of Biological Products; Withdrawal, 40704 2016-14722 Health and Human Health and Human Services Department See

Centers for Disease Control and Prevention

See

Centers for Medicare & Medicaid Services

See

Food and Drug Administration

See

Health Resources and Services Administration

See

National Institutes of Health

See

Substance Abuse and Mental Health Services Administration

NOTICES Delegation of Authority, 40705 2016-14802
Health Resources Health Resources and Services Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 40704-40705 2016-14658 Homeland Homeland Security Department See

Coast Guard

See

U.S. Immigration and Customs Enforcement

Indian Affairs Indian Affairs Bureau NOTICES HEARTH Act Approval of Oneida Nation of New York Regulations, 40718-40719 2016-14798 HEARTH Act Approval of Twenty-Nine Palms Band of Mission Indians of California Regulations, 40717-40718 2016-14796 Proclaiming Certain Lands as Reservation for the Shakopee Mdewakanton Sioux Community of Minnesota, 40719-40720 2016-14797 Industry Industry and Security Bureau RULES Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases Introduction, 40499-40511 2016-14770 NOTICES Denials of Export Privileges: Dennis Haag, 40657 2016-14744 Ismael Reta, 40658-40659 2016-14745 Jose Orence Cocchiola, 40654-40655 2016-14746 Temporary Denial Orders: Ribway Airlines Co., Ltd., et al.; Modifications, 40655-40656 2016-14748 Interior Interior Department See

Fish and Wildlife Service

See

Indian Affairs Bureau

NOTICES Statements of Findings: Crow Tribe Water Rights Settlement Act of 2010, 40720 2016-14699
Internal Revenue Internal Revenue Service RULES Modification of Treatment of Certain Health Organizations, 40518-40521 2016-14784 PROPOSED RULES Application of Section 409A to Nonqualified Deferred Compensation Plans, 40569-40584 2016-14331 Deferred Compensation Plans of State and Local Governments and Tax-Exempt Entities, 40548-40569 2016-14329 International Trade Adm International Trade Administration NOTICES Antidumping or Countervailing Duty Investigations, Orders, or Reviews: Ammonium Sulfate from the People's Republic of China, 40661-40665 2016-14670 Certain Frozen Warmwater Shrimp from Thailand, 40671-40676 2016-14808 Certain Pasta from Italy, 40659-40661 2016-14672 Stainless Steel Bar from Brazil, 40670-40671 2016-14811 Initiation of Less-Than-Fair-Value Investigation: Ammonium Sulfate from the People's Republic of China, 40665-40670 2016-14668 Labor Department Labor Department See

Workers Compensation Programs Office

NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: National Evaluation of Round 4 of the Trade Adjustment Assistance Community College Career Training Grants Program, 40720-40721 2016-14819
Maritime Maritime Administration NOTICES Requests for Administrative Waivers of the Coastwise Trade Laws: Vessel PHOTOBOAT, 40756 2016-14653 NASA National Aeronautics and Space Administration NOTICES Meetings: Aerospace Safety Advisory Panel, 40724-40725 2016-14805 National Highway National Highway Traffic Safety Administration RULES Lighting and Marking on Agricultural Equipment, 40528-40534 2016-14571 National Institute National Institutes of Health NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 40708-40709 2016-14825 Agency Information Collection Activities; Proposals, Submissions, and Approvals: Evaluation of the Enhancing Diversity of the NIH-funded Workforce Program, 40712-40713 2016-14739 NEXT Generation Health Study, 40713-40714 2016-14738 Availability of Biological Samples to Evaluate the Technical Performance of Inflammatory Markers, 40707-40708 2016-14740 Meetings: Center for Scientific Review, 40705-40707, 40711-40712 2016-14689 2016-14690 2016-14691 2016-14692 National Institute of Mental Health, 40710-40711 2016-14693 National Institute of Neurological Disorders and Stroke, 40709-40710 2016-14778 National Institute on Drug Abuse, 40708 2016-14777 National Oceanic National Oceanic and Atmospheric Administration PROPOSED RULES Fisheries of the Northeastern United States: Spiny Dogfish Fishery; Proposed 2016-2018 Specifications, 40650-40652 2016-14815 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: West Coast Saltwater Fishing Survey, 40676 2016-14750 Evaluations of National Estuarine Research Reserves and Coastal Management Programs, 40676-40677 2016-14607 National Science National Science Foundation NOTICES Meetings: Advisory Committee for International Science and Engineering, 40725 2016-14659 Nuclear Regulatory Nuclear Regulatory Commission NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Uniform Low-Level Radioactive Waste Manifest (Shipping Paper) and Continuation Page, 40728-40729 2016-14701 Uniform Low-Level Radioactive Waste Manifest Index and Regional Compact Tabulation, and Continuation Page, 40725-40726 2016-14702 Uniform Low-Level Radioactive Waste Manifest, Container and Waste Description, and Continuation Page, 40727-40728 2016-14700 Meetings: Advisory Committee on Reactor Safeguards, 40729-40730 2016-14792 Advisory Committee on Reactor Safeguards Subcommittee on Future Plant Designs, 40726-40727 2016-14790 Patent Patent and Trademark Office PROPOSED RULES Affidavits or Declarations of Use, Continued Use, or Excusable Nonuse in Trademark Cases, 40589-40594 2016-14791 Personnel Personnel Management Office NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Annuitant's Report of Earned Income, 40731-40732 2016-14781 Initial Certification of Full-Time School Attendance, 40730-40731 2016-14772 Reinstatement of Disability Annuity Previously Terminated Because of Restoration to Earning Capacity, 40732-40733 2016-14774 Request for Case Review for Enhanced Disability Annuity Benefit, 40731 2016-14779 Request to Disability Annuitant for Information on Physical Condition and Employment, 40732 2016-14776 Pipeline Pipeline and Hazardous Materials Safety Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Pipeline Safety: Pipeline Mapping System Program, 40757-40765 2016-14712 Postal Regulatory Postal Regulatory Commission NOTICES New Postal Products, 40733-40734 2016-14709 Presidential Documents Presidential Documents PROCLAMATIONS Special Observances: Father's Day (Proc. 9464), 40473-40474 2016-14868 ADMINISTRATIVE ORDERS Norway; Proposed Agreement for Cooperation With U. S. for Peaceful Uses of Nuclear Energy (Presidential Determination No. 2016-08 of June 10, 2016), 40475 2016-14884 Securities Securities and Exchange Commission RULES Asset-Backed Securities Disclosure and Registration, 40511-40512 2016-14730 NOTICES Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc., 40739-40741 2016-14714 NASDAQ PHLX, LLC, 40734-40736 2016-14715 NASDAQ Stock Market, LLC, 40736-40739 2016-14713 State Department State Department NOTICES Privacy Act; Systems of Records, 40741-40742 2016-14828 Substance Substance Abuse and Mental Health Services Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 2016-14710 40714-40715 2016-14711 Transportation Department Transportation Department See

Federal Aviation Administration

See

Federal Motor Carrier Safety Administration

See

Federal Railroad Administration

See

Maritime Administration

See

National Highway Traffic Safety Administration

See

Pipeline and Hazardous Materials Safety Administration

Treasury Treasury Department See

Alcohol and Tobacco Tax and Trade Bureau

See

Comptroller of the Currency

See

Internal Revenue Service

Immigration U.S. Immigration and Customs Enforcement NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Candidate Questionnaire, 40716 2016-14716 Veteran Affairs Veterans Affairs Department RULES Federal Civil Penalties Adjustment Act, 40523-40525 2016-14592 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Acquisition Regulation, 40768 2016-14685 Acquisition Regulation Provision, Caution to Bidder--Bid Envelopes, 40773-40774 2016-14687 Acquisition Regulation, Purchase of Shellfish, 40772-40773 2016-14686 Agent Orange Registry Code Sheet, 40769 2016-14677 Application for Residential Care Home Program Sponsor Application, 40767 2016-14679 Authorization to Disclose Personal Information to a Third Party, 40772 2016-14676 Brand Name or Equal, 40768-40769, 40771-40772 2016-14683 2016-14684 Certificate of Delivery of Advance Payment and Enrollment, 40773 2016-14680 Inquiry Concerning Applicant for Employment, 40771 2016-14682 Reconsideration of Denied Claims, 40769-40770 2016-14678 Transfer of Scholastic Credit, 40770-40771 2016-14681 Workers' Workers Compensation Programs Office NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 40721-40722 2016-14818 Meetings: Advisory Board on Toxic Substances and Worker Health: Subcommittee on Medical Advice, 40722-40723 2016-14822 Advisory Board on Toxic Substances and Worker Health: Subcommittee on the Site Exposure Matrices, 40723-40724 2016-14820 Reader Aids

Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, and notice of recently enacted public laws.

To subscribe to the Federal Register Table of Contents LISTSERV electronic mailing list, go to http://listserv.access.thefederalregister.org and select Online mailing list archives, FEDREGTOC-L, Join or leave the list (or change settings); then follow the instructions.

81 120 Wednesday, June 22, 2016 Rules and Regulations DEPARTMENT OF AGRICULTURE Federal Crop Insurance Corporation 7 CFR Part 457 [Docket No. FCIC-16-0002] RIN 0563-AC50 Common Crop Insurance Regulations, Basic Provisions AGENCY:

Federal Crop Insurance Corporation, USDA.

ACTION:

Final rule with request for comments.

SUMMARY:

The Federal Crop Insurance Corporation (FCIC) amends the Common Crop Insurance Regulations, Basic Provisions. The intended effect of this action is to provide policy changes and to clarify existing policy provisions to better meet the needs of policyholders. Issues have arisen regarding: The qualifications for double cropping; and when it is practical to replant. This rule addresses those issues.

DATES:

Effective date: This final rule is effective June 22, 2016.

Applicability date: The changes are applicable for the 2017 and succeeding crop years for all crops with a contract change date on or after June 22, 2016, and for the 2018 and succeeding crop years for all crops with a contract change date prior to June 22, 2016.

Comment due date: FCIC will accept written comments on this final rule until close of business August 22, 2016. FCIC may consider the comments received and may conduct additional rulemaking based on the comments.

ADDRESSES:

FCIC prefers interested persons submit their comments electronically through the Federal eRulemaking Portal. Interested persons may submit comments, identified by Docket ID No. FCIC-16-0002, by any of the following methods:

Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

Mail: Director, Product Administration and Standards Division, Risk Management Agency, United States Department of Agriculture, P.O. Box 419205, Kansas City, MO 64133-6205.

FCIC will post all comments received, including those received by mail, without change to http://www.regulations.gov, including any personal information provided. Once these comments are posted to this Web site, the public can access all comments at its convenience from this Web site. All comments must include the agency name and docket number or Regulatory Information Number (RIN) for this rule. For detailed instructions on submitting comments and additional information, see http://www.regulations.gov. If interested persons are submitting comments electronically through the Federal eRulemaking Portal and want to attach a document, FCIC requests that the document attachment be in a text-based format. If interested persons want to attach a document that is a scanned Adobe PDF file, it must be scanned as text and not as an image, thus allowing FCIC to search and copy certain portions of the submissions. For questions regarding attaching a document that is a scanned Adobe PDF file, please contact the Risk Management Agency (RMA) Web Content Team at (816) 823-4694 or by email at [email protected]

Privacy Act: Anyone is able to search the electronic form of all comments received for any dockets by the name of the person submitting the comment (or signing the comment, if submitted on behalf of an entity, such as an association, business, labor union, etc.). Interested persons may review the complete User Notice and Privacy Notice for Regulations.gov at http://www.regulations.gov/#!privacyNotice.

FOR FURTHER INFORMATION CONTACT:

Tim Hoffmann, Product Management, Product Administration and Standards Division, Risk Management Agency, United States Department of Agriculture, Beacon Facility, Stop 0812, Room 421, P.O. Box 419205, Kansas City, MO 64141-6205, telephone (816) 926-7730.

SUPPLEMENTARY INFORMATION:

Background

FCIC amends the Common Crop Insurance Regulations (7 CFR part 457) by revising 7 CFR 457.8 Common Crop Insurance Regulations, Basic Provisions. The changes to the policy made in this rule are applicable for the 2017 and succeeding crop years for all crops with a contract change date on or after June 22, 2016, and for the 2018 and succeeding crop years for all crops with a contract change date prior to June 22, 2016.

FCIC is issuing this final rule without opportunity for prior notice and comment. The Administrative Procedure Act exempts rules “relating to agency management or personnel or to public property, loans, grants, benefits, or contracts” from the statutory requirement for prior notice and opportunity for public comment (5 U.S.C. 553(a)(2)). However, FCIC is providing a 60-day comment period and invites interested persons to participate in this rulemaking by submitting written comments. FCIC may consider the comments received and may conduct additional rulemaking based on the comments.

The changes to the Common Crop Insurance Regulations, Basic Provisions (7 CFR part 457) are as follows:

(a) Section 1—FCIC is revising the definition of “practical to replant.” Concerns have been raised regarding the definition of “practical to replant” and the difficulty and inconsistency that can occur in administering the practical to replant provisions of the crop insurance policy. Approved insurance providers have stated the provisions, as written, regarding “practical to replant” lead to different approved insurance providers reaching differing determinations as to whether it is practical to replant in the same area. FCIC is revising the definition to provide a clear, known deadline for when replanting of the crop is considered to be practical and if not replanted, coverage will not be provided for the initial crop. The definition provides an exception for adverse weather conditions that would either prohibit the physical replanting of the crop, or impact seed germination, emergence, and formation of a healthy plant.

(b) Section 15—FCIC is revising section 15 to allow the allocation of comingled first and second crop production to the associated crop acreage in proportion to the liability for the acreage that was and was not double cropped. Some producers have found challenges keeping separate records of acreage and production that was and was not double cropped because often times the acreage is in the very same field and they harvest both first and second crop production at the same time. For example, if a producer has two fields in the same unit, or one field half of which was first crop acreage and half that was double crop acreage, next to each other and on one field they plant wheat, harvest the wheat, and plant soybeans while the other field was a single crop of soybeans only, they may harvest both soybean fields at the same time making it difficult to keep the production separate. This change has previously been implemented administratively through MGR-11-003.

FCIC is also revising section 15 to allow eligible double cropping acres to be based on either, (1) the greatest number of acres double cropped in two of the last four crop years in which the first insured crop was planted; or (2) the percentage of acres historically double cropped in two of the last four crop years in which the first insured crop was planted. Current double cropping requirements do not adequately recognize changes in growing farm operations or for added land. This change will address both land added to an operation, and account for multiple crop rotations. For example, if a producer has a 100-acre farm and has historically double cropped 50 acres planted to wheat followed by soybeans (50 percent of acres historically double cropped), and the producer purchases and plants an additional 200 acres of wheat for a total of 300 acres of planted wheat, the number of acres eligible for double cropping would be based on 50 percent, or 150 acres. If the producer has historically double cropped wheat followed by soybeans on some or even all of the acreage, there is a reasonable presumption they may continue to do so in the future.

Previously, changes made to the Federal crop insurance policies codified in the Code of Federal Regulations were required to be implemented through the rulemaking process. Such action was not required by the Administrative Procedures Act because contracts were exempt from notice and comment rulemaking and the crop insurance policy is a contract. However, a prior Secretary of Agriculture published a notice in the Federal Register stating that the Department of Agriculture would, to the maximum extent practicable, use the notice and comment rulemaking process when making program changes, including those involving contracts. FCIC has complied with this notice over the subsequent years. Recently, the current Secretary of Agriculture has published a notice in the Federal Register rescinding the prior notice, thereby making contracts again exempt from the notice and comment rulemaking process. This exemption applies to the 30 day notice prior to implementation of a rule. Therefore, the policy changes made by this final rule are effective upon publication in the Federal Register.

Executive Order 12866

This rule has been determined to be not significant for the purposes of Executive Order 12866 and, therefore, it has not been reviewed by the OMB.

Paperwork Reduction Act of 1995

Pursuant to the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35, subchapter I), the collections of information in this rule have been approved by OMB under control number 0563-0053.

E-Government Act Compliance

FCIC is committed to complying with the E-Government Act of 2002, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

Unfunded Mandates Reform Act of 1995

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. This rule contains no Federal mandates (under the regulatory provisions of title II of the UMRA) for State, local, and tribal governments or the private sector. Therefore, this rule is not subject to the requirements of sections 202 and 205 of UMRA.

Executive Order 13132

It has been determined under section 1(a) of Executive Order 13132, Federalism, that this rule does not have sufficient implications to warrant consultation with the States. The provisions contained in this rule will not have a substantial direct effect on States, or on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

Executive Order 13175

This rule has been reviewed in accordance with the requirements of Executive Order 13175, “Consultation and Coordination with Indian Tribal Governments.” Executive Order 13175 requires Federal agencies to consult and coordinate with tribes on a government-to-government basis on policies that have tribal implications, including regulations, legislative comments or proposed legislation, and other policy statements or actions that have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

The Federal Crop Insurance Corporation has assessed the impact of this rule on Indian tribes and determined that this rule does not, to our knowledge, have tribal implications that require tribal consultation under E.O. 13175. If a Tribe requests consultation, the Federal Crop Insurance Corporation will work with the Office of Tribal Relations to ensure meaningful consultation is provided where changes, additions and modifications identified herein are not expressly mandated by Congress.

Regulatory Flexibility Act

FCIC certifies that this regulation will not have a significant economic impact on a substantial number of small entities. Program requirements for the Federal crop insurance program are the same for all producers regardless of the size of their farming operation. For instance, all producers are required to submit an application and acreage report to establish their insurance guarantees and compute premium amounts, and all producers are required to submit a notice of loss and production information to determine the indemnity amount for an insured cause of crop loss. Whether a producer has 10 acres or 1000 acres, there is no difference in the kind of information collected. To ensure crop insurance is available to small entities, the Federal Crop Insurance Act (FCIA) authorizes FCIC to waive collection of administrative fees from limited resource farmers. FCIC believes this waiver helps to ensure that small entities are given the same opportunities as large entities to manage their risks through the use of crop insurance. A Regulatory Flexibility Analysis has not been prepared since this regulation does not have a significant impact on a substantial number of small entities, and, therefore, this regulation is exempt from the provisions of the Regulatory Flexibility Act (5 U.S.C. 605).

Federal Assistance Program

This program is listed in the Catalog of Federal Domestic Assistance under No. 10.450.

Executive Order 12372

This program is not subject to the provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. See 2 CFR part 415, subpart C.

Executive Order 12988

This rule has been reviewed in accordance with Executive Order 12988 on civil justice reform. The provisions of this rule will not have a retroactive effect. The provisions of this rule will preempt State and local laws to the extent such State and local laws are inconsistent herewith. With respect to any direct action taken by FCIC or action by FCIC directing the insurance provider to take specific action under the terms of the crop insurance policy, the administrative appeal provisions published at 7 CFR part 11 must be exhausted before any action against FCIC for judicial review may be brought.

Environmental Evaluation

This action is not expected to have a significant economic impact on the quality of the human environment, health, or safety. Therefore, neither an Environmental Assessment nor an Environmental Impact Statement is needed.

List of Subjects in 7 CFR Part 457

Crop insurance, Reporting and recordkeeping requirements.

Final Rule

Accordingly, as set forth in the preamble, the Federal Crop Insurance Corporation amends 7 CFR part 457 as follows:

PART 457—COMMON CROP INSURANCE REGULATIONS 1. The authority citation for 7 CFR part 457 continues to read as follows: Authority:

7 U.S.C. 1506(l) and 1506(o).

2. Amend § 457.8, in the Common Crop Insurance Policy, as follows: a. In section 1 by revising the definition of “practical to replant;” and b. In section 15 by revising paragraphs (h) and (i).

The revisions and additions reads as follows:

§ 457.8 The application and policy. Common Crop Insurance Policy

1. Definitions.

Practical to replant. Our determination, after loss or damage to the insured crop, based on all factors, including, but not limited to moisture availability, marketing window, condition of the field, and time to crop maturity, that replanting the insured crop will allow it to attain maturity prior to the calendar date for the end of the insurance period. It will be considered practical to replant within or prior to the late planting period, or on or prior to the final planting date if no late planting period is applicable, unless we determine it is physically impossible to replant the acreage or there is no chance of seed germination, emergence, and formation of a healthy plant.

15. Production Included in Determining an Indemnity and Payment Reductions.

(h) You may receive a full indemnity, or a full prevented planting payment for a first insured crop when a second crop is planted on the same acreage in the same crop year, if each of the following conditions are met, regardless of whether or not the second crop is insured or sustains an insurable loss:

(1) Planting two or more crops for harvest in the same crop year in the area is generally recognized by agricultural experts or organic agricultural experts;

(2) The second or more crops are customarily planted after the first insured crop for harvest on the same acreage in the same crop year in the area;

(3) Additional coverage insurance offered under the authority of the Act is available in the county on the two or more crops that are double cropped;

(4) In the case of prevented planting, the second crop is not planted on or prior to the final planting date or, if applicable, prior to the end of the late planting period for the first insured crop;

(5) You provide records, acceptable to us, of acreage and production specific to the double cropped acreage proving that:

(i) You have double cropped acreage in at least two of the last four crop years in which the first insured crop was planted; if you acquired additional acreage, you may apply the percentage of acres that you have previously double cropped to the total acreage now in your operation using the following calculation:

(A) Determine the number of acres of the first insured crop that were double cropped in each of the years for which records are provided (For example, records are provided showing: 100 acres of wheat planted in 2015 and 50 of those acres were double cropped with soybeans; and 100 acres of wheat planted in 2016 and 70 of those acres were double cropped with soybeans);

(B) Divide each result of section 15(h)(5)(i)(A) by the number of acres of the first insured crop that were planted in each respective year (In the example above, 50 divided by 100 equals 50 percent of the first insured crop acres were double cropped in 2015 and 70 divided by 100 equals 70 percent were double cropped in 2016);

(C) Add the results of section 15(h)(5)(i)(B) and divide by the number of years the first insured crop was double cropped (In the example above, 50 plus 70 equals 120 divided by 2 equals 60 percent); and

(D) Multiply the result of 15(h)(5)(i)(C) by the number of insured acres of the first insured crop (In the example above, 60 percent of the wheat acres insured in 2017 and 60 percent of the second crop acres insured in 2017 are eligible for double cropping history);

or

(ii) The applicable acreage was double cropped (by one or more other producers, and the producer(s) will allow you to use their records) for at least two of the last four crop years in which the first insured crop was grown on it; and

(6) If you do not have records of acreage and production specific to the double cropped acreage, as required in section 15(h)(5), but instead have records that combine production from acreage you double cropped with records of production you did not double crop, we will allocate the first and second crop production to the specific acreage in proportion to the liability for the acreage that was and was not double cropped.

(i) If you provided acceptable records in accordance with section 15(h), your double cropping history is based on the acres historically cropped:

(1) If the records you provided are from acreage you double cropped in at least two of the last four crop years, you may apply your history of double cropping to any acreage of the insured crop in the county (e.g., if you have double cropped 100 acres of wheat and soybeans in the county and you acquire an additional 100 acres in the county, you can apply that history of double cropped acreage to any of the 200 acres in the county as long as it does not exceed 100 acres); or

(2) If the records you provided are from acreage that one or more other producers double cropped in at least two of the last four crop years, you may only use the history of double cropping for the same physical acres from which double cropping records were provided (e.g., if a neighbor has double cropped 100 acres of wheat and soybeans in the county and you acquire your neighbor's 100 double cropped acres and an additional 100 acres in the county, you can only apply your neighbor's history of double cropped acreage to the same 100 acres that your neighbor double cropped).

Signed in Washington, DC, on June 16, 2016. Brandon Willis, Manager, Federal Crop Insurance Corporation.
[FR Doc. 2016-14735 Filed 6-21-16; 8:45 am] BILLING CODE 3410-08-P
DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2015-6542; Directorate Identifier 2015-NM-038-AD; Amendment 39-18563; AD 2016-12-14] RIN 2120-AA64 Airworthiness Directives; Embraer S.A. Airplanes AGENCY:

Federal Aviation Administration (FAA), Department of Transportation (DOT).

ACTION:

Final rule.

SUMMARY:

We are adopting a new airworthiness directive (AD) for all Embraer S.A. Model ERJ 170 airplanes; and all Embraer S.A. Model ERJ 190-100 STD, -100 LR, -100 IGW, -200 STD, -200 LR, and -200 IGW airplanes. This AD was prompted by reports of cracks in certain engine low-stage bleed check valves. This AD requires replacing the air management system (AMS) controller operation program of the AMS controller processor boards, and replacing the current low-stage bleed check valve and associated seals. We are issuing this AD to prevent failure of the low-stage bleed check valve; simultaneous failures of both low-stage bleed check valves could result in a dual engine in-flight shutdown.

DATES:

This AD is effective July 27, 2016.

The Director of the Federal Register approved the incorporation by reference of certain publications listed in this AD as of July 27, 2016.

ADDRESSES:

For service information identified in this final rule, contact Embraer S.A., Technical Publications Section (PC 060), Av. Brigadeiro Faria Lima, 2170—Putim—12227-901 São Jose dos Campos—SP—Brasil; telephone +55 12 3927-5852 or +55 12 3309-0732; fax +55 12 3927-7546; email [email protected]; Internet http://www.flyembraer.com. You may view this referenced service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221. It is also available on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2015-6542.

Examining the AD Docket

You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2015-6542; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Office (telephone 800-647-5527) is Docket Management Facility, U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT:

Ana Martinez Hueto, Aerospace Engineer, International Branch, ANM-116, Transport Airplane Directorate, FAA, 1601 Lind Avenue SW., Renton, WA 98057-3356; telephone 425-227-1622; fax 425-227-1149.

SUPPLEMENTARY INFORMATION: Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to all Embraer S.A. Model ERJ 170 airplanes; and all Embraer S.A. Model ERJ 190-100 STD, -100 LR, -100 IGW, -200 STD, -200 LR, and -200 IGW airplanes. The NPRM published in the Federal Register on November 30, 2015 (80 FR 74720) (“the NPRM”).

The Agência Nacional de Aviação Civil (ANAC), which is the aviation authority for Brazil, has issued Brazilian Airworthiness Directive 2015-02-02, effective March 6, 2015 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Embraer S.A. Model ERJ 170 airplanes; and all Embraer S.A. Model ERJ 190-100 STD, -100 LR, -100 IGW, -200 STD, -200 LR, and -200 IGW airplanes. The MCAI states:

This [Brazilian] AD was prompted by reports of cracks in some engine low-stage bleed check valves having part number (P[/]N) 1001447-6. Further analysis has determined that if a new (zero hour) low-stage bleed check valve P/N 1001447-6 is installed in an airplane already equipped with the Air Management System (AMS) controller processor boards containing the AMS Controller Operational Program version Black Label 13, or a later version, premature cracking on the petals of the low-stage bleed check valve is not expected to occur. We are issuing this [Brazilian] AD to prevent the possibility of a dual engine in-flight shutdown due to low-stage bleed check valve failure.

The unsafe condition is failure of the low-stage bleed check valve; simultaneous failures of both low-stage bleed check valves could result in a dual engine in-flight shutdown. The required action is replacement of the AMS controller operation program of the AMS controller processor boards, and replacement of the low-stage bleed check valves and associated seals. You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2015-6542.

Comments

We gave the public the opportunity to participate in developing this AD. The following presents the comments received on the NPRM and the FAA's response to each comment.

Request To Authorize Operators To Install Used Overhauled Valves

An anonymous commenter requested that we revise the NPRM to authorize operators to install used valves that have been overhauled by the manufacturer or other authorized 14 CFR part 145 repair station. The commenter stated that the historical service records required to determine the serviceability of used valves installed on airplanes are not required by 14 CFR 91.417 and are generally not available. According to the commenter, this limits the ability of operators of Embraer Model ERJ 170 airplanes to adequately determine the service history of valves that were previously installed on Embraer Model ERJ 190 airplanes, and whether the installation of a used valve will meet compliance with the requirements of paragraph (j)(1) of the proposed AD.

We disagree to revise this AD to authorize operators to install used valves that have been overhauled. A valve that has been used on a Model ERJ 190 airplane without the AMS controller operational program version Black Label 13 or later version has been subjected to hydraulic pressures above the valve's structural limits. The damage to the valve could be undetectable, and the valve can therefore experience premature cracking. However, as is stated in paragraph (i) of this AD, low-stage bleed check valves having P/N 1001447-6 that can be demonstrated with logged hours only on Model ERJ-170 airplanes and/or on Model ERJ-190 airplanes equipped with the AMS controller operational program version Black Label 13, or a later version, can be used instead of new ones (zero-hour). We have made no changes to this AD in this regard.

Request To Revise Wording of the Unsafe Condition

Embraer requested that we revise the unsafe condition in the NPRM to indicate that a single valve failure cannot result in a dual engine failure. Embraer stated that a dual engine failure can occur only in the event of simultaneous failures of both valves on both engines on the same flight.

For the reasons stated by Embraer, we agree to include the requested phrasing in all appropriate locations in this final rule.

Request To Revise the Applicability

United Technologies Aerospace Systems (UTAS) requested that we revise the applicability of the NPRM to include Model ERJ “195 airplanes” and limit the applicability for Model ERJ 170 airplanes (including Model ERJ “175 airplanes”) to those “requiring replacement check valves.”

We disagree to revise the applicability of this AD. There is a difference between the commercial designation and the model designation on the type certificate data sheet (TCDS): “ERJ 175” is the commercial designation of Model ERJ 170-200 airplanes on the TCDS, and “ERJ 195” is the commercial designation of Model ERJ 190-200 airplanes on the TCDS. We use the model designation on the TCDS to define the applicability of ADs.

Although this AD is applicable to Model ERJ 190 and Model ERJ 170 airplanes, the only requirement for Model ERJ 170 airplanes is included in paragraph (j)(1) of this AD, which is related to installation of used low-stage bleed check valves having P/N 1001447-6 on Model ERJ 170 airplanes. As noted in the NPRM, ANAC is considering future rulemaking to include a similar requirement. We have made no changes to this AD in this regard.

Request To Clarify the Reason for the NPRM

UTAS requested that we revise paragraph (e), “Reason,” of the proposed AD to specify that cracks were found only on check valve P/N 1001447-6 on Model ERJ 190 airplanes.

Although we agree that cracks may have been found only on check valveP/N 1001447-6 on Model ERJ 190 airplanes, we disagree to revise paragraph (e), “Reason,” of this AD. The unsafe condition of this AD is not limited to Model ERJ 190 airplanes since the check valves may also be installed on Model ERJ 170 airplanes. We have made no changes to this AD in this regard.

Conclusion

We reviewed the relevant data, considered the comments received, and determined that air safety and the public interest require adopting this AD with the changes described previously and minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the NPRM.

We also determined that these changes will not increase the economic burden on any operator or increase the scope of this AD.

Related Service Information Under 1 CFR Part 51

Embraer has issued Service Bulletin 190-36-0023, Revision 03, dated September 24, 2014; and Service Bulletin 190-21-0041, Revision 02, dated July 30, 2013. The service information describes procedures for replacing the engine low-stage bleed check valves. Embraer Service Bulletin 190-21-0041, Revision 02, dated July 30, 2013, also describes procedures for replacing the AMS controller operation program of the AMS controller processor boards. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

Costs of Compliance

We estimate that this AD affects 197 airplanes of U.S. registry.

We also estimate that it will take about 4 work-hours per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour. Required parts will cost about $638 per product. Based on these figures, we estimate the cost of this AD on U.S. operators to be $192,666, or $978 per product.

Authority for This Rulemaking

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

Regulatory Findings

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify that this AD:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

Adoption of the Amendment

Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

49 U.S.C. 106(g), 40113, 44701.

§ 39.13 [Amended]
2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): 2016-12-14 Embraer S.A.: Amendment 39-18563. Docket No. FAA-2015-6542; Directorate Identifier 2015-NM-038-AD. (a) Effective Date

This AD is effective July 27, 2016.

(b) Affected ADs

None.

(c) Applicability

This AD applies to the airplanes identified in paragraphs (c)(1) and (c)(2) of this AD, certificated in any category.

(1) All Embraer S.A. Model ERJ 170-100 LR, -100 STD, -100 SE., and -100 SU airplanes; and Model ERJ 170-200 LR, -200 SU, and -200 STD airplanes.

(2) All Embraer S.A. Model ERJ 190-100 STD, -100 LR, -100 IGW, -200 STD, -200 LR, and -200 IGW airplanes.

(d) Subject

Air Transport Association (ATA) of America Code 36, Pneumatic.

(e) Reason

This AD was prompted by reports of cracks in certain engine low-stage bleed check valves. We are issuing this AD to prevent failure of the low-stage bleed check valve; simultaneous failures of both low-stage bleed check valves could result in a dual engine in-flight shutdown.

(f) Compliance

Comply with this AD within the compliance times specified, unless already done.

(g) Modification

For Embraer S.A. Model ERJ 190 airplanes identified in Embraer Service Bulletin 190-21-0041, Revision 02, dated July 30, 2013: Within 3 months after the effective date of this AD, replace the Hamilton Sundstrand air management system (AMS) controller operation program of the AMS controller processor boards, as specified in paragraph (g)(1) or (g)(2) of this AD.

(1) Replace with a new, improved program, in accordance with the Accomplishment Instructions of Embraer Service Bulletin 190-21-0041, Revision 02, dated July 30, 2013.

(2) Replace with a version of the Hamilton Sundstrand AMS controller operation program approved after August 31, 2012, using a method approved by the Manager, International Branch, ANM-116, Transport Airplane Directorate, FAA; Agência Nacional de Aviação Civil (ANAC); or ANAC's authorized Designee.

(h) Valve Replacement

For Embraer S.A. Model ERJ 190 airplanes identified in Embraer Service Bulletin 190-21-0041, Revision 02, dated July 30, 2013: Within 3 months after the effective date of this AD, and after accomplishment of the actions required by paragraph (g) of this AD, replace the check valve and associated seals of the left-hand and right-hand engine bleed system with a check valve identified in paragraph (i) of this AD, and new seals, in accordance with the Accomplishment Instructions of Embraer Service Bulletin 190-36-0023, Revision 03, dated September 24, 2014.

(i) Allowed Valves

When complying with paragraph (h) of this AD, the low-stage bleed check valves having P/N 1001447-6, and associated seals, are replaced with new ones (zero-hour). Low-stage bleed check valves having P/N 1001447-6 that can be demonstrated with logged hours only on Model ERJ 170 airplanes and/or on Model ERJ 190 airplanes equipped with the AMS controller operational program version Black Label 13, or a later version, can be used instead of new ones (zero-hour).

(j) Parts Installation Limitation

(1) For Model ERJ 170-100 STD, -100 LR, -100SU, -100SE, -200 STD, -200 LR, and -200 SU airplanes: No person may install on any airplane a low-stage bleed check valve having P/N 1001447-6 that was installed on any Model ERJ 190-100 STD, -100 LR, -100 IGW, -200 STD, -200 LR, or -200 IGW airplane, any serial number except 190-00587, 190-00589, and 190-00593 and subsequent, prior to accomplishment of the requirements of paragraph (g) of this AD.

(2) For Model ERJ 190-100 STD, -100 LR, -100IGW, -200 STD, -200 LR, and -200 IGW airplanes: No person may install on any airplane on which the actions of paragraph (g) of this AD have been done, a low-stage bleed check valve having P/N 1001447-6 that was previously installed on any Model ERJ 190-100 STD, -100 LR, -100 IGW, -200 STD, -200 LR, or -200 IGW airplane, any serial number except 190-00587, 190-00589, 190-00593 and subsequent, prior to accomplishment of the requirements of paragraph (g) of this AD.

(k) Credit for Previous Actions

(1) This paragraph provides credit for actions required by paragraph (g) of this AD, if those actions were performed before the effective date of this AD using the service information identified in paragraph (k)(1)(i) or (k)(1)(ii) of this AD. This service information is not incorporated by reference in this AD.

(i) Embraer Service Bulletin 190-21-0041, dated September 27, 2012.

(ii) Embraer Service Bulletin 190-21-0041, Revision 01, dated December 20, 2012.

(2) This paragraph provides credit for actions required by paragraph (h) of this AD, if those actions were performed before the effective date of this AD using the service information identified in paragraph (k)(2)(i), (k)(2)(ii), or (k)(2)(iii) of this AD. This service information is not incorporated by reference in this AD.

(i) Embraer Service Bulletin 190-36-0023, dated July 22, 2013.

(ii) Embraer Service Bulletin 190-36-0023, Revision 01, dated September 3, 2013.

(iii) Embraer Service Bulletin 190-36-0023, Revision 02, dated April 30, 2014.

(l) Other FAA AD Provisions

The following provisions also apply to this AD:

(1) Alternative Methods of Compliance (AMOCs): The Manager, International Branch, ANM-116, Transport Airplane Directorate, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the International Branch, send it to ATTN: Ana Martinez Hueto, Aerospace Engineer, International Branch, ANM-116, Transport Airplane Directorate, FAA, 1601 Lind Avenue SW., Renton, WA 98057-3356; telephone 425-227-1622; fax 425-227-1149. Information may be emailed to: [email protected] Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office. The AMOC approval letter must specifically reference this AD.

(2) Contacting the Manufacturer: For any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, International Branch, ANM-116, Transport Airplane Directorate, FAA; or ANAC; or ANAC's authorized Designee. If approved by the ANAC Designee, the approval must include the Designee's authorized signature.

(m) Related Information

(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) Brazilian Airworthiness Directive 2015-02-02, effective March 6, 2015, for related information. This MCAI may be found in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2015-6542.

(2) Service information identified in this AD that is not incorporated by reference is available at the addresses specified in paragraphs (n)(3) and (n)(4) of this AD.

(n) Material Incorporated by Reference

(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.

(2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise.

(i) Embraer Service Bulletin 190-21-0041, Revision 02, dated July 30, 2013.

(ii) Embraer Service Bulletin 190-36-0023, Revision 03, dated September 24, 2014.

(3) For service information identified in this AD, contact Embraer S.A., Technical Publications Section (PC 060), Av. Brigadeiro Faria Lima, 2170—Putim—12227-901 São Jose dos Campos—SP—Brasil; telephone +55 12 3927-5852 or +55 12 3309-0732; fax +55 12 3927-7546; email [email protected]; Internet http://www.flyembraer.com.

(4) You may view this service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221.

(5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

Issued in Renton, Washington, on June 8, 2016. Michael Kaszycki, Acting Manager, Transport Airplane Directorate, Aircraft Certification Service.
[FR Doc. 2016-14305 Filed 6-21-16; 8:45 am] BILLING CODE 4910-13-P
DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2016-2042; Directorate Identifier 2016-NE-02-AD; Amendment 39-18568; AD 2016-13-04] RIN 2120-AA64 Airworthiness Directives; BRP-Powertrain GmbH & Co KG Reciprocating Engines AGENCY:

Federal Aviation Administration (FAA), DOT.

ACTION:

Final rule.

SUMMARY:

We are adopting a new airworthiness directive (AD) for certain BRP-Powertrain GmbH & Co KG Rotax 912 F2, 912 F3, 912 F4, 912 S2, 912 S3, 912 S4, 914 F2, 914 F3, and 914 F4 reciprocating engines. This AD requires re-identification of the engine model and concurrent modification of the aircraft to indicate the maximum coolant temperature limit. This AD was prompted by a design change introduced by the manufacturer that relocated the engine cylinder head temperature sensor to a different location and converted it to a coolant temperature sensor. We are issuing this AD to prevent exceeding engine coolant temperature limits, which could result in loss of engine coolant, damage to the engine, and loss of control of the airplane.

DATES:

This AD becomes effective July 27, 2016.

The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of July 27, 2016.

ADDRESSES:

For service information identified in this final rule, contact BRP-Powertrain GmbH & Co KG, Rotaxstrasse 1, A-4623 Gunskirchen, Austria; phone: +43 7246 6010; fax: +43 7246 601 9130; email: [email protected]; Internet: http://www.FLYROTAX.com. You may view this service information at the FAA, Engine & Propeller Directorate, 1200 District Avenue, Burlington, MA. For information on the availability of this material at the FAA, call 781-238-7125. It is also available on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-2042.

Examining the AD Docket

You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-2042; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this AD, the mandatory continuing airworthiness information (MCAI), the regulatory evaluation, any comments received, and other information. The address for the Docket Office (phone: 800-647-5527) is Document Management Facility, U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT:

Robert Green, Aerospace Engineer, Engine Certification Office, FAA, Engine & Propeller Directorate, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7754; fax: 781-238-7199; email: [email protected]

SUPPLEMENTARY INFORMATION:

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to the specified products. The NPRM was published in the Federal Register on March 18, 2016 (81 FR 14804). The NPRM proposed to correct an unsafe condition for the specified products. The MCAI states:

A design change of the engine cylinder heads was introduced by BRP-Powertrain in March 2013 which modifies the engine/aircraft interfaces by substituting the previous cylinder head temperature (CHT) measurement (limit temperature 135 °C/150 °C) with a coolant temperature (CT) measurement (limit temperature 120 °C).

The design change was communicated on 15 May 2013 by BRP-Powertrain Service Instruction (SI) 912-020R7/914-022R7 (single document) but was not identified by a change of the engine model designation or of the engine P/N but only through the cylinder head P/N and the position of the temperature sensor.

Consequently, engines with the new cylinder heads (installed during production or replaced in-service during maintenance) may be installed on an aircraft without concurrent modification of that aircraft, instructions for which should be provided by the type certificate (TC) holder or the supplemental type certificate (STC) holder, as applicable. In this case, the coolant temperature with a maximum engine operating limit of 120 °C (valid for engines operated with water diluted glycol coolant) is displayed on a CHT indicator with a typical limit marking (red radial/range) of more than 120 °C.

You may obtain further information by examining the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-2042.

Comments

We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM (81 FR 14804, March 18, 2016).

Conclusion

We reviewed the available data and determined that air safety and the public interest require adopting this AD as proposed expect for minor editorial changes. We determined that these changes will not increase the economic burden on any operator or increase the scope of this AD.

Related Service Information Under 1 CFR Part 51

BRP-Powertrain GmbH & Co KG has issued Service Bulletin (SB) SB-912-068/SB-914-049 (one document), dated April 16, 2015. The service information describes procedures for re-identification of the type plate for certain BRP-Powertrain GmbH & Co KG Rotax 912 and 914 engines. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

Costs of Compliance

We estimate that this AD affects about 40 engines installed on aircraft of U.S. registry. We also estimate that it will take about 5 hours per engine to inspect and re-identify the type plate. The average labor rate is $85 per hour. Based on these figures, we estimate the cost of this AD on U.S. operators to be $17,000.

Authority for This Rulemaking

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

Regulatory Findings

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this AD:

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska to the extent that it justifies making a regulatory distinction, and

(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

Adoption of the Amendment

Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

49 U.S.C. 106(g), 40113, 44701.

§ 39.13 [Amended]
2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): 2016-13-04 BRP-Powertrain GmbH & Co KG (formerly BRP-Rotax GmbH & Co KG, Bombardier-Rotax GmbH & Co. KG, and Bombardier-Rotax GmbH): Amendment 39-18568; Docket No. FAA-2016-2042; Directorate Identifier 2016-NE-02-AD. (a) Effective Date

This AD becomes effective July 27, 2016.

(b) Affected ADs

None.

(c) Applicability

This AD applies to BRP-Powertrain GmbH & Co KG Rotax model 912 F2, 912 F3, 912 F4, 912 S2, 912 S3, 912 S4, 914 F2, 914 F3, and 914 F4 reciprocating engines with a cylinder head that has a part number (P/N) listed in Figure 1 to paragraph (c) of this AD and that is installed in position 2 or 3.

Figure 1 to Paragraph (c) of This AD—Post-Modification Cylinder Head P/N Engine model Cylinder head P/N 912 F2, 912 F3, 912 F4, 914 F2, 914 F3, and 914 F4 P/N 413235 or P/N 413236. 912 S2, 912 S3, and 912 S4 P/N 413185. (d) Reason

This AD was prompted by a design change introduced by the manufacturer that relocated the engine cylinder head temperature sensor to a new location and converted it to a coolant temperature sensor. We are issuing this AD to prevent exceeding coolant temperature limits, which could result in loss of engine coolant, damage to the engine, and loss of control of the airplane.

(e) Actions and Compliance

Comply with this AD within 6 months after the effective date of this AD, unless already done.

(1) For engines with cylinder heads that have a P/N listed in Figure 1 to paragraph (c) of this AD installed on both position 2 and position 3, change the engine model designation on the engine type data plate to include a “-01” suffix. Use paragraph 3.1.1 of BRP-Powertrain Service Bulletin (SB) SB-912-068/SB-914-049, dated April 16, 2015, to make this change.

(2) For engines with only one cylinder head having a P/N listed in Figure 1 to paragraph (c) of this AD installed in position 2 or 3, do one of the following:

(i) Replace the cylinder head having a P/N listed in Figure 1 to paragraph (c) of this AD with a P/N 623682 cylinder head on Rotax 912 F2, 912 F3, 912 F4, 914 F2, 914 F3, and 914 F4 engines and with a P/N 623687 cylinder head on Rotax 912 S2, 912 S3, and 912 S4 engines. If you complete the actions in paragraph (e)(2)(i), no further action is required. Or,

(ii) Install cylinder heads identified in Figure 1 to paragraph (c) of this AD on both cylinder head positions 2 and 3 and change the engine model designation of the engine type data plate in accordance with paragraph (e)(1) of this AD.

(3) For engines re-identified in accordance with paragraph (e)(1) or (e)(2)(ii) of this AD, before further flight, modify the aircraft cockpit instrumentation and related documentation to indicate a maximum coolant temperature limit of 120 degrees Celsius using FAA-approved procedures. These re-identified engines remain eligible for installation on approved aircraft-engine combinations.

(f) Alternative Methods of Compliance (AMOCs)

The Manager, Engine Certification Office, FAA, may approve AMOCs for this AD. Use the procedures found in 14 CFR 39.19 to make your request. You may email your request to: [email protected]

(g) Related Information

(1) For more information about this AD, contact Robert Green, Aerospace Engineer, Engine Certification Office, FAA, Engine & Propeller Directorate, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7754; fax: 781-238-7199; email: [email protected]

(2) For more information about the installation modifications described in paragraph (e)(3) of this AD, contact Jim Rutherford, Aerospace Engineer, FAA, Small Airplane Directorate, 901 Locust Ave. Room 301, Kansas City, MO; phone: 816-329-4165; fax: 816-329-4090; email: [email protected]

(3) Refer to MCAI European Aviation Safety Agency, AD 2015-0240, dated December 18, 2015, for more information. You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating it in Docket No. FAA-2016-2042.

(4) The following aircraft service information, which are not incorporated by reference in this AD, contain FAA-approved procedures for complying with paragraph (e)(3) of this AD and can be obtained from BRP-Powertrain GmbH & Co. KG, using the contact information in paragraph (h)(3) of this AD:

Figure 2 to Paragraph (g) of This AD—Aircraft Type/Model and Service Information Type/model(s) SB Aquila AT01 SB-AT01-029. TECNAM P92, P2002 and P2006T SB-183-CS. TECNAM P2008 JC SB-185-CS. Diamond H 36 “Dimona” and HK 36 “Super Dimona” OSB 36-111. Diamond DV 20 “Katana” OSB 20-066. Diamond (Canada) DA20-A1 “Katana” SB Da20-72-04. M&D AVO 68 “Samburo” TM 808-31. Scheibe SF 25 C and SF 36 R SI_02-14. (h) Material Incorporated by Reference

(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.

(2) You must use this service information as applicable to do the actions required by this AD, unless the AD specifies otherwise.

(i) BRP-Powertrain Service Bulletin SB-912-068/SB-914-049 (one document), dated April 16, 2015.

(ii) Reserved.

(3) For BRP-Powertrain service information identified in this AD, contact BRP-Powertrain GmbH & Co. KG, Rotaxstrasse 1, A-4623 Gunskirchen, Austria; phone: +43 7246 6010; fax: +43 7246 601 9130; email: [email protected]; Internet: www.flyrotax.com.

(4) You may view this service information at FAA, Engine & Propeller Directorate, 1200 District Avenue, Burlington, MA. For information on the availability of this material at the FAA, call 781-238-7125.

(5) You may view this service information at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

Issued in Burlington, Massachusetts, on June 14, 2016. Colleen M. D'Alessandro, Manager, Engine & Propeller Directorate, Aircraft Certification Service.
[FR Doc. 2016-14789 Filed 6-21-16; 8:45 am] BILLING CODE 4910-13-P
DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2015-4812; Directorate Identifier 2015-NM-034-AD; Amendment 39-18560; AD 2016-12-11] RIN 2120-AA64 Airworthiness Directives; The Boeing Company Airplanes AGENCY:

Federal Aviation Administration (FAA), DOT.

ACTION:

Final rule.

SUMMARY:

We are adopting a new airworthiness directive (AD) for certain The Boeing Company Model 787-8 airplanes. This AD was prompted by a report that certain center and outboard stowage bin modules were incorrectly installed. This AD requires an inspection of the center and outboard stowage bin modules for missing parts, quick release pins that are not fully engaged, and parts that are installed in incorrect locations; and corrective actions if necessary. We are issuing this AD to detect and correct incorrectly installed center and outboard stowage bin modules that might not remain intact during an emergency landing, resulting in injuries to occupants and interference with airplane evacuation.

DATES:

This AD is effective July 27, 2016.

The Director of the Federal Register approved the incorporation by reference of certain publications listed in this AD as of July 27, 2016.

ADDRESSES:

For service information identified in this final rule, contact Boeing Commercial Airplanes, Attention: Data & Services Management, P.O. Box 3707, MC 2H-65, Seattle, WA 98124-2207; telephone 206-544-5000, extension 1; fax 206-766-5680; Internet https://www.myboeingfleet.com. You may view this referenced service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221. It is also available on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2015-4812.

Examining the AD Docket

You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2015-4812; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this AD, the regulatory evaluation, any comments received, and other information. The address for the Docket Office (phone: 800-647-5527) is Docket Management Facility, U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT:

Stanley Chen, Aerospace Engineer, Cabin Safety and Environmental Systems Branch, ANM-150S, FAA, Seattle Aircraft Certification Office (ACO), 1601 Lind Avenue SW., Renton, WA 98057-3356; phone: 425-917-6585; fax: 425-917-6590; email: [email protected]

SUPPLEMENTARY INFORMATION:

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to certain The Boeing Company Model 787-8 airplanes. The NPRM published in the Federal Register on November 17, 2015 (80 FR 71745), (“the NPRM”). The NPRM was prompted by a report that certain center and outboard stowage bin modules were incorrectly installed. The NPRM proposed to require an inspection of the center and outboard stowage bin modules for missing parts, quick release pins that are not fully engaged, and parts that are installed in incorrect locations; and corrective actions if necessary. We are issuing this AD to detect and correct incorrectly installed center and outboard stowage bin modules that might not remain intact during an emergency landing, resulting in injuries to occupants and interference with airplane evacuation.

Comments

We gave the public the opportunity to participate in developing this AD. The following presents the comment received on the NPRM and the FAA's response to that comment.

Request To Include Additional Illustrations in Service Information

United Airlines stated that it would be helpful if the service information provided examples (illustrations or descriptions) of incorrectly installed parts that required removal. We infer that the commenter is requesting a revision to the service information to include examples of incorrectly installed parts.

We disagree with the commenter's request. We consider that it would be potentially confusing to show examples of possible incorrect part installations. We have determined that the service information should provide detailed illustrations of proper installation configurations. A general description of the incorrect installations is provided. We have not changed this final rule regarding this issue.

Conclusion

We reviewed the relevant data, considered the comment received, and determined that air safety and the public interest require adopting this AD as proposed, except for minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the NPRM.

Related Service Information Under 1 CFR Part 51

We reviewed the following Boeing service information. This service information describes procedures for inspecting the installation of the center and outboard stowage bin modules and doing corrective actions.

• Boeing Alert Service Bulletin B787-81205-SB250036-00, Issue 001, dated September 10, 2013.

• Boeing Alert Service Bulletin B787-81205-SB250039-00, Issue 001, dated October 8, 2013.

• Boeing Alert Service Bulletin B787-81205-SB250040-00, Issue 001, dated October 14, 2013.

• Boeing Alert Service Bulletin B787-81205-SB250041-00, Issue 001, dated October 18, 2013.

• Boeing Alert Service Bulletin B787-81205-SB250042-00, Issue 001, dated October 28, 2013.

• Boeing Alert Service Bulletin B787-81205-SB250043-00, Issue 001, dated November 4, 2013.

• Boeing Alert Service Bulletin B787-81205-SB250044-00, Issue 001, dated November 8, 2013.

• Boeing Alert Service Bulletin B787-81205-SB250045-00, Issue 001, dated November 15, 2013.

This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

Costs of Compliance

We estimate that this AD affects 6 airplanes of U.S. registry.

We estimate the following costs to comply with this AD:

Estimated Costs Action Labor cost Parts cost Cost per
  • product
  • Cost on U.S.
  • operators
  • Inspection 222 work-hours × $85 per hour = $18,870 $0 $18,870 $113,220

    We estimate the following costs to do any necessary replacements that will be required based on the results of the inspection. We have no way of determining the number of aircraft that might need these replacements.

    On-Condition Costs Action Labor cost Parts cost Cost per
  • product
  • Replacement 20 work-hours × $85 per hour = $1,700 Up to $21,191 Up to $22,891.

    According to the manufacturer, all of the costs of this AD may be covered under warranty, thereby reducing the cost impact on affected individuals. We do not control warranty coverage for affected individuals. As a result, we have included all costs in our cost estimate.

    Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.

    We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

    Regulatory Findings

    This AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

    For the reasons discussed above, I certify that this AD:

    (1) Is not a “significant regulatory action” under Executive Order 12866,

    (2) Is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

    (3) Will not affect intrastate aviation in Alaska, and

    (4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    Adoption of the Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): 2016-12-11 The Boeing Company: Amendment 39-18560; Docket No. FAA-2015-4812; Directorate Identifier 2015-NM-034-AD. (a) Effective Date

    This AD is effective July 27, 2016.

    (b) Affected ADs

    None.

    (c) Applicability

    This AD applies to certain The Boeing Company Model 787-8 airplanes, certificated in any category, identified in the service information specified in paragraphs (c)(1) through (c)(8) of this AD.

    (1) Boeing Alert Service Bulletin B787-81205-SB250036-00, Issue 001, dated September 10, 2013.

    (2) Boeing Alert Service Bulletin B787-81205-SB250039-00, Issue 001, dated October 8, 2013.

    (3) Boeing Alert Service Bulletin B787-81205-SB250040-00, Issue 001, dated October 14, 2013.

    (4) Boeing Alert Service Bulletin B787-81205-SB250041-00, Issue 001, dated October 18, 2013.

    (5) Boeing Alert Service Bulletin B787-81205-SB250042-00, Issue 001, dated October 28, 2013.

    (6) Boeing Alert Service Bulletin B787-81205-SB250043-00, Issue 001, dated November 4, 2013.

    (7) Boeing Alert Service Bulletin B787-81205-SB250044-00, Issue 001, dated November 8, 2013.

    (8) Boeing Alert Service Bulletin B787-81205-SB250045-00, Issue 001, dated November 15, 2013.

    (d) Subject

    Air Transport Association (ATA) of America Code 25, Equipment/Furnishings.

    (e) Unsafe Condition

    This AD was prompted by a report that certain center and outboard stowage bin modules were incorrectly installed. We are issuing this AD to detect and correct incorrectly installed center and outboard stowage bin modules that might not remain intact during an emergency landing, resulting in injuries to occupants and interference with airplane evacuation.

    (f) Compliance

    Comply with this AD within the compliance times specified, unless already done.

    (g) Inspection and Corrective Action

    Except as specified in paragraph (h) of this AD, at the applicable time specified in paragraph 5., “Compliance,” of the applicable service information specified in paragraphs (g)(1) through (g)(8) of this AD: Do a general visual inspection of the installations of the center and outboard stowage bin modules to determine if any part is missing, if any part is installed at an incorrect location, or if any quick release pin is not fully engaged; and do all applicable corrective actions; in accordance with the Accomplishment Instructions of the applicable service information identified in paragraphs (g)(1) through (g)(8) of this AD. Do all applicable corrective actions before further flight.

    (1) For airplanes having variable numbers (V/Ns) ZA177 through ZA183 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250036-00, Issue 001, dated September 10, 2013.

    (2) For airplanes having V/Ns ZA100 through ZA105 inclusive, V/Ns ZA116 through ZA119 inclusive, V/N ZA135, and V/Ns ZA506 through ZA511 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250039-00, Issue 001, dated October 8, 2013.

    (3) For airplanes having V/Ns ZA460 through ZA464 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250040-00, Issue 001, dated October 14, 2013.

    (4) For airplanes having V/N ZA233 and V/Ns ZA236 through ZA240 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250041-00, Issue 001, dated October 18, 2013.

    (5) For airplanes having V/Ns ZA285 through ZA290 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250042-00, Issue 001, dated October 28, 2013.

    (6) For airplanes having V/Ns ZA270 through ZA271 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250043-00, Issue 001, dated November 4, 2013.

    (7) For airplanes having V/Ns ZA261 through ZA264 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250044-00, Issue 001, dated November 8, 2013.

    (8) For airplanes having V/Ns ZA536 through ZA538 inclusive: Use Boeing Alert Service Bulletin B787-81205-SB250045-00, Issue 001, dated November 15, 2013.

    (h) Exceptions to Service Information Specifications

    Where the service information identified in paragraphs (g)(1) through (g)(8) of this AD specifies a compliance time “after the original issue date of this service bulletin,” this AD requires compliance within the specified compliance time after the effective date of this AD.

    (i) Alternative Methods of Compliance (AMOCs)

    (1) The Manager, Seattle Aircraft Certification Office (ACO), FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the manager of the ACO, send it to the attention of the person identified in paragraph (j) of this AD. Information may be emailed to: [email protected]

    (2) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office.

    (3) An AMOC that provides an acceptable level of safety may be used for any repair, modification, or alteration required by this AD if it is approved by the Boeing Commercial Airplanes Organization Designation Authorization (ODA) that has been authorized by the Manager, Seattle ACO, to make those findings. To be approved, the repair method, modification deviation, or alteration deviation must meet the certification basis of the airplane and the approval must specifically refer to this AD.

    (j) Related Information

    For more information about this AD, contact Stanley Chen, Aerospace Engineer, Cabin Safety and Environmental Systems Branch, ANM-150S, FAA, Seattle ACO, 1601 Lind Avenue SW., Renton, WA 98057-3356; phone: 425-917-6585; fax: 425-917-6590; email: [email protected]

    (k) Material Incorporated by Reference

    (1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.

    (2) You must use this service information as applicable to do the actions required by this AD, unless the AD specifies otherwise.

    (i) Boeing Alert Service Bulletin B787-81205-SB250036-00, Issue 001, dated September 10, 2013.

    (ii) Boeing Alert Service Bulletin B787-81205-SB250039-00, Issue 001, dated October 8, 2013.

    (iii) Boeing Alert Service Bulletin B787-81205-SB250040-00, Issue 001, dated October 14, 2013.

    (iv) Boeing Alert Service Bulletin B787-81205-SB250041-00, Issue 001, dated October 18, 2013.

    (v) Boeing Alert Service Bulletin B787-81205-SB250042-00, Issue 001, dated October 28, 2013.

    (vi) Boeing Alert Service Bulletin B787-81205-SB250043-00, Issue 001, dated November 4, 2013.

    (vii) Boeing Alert Service Bulletin B787-81205-SB250044-00, Issue 001, dated November 8, 2013.

    (viii) Boeing Alert Service Bulletin B787-81205-SB250045-00, Issue 001, dated November 15, 2013.

    (3) For service information identified in this AD, contact Boeing Commercial Airplanes, Attention: Data & Services Management, P.O. Box 3707, MC 2H-65, Seattle, WA 98124-2207; telephone 206-544-5000, extension 1; fax 206-766-5680; Internet https://www.myboeingfleet.com.

    (4) You may view this service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425 227-1221.

    (5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued in Renton, Washington, on June 3, 2016. Michael Kaszycki, Acting Manager, Transport Airplane Directorate, Aircraft Certification Service.
    [FR Doc. 2016-14198 Filed 6-21-16; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2016-7266; Directorate Identifier 2016-NM-085-AD; Amendment 39-18566; AD 2016-13-02] RIN 2120-AA64 Airworthiness Directives; Bombardier, Inc. Airplanes AGENCY:

    Federal Aviation Administration (FAA), Department of Transportation (DOT).

    ACTION:

    Final rule; request for comments.

    SUMMARY:

    We are superseding Airworthiness Directive (AD) 2016-09-04 for certain Bombardier, Inc. Model CL-600-2B19 (Regional Jet Series 100 & 440) airplanes. AD 2016-09-04 required replacement of incorrectly calibrated angle of attack (AOA) transducers. This new AD requires the same actions as AD 2016-09-04. This new AD was prompted by a report of a typographical error in the regulatory text of AD 2016-09-04. We are issuing this AD detect and replace incorrectly calibrated AOA transducers; incorrect calibration of the transducers could result in late activation of the stick pusher.

    DATES:

    This AD is effective July 7, 2016.

    The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of June 6, 2016 (81 FR 26102, May 2, 2016).

    We must receive comments on this AD by August 8, 2016.

    ADDRESSES:

    You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:

    Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.

    Fax: 202-493-2251.

    Mail: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590.

    Hand Delivery: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

    For service information identified in this final rule, contact Bombardier, Inc., 400 Côte-Vertu Road West, Dorval, Québec H4S 1Y9, Canada; Widebody Customer Response Center North America toll-free telephone: 1-866-538-1247 or direct-dial telephone: 1-514-855-2999; fax: 514-855-7401; email: [email protected]; Internet: http://www.bombardier.com. You may view this referenced service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221. It is also available on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7266.

    Examining the AD Docket

    You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7266; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., proposed AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone: 800-647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

    FOR FURTHER INFORMATION CONTACT:

    Cesar Gomez, Aerospace Engineer, Airframe and Mechanical Systems Branch, ANE-171, FAA, New York Aircraft Certification Office (ACO), 1600 Stewart Avenue, Suite 410, Westbury, NY 11590; telephone: 516-228-7318; fax: 516-794-5531.

    SUPPLEMENTARY INFORMATION:

    Discussion

    On April 20, 2016, we issued AD 2016-09-04, Amendment 39-18502 (81 FR 26102, May 2, 2016) (“AD 2016-09-04”), for certain Bombardier, Inc. Model CL-600-2B19 (Regional Jet Series 100 & 440) airplanes. AD 2016-09-04 was prompted by the discovery of a number of incorrectly calibrated AOA transducers installed in the stall protection system. AD 2016-09-04 required replacement of incorrectly calibrated AOA transducers. We issued AD 2016-09-04 to detect and replace incorrectly calibrated AOA transducers; incorrect calibration of the transducers could result in late activation of the stick pusher.

    Since we issued AD 2016-09-04, we received a report of a typographical error in the regulatory text of AD 2016-09-04. Paragraph (h) of AD 2016-09-04 inadvertently stated, “having a part number or serial number.” This should have stated “having a part number and serial number.” We have revised paragraph (h) of this AD accordingly.

    Transport Canada Civil Aviation (TCCA), which is the aviation authority for Canada, has issued Canadian AD CF-2015-17, dated July 16, 2015 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Bombardier, Inc. Model CL-600-2B19 (Regional Jet Series 100 & 440) airplanes. The MCAI states:

    It was discovered that a number of AOA transducers installed on Bombardier CL-600-2B19 aeroplanes were incorrectly calibrated due to a quality control problem at both the production and repair facilities. Incorrect calibration of the AOA transducer could result in a late activation of the stick pusher.

    This [Canadian] AD mandates the replacement of the incorrectly calibrated AOA transducer.

    You may examine the MCAI on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7266.

    Related Service Information Under 1 CFR Part 51

    We reviewed Bombardier Service Bulletin 601R-27-164, dated March 30, 2015. The service information describes procedures for replacement of incorrectly calibrated AOA transducers with correctly calibrated AOA transducers. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

    FAA's Determination and Requirements of This AD

    This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are issuing this AD because we evaluated all pertinent information and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design.

    FAA's Justification and Determination of the Effective Date

    We are superseding AD 2016-09-04 to correct a typographical error in the regulatory text. No other changes have been made to AD 2016-09-04. Therefore, we determined that notice and opportunity for public comment are unnecessary.

    Comments Invited

    This AD is a final rule that involves requirements affecting flight safety, and we did not precede it by notice and opportunity for public comment. We invite you to send any written relevant data, views, or arguments about this AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-7266; Directorate Identifier 2016-NM-085-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this AD. We will consider all comments received by the closing date and may amend this AD because of those comments.

    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this AD.

    Costs of Compliance

    We estimate that this AD affects 575 airplanes of U.S. registry.

    We also estimate that it would take about 4 work-hours per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour. Required parts would cost about $10,000 per product. Based on these figures, we estimate the cost of this AD on U.S. operators to be $5,945,500, or $10,340 per product.

    Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

    We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

    Regulatory Findings

    We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

    For the reasons discussed above, I certify that this AD:

    1. Is not a “significant regulatory action” under Executive Order 12866;

    2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

    3. Will not affect intrastate aviation in Alaska; and

    4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    Adoption of the Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by removing airworthiness directive (AD) 2016-09-04, Amendment 39-18502 (81 FR 26102, May 2, 2016), and adding the following new AD: 2016-13-02 Bombardier, Inc.: Amendment 39-18566. Docket No. FAA-2016-7266; Directorate Identifier 2016-NM-085-AD. (a) Effective Date

    This AD is effective July 7, 2016.

    (b) Affected ADs

    This AD replaces AD 2016-09-04, Amendment 39-18502 (81 FR 26102, May 2, 2016) (“AD 2016-09-04”).

    (c) Applicability

    This AD applies to Bombardier, Inc. Model CL-600-2B19 (Regional Jet Series 100 & 440) airplanes, certificated in any category, serial numbers 7003 through 7067 inclusive, 7069 through 7990 inclusive, and 8000 through 8999 inclusive.

    (d) Subject

    Air Transport Association (ATA) of America Code 27, Flight Controls.

    (e) Reason

    This AD was prompted by the discovery of a number of incorrectly calibrated angle of attack (AOA) transducers installed in the stall protection system. We are issuing this AD to detect and replace incorrectly calibrated AOA transducers; incorrect calibration of the transducers could result in late activation of the stick pusher.

    (f) Compliance

    Comply with this AD within the compliance times specified, unless already done.

    (g) Retained Replacement of AOA Transducers With No Changes

    This paragraph restates the requirements of paragraph (g) of AD 2016-09-04, with no changes. For AOA transducers identified in paragraph 1.A., “Effectivity,” of Bombardier Service Bulletin 601R-27-164, dated March 30, 2015: Within 2,500 flight hours or 12 months, whichever occurs first after June 6, 2016 (the effective date of AD 2016-09-04), replace the AOA transducers with correctly calibrated AOA transducers, in accordance with the Accomplishment Instructions of Bombardier Service Bulletin 601R-27-164, dated March 30, 2015.

    (h) Retained Parts Installation Prohibition, With a Change to the Affected Parts Language

    This paragraph restates the parts installation prohibition specified in paragraph (h) of AD 2016-09-04, with a change to the affected parts language. As of June 6, 2016 (the effective date of AD 2016-09-04), no person may install, on any airplane, an AOA transducer having a part number and serial number listed in paragraph 1.A., “Effectivity,” of Bombardier Service Bulletin 601R-27-164, dated March 30, 2015.

    (i) Other FAA AD Provisions

    The following provisions also apply to this AD:

    (1) Alternative Methods of Compliance (AMOCs): The Manager, New York Aircraft Certification Office (ACO), ANE-170, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the ACO, send it to ATTN: Program Manager, Continuing Operational Safety, FAA, New York ACO, 1600 Stewart Avenue, Suite 410, Westbury, NY 11590; telephone: 516-228-7300; fax: 516-794-5531. Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office. The AMOC approval letter must specifically reference this AD.

    (2) Contacting the Manufacturer: As of the effective date of this AD, for any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, New York ACO, ANE-170, FAA; or Transport Canada Civil Aviation (TCCA); or Bombardier, Inc.'s TCCA Design Approval Organization (DAO). If approved by the DAO, the approval must include the DAO-authorized signature.

    (j) Related Information

    Refer to Mandatory Continuing Airworthiness Information (MCAI) Canadian AD CF-2015-17, dated July 16, 2015, for related information. This MCAI may be found in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7266.

    (k) Material Incorporated by Reference

    (1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.

    (2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise.

    (3) The following service information was approved for IBR on June 6, 2016, (81 FR 26102, May 2, 2016).

    (i) Bombardier Service Bulletin 601R-27-164, dated March 30, 2015.

    (ii) Reserved.

    (4) For service information identified in this AD, contact Bombardier, Inc., 400 Côte-Vertu Road West, Dorval, Québec H4S 1Y9, Canada; Widebody Customer Response Center North America toll-free telephone: 1-866-538-1247 or direct-dial telephone: 1-514-855-2999; fax: 514-855-7401; email: [email protected]; Internet: http://www.bombardier.com.

    (5) You may view this service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221.

    (6) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued in Renton, Washington, on June 13, 2016. Dionne Palermo, Acting Manager, Transport Airplane Directorate, Aircraft Certification Service.
    [FR Doc. 2016-14578 Filed 6-21-16; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2016-7265; Directorate Identifier 2016-NM-084-AD; Amendment 39-18565; AD 2016-13-01] RIN 2120-AA64 Airworthiness Directives; Bombardier, Inc. Airplanes AGENCY:

    Federal Aviation Administration (FAA), Department of Transportation (DOT).

    ACTION:

    Final rule; request for comments.

    SUMMARY:

    We are superseding Airworthiness Directive (AD) 2016-08-05 for certain Bombardier, Inc. Model CL-600-2C10 (Regional Jet Series 700, 701, & 702) airplanes, Model CL-600-2D15 (Regional Jet Series 705) airplanes, Model CL-600-2D24 (Regional Jet Series 900) airplanes, and Model CL-600-2E25 (Regional Jet Series 1000) airplanes. AD 2016-08-05 required replacement of affected angle of attack (AOA) transducers. This new AD requires the same actions as AD 2016-08-05. This new AD was prompted by a report of a typographical error in the regulatory text of AD 2016-08-05. We are issuing this AD to detect and replace incorrectly calibrated AOA transducers; incorrect calibration of the transducers could result in late activation of the stick pusher.

    DATES:

    This AD is effective July 7, 2016.

    The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of May 18, 2016 (81 FR 21709, April 13, 2016).

    We must receive comments on this AD by August 8, 2016.

    ADDRESSES:

    You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:

    Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.

    Fax: 202-493-2251.

    Mail: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590.

    Hand Delivery: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

    For service information identified in this final rule, contact Bombardier, Inc., 400 Côte-Vertu Road West, Dorval, Québec H4S 1Y9, Canada; Widebody Customer Response Center North America toll-free telephone: 1-866-538-1247 or direct-dial telephone: 1-514-855-2999; fax: 514-855-7401; email: [email protected]; Internet: http://www.bombardier.com. You may view this referenced service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221. It is also available on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7265.

    Examining the AD Docket

    You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7265; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., proposed AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone: 800-647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

    FOR FURTHER INFORMATION CONTACT:

    Cesar Gomez, Aerospace Engineer, Airframe and Mechanical Systems Branch, ANE-171, FAA, New York Aircraft Certification Office (ACO), 1600 Stewart Avenue, Suite 410, Westbury, NY 11590; telephone: 516-228-7318; fax: 516-794-5531.

    SUPPLEMENTARY INFORMATION:

    Discussion

    On March 31, 2016, we issued AD 2016-08-05, Amendment 39-18481 (81 FR 21709, April 13, 2016) (“AD 2016-08-05”), for certain Bombardier, Inc. Model CL-600-2C10 (Regional Jet Series 700, 701, & 702) airplanes, Model CL-600-2D15 (Regional Jet Series 705) airplanes, Model CL-600-2D24 (Regional Jet Series 900) airplanes, and Model CL-600-2E25 (Regional Jet Series 1000) airplanes. AD 2016-08-05 was prompted by the discovery of a number of incorrectly calibrated AOA transducers installed in the stall protection system. AD 2016-08-05 required replacement of affected AOA transducers. We issued AD 2016-08-05 to detect and replace incorrectly calibrated AOA transducers; incorrect calibration of the transducers could result in late activation of the stick pusher.

    Since we issued AD 2016-08-05, we received a report of a typographical error in the regulatory text of AD 2016-08-05. Paragraph (h) of AD 2016-08-05 inadvertently stated, “having a part number or serial number.” This should have stated “having a part number and serial number.” We have revised paragraph (h) of this AD accordingly.

    Transport Canada Civil Aviation (TCCA), which is the aviation authority for Canada, has issued Canadian AD CF-2015-18, dated July 16, 2015 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Bombardier, Inc. Model CL-600-2C10 (Regional Jet Series 700, 701, & 702) airplanes, Model CL-600-2D15 (Regional Jet Series 705) airplanes, Model CL-600-2D24 (Regional Jet Series 900) airplanes, and Model CL-600-2E25 (Regional Jet Series 1000) airplanes. The MCAI states:

    It was discovered that a number of AOA transducers installed on Bombardier CL-600-2C10, CL-600-2D15, CL-600-2D24, and CL-600-2E25 aeroplanes were incorrectly calibrated due to a quality control problem at both the production and repair facilities. Incorrect calibration of the AOA transducer could result in a late activation of the stick pusher.

    This [Canadian] AD mandates the replacement of the incorrectly calibrated AOA transducer.

    You may examine the MCAI on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7265.

    Related Service Information Under 1 CFR Part 51

    We reviewed Bombardier Service Bulletin 670BA-27-069, dated March 30, 2015. This service information describes procedures for replacement of incorrectly calibrated AOA transducers with correctly calibrated AOA transducers. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

    FAA's Determination and Requirements of This AD

    This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are issuing this AD because we evaluated all pertinent information and determined the unsafe condition exists and is likely to exist or develop on other products of these same type designs.

    FAA's Justification and Determination of the Effective Date

    We are superseding AD 2016-08-05 to correct a typographical error in the regulatory text. No other changes have been made to AD 2016-08-05. Therefore, we determined that notice and opportunity for public comment are unnecessary.

    Comments Invited

    This AD is a final rule that involves requirements affecting flight safety, and we did not precede it by notice and opportunity for public comment. We invite you to send any written relevant data, views, or arguments about this AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-7265; Directorate Identifier 2016-NM-084-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this AD. We will consider all comments received by the closing date and may amend this AD because of those comments.

    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this AD.

    Costs of Compliance

    We estimate that this AD affects 400 airplanes of U.S. registry.

    We also estimate that it would take about 4 work-hours per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour. Required parts would cost about $10,000 per product. Based on these figures, we estimate the cost of this AD on U.S. operators to be $4,136,000, or $10,340 per product.

    Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

    We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

    Regulatory Findings

    We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

    For the reasons discussed above, I certify that this AD:

    1. Is not a “significant regulatory action” under Executive Order 12866;

    2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

    3. Will not affect intrastate aviation in Alaska; and

    4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    Adoption of the Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by removing airworthiness directive (AD) 2016-08-05, Amendment 39-18481 (81 FR 21709, April 13, 2016), and adding the following new AD: 2016-13-01 Bombardier, Inc.: Amendment 39-18565. Docket No. FAA-2016-7265; Directorate Identifier 2016-NM-084-AD. (a) Effective Date

    This AD is effective July 7, 2016.

    (b) Affected ADs

    This AD replaces AD 2016-08-05, Amendment 39-18481 (81 FR 21709, April 13, 2016) (“AD 2016-08-05”).

    (c) Applicability

    This AD applies to the Bombardier, Inc. airplanes, certificated in any category, identified in paragraphs (c)(1), (c)(2), and (c)(3) of this AD.

    (1) Model CL-600-2C10 (Regional Jet Series 700, 701, & 702) airplanes, serial numbers 10002 through 10999 inclusive.

    (2) Model CL-600-2D15 (Regional Jet Series 705) airplanes and Model CL-600-2D24 (Regional Jet Series 900) airplanes, serial numbers 15001 through 15990 inclusive.

    (3) Model CL-600-2E25 (Regional Jet Series 1000) airplanes, serial numbers 19001 through 19990 inclusive.

    (d) Subject

    Air Transport Association (ATA) of America Code 27, Flight Controls.

    (e) Reason

    This AD was prompted by the discovery of a number of incorrectly calibrated angle of attack (AOA) transducers installed in the stall protection system. We are issuing this AD to detect and replace incorrectly calibrated AOA transducers; incorrect calibration of the transducers could result in late activation of the stick pusher.

    (f) Compliance

    Comply with this AD within the compliance times specified, unless already done.

    (g) Retained Replacement of AOA Transducers With No Changes

    This paragraph restates the requirements paragraph (g) of AD 2016-08-05, with no changes. Within 2,500 flight hours or 12 months, whichever occurs first after May 18, 2016 (the effective date of AD 2016-08-05), replace the AOA transducers identified in paragraph 1.A., “Effectivity,” of Bombardier Service Bulletin 670BA-27-069, dated March 30, 2015, with correctly calibrated AOA transducers, in accordance with the Accomplishment Instructions of Bombardier Service Bulletin 670BA-27-069, dated March 30, 2015.

    (h) Retained Parts Installation Prohibition, With a Change to the Affected Parts Language

    This paragraph restates the parts installation prohibition specified in paragraph (h) of AD 2016-08-05, with a change to the affected parts language. As of May 18, 2016 (the effective date of AD 2016-08-05), no person may install, on any airplane, an AOA transducer having a part number and serial number listed in paragraph 1.A., “Effectivity,” of Bombardier Service Bulletin 670BA-27-069, dated March 30, 2015.

    (i) Other FAA AD Provisions

    The following provisions also apply to this AD:

    (1) Alternative Methods of Compliance (AMOCs): The Manager, New York Aircraft Certification Office (ACO), ANE-170, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the ACO, send it to ATTN: Program Manager, Continuing Operational Safety, FAA, New York ACO, 1600 Stewart Avenue, Suite 410, Westbury, NY 11590; telephone: 516-228-7300; fax: 516-794-5531. Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office. The AMOC approval letter must specifically reference this AD.

    (2) Contacting the Manufacturer: As of the effective date of this AD, for any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, New York ACO, ANE-170, FAA; or Transport Canada Civil Aviation (TCCA); or Bombardier, Inc.'s TCCA Design Approval Organization (DAO). If approved by the DAO, the approval must include the DAO-authorized signature.

    (j) Related Information

    Refer to Mandatory Continuing Airworthiness Information (MCAI) Canadian AD CF-2015-18, dated July 16, 2015, for related information. This MCAI may be found in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7265.

    (k) Material Incorporated by Reference

    (1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.

    (2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise.

    (3) The following service information was approved for IBR on May 18, 2016, (81 FR 21709, April 13, 2016).

    (i) Bombardier Service Bulletin 670BA-27-069, dated March 30, 2015.

    (ii) Reserved.

    (4) For service information identified in this AD, contact Bombardier, Inc., 400 Côte-Vertu Road West, Dorval, Québec H4S 1Y9, Canada; Widebody Customer Response Center North America toll-free telephone: 1-866-538-1247 or direct-dial telephone: 1-514-855-2999; fax: 514-855-7401; email: [email protected]; Internet: http://www.bombardier.com.

    (5) You may view this service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221.

    (6) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued in Renton, Washington, on June 13, 2016. Dionne Palermo, Acting Manager, Transport Airplane Directorate, Aircraft Certification Service.
    [FR Doc. 2016-14579 Filed 6-21-16; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2014-0105; Directorate Identifier 2008-SW-58-AD; Amendment 39-18562; AD 2016-12-13] RIN 2120-AA64 Airworthiness Directives; Airbus Helicopters (Previously Eurocopter France) Helicopters AGENCY:

    Federal Aviation Administration (FAA), DOT.

    ACTION:

    Final rule.

    SUMMARY:

    We are superseding Airworthiness Directive (AD) 2000-05-17 and AD 2001-04-12, which apply to Eurocopter France (now Airbus Helicopters) Model EC120B helicopters. AD 2000-05-17 and AD 2001-04-12 required repetitive visual checks of the engine-to-main gearbox (MGB) coupling tube assembly (coupling tube) for a crack and replacing any cracked tube with an airworthy tube. This new AD requires removing certain engine mount parts from service, measuring the height of the engine mounting base for certain helicopters, replacing the engine mount if a certain height is exceeded, inspecting the flared coupling on certain helicopters for a crack, and replacing the coupling if it is cracked. Since we issued AD 2000-05-17 and AD 2001-04-12, there have been reports of additional cracks in coupling tubes. These actions are intended to prevent coupling tube failure, loss of engine drive, and a subsequent forced landing of the helicopter.

    DATES:

    This AD is effective July 27, 2016.

    The Director of the Federal Register approved the incorporation by reference of certain publications listed in this AD as of July 27, 2016.

    ADDRESSES:

    For service information identified in this final rule, contact Airbus Helicopters, 2701 N. Forum Drive, Grand Prairie, TX 75052; telephone (972) 641-0000 or (800) 232-0323; fax (972) 641-3775; or at http://www.airbushelicopters.com/techpub. You may view this referenced service information at the FAA, Office of the Regional Counsel, Southwest Region, 10101 Hillwood Pkwy., Room 6N-321, Fort Worth, TX 76177. It is also available on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2014-0105.

    Examining the AD Docket

    You may examine the AD docket on the Internet at http://www.regulations.gov in Docket No. FAA-2014-0105; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this AD, the Direction Generale de L'Aviation Civile (DGAC) AD, any incorporated-by-reference information, the economic evaluation, any comments received, and other information. The address for the Docket Office (phone: 800-647-5527) is Document Management Facility, U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590.

    FOR FURTHER INFORMATION CONTACT:

    James Blyn, Aviation Safety Engineer, Regulations and Policy Group, Rotorcraft Directorate, FAA, 10101 Hillwood Pkwy., Fort Worth, TX 76177; telephone (817) 222-5110; email [email protected]

    SUPPLEMENTARY INFORMATION: Discussion

    On May 29, 2015, we issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 to remove AD 2000-05-17 (65 FR 13875, March 15, 2000) and AD 2001-04-12 (66 FR 13232, March 5, 2001) and add a new AD. AD 2000-05-17 applied to Model EC120B helicopters with engine coupling tube part number (P/N) C631A1002101 and required recurring inspections of each coupling tube for a crack and replacing any cracked coupling tube with a reinforced coupling tube P/N C631A1101101. AD 2001-04-12 applied to Model EC120B helicopters with engine coupling tube P/N C631A1101101 and required repetitive visual checks of each coupling tube for a crack. AD 2000-05-17 and AD 2001-04-12 were prompted by reports of cracks on the reinforced coupling tube and were intended to prevent coupling tube failure, loss of engine drive, and a subsequent forced landing.

    The NPRM published in the Federal Register on June 16, 2015 (80 FR 34335). The NPRM was prompted by reports of additional cracks in coupling tubes. Eurocopter France (now Airbus Helicopters) determined that the washer-type engine mount may, in certain cases, induce excessive loading on the coupling tube, which results in binding that increases component wear of the inner diameter of the mounting base. Because of this, the DGAC, on behalf of the European Aviation Safety Agency (EASA), issued AD No. F-2003-325 R1, dated May 12, 2004, for Model EC120B helicopters with engine coupling tube, P/N C631A1101101, and with an engine mount containing certain parts listed in Eurocopter Alert Service Bulletin (ASB) No. 04A005, dated July 16, 2003. DGAC AD No. F-2003-325 R1 requires inspections for helicopters with an engine mount block modified in accordance with Eurocopter Service Bulletin (SB) No. 71-003, Revision 1, dated July 18, 2002; replacing any coupling tube that has a crack; and increasing the life limit of the coupling tube from 1,000 flight hours to 20,000 flight hours. Also, DGAC AD No. F-2003-325 R1 requires, for helicopters with a new spring-loaded engine suspension modification in accordance with Eurocopter SB No. 71-005, Revision 0, dated May 14, 2004, increasing the life limit of the coupling tube to 20,000 flight hours and canceling the repetitive inspections of the coupling tube.

    The NPRM proposed to require, for helicopters with certain engine mounts, before further flight, removing from service certain engine mount parts and measuring the height of the engine mounting base. If the height is more than 10.5 millimeters, the NPRM proposed replacing the engine mount with an engine mount that does not have the affected parts. For certain other helicopters, the NPRM proposed to require within 25 hours time-in-serice (TIS) replacing the spring-type engine suspension system, dye-penetrant inspecting the flared coupling for a crack, and replacing any cracked flared coupling. The NPRM also proposed removing coupling tube P/N C631A1002101 from service and prohibiting installation of that coupling tube on any helicopter.

    Since the NPRM was issued, the FAA Southwest Regional Office has relocated and a group email address has been established for requesting an FAA alternative method of compliance for a helicopter of foreign design. We have revised the contact information throughout this final rule to reflect the new address and new email address.

    Comments

    After our NPRM (80 FR 34335, June 16, 2015) was published, we received comments from one commenter.

    Request

    Airbus Helicopters disagrees with the proposed requirement to replace the spring-type engine suspension system in accordance with Eurocopter SB No. 71-005 for helicopters with an improved engine mount under Eurocopter SB No. 71-003. Airbus Helicopters states there have been no coupling tube failures since incorporation of Eurocopter SB No. 71-003, and therefore the proposed requirement would not increase safety levels.

    We disagree. Installing the improved engine mount specified in Eurocopter SB No. 71-003 extends the compliance time for a recurring visual inspection of the coupling tube from 5 hours TIS to 25 hours TIS. When issued, that recurring inspection was considered a short-term interim action until an effective modification or action was developed, approved, and available. Eurocopter SB No. 71-005 contained such an effective action to cancel that interim action and was developed and approved in May 2004.

    Airbus Helicopters requested that, if we mandate the proposed requirement to replace the spring-type engine suspension system in accordance with Eurocopter SB No. 71-005, we change the proposed compliance time from 25 hours TIS to 18 months to allow for availability of parts.

    We disagree. Eurocopter SB No. 71-005 was approved May 13, 2004. The NPRM was published June 16, 2015. The substantial amount of time that has passed since the approval of the service information and publication of our NPRM provided operators with enough notice of our proposal to mandate that procedure such that availability of parts should not be an issue.

    FAA's Determination

    This helicopter has been approved by the aviation authority of France and is approved for operation in the United States. Pursuant to our bilateral agreement with France, the DGAC on behalf of EASA, has kept the FAA informed of the situation described above. We are issuing this AD because we evaluated all information provided by the DGAC, reviewed the relevant information, considered the comments received, and determined the unsafe condition exists and is likely to exist or develop on other helicopters of this same type design and that air safety and the public interest require adopting the AD requirements as proposed.

    Related Service Information Under 1 CFR Part 51

    Eurocopter issued ASB No. 04A005, Revision 0, dated July 16, 2003, which prohibits, after June 30, 2004, operating an engine mount made up of the following parts: Support arm, P/N C714A1107201; swaged support arm, P/N C714A1106201; left-hand support bracket, P/N C714A1101102; and right-hand support bracket, P/N C714A1101103. ASB No. 04A005 also specifies measuring the height of the engine mounting base and, if the height is more than 10.5 millimeters, replacing the engine mount with an engine mount that does not have the specified P/N. ASB No. 04A005 does not apply to helicopters modified with an improved engine mount in accordance with SB No. 71-003. ASB No. 04A005 also does not apply to helicopters with a serial number 1170 or larger, as the specified engine mounts are not installed on those helicopters.

    Eurocopter also issued SB No. 71-005, Revision 0, dated May 14, 2004, which contains procedures to modify the spring-type engine suspension system and dye-penetrant inspect the flared coupling assembly.

    This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

    Other Related Service Information

    Eurocopter issued SB No. 71-003, Revision 1, dated July 18, 2002, which contains procedures to improve the engine mount. Eurocopter also issued ASB No. 05A003, Revision 2, dated July 16, 2003, for helicopters that have not been modified with an improved engine mount in accordance with SB No. 71-003, which specifies inspecting the coupling tube for a crack every 5 hours and establishing a coupling tube life limit of 1,000 hours. For helicopters that have been modified with an improved engine mount, ASB No. 05A003 specifies inspecting the coupling tube for a crack every 25 hours and increasing the coupling tube life limit to 20,000 hours. ASB No. 05A003 was revised to Revision 3, dated May 11, 2004, to specify an optional spring-type engine suspension modification and cancel the repetitive inspection for this modified configuration.

    Differences Between This AD and the DGAC AD

    This AD requires the installation of the spring-type engine suspension modification specified in Eurocopter SB No. 71-005 and does not require the repetitive inspection of the coupling tube and the engine mount base. This AD also does not require you to contact the manufacturer.

    Costs of Compliance

    We estimate that this AD will affect 23 helicopters of the 115 helicopters of U.S. Registry. At an average labor rate of $85 per work-hour, we estimate that operators may incur the following costs in order to comply with this AD.

    Installing new mounting arms and brackets requires about 12 work-hours and required parts cost $9,194, for a total cost per helicopter of $10,214 and $234,922 for the U.S. fleet. Installing the mounting spring kit requires about 14 work-hours and required parts cost $14,621, for a total cost per helicopter of $15,811 and $363,653 for the U.S. fleet. Dye-penetrant inspecting the coupling tube requires about 1 work-hour for a cost per helicopter of $85 and $1,955 for the U.S. fleet.

    Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority.

    We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

    Regulatory Findings

    We have determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

    For the reasons discussed above, I certify that this AD:

    (1) Is not a “significant regulatory action” under Executive Order 12866,

    (2) Is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

    (3) Will not affect intrastate aviation in Alaska to the extent that a regulatory, and

    (4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    Adoption of the Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by: a. Removing Airworthiness Directive (AD) 2000-05-17, Amendment 39-11627 (65 FR 13875, March 15, 2000); and AD 2001-04-12, Amendment 39-12131 (66 FR 13232, March 5, 2001); and b. Adding the following new AD: 2016-12-13 Airbus Helicopters (Previously Eurocopter France): Amendment 39-18562; Docket No. FAA-2014-0105; Directorate Identifier 2008-SW-58-AD. (a) Applicability

    This AD applies to Model EC120B helicopters with an engine-to-main gearbox coupling tube assembly (coupling tube), part number (P/N) C631A1101101 or P/N C631A1002101, installed, certificated in any category.

    (b) Unsafe Condition

    This AD defines the unsafe condition as a crack in a coupling tube. This condition could result in coupling tube failure, loss of engine drive, and a subsequent forced landing of the helicopter.

    (c) Affected ADs

    This AD supersedes AD 2000-05-17, Amendment 39-11627 (65 FR 13875, March 15, 2000) and AD 2001-04-12, Amendment 39-12131 (66 FR 13232, March 5, 2001).

    (d) Effective Date

    This AD becomes effective July 27, 2016.

    (e) Compliance

    You are responsible for performing each action required by this AD within the specified compliance time unless it has already been accomplished prior to that time.

    (f) Required Actions

    (1) For helicopters with a serial number up to and including 1169, not modified with an improvement of the engine mount in accordance with Eurocopter Service Bulletin (SB) No. 71-003, Revision 1, dated July 18, 2002 (SB 71-003), or not modified by installing a spring-type engine suspension system in accordance with Eurocopter SB No. 71-005, Revision 0, dated May 14, 2004 (SB 71-005), before further flight:

    (i) Remove from service the following engine mount parts:

    (A) Support arm, P/N C714A1107201;

    (B) Swaged support arm, P/N C714A1106201;

    (C) Left-hand support bracket, P/N C714A1101102; and

    (D) Right-hand support bracket, P/N C714A1101103.

    (ii) Measure the height of the engine mounting base as depicted in Figure 1 of Eurocopter Alert SB No. 04A005, Revision 0, dated July 16, 2003. If the height is more than 10.5 millimeters, replace the engine mount with an engine mount that does not have the parts identified in paragraph (f)(1)(i) of this AD.

    (2) For helicopters with a serial number 1170 and larger or helicopters modified with an improvement of the engine mount in accordance with SB 71-003:

    (i) Within 25 hours TIS, replace the spring-type engine suspension system and perform a dye-penetrant inspection of the flared coupling for a crack by following the Accomplishment Instructions, paragraphs 2.B.2.a through 2.B.2.c of SB 71-005.

    (ii) If there is a crack in the flared coupling, before further flight, replace the coupling with an airworthy coupling.

    (3) For helicopters with coupling tube, P/N C631A1002101, installed, before further flight, remove coupling tube, P/N C631A1002101, from service. Do not install coupling tube, P/N C631A1002101, on any helicopter.

    (g) Special Flight Permits

    Special flight permits may be issued provided there are no cracks in the coupling tube attachment fitting.

    (h) Alternative Methods of Compliance (AMOCs)

    (1) The Manager, Safety Management Group, FAA, may approve AMOCs for this AD. Send your proposal to: James Blyn, Aviation Safety Engineer, Regulations and Policy Group, Rotorcraft Directorate, FAA, 10101 Hillwood Pkwy., Fort Worth, TX 76177; telephone (817) 222-5110; email [email protected]

    (2) For operations conducted under a 14 CFR part 119 operating certificate or under 14 CFR part 91, subpart K, we suggest that you notify your principal inspector, or lacking a principal inspector, the manager of the local flight standards district office or certificate holding district office, before operating any aircraft complying with this AD through an AMOC.

    (i) Additional Information

    (1) Eurocopter Alert Service Bulletin (ASB) No. 05A003, Revision 2, dated July 16, 2003; Eurocopter ASB No. 05A003, Revision 3, dated May 11, 2004; and Eurocopter Service Bulletin No. 71-003, Revision 1, dated July 18, 2002; which are not incorporated by reference, contain additional information about the subject of this final rule. For Eurocopter service information identified in this final rule, contact Airbus Helicopters, 2701 N. Forum Drive, Grand Prairie, TX 75052; telephone (972) 641-0000 or (800) 232-0323; fax (972) 641-3775; or at http://www.airbushelicopters.com/techpub. You may review a copy of the service information at the FAA, Office of the Regional Counsel, Southwest Region, 10101 Hillwood Pkwy., Room 6N-321, Fort Worth, TX 76177.

    (2) The subject of this AD is addressed in Direction Generale de L'Aviation Civile (DGAC) AD No. F-2003-325 R1, Revision 1, dated May 12, 2004. You may view the DGAC AD on the Internet at http://www.regulations.gov in Docket No. FAA-2014-0105.

    (j) Subject

    Joint Aircraft Service Component (JASC) Code: 6310, Engine/Transmission Coupling—Coupling Tube, Engine Mount, and Engine Mount Base.

    (k) Material Incorporated by Reference

    (1) The Director of the Federal Register approved the incorporation by reference of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.

    (2) You must use this service information as applicable to do the actions required by this AD, unless the AD specifies otherwise.

    (i) Eurocopter Alert Service Bulletin No. 04A005, Revision 0, dated July 16, 2003.

    (ii) Eurocopter Service Bulletin No. 71-005, Revision 0, dated May 14, 2004.

    (3) For Eurocopter service information identified in this final rule, contact Airbus Helicopters, 2701 N. Forum Drive, Grand Prairie, TX 75052; telephone (972) 641-0000 or (800) 232-0323; fax (972) 641-3775; or at http://www.airbushelicopters.com/techpub.

    (4) You may view this service information at FAA, Office of the Regional Counsel, Southwest Region, 10101 Hillwood Pkwy., Room 6N-321, Fort Worth, TX 76177. For information on the availability of this material at the FAA, call (817) 222-5110.

    (5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call (202) 741-6030, or go to: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued in Fort Worth, Texas, on June 9, 2016. Scott A. Horn, Acting Manager, Rotorcraft Directorate, Aircraft Certification Service.
    [FR Doc. 2016-14467 Filed 6-21-16; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 95 [Docket No. 31084; Amdt. No. 527] IFR Altitudes; Miscellaneous Amendments AGENCY:

    Federal Aviation Administration (FAA), DOT.

    ACTION:

    Final rule.

    SUMMARY:

    This amendment adopts miscellaneous amendments to the required IFR (instrument flight rules) altitudes and changeover points for certain Federal airways, jet routes, or direct routes for which a minimum or maximum en route authorized IFR altitude is prescribed. This regulatory action is needed because of changes occurring in the National Airspace System. These changes are designed to provide for the safe and efficient use of the navigable airspace under instrument conditions in the affected areas.

    DATES:

    Effective 0901 UTC, July 21, 2016.

    FOR FURTHER INFORMATION CONTACT:

    Richard A. Dunham, Flight Procedure Standards Branch (AMCAFS-420), Flight Technologies and Programs Division, Flight Standards Service, Federal Aviation Administration, Mike Monroney Aeronautical Center, 6500 South MacArthur Blvd., Oklahoma City, OK 73169 (Mail Address: P.O. Box 25082 Oklahoma City, OK 73125) telephone: (405) 954-4164.

    SUPPLEMENTARY INFORMATION:

    This amendment to part 95 of the Federal Aviation Regulations (14 CFR part 95) amends, suspends, or revokes IFR altitudes governing the operation of all aircraft in flight over a specified route or any portion of that route, as well as the changeover points (COPs) for Federal airways, jet routes, or direct routes as prescribed in part 95.

    The Rule

    The specified IFR altitudes, when used in conjunction with the prescribed changeover points for those routes, ensure navigation aid coverage that is adequate for safe flight operations and free of frequency interference. The reasons and circumstances that create the need for this amendment involve matters of flight safety and operational efficiency in the National Airspace System, are related to published aeronautical charts that are essential to the user, and provide for the safe and efficient use of the navigable airspace. In addition, those various reasons or circumstances require making this amendment effective before the next scheduled charting and publication date of the flight information to assure its timely availability to the user. The effective date of this amendment reflects those considerations. In view of the close and immediate relationship between these regulatory changes and safety in air commerce, I find that notice and public procedure before adopting this amendment are impracticable and contrary to the public interest and that good cause exists for making the amendment effective in less than 30 days.

    Conclusion

    The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. It, therefore—(1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. For the same reason, the FAA certifies that this amendment will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

    List of Subjects in 14 CFR Part 95

    Airspace, Navigation (air).

    Issued in Washington, DC on June 17, 2016. John Duncan, Director, Flight Standards Service. Adoption of the Amendment

    Accordingly, pursuant to the authority delegated to me by the Administrator, part 95 of the Federal Aviation Regulations (14 CFR part 95) is amended as follows effective at 0901 UTC, July 21, 2016.

    PART 95—[AMENDED] 1. The authority citation for part 95 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40103, 40106, 40113, 40114, 40120, 44502, 44514, 44719, 44721.

    2. Part 95 is amended to read as follows: Revisions to IFR Altitudes & Changeover Point [Amendment 527, effective date July 21, 2016] From To MEA § 95.6001 Victor Routes—U.S. § 95.6025 VOR Federal Airway V25 is Amended to Read in Part VENTURA, CA VOR/DME DEANO, CA FIX 6000 DEANO, CA FIX * SAN MARCUS, CA VORTAC 6200 * 7600—MCA SAN MARCUS, CA VORTAC, NW BND § 95.6026 VOR Federal Airway V26 is Amended to Read in Part EDGRR, WI FIX WAUSAU, WI VORTAC * 6000 * 3600—MOCA * 3600—GNSS MEA WAUSAU, WI VORTAC CHURP, WI FIX * 8000 * 3000—GNSS MEA CHURP, WI FIX GREEN BAY, WI VORTAC * 7000 * 2400—MOCA § 95.6067 VOR Federal Airway V67 is Amended to Read in Part CEDAR RAPIDS, IA VOR/DME * LYERS, IA FIX 2900 * 3200—MRA * LYERS, IA FIX WATERLOO, IA VOR/DME 2900 * 3200—MRA § 95.6077 VOR Federal Airway V77 is Amended to Read in Part WATERLOO, IA VOR/DME WAUKON, IA VORTAC * 3000 * 2800—MOCA § 95.6097 VOR Federal Airway V97 is Amended to Read in Part NOISE, TN FIX LONDON, KY VORTAC * 5000 * 4200—MOCA LONDON, KY VORTAC REBEL, KY FIX * 3400 * 2900—MOCA § 95.6120 VOR Federal Airway V120 is Amended to Read in Part MASON CITY, IA VORTAC * AREDA, IA FIX ** 3000 * 4500—MRA ** 2800—MOCA * AREDA, IA FIX ** SEATS, IA FIX *** 3000 * 4500—MRA ** 4500—MRA *** 2800—MOCA § 95.6139 VOR Federal Airway V139 is Amended to Read in Part DUNFE, VA FIX SNOW HILL, MD VORTAC * 4000 * 1600—MOCA § 95.6146 VOR Federal Airway V146 is Amended to Read in Part PROVIDENCE, RI VORTAC MARTHAS VINEYARD, MA VOR/DME 2100 § 95.6148 VOR Federal Airway V148 is Amended to Read in Part ALEEN, WI FIX HAYWARD, WI VOR/DME # #UNUSABLE HAYWARD, WI VOR/DME * IRONWOOD, MI VORTAC 10000 * 5200—MCA IRONWOOD, MI VORTAC, SW BND § 95.6165 VOR Federal Airway V165 is Amended to Read in Part JEFFY, CA FIX * LOPES, CA FIX 9000 *8600—MCA LOPES, CA FIX, S BND LOPES, CA FIX * ARVIN, CA FIX 8500 * 7300—MCA ARVIN, CA FIX, SE BND § 95.6167 VOR Federal Airway V167 is Amended to Read in Part JEWIT, CT FIX PROVIDENCE, RI VORTAC 2500 § 95.6186 VOR Federal Airway V186 is Amended to Read in Part SAN MARCUS, CA VORTAC DEANO, CA FIX 6200 DEANO, CA FIX * HENER, CA FIX 5000 * 5100—MCA HENER, CA FIX, E BND HENER, CA FIX FILLMORE, CA VORTAC 6300 FILLMORE, CA VORTAC VAN NUYS, CA VOR/DME 6000 VAN NUYS, CA VOR/DME TIFNI, CA FIX 5500 PARADISE, CA VORTAC TANNR, CA FIX 6000 § 95.6187 VOR Federal Airway V187 is Amended to Read in Part MANCA, CO FIX HERRM, CO FIX # * 15000 * 12800—MOCA # MEA IS ESTABLISHED WITH A GAP IN NAVIGATION SIGNAL COVERAGE. § 95.6197 VOR Federal Airway V197 is Amended to Read in Part PARADISE, CA VORTAC * POMONA, CA VORTAC 4500 * 5800—MCA POMONA, CA VORTAC, NW BND FISCH, CA FIX * KELEN, CA FIX ** 10200 * 9300—MCA KELEN, CA FIX, SE BND ** 10200—MOCA KELEN, CA FIX * ARVIN, CA FIX 8500 * 7300—MCA ARVIN, CA FIX, SE BND § 95.6198 VOR Federal Airway V198 is Amended to Read in Part TIBBY, LA VOR/DME HARVEY, LA VORTAC 2100 § 95.6248 VOR Federal Airway V248 is Amended to Read in Part AVENAL, CA VOR/DME SCRAP, CA FIX 4000 § 95.6310 VOR Federal Airway V310 is Amended to Read in Part LOUISVILLE, KY VORTAC LONDON, KY VORTAC * 3300 * 2900—MOCA LONDON, KY VORTAC ROSAR, KY FIX * 5500 * 3800—MOCA § 95.6345 VOR Federal Airway V345 is Amended to Read in Part EAU CLAIRE, WI VORTAC HAYWARD, WI VOR/DME # * 5200 * 3100—MOCA * 4000—GNSS MEA # HAYWARD R-178 UNUSABLE USE EAU CLAIRE R-357 § 95.6347 VOR Federal Airway V347 is Amended to Read in Part LONDON, KY VORTAC HINCH MOUNTAIN, TN VORTAC * 4700 * 4600—MOCA § 95.6459 VOR Federal Airway V459 is Amended to Read in Part JEFFY, CA FIX * LOPES, CA FIX 9000 * 8600—MCA LOPES, CA FIX, S BND LOPES, CA FIX * WRING, CA FIX 8500 * 5800—MCA WRING, CA FIX, SE BND § 95.6517 VOR Federal Airway V517 is Amended to Read in Part LONDON, KY VORTAC LOGIC, KY FIX 2900 § 95.6552 VOR Federal Airway V552 is Amended to Read in Part * GRICE, LA FIX TIBBY, LA VOR/DME 2000 * 4000—MRA TIBBY, LA VOR/DME HARVEY, LA VORTAC 2100 § 95.6562 VOR Federal Airway V562 is Amended to Read in Part DRAKE, AZ VORTAC PEACH SPRINGS, AZ VORTAC 9200 § 95.6597 VOR Federal Airway V597 is Amended to Read in Part FILLMORE, CA VORTAC VAN NUYS, CA VOR/DME 6000 VAN NUYS, CA VOR/DME DARTS, CA FIX 5500 § 95.6311 Alaska VOR Federal Airway V311 is Amended to Read in Part ANNETTE ISLAND, AK VOR/DME * TOKEE, AK FIX 6000 * 9000—MCA TOKEE, AK FIX, NW BND TOKEE, AK FIX WIBTA, AK FIX * 9000 * 4700—MOCA WIBTA, AK FIX FLIPS, AK FIX W BND * 7500 E BND * 9000 * 6300—MOCA FLIPS, AK FIX BIORKA ISLAND, AK VORTAC W BND 6100 E BND 7500 § 95.6473 Alaska VOR Federal Airway V473 is Amended to Read in Part FLIPS, AK FIX BIORKA ISLAND, AK VORTAC W BND 6100 E BND 7500 From To MEA MAA § 95.7001 Jet Routes § 95.7005 Jet Route J5 is Amended to Read in Part POWEL, OR FIX SUMMA, WA FIX 24000 45000 § 95.7054 Jet Route J54 is Amended to Read in Part OLYMPIA, WA VORTAC BAKER CITY, OR VOR/DME # 24000 45000 # MEA IS ESTABLISHED WITH A GAP IN NAVIGATION SIGNAL COVERAGE. § 95.7086 Jet Route J86 is Amended to Read in Part BOULDER CITY, NV VORTAC PEACH SPRINGS, AZ VORTAC 18000 45000 From To Distance § 95.8003 VOR Federal Airway Changeover Point Airway Segment Changeover Points Is Amended To Add Changeover Point V148 HAYWARD, WI VOR/DME IRONWOOD, MI VORTAC 20 HAYWARD § 95.8005 Jet Routes Changeover Points Airway Segment Changeover Points Is Amended To Add Changeover Point J54 OLYMPIA, WA VORTAC BAKER CITY, OR VOR/DME 143 OLYMPIA
    [FR Doc. 2016-14799 Filed 6-21-16; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF COMMERCE Bureau of Industry and Security 15 CFR Part 766 [Docket No. 151204999-6179-02] RIN 0694-AG73 Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases AGENCY:

    Bureau of Industry and Security, Commerce.

    ACTION:

    Final rule.

    SUMMARY:

    This final rule revises the Bureau of Industry and Security's (BIS) guidance regarding administrative enforcement cases based on violations of the Export Administration Regulations (EAR). The rule rewrites that guidance in the EAR, setting forth the factors that the Office of Export Enforcement (OEE) considers when setting penalties in settlements of administrative enforcement cases and when deciding whether to pursue administrative charges or settle allegations of EAR violations. This final rule does not apply to alleged violations of regulations concerning restrictive trade practices and boycotts, which would continue to be subject to the guidance.

    DATES:

    Effective date: July 22, 2016.

    FOR FURTHER INFORMATION CONTACT:

    Norma Curtis, Assistant Director, Office of Export Enforcement, Bureau of Industry and Security. Tel: (202) 482-5036, or by email at [email protected]

    SUPPLEMENTARY INFORMATION: Background

    The mission of the Office of Export Enforcement (OEE) at BIS is to enforce the provisions of the Export Administration Regulations (EAR), secure America's trade, and preserve America's technological advantage by detecting, investigating, preventing, and deterring the unauthorized export and reexport of U.S.-origin items to parties involved with: (1) Weapons of mass destruction programs; (2) threats to national security or regional stability; (3) terrorism; or (4) human rights abuses. Export Enforcement at BIS is the only federal law enforcement agency exclusively dedicated to the enforcement of export control laws and the only agency constituted to do so with both administrative and criminal export enforcement authorities. OEE's criminal investigators and analysts leverage their subject-matter expertise, unique and complementary administrative enforcement tools, and relationships with other federal agencies and industry to protect our national security and promote our foreign policy interests. OEE protects legitimate exporters from being put at a competitive disadvantage by those who do not comply with the law. It works to educate parties to export transactions on how to improve export compliance practices, supporting American companies' efforts to be reliable trading partners and reputable stewards of U.S. national and economic security. BIS also discourages, and in some circumstances prohibits, U.S. companies from furthering or supporting any unsanctioned foreign boycott (including the Arab League boycott of Israel).

    OEE at BIS may refer violators of export control laws to the U.S. Department of Justice for criminal prosecution, and/or to the Department's Office of the Chief Counsel for Industry and Security for administrative prosecution. In cases where there has been a willful violation of the EAR, violators may be subject to both criminal fines and administrative penalties. Administrative penalties may also be imposed when there is no willful intent, allowing administrative cases to be brought in a much wider variety of circumstances than criminal cases. OEE has a unique combination of administrative enforcement authorities including both civil penalties and denials of export privileges. BIS may also place individuals and entities on lists that restrict or prohibit their involvement in exports, reexports, and transfers (in-country).

    In this rule, BIS amends the EAR to update its Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases (the “BIS Guidelines”) found in Supplement No. 1 to part 766 of the EAR in order to make civil penalty determinations more predictable and transparent to the public and aligned with those promulgated by the Treasury Department's Office of Foreign Assets Control (OFAC). OFAC administers most of its sanctions programs under the International Emergency Economic Powers Act (IEEPA), the same statutory authority by which BIS implements the EAR. OFAC uses the transaction value as the starting point for determining civil penalties pursuant to its Economic Sanctions Enforcement Guidelines. Under IEEPA, criminal penalties can reach 20 years imprisonment and $1 million per violation, and administrative monetary penalties can reach $250,000 (subject to adjustment in accordance with U.S. law, e.g., the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (Pub. L. 114-74, sec. 701)) or twice the value of the transaction, whichever is greater. Both agencies coordinate and cooperate on investigations involving violations of export controls that each agency enforces, including programs relating to weapons of mass destruction, terrorism, Iran, Sudan, Specially Designated Nationals and Specially Designated Global Terrorists. This guidance would not apply to civil administrative enforcement cases for violations under part 760 of the EAR—Restrictive Trade Practices and Boycotts. Supplement No. 2 to Part 766 continues to apply to enforcement cases involving part 760 violations. This guidance also will not apply to pending matters where, as of July 22, 2016, there are ongoing settlement negotiations and a charging letter has not been filed.

    Proposed Rule and Comments

    On December 28, 2015, BIS published a proposed rule to amend the BIS Guidelines (80 FR 80710). BIS received eleven submissions commenting on the proposed rule.

    Overall Approach and Relation to Export Control Reform

    Comment: Several commenters, although making suggestions or raising concerns about specific provisions in the proposed rule, commended OEE and BIS for making the BIS Guidelines more transparent, predictable and consistent and for aligning them with OFAC's Economic Sanctions Enforcement Guidelines (“OFAC Guidelines”). One commenter noted that the OFAC Guidelines have “[h]istorically . . . withstood the test of time” and that “using them as a general model makes sense.”

    One submission, however, stated that the proposed rule fails to discuss how it advances the goal of Export Control Reform (“ECR”) by not aligning the BIS Guidelines with the administrative penalties and procedures promulgated by the Department of State, Directorate of Defense Trade Controls (“DDTC”) in the International Traffic in Arms Regulations (“ITAR”). The author submits that the alignment of BIS's enforcement policies and procedures with those of DDTC for enforcing export violations under the shared jurisdiction of BIS and DDTC would be more in line with the objectives of ECR.

    Response: One of the primary goals of ECR is to transfer less sensitive military items from the United States Munitions List (“USML”) to the more flexible licensing authority of the Commerce Department's Commerce Control List (“CCL”). ECR would thus enhance national security by (i) improving interoperability of U.S. military forces with allied countries, (ii) strengthening the U.S. industrial base by, among other things, reducing incentives for foreign manufacturers to “design out” and avoid U.S.-origin content and services, and (iii) allowing export control officials to focus government resources on transactions that pose greater concern. This goal has been largely accomplished.

    It does not necessarily follow, however, that the manner in which controls are enforced on the items transferred to the CCL from the USML should involve aligning BIS Guidelines with those enforcement policies and procedures of DDTC. The licensing and enforcement functions of all three regulatory agencies—DDTC, BIS and OFAC—are encompassed within the ECR initiative. All three have defined jurisdictional roles over licensing exports. BIS has maintained a robust enforcement posture regarding violations of the EAR, and its policies and practices—including with regard to voluntary self-disclosures (“VSDs”), consideration of mitigating and aggravating factors, settlements and the imposition of civil monetary penalties—have historically been much more closely aligned with those of OFAC.

    As stated in the proposed rule, both BIS and OFAC administer their regulations under the authority of the International Emergency Economic Powers Act, and the OFAC Guidelines serve as the only other published example of enforcement policies and practices promulgated under that statute. It is therefore consistent with the principles of ECR to bring the BIS Guidelines further into alignment with the OFAC Guidelines, which are more recent than BIS's current Guidelines and account for the higher penalties set forth in the International Emergency Economic Powers Enhancement Act of 2007.

    Furthermore, the “higher fences” principle of ECR, referring to the more focused and concentrated enforcement efforts around the more significant military items that remain on the USML also applies to enforcement of items transferred to the CCL. Because of the more flexible licensing authority of the EAR that serves to facilitate trade (e.g., License Exception STA), it is also paramount that the diversion risk with respect to such items of lesser military significance be monitored closely and that the deterrent effect of a strong enforcement response to violations be maintained.

    Nevertheless, the proposed rule and this final rule share some characteristics with the enforcement policy of DDTC. Both DDTC and OEE have long placed great emphasis on the importance of VSDs, a policy that is reiterated and reinforced in the proposed rule and in this final rule. More generally, OEE sought to convey in the proposed rule the importance it places on the submission of VSDs, and underscored the fact that, over the past several years, on average only three percent of VSDs submitted have resulted in a civil monetary penalty. OEE does not expect that rate to change significantly, and OEE's practice is consistent with DDTC in responding to most VSDs submitted to it with a warning letter. Additionally, the proposed rule and this final rule provide that the use of funds that would otherwise be paid as a civil penalty may, in some cases, be suspended conditioned upon the respondent using funds in an equivalent amount for compliance activities required under the final order including improving internal compliance programs and conducting audits. Although such suspensions have been used by DDTC in the past, OEE has generally suspended penalties only due to inability to pay. For the foregoing reasons, BIS believes that aligning the BIS Guidelines with the OFAC Guidelines with the adoption of the DDTC practice noted above supports goals of the Export Control Reform Initiative and is making no changes in response to the comment that suggested otherwise.

    Comment: One commenter stated that setting a base penalty amount based on whether a violation is egregious or non-egregious reduces uncertainty because exporters can assess whether a violation would be considered egregious based on past Office of Export Enforcement behavior for similar violations.

    Response: BIS agrees with this comment and notes that all settlement agreements, charging letters and final orders are posted in the BIS electronic Freedom of Information Act reading room on the BIS Web site for public access.

    Voluntary Self-Disclosures

    A significant change in the proposed rule was the introduction of the concept of base penalty amounts for egregious and non-egregious apparent violations and the principle of reducing the base penalty amount by one-half if the case is based on a VSD. Base penalty amounts could then be adjusted based on aggravating, mitigating and general factors (which could be either aggravating or mitigating). The existing guidelines treat a VSD as a mitigating factor of “GREAT WEIGHT.”

    Comment: Several commenters expressed concern over the rule's treatment of VSDs, stating that the rule would reduce the incentive for voluntary disclosure and that it seemed to diminish the importance of VSDs. Some stated that the rule would unduly restrict OEE's ability to consider all aggravating and mitigating factors present in a complex fact pattern because the determination of the base penalty amount is based on only four factors. Others indicated that the rule was likely to result in civil penalties in cases that currently receive only a warning letter. One commenter predicted that the proposed rule's treatment of VSDs could limit the government's options for seeking a “global settlement” in a criminal case. The commenters suggested several changes to the base penalty amount calculation and to the mitigating factors recognized by the guidelines to address, inter alia, the impact of the proposed guidelines on the incentive to voluntarily self-disclose violations. Those specific proposals are addressed under the headings “Base Penalty Policy” and “Mitigating Factors” below.

    Response: OEE has not changed its view regarding the importance of VSDs and believes that the concern expressed by the commenters that OEE appears to be diminishing the role and importance of VSDs is misplaced. According a VSD 50% mitigation up front in determining the base penalty amount does not “diminish” the importance that OEE accords VSDs. The proposed rule would simply formalize the long-standing practice of OEE to accord up to 50% mitigation to VSDs by assigning them “great weight” as a mitigating factor. While in most instances OEE's practice has been to assign 50% mitigation for the submission and completion of VSDs that meet the requirements of § 764.5, the proposed rule would remove the discretion to assign anything less than that, thus enhancing, not diminishing, the importance of VSDs, and providing that they will result in an initial 50% reduction in the base penalty amount of any penalty to be determined.

    OEE continues to encourage the submission of VSDs by persons who believe they may have violated the EAR. The purpose of an enforcement action includes raising awareness, increasing compliance, and deterring future violations, not merely punishing past conduct. VSDs are an indicator of a person's present intent and future commitment to comply with U.S. export control requirements. The purpose of mitigating the enforcement response in voluntary self-disclosure cases is to encourage the notification to OEE of apparent violations about which OEE would not otherwise have learned. As stated in the proposed rule, the submission of VSDs is a critical component of OEE's ability to collect information in carrying out its national security mission. Investigative leads provided by the public, including in the context of VSDs, provide an important tool used by the U.S. Government to enforce export regulations. OEE also is cognizant of the time, energy and financial expense of self-disclosing an apparent violation, especially when undertaken by small and medium enterprises.

    OEE believes that the existing incentive of 50% mitigation is sufficient to encourage the submission of VSDs, which is further reinforced by the very low percentage of VSDs that result in civil monetary penalties. As noted above, over the past several years, on average only three percent of VSDs submitted have resulted in a civil monetary penalty. OEE does not expect that rate to change significantly as a result of these guidelines.

    This final rule also makes changes to the formula for calculating the base penalty amounts and to the maximum effect of mitigating factors in response to the comments about their impact on VSDs and to comments suggesting that the base penalty amounts as proposed would provide OEE with insufficient flexibility in settlements. The changes to the base penalty amounts and impact of mitigating factors are discussed under the headings “Base Penalty Policy” and “Mitigating Factors” below.

    Base Penalty Policy

    Comment: Several commenters recommended changes to the proposed base penalty amounts. One commenter suggested that OEE may be faced with the prospect of feeling obliged to apply the other factors in such a way as to reduce the base penalty to a more appropriate level, which could produce a result-oriented exercise not entirely consistent with the purpose of the guidelines. Another stated that this formula could result in reduced prospects for settling cases because the penalty would be unrealistically high in cases with multi-million dollar transaction values. Another commenter suggested that this lack of flexibility could limit the government's options for seeking a comprehensive or “global” settlement of all civil and criminal penalties. To further encourage the submission of VSDs, one commenter advocated further decreasing the base penalty amount of the civil monetary penalty in instances involving VSDs as set forth in the Base Penalty Matrix. A commenter also urged that a reference to VSDs be added to the BIS Guidelines for purposes of evaluating General Factor E.—Compliance Program and to Mitigating Factor F. Remedial Response, in determining an appropriate civil monetary penalty amount.

    Commenters proposed three different changes to the base penalty amount calculation to address this perceived lack of flexibility.

    One proposed change was to set the base penalty for an egregious case that results from a VSD within a range from one-half the transaction value up to one-half of the statutory maximum and to set the base penalty in an egregious case that results from some source other than a VSD within a range from the applicable schedule amount and up to the statutory maximum.

    Another proposed change was to set the base penalty amount of the civil monetary penalty in non-egregious cases involving a VSD at no greater than 10 percent of the transaction value, capped at a maximum of $25,000 per violation and in egregious cases involving a VSD to set base penalty at no greater than 10 percent of the statutory maximum applicable to the violation.

    A third proposed change was to set a single range for base penalties in egregious cases from the applicable schedule amount to the applicable statutory maximum.

    Response: OEE agrees that the formula stated in the proposed rule may have been too rigid and/or unduly restricted OEE's discretion in settling cases, potentially resulting in cases unlikely to be settled because of the unrealistically high penalties in certain cases. OEE is also cognizant of the concern that the potential inflexibility of the proposed formula could have limited the Government's options for seeking a comprehensive or “global settlement” of all criminal and civil penalties and the need to further encourage the submission of VSDs.

    Accordingly, this final rule adopts a variation of the first of the proposals for calculating the base penalty amount noted above. The base penalty amount for an egregious case that results from a VSD will be changed from one-half the statutory maximum to a range of up to one-half of the statutory maximum. The base penalty amount for an egregious case that results from some source other than a VSD will be set at a range up to the statutory maximum whereas the proposed rule would have set the base penalty at the applicable statutory maximum. OEE believes that the adoption of this formula, along with changes related to the impact of mitigating factors on the penalty amount discussed below, will provide the degree of flexibility necessary to obtain a reasonable result in settlement negotiations.

    OEE did not adopt the second proposal for calculating the base penalty amount which would have set the base penalty amount of the civil monetary penalty in non-egregious cases involving a VSD at no greater than 10 percent of the transaction value, capped at a maximum of $25,000 per violation and in egregious cases involving a VSD to set base penalty at no greater than 10 percent of the statutory maximum applicable to the violation. This proposal focused exclusively on cases based on VSDs and thus would not have addressed the need for greater flexibility in setting the base penalty amount for egregious cases that are not based on VSDs. In addition, this proposal would have set an extremely low base penalty amount for cases based on VSDs, which would then be subject to further adjustment based on other applicable factors. The selected proposal is in keeping with OEE's existing practice of a 50 percent reduction in the case of voluntary disclosures.

    OEE did not adopt the third proposal, which would have set a single range from the applicable schedule amount to the applicable statutory maximum for all egregious cases whether based on a VSD or not. This proposal would have abandoned the principle of providing 50 percent reduction in base penalty amount in cases based on a VSD.

    Aggravating Factors

    Comment: One commenter stated that, under the proposed rule, a warning letter with no civil penalty could result only from a situation where there are no aggravating factors. The commenter stated that some aggravating factors are likely to be present in any transaction that results in a violation even though the violation does not result in harm to national security, economic or political concerns. The commenter listed some examples of conduct that might be construed as being within the scope of aggravating factor III.B.2—“having a reason to know based on readily available information.” Those examples are: Misdelivering goods that are recovered and incorrectly entering data into the Automated Export System. Freight forwarders often input information from conflicting data provided by shippers or make inadvertent mistakes in entering names into screening software. Under the current guidelines, the commenter asserted, these cases likely would result in a warning letter or a no action letter.

    Response: The commenter is incorrect. OEE would continue to issue warning letters in many cases including cases with some level of aggravation. In determining whether to conclude enforcement action with a warning letter or a no action letter, OEE would consider all aggravating, general and mitigating factors that apply to the action at issue. OEE does not anticipate that new penalty guidelines would increase the number of administrative enforcement actions brought by OEE. OEE believes that no change to the regulatory text is needed to make this point.

    Comment: One commenter stated that the determination that a company acted with willfulness or recklessness because it “should reasonably have been on notice” that the conduct was a violation of the EAR should be modified to limit the applicability of Factor A. Willful or Reckless Violation of Law to instances where the company was on notice and clearly understood that its conduct was unlawful. The commenter stated that determining that a company acted with willfulness or recklessness because it “should reasonably have been on notice” that its conduct violated U.S. law would not be appropriate. Ignorance, the commenter said, should not be equated with willfulness or recklessness. Only if a company actually was on notice and clearly understood that its conduct violated U.S. law should OEE determine that willfulness or recklessness was involved.

    Response: Use of the phrase “should reasonably have been on notice” as an example of conduct encompassed within the aggravating factor “Willful or Reckless Violation of Law” is adopted from the general factors set forth in the OFAC guidelines (see 31 CFR part 501, Appendix A, III.A.5). A higher threshold in BIS guidelines would create unnecessary inconsistencies between the agencies' policies and furthermore, OEE is not aware of any significant issue that OFAC's use of this language has created. Additionally, raising the threshold from “should reasonably have been on notice” to “was on notice” would unnecessarily increase the evidentiary burden on OEE. Therefore, OEE is making no changes to the rule in response to this comment.

    Comment: One commenter observed that the first four factors (factors A, B, C and D in the proposed rule) upon which a determination of egregiousness may be made for purposes of determining the base penalty amount also appear to factor into the determination of the final penalty amount as aggravating factors. The commenter questioned whether this procedure risks penalizing the company twice for the same factors. The commenter recommended that the factors be limited to one phase or the other or that an internal mechanism be used to safeguard against the inadvertent stacking of these factors—perhaps with a monetary limit after employing the factors the first time in the base phase.

    Response: As noted above, the proposed rule and this final rule differ in the method for determining the base penalty amount in egregious cases. The proposed rule would have set the base penalty amount at one-half of the applicable statutory maximum if the case was based on a VSD and at the statutory maximum if the case was based on something other than a VSD. Under this final rule, the base value in an egregious case will be an amount up to one-half of the applicable statutory maximum if the case is based on a VSD and an amount up to the applicable statutory maximum if the case is based on something other than a VSD. Under this procedure, substantial weight will generally be given to Factors A (“willful or reckless violation of law”), B (“awareness of conduct at issue”), C (“harm to regulatory program objectives”), and D (“individual characteristics”), with particular emphasis on Factors A, B, and C. A case will be considered an “egregious case” where the analysis of the applicable Factors, with a focus on Factors A, B, and C, indicates that the case represents a particularly serious violation of the law calling for a strong enforcement response. A determination by OEE that a case is “egregious” must have the concurrence of the Assistant Secretary of Commerce for Export Enforcement.

    Aggravating factors A through D are thus germane at two stages of the process: First in determining whether a case is egregious or not and second in determining the degree of egregiousness. Once a case is determined to be egregious based on those factors, a range for determining the final penalty amount is established, either up to half the statutory maximum or up to the statutory maximum, depending upon whether or not the case was brought to OEE's attention pursuant to a VSD. The same factors will necessarily be considered in determining what final penalty will be set within the prescribed range. A determination as to whether a case is egregious is separate and apart from an evaluation of the degree of egregiousness. This rule thus does not preclude consideration of any of the factors A through D in determining the final penalty amount.

    General Factors

    Comment: One commenter stated that General Factor D—Individual Characteristics, which is also the fourth criterion for determining whether a violation is egregious, likely could be read in more than one way and that some amplification in the final rule would be welcomed. The commenter did not pose any specific questions about this factor.

    Response: The proposed rule discussed five illustrative factors that could be considered in assessing this criterion. They are: the respondent's commercial sophistication, the size and sophistication of its operations, the volume and value of its apparent violations relative to the volume and value of all of its transactions, its regulatory history, any other illegal conduct in connection with the export, and prior criminal convictions of the respondent. Given the infinite possibilities for variation in human behavior, OEE cannot predict in advance all of the possible characteristics of the parties involved in an apparent violation that will ever be relevant in determining whether that apparent violation is egregious. The factors discussed in the proposed rule were intended to provide reasonable guidance as to how OEE would apply this factor. The commenter did not note any specific ambiguity or uncertainty in the proposed regulatory text describing this factor. On that basis, OEE concludes that additional discussion would not likely provide sufficient additional information to be useful and is making no changes to the rule in response to this comment.

    Comment: One commenter expressed concern that the proposed rule appeared to diminish the importance of VSDs and could thereby discourage activities or programs by regulated parties to discover violations. To remedy this situation, the commenter recommended that a reference to VSDs be added to the elements of General Factor E—Compliance Program and to Mitigating Factor F—Remedial Response.

    Response: As stated above, the importance of VSDs has not diminished and OEE certainly encourages activities designed to uncover violations. Accordingly, this final rule adds references to VSDs to the elements of General Factor E—Compliance Program and to Mitigating Factor F—Remedial Response. This rule also provides that a fully suspended monetary penalty is possible with conditions in certain non-egregious VSD cases.

    Comment: One commenter said that not including past violations of an acquired entity where an acquirer takes reasonable action to discover, correct and disclose violations is a welcomed addition.

    Response: OEE acknowledges the comment.

    Mitigating Factors

    Comment: One commenter stated that tips and leads from industry are valuable to enforcement; however, the companies that provide them receive little or no benefit for doing so. The commenter recommended creating a clear incentive for companies to provide information that comes to their attention by adding as a specific mitigating factor the phrase “Has the respondent previously made substantial voluntary efforts to provide information to Federal law enforcement authorities in support of U.S. export control legislation and regulations?”

    Response: OEE agrees with the commenter's reasoning on this issue. In this final rule, Mitigating Factor G is modified to include the question: “Has the Respondent previously made substantial voluntary efforts to provide information (such as providing tips that led to enforcement actions against other parties) to federal law enforcement authorities in support of the enforcement of U.S. export control regulations?”

    Comment: Another submission noted that in an apparent violation, a license exception may have been available but was not used or was used incorrectly. The commenter recommended that Factor H. License Was Likely to Be Approved be amended to acknowledge the availability of a license exception.

    Response: OEE agrees that if a license exception that would have authorized the export was available at the time of export, but was not properly utilized or asserted by the respondent, that license exception availability should be treated as a mitigating factor. Accordingly, this final rule amends Mitigating Factor H by adding the question: “Would the export have qualified for a license exception?”

    Comment: One commenter stated that the order in which mitigating factors are captured and applied in the mathematical formula is not clear. The commenter also stated that “to further complicate the equation, there is a cumulative mitigation cap at 75%.”

    Response: OEE believes that the order in which mitigating factors are considered will not affect the outcome of a case. Therefore this final rule does not specify the order in which the factors are to be considered. In recognition of the importance of voluntary self-disclosures, this final rule removes the proposed 75 percent limit on mitigation when the when the apparent violation is not egregious and investigation is based on a voluntary self-disclosure, but retains that limit in other cases.

    Other Relevant Factors Considered on a Case-by-Case Basis

    Comment: One commenter stated that violations should not be considered egregious on the basis of charging multiple violations on a single export.

    Response: OEE agrees and would not consider multiple violations arising out of the same act in and of itself to constitute egregiousness. Consistent with current practice, for cases that settle before filing of a charging letter with an Administrative Law Judge, OEE will generally charge only the most serious violation per transaction. If OEE issues such a proposed charging letter and subsequently files a charging letter with an Administrative Law Judge because a mutually agreeable settlement cannot be reached, OEE will continue to reserve its authority to proceed with all available charges based on the facts presented. In this final rule, Section III.A.4 Pattern of Conduct has been modified to make this practice clear.

    Comment: One commenter asserted that the criteria for determining whether violations are related would change under the proposed rule. The commenter noted that the current guidelines appear to use the criterion “whether they stemmed from the same underlying error or omission” to determine whether violations are related and stated that such language does not appear in the proposed guidelines. The commenter asserted that under the current guidelines, the insertion of inaccurate Electronic Export Information (EEI) data in many transactions because the respondent did not realize that a default value would have to be overridden likely would be considered related violations and probably would not result in increased penalties. The commenter stated that it is not clear whether the results would be the same under the proposed guidelines. Another commenter stated that the proposed rule would allow OEE to consider a lesser charge on related violations or it can consider them as separate chargeable offenses. The commenter stated that related violations should be lesser. The commenter asserted that the EAR could add on so many reporting requirements that one clerical mistake could result in an infinite number of violations. This would be unfair to the respondent. Related violations should not be treated as separate offenses.

    Response: In certain situations where multiple recurring violations resulted from a single inadvertent error, such as misclassification, when determining whether to bring charges, OEE will generally regard that as one violation instead of multiple violations in determining if the matter is considered egregious. However, when determining a penalty, each violation is potentially chargeable. In this final rule Factor A.4 Pattern of Conduct is revised to make this point explicit.

    Comment: A commenter questioned whether multiple shipments being exported to the same end user under an expired license would be counted separately or as one violation?

    Response: OEE recognizes the importance of distinguishing between truly unrelated multiple violations and multiple violations arising out of the same fact pattern. OEE will continue to consider inadvertent, compounded clerical errors as related and not separate infractions for the purpose of determining if the case is egregious. In this final rule, Factor III.I Related Violations has been revised to make this point explicit.

    No Action and Warning Letters

    Comment: One commenter expressed appreciation of the introduction of “no action” determinations. To assist in emphasizing this option, the commenter recommended referring to it in the second sentence under heading “II. Types of Responses to Apparent Violations” and under the heading “III. Factors Affecting Administrative Sanctions”

    Response: OEE agrees and this final rule adopts the recommendation.

    Comment: One commenter stated that the guidelines appear to lower the threshold for issuing warning letters, resulting in the possibility of issuing warning letters in the absence of a violation. The commenter noted that current and proposed guidelines provide for a “no action” letter when OEE determines that there is insufficient evidence to conclude that a violation has occurred. However, the commenter referred to a difference between the current and proposed guidance regarding letters. The current guidelines provide that “OEE will not issue a warning letter if, based on available information, it concludes that a violation did not occur.” The proposed guidelines, state that “If OEE determines that a violation may have occurred . . . . OEE may issue a warning letter.” The proposed guidelines do not explicitly state that OEE will not issue a warning letter based on its conclusion that a violation did not occur as appears in the current guidelines. The commenter asserted that this difference between the current and proposed guidelines could mean the issuance of warning letters in situations where a violation did not occur. If such is the case, the commenter observed the difference could be significant in future investigations because the proposed guidelines provide that generally the base penalty amount will be reduced by up to 25 percent in the Respondent's first violation and a violation is considered a “first violation” if the respondent, among other things, did not receive a warning letter in three years preceding the date of the transaction giving rise to the violation. The commenters recommend that the guidelines state that there must be at least an apparent violation before a warning letter is issued.

    Response: OEE would not issue a warning letter based on its conclusion that a violation did not occur. OEE agrees, however, that the consideration of warning letters within a 3-year time frame for purposes of determining whether a Respondent is entitled to up to 25% mitigation as a “first offense” is inconsistent when the warning letter does not constitute a finding that a violation did occur, with an opportunity for the Respondent to respond to the allegation.

    Accordingly, this final rule revises Section IV.B.2.b of the guidelines to provide that first offense mitigation will therefore be determined without regard to the prior issuance of warning letters received by that Respondent. Prior issuance of a warning letter may, however, evidence a pattern and practice of non-compliance and failure to rectify compliance shortcomings and be considered aggravating under General Factor E. Compliance Program and Aggravating Factor A. Willful or Reckless Violation of Law. For example, if OEE alerted a Respondent to unlawful conduct through issuance of a warning letter and the current charges are a continuation of that conduct, or involve similar conduct, that fact may be taken into account.

    Comment: One commenter observed that the statement in the proposed rule that warning letters will typically be issued for VSDs absent the presence of aggravating factors implies that in cases where aggravating factors are present, a civil monetary penalty would necessarily ensue.

    Response: As discussed above, the commenter misunderstands the impact on VSDs. OEE issues a warning letter for almost all VSDs including those with aggravating factors. In recent years, OEE has only sought charges in a small percentage of VSD cases. While all cases charged had significant aggravating factors, many of the cases with warning letters also had aggravating factors, though less serious than in the cases charged. OEE does not believe that these guidelines will result in a significant change in the number of cases charged and is making no change to the guidelines in response to this comment.

    Comment: Some commenters suggested that more certainty was needed with respect to the meaning of no action letters and warning letters. One commenter stated that the proposed rule would allow OEE to take no action if it determines that there is insufficient evidence to conclude that a violation has occurred, determines that a violation did not occur and/or, based on an analysis of the Factors outlined in Section III of the guidelines, concludes that the conduct does not rise to a level warranting an administrative response. However, the commenter asserted, OEE can “put time back on the clock anytime it desires and reprocess a `final determination.' ” The commenter stated that exporters need closure at some point. This practice is no less than double jeopardy, the commenter asserted.

    Another commenter noted that a warning letter does not constitute a final agency determination as to whether a violation has occurred. This leaves the recipient in a state of uncertainty as to whether a violation occurred and, therefore, how to proceed in similar situations in the future. The commenter requested that OEE eliminate that perceived uncertainty by ensuring that a warning letter provide guidance as to whether OEE believes a violation occurred, and, if so, limit the warning to the substance of the violation.

    Response: As stated in the proposed rule, the majority of cases brought to the attention of OEE through VSDs result in the issuance of warning letters, containing a finding that an apparent violation may have taken place. No action letters are simply that: No action will be taken in cases where there is insufficient evidence to conclude that a violation may have taken place. The use of the words “apparent” and “may” simply reflect that reality. In instances where it appears to OEE that a violation(s) did occur but that pursuing a civil monetary penalty is not appropriate under the circumstances, a warning letter will also be issued.

    Although warning letters and no action letters constitute the final OEE disposition of the matter, neither constitutes final agency action with respect to a violation of the EAR. To help clarify this point, this final rule refers to OEE's disposition when describing OEE's action with respect to warning letters and no action letters, and clearly states that these are not “final agency actions.”

    Neither the proposed rule nor this final rule state that OEE may resume an investigation into a matter concerning which it previously issued a no action letter “anytime it desires.” The proposed rule text stated that “A no-action determination represents a final determination (OEE's . . . disposition in this final rule) as to the apparent violation, unless OEE later learns of additional information regarding the same or similar transactions or other relevant facts.” Reopening an investigation or inquiry because the enforcement agency learns of new relevant information does not constitute double jeopardy as that term is understood in connection with Fifth Amendment to the United States Constitution. OEE believes that no change to the rule is needed on this point.

    Warning letters currently identify the transaction or conduct OEE believes violated the EAR and will continue to do so.

    Transaction Value

    Several commenters addressed the question of determining transaction value.

    Comment: One commenter stated that where a violation is related to a transaction that has been reported into the Automated Export System (AES), that value should be relied upon as the transaction value unless there is evidence indicating that the reported AES value was erroneous or otherwise flawed because the commenter believed that approach to determining the transaction value is accurate. Two commenters pointed out the difficulty in determining the transaction value of the export or deemed export of technology. One commenter stated that the proposed rule standard of “the economic benefit derived by the Respondent” is extremely subjective and open to wide interpretation. The other commenter stated that “the value of a transaction identified on commercial invoices, customs declarations, or similar documents may reflect the value of the media transferred instead of the technical data itself, especially in situations where the data is not being sold, but is being used for offshore production or some other related activity.” (Emphasis in the original.)

    Response: This final rule amends the definition of “transaction value” by adding a reference to AES filings. However, it is impossible for OEE to determine in advance the appropriate method by which to value all exports or deemed exports of technology, particularly where the technology at issue is not traded widely enough to provide a basis for determining a market value, is being transferred to a firm related to the exporter, or is being transferred as part of a larger transaction involving an agreement to produce or repair a part or product. In such instances, OEE will have to apply the “the economic benefit derived by the Respondent” standard, which remains in this final rule.

    Comment: Two commenters objected to penalizing a freight forwarder using the monetary value of a shipment, given that forwarding fees almost always represent a minor fraction of the value of goods being exported.

    Response: OEE recognizes that the consequence of using the same transaction value for both forwarders and exporters may create the impression of disproportionate penalties on forwarders. However, OEE has and will continue to take into account that transaction values may not be indicative of the nature of a party's role in the transaction, including applying mitigation based on general factor D where appropriate. OEE believes that definition of “transaction value” provides adequate flexibility to achieve fair results and that a specific separate standard for freight forwarders is not needed. Accordingly, this final rule makes no changes in response to this comment.

    Comment: One commenter raised six specific questions about how transaction value would be determined. OEE's response is set forth immediately following each question. OEE does not believe that any changes to the proposed rule are needed in response to these questions and this final rule makes none.

    1. “In the proposed definition, what transaction is the `subject transaction'”?

    Response: The subject transaction is the transaction or transactions identified in a proposed charging letter or charging letter wherein OEE alleges that a violation occurred.

    2. “How will the referenced documents (e.g., commercial invoices, bills of lading, signed Customs declarations, or similar documents) be used in determining value”?

    Response: In many cases, such documents will list a price or value that is likely to be the appropriate transaction value. However, in instances where OEE believes that the price or value listed in such documents is inaccurate or is otherwise inappropriate as a measure of transaction value, it may, in accordance with the definition, consider the market value of the items that were the subject of the transaction and/or, in limited situations, “the economic benefit derived by the Respondent” standard as noted above.

    3. “How will BIS reconcile inconsistent information found in these related documents”?

    Response: This will have to be determined on a case-by-case basis depending on the facts of each case.

    4. “At what point in BIS's internal deliberations will the transaction value be considered as `not otherwise ascertainable'”?

    Response: This will have to be determined on a case-by-case basis depending on the facts of each case.

    5. “Will the disclosing or investigated party be allowed an opportunity to speak to that issue before the conclusion is reached”?

    Response: The respondent would have the opportunity to challenge OEE's transaction value determination during settlement negotiations or in pleadings before an administrative law judge.

    6. “How will `market value' and `economic benefit' be evaluated”?

    Response: OEE cannot determine in advance a method that always will be appropriate under any circumstance that may occur in the future. These determinations will have to be made on a case-by-case basis depending on the facts of each case.

    Settlements

    Two commentators expressed concern regarding the statements in the proposed Guidelines that “[p]enalties for settlements reached after the initiation of an enforcement proceeding and litigation through the filing of a charging letter will usually be higher than those described by these Guidelines” and that “[i]f a case does not settle before issuance of a charging letter and the case proceeds to adjudication, the resulting charging letter may include more violations than alleged in the proposed charging letter.” The commenters stated that such practices could put inappropriate pressure to settle even if the respondent has a legitimate defense, or feels that the proposed penalty is excessive. They could constitute coercion and a denial of procedural due process. One commenter stated that BIS should establish reasonable limits concerning when it is appropriate for OEE to tack on additional charges or seek higher penalties than originally proposed.

    Response: OEE notes that it is common in settlement negotiations for parties to seek early resolution in hopes of avoiding the expenditure of resources necessary to litigate a case. Doing so is not coercive, but the most efficient means of reaching resolution. It is common government practice for an agency, in an effort to reach settlement before trial, to propose a subset or sampling of charges, reserving the ability to bring a fuller set of charges should litigation prove necessary. It also is commonly recognized that the additional resources the government must expend to take a case to trial also can justify a penalty greater than the amount the agency may have accepted prior to litigation. Both practices are designed to efficiently utilize limited government resources and provide an incentive for early settlements. OEE considers the totality of the circumstances in charging and penalty determinations, including any defenses raised in response to a proposed charging letter and any arguments made concerning the appropriate penalty levels. OEE is making no changes to the proposed rule in response to these comments.

    Comment: Two commenters suggested that the proposed rule seemed to state or at least imply that cases could not or would not be settled once adjudication begins or once a decision is made to initiate an enforcement action.

    Response: Cases may be settled after OEE decides to initiate an enforcement action or after administrative adjudication begins. Section II.C of the proposed rule and this final rule state: “Cases may be settled before or after the issuance of a charging letter. See § 766.18 of the EAR.” OEE believes that no change to the text of the proposed rule is needed to address this point.

    OEE and BIS

    Comment: Several commenters stated that references to OEE and BIS in the proposed rule are confused and undefined. That it is difficult to understand exactly who in BIS is responsible for doing what in the administrative enforcement process.

    Response: OEE is the organizational unit of BIS that has been delegated the responsibility for determining what cases will be referred to the Department of Justice for criminal prosecution and what administrative sanctions will be sought. The reference to BIS in this final rule is therefore changed in most instances to refer specifically to OEE. This change was made throughout the guidelines for ease of reference even though, for example under § 764.1 of the EAR, OEE does not issue penalties.

    Stylistic Change to the Structure of the Base Penalty Matrix

    Comment: One commenter proposed delete the subheading “Egregious Case” from the base penalty matrix and changing the headings above the two columns by substituting “Non-Egregious” for “NO” and “Egregious” for “YES.” The commenter stated that this change would make the penalty matrix easier to understand.

    Response: This final rule addresses this matter by adding question marks immediately following the phrases “Egregious Case” and “Voluntary Self Disclosure,” making clear that they are questions to which a yes or no answer is appropriate.

    Rulemaking Requirements

    1. Executive Orders 13563 and 12866 direct agencies to assess all costs and benefits 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, distribute impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule has been designated a “significant regulatory action,” although not economically significant, under section 3(f) of Executive Order 12866. Accordingly, the rule has been reviewed by the Office of Management and Budget (OMB).

    2. Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with a collection of information, subject to the requirements of the Paperwork Reduction Act (PRA), unless that collection of information displays a currently valid OMB Control Number. This rule does not contain any collections of information.

    3. This rule does not contain policies with Federalism implications as that term is defined in Executive Order 13132.

    4. The Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), 5 U.S.C. 601 et seq., generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to the notice and comment rulemaking requirements under the Administrative Procedure Act (5 U.S.C. 553) or any other statute. Under section 605(b) of the RFA, however, if the head of an agency certifies that a rule will not have a significant impact on a substantial number of small entities, the statute does not require the agency to prepare a regulatory flexibility analysis. Pursuant to section 605(b), the Chief Counsel for Regulation, Department of Commerce, certified to the Chief Counsel for Advocacy, Small Business Administration at the proposed rule stage that this rule would not have a significant impact on a substantial number of small entities. The rationale for that certification is at 80 FR 80710, 80712 (December 28, 2015) and is not repeated here. BIS received no comments on the certification. Consequently, BIS has not prepared a final regulatory flexibility analysis.

    Export Administration Act

    Although the Export Administration Act expired on August 20, 2001, the President, through Executive Order 13222 of August 17, 2001, 3 CFR, 2001 Comp., p. 783 (2002), as amended by Executive Order 13637 of March 8, 2013, 78 FR 16129 (March 13, 2013), and as extended by the Notice of August 7, 2015, (80 FR 48233 (Aug. 11, 2015)), has continued the Export Administration Regulations in effect under the International Emergency Economic Powers Act. BIS continues to carry out the provisions of the Export Administration Act, as appropriate and to the extent permitted by law, pursuant to Executive Order 13222 as amended by Executive Order 13637.

    List of Subjects in 15 CFR Part 766

    Administrative practice and procedure, Confidential business information, Exports, Law enforcement, Penalties.

    Accordingly, this rule amends part 766 of the Export Administration Regulations (15 CFR parts 730-774) (EAR) as follows:

    PART 766—[AMENDED] 1. The authority citation for part 766 continues to read as follows: Authority:

    50 U.S.C. 4601 et seq.; 50 U.S.C. 1701 et seq.; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August 7, 2015, 80 FR 48233 (August 11, 2015).

    2. Supplement No. 1 to Part 766 is revised to read as follows: Supplement No. 1 to Part 766—Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases Introduction

    This Supplement describes how the Office of Export Enforcement (OEE) at the Bureau of Industry and Security (BIS) responds to apparent violations of the Export Administration Regulations (EAR) and, specifically, how OEE makes penalty determinations in the settlement of civil administrative enforcement cases under part 764 of the EAR. This guidance does not apply to enforcement cases for violations under part 760 of the EAR—Restrictive Trade Practices or Boycotts. Supplement No. 2 to part 766 continues to apply to civil administrative enforcement cases involving part 760 violations.

    Because many administrative enforcement cases are resolved through settlement, the process of settling such cases is integral to the enforcement program. OEE carefully considers each settlement offer in light of the facts and circumstances of the case, relevant precedent, and OEE's objective to achieve in each case an appropriate penalty and deterrent effect. In settlement negotiations, OEE encourages parties to provide, and will give serious consideration to, information and evidence that parties believe are relevant to the application of this guidance to their cases, to whether a violation has in fact occurred, or to whether they have an affirmative defense to potential charges.

    This guidance does not confer any right or impose any obligation regarding what penalties OEE may seek in litigating a case or what posture OEE may take toward settling a case. Parties do not have a right to a settlement offer or particular settlement terms from OEE, regardless of settlement positions OEE has taken in other cases.

    I. Definitions

    Note: See also: Definitions contained in § 766.2 of the EAR.

    Apparent violation means conduct that constitutes an actual or possible violation of the Export Administration Act of 1979, the International Emergency Economic Powers Act, the EAR, other statutes administered or enforced by BIS, as well as executive orders, regulations, orders, directives, or licenses issued pursuant thereto.

    Applicable schedule amount means:

    1. $1,000 with respect to a transaction valued at less than $1,000;

    2. $10,000 with respect to a transaction valued at $1,000 or more but less than $10,000;

    3. $25,000 with respect to a transaction valued at $10,000 or more but less than $25,000;

    4. $50,000 with respect to a transaction valued at $25,000 or more but less than $50,000;

    5. $100,000 with respect to a transaction valued at $50,000 or more but less than $100,000;

    6. $170,000 with respect to a transaction valued at $100,000 or more but less than $170,000;

    7. $250,000 with respect to a transaction valued at $170,000 or more.

    Note to definition of applicable schedule amount. The applicable schedule amount may be adjusted in accordance with U.S. law, e.g., the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (Pub. L. 114-74, sec. 701).

    Transaction value means the U.S. dollar value of a subject transaction, as demonstrated by commercial invoices, bills of lading, signed Customs declarations, AES filings or similar documents. Where the transaction value is not otherwise ascertainable, OEE may consider the market value of the items that were the subject of the transaction and/or the economic benefit derived by the Respondent from the transaction, in determining transaction value. In situations involving a lease of U.S.-origin items, the transaction value will generally be the value of the lease. For purposes of these Guidelines, “transaction value” will not necessarily have the same meaning, nor be applied in the same manner, as that term is used for import valuation purposes at 19 CFR 152.103.

    Voluntary self-disclosure means the self-initiated notification to OEE of an apparent violation as described in and satisfying the requirements of § 764.5 of the EAR.

    II. Types of Responses to Apparent Violations

    OEE, among other responsibilities, investigates apparent violations of the EAR, or any order, license or authorization issued thereunder. When it appears that such a violation may have occurred, OEE investigations may lead to no action, a warning letter or an administrative enforcement proceeding. A violation may also be referred to the Department of Justice for criminal prosecution. The type of enforcement action initiated by OEE will depend primarily on the nature of the violation. Depending on the facts and circumstances of a particular case, an OEE investigation may lead to one or more of the following actions:

    A. No Action. If OEE determines that there is insufficient evidence to conclude that a violation has occurred, determines that a violation did not occur and/or, based on an analysis of the Factors outlined in Section III of these Guidelines, concludes that the conduct does not rise to a level warranting an administrative response, then no action will be taken. In such circumstances, if the investigation was initiated by a voluntary self-disclosure (VSD), OEE will issue a letter (a no-action letter) indicating that the investigation is being closed with no administrative action being taken. OEE may issue a no-action letter in non-voluntarily disclosed cases at its discretion. A no-action determination by OEE represents OEE's disposition of the apparent violation, unless OEE later learns of additional information regarding the same or similar transactions or other relevant facts. A no-action letter is not a final agency action with respect to whether a violation occurred.

    B. Warning Letter. If OEE determines that a violation may have occurred but a civil penalty is not warranted under the circumstances, and believes that the underlying conduct could lead to a violation in other circumstances and/or that a Respondent does not appear to be exercising due diligence in assuring compliance with the statutes, executive orders, and regulations that OEE enforces, OEE may issue a warning letter. A warning letter may convey OEE's concerns about the underlying conduct and/or the Respondent's compliance policies, practices, and/or procedures. It may also address an apparent violation of a technical nature, where good faith efforts to comply with the law and cooperate with the investigation are present, or where the investigation commenced as a result of a voluntary self-disclosure satisfying the requirements of § 764.5 of the EAR, provided that no aggravating factors exist. In the exercise of its discretion, OEE may determine in certain instances that issuing a warning letter, instead of bringing an administrative enforcement proceeding, will achieve the appropriate enforcement result. A warning letter will describe the apparent violation and urge compliance. A warning letter represents OEE's enforcement response to and disposition of the apparent violation, unless OEE later learns of additional information concerning the same or similar apparent violations. A warning letter does not constitute a final agency action with respect to whether a violation has occurred.

    C. Administrative enforcement case. If OEE determines that a violation has occurred and, based on an analysis of the Factors outlined in Section III of these Guidelines, concludes that the Respondent's conduct warrants a civil monetary penalty or other administrative sanctions, OEE may initiate an administrative enforcement case. The issuance of a charging letter under § 766.3 of the EAR initiates an administrative enforcement proceeding. Charging letters may be issued when there is reason to believe that a violation has occurred. Cases may be settled before or after the issuance of a charging letter. See § 766.18 of the EAR. OEE may prepare a proposed charging letter which could result in a case being settled before issuance of an actual charging letter. See § 766.18(a) of the EAR. If a case does not settle before issuance of a charging letter and the case proceeds to adjudication, the resulting charging letter may include more violations than alleged in the proposed charging letter, and the civil monetary penalty amounts assessed may be greater that those provided for in Section IV of these Guidelines. Civil monetary penalty amounts for cases settled before the issuance of a charging letter will be determined as discussed in Section IV of these Guidelines. A civil monetary penalty may be assessed for each violation. The maximum amount of such a penalty per violation is stated in § 764.3(a)(1), subject to adjustments under the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461), which are codified at 15 CFR 6.4. OEE will afford the Respondent an opportunity to respond to a proposed charging letter. Responses to charging letters following the institution of an enforcement proceeding under part 766 of the EAR are governed by § 766.3 of the EAR.

    D. Civil Monetary Penalty. OEE may seek a civil monetary penalty if OEE determines that a violation has occurred and, based on the Factors outlined in Section III of these Guidelines, concludes that the Respondent's conduct warrants a monetary penalty. Section IV of these Guidelines will guide the agency's exercise of its discretion in determining civil monetary penalty amounts.

    E. Criminal Referral. In appropriate circumstances, OEE may refer the matter to the Department of Justice for criminal prosecution. Apparent violations referred for criminal prosecution also may be subject to a civil monetary penalty and/or other administrative sanctions or action by BIS.

    F. Other Administrative Sanctions or Actions. In addition to or in lieu of other administrative actions, OEE may seek sanctions listed in § 764.3 of the EAR. BIS may also take the following administrative actions, among other actions, in response to an apparent violation:

    License Revision, Suspension or Revocation. BIS authorizations to engage in a transaction pursuant to a license or license exception may be revised, suspended or revoked in response to an apparent violation as provided in §§ 740.2(b) and 750.8 of the EAR.

    Denial of Export Privileges. An order denying a Respondent's export privileges may be issued, as described in § 764.3(a)(2) of the EAR. Such a denial may extend to all export privileges, as set out in the standard terms for denial orders in Supplement No. 1 to part 764 of the EAR, or may be narrower in scope (e.g., limited to exports of specified items or to specified destinations or customers). A denial order may also be suspended in whole or in part in accordance with § 766.18(c).

    Exclusion from practice. Under § 764.3(a)(3) of the EAR, any person acting as an attorney, accountant, consultant, freight forwarder or other person who acts in a representative capacity in any matter before BIS may be excluded from practicing before BIS.

    Training and Audit Requirements. In appropriate cases, OEE may require as part of a settlement agreement that the Respondent provide training to employees as part of its compliance program, adopt other compliance measures, and/or be subject to internal or independent audits by a qualified outside person. In those cases, OEE may suspend or defer a portion or all of the penalty amount if the suspended amount is applied to comply with such requirements.

    G. Suspension or Deferral. In appropriate cases, payment of a civil monetary penalty may be suspended or deferred during a probationary period under a settlement agreement and order. If the terms of the settlement agreement or order are not adhered to by the Respondent, then suspension or deferral may be revoked and the full amount of the penalty imposed. See § 764.3(a)(1)(iii) of the EAR. In determining whether suspension or deferral is appropriate, OEE may consider, for example, whether the Respondent has demonstrated a limited ability to pay a penalty that would be appropriate for such violations, so that suspended or deferred payment can be expected to have sufficient deterrent value, and whether, in light of all of the circumstances, such suspension or deferral is necessary to make the financial impact of the penalty consistent with the impact of penalties on other parties who committed similar violations. OEE may also take into account when determining whether or not to suspend or defer a civil penalty whether the Respondent will apply a portion or all of the funds suspended or deferred to audit, compliance, or training that may be required under a settlement agreement and order, or the matter is part of a “global settlement” as discussed in more detail below.

    III. Factors Affecting Administrative Sanctions

    Many apparent violations are isolated occurrences, the result of a good-faith misinterpretation, or involve no more than simple negligence or carelessness. In such instances, absent the presence of aggravating factors, the matter frequently may be addressed with a no action determination letter or, if deemed necessary, a warning letter. Where the imposition of an administrative penalty is deemed appropriate, as a general matter, OEE will consider some or all of the following Factors in determining the appropriate sanctions in administrative cases, including the appropriate amount of a civil monetary penalty where such a penalty is sought and is imposed as part of a settlement agreement and order. These factors describe circumstances that, in OEE's experience, are commonly relevant to penalty determinations in settled cases. Factors that are considered exclusively aggravating, such as willfulness, or exclusively mitigating, such as situations where remedial measures were taken, are set forth below. This guidance also identifies General Factors—which can be either mitigating or aggravating—such as the presence or absence of an internal compliance program at the time the apparent violations occurred. Other relevant Factors may also be considered at the agency's discretion.

    While some violations of the EAR have a degree of knowledge or intent as an element of the offense, OEE may regard a violation of any provision of the EAR as knowing or willful if the facts and circumstances of the case support that conclusion. For example, evidence that a corporate entity had knowledge at a senior management level may mean that a higher penalty may be appropriate. OEE will also consider, in accordance with Supplement No. 3 to part 732 of the EAR, the presence of any red flags that should have alerted the Respondent that a violation was likely to occur. The aggravating factors identified in the Guidelines do not alter or amend § 764.2(e) or the definition of “knowledge” in § 772.1, or other provisions of parts 764 and 772 of the EAR. If the violations are of such a nature and extent that a monetary fine alone represents an insufficient penalty, a denial or exclusion order may also be imposed to prevent future violations of the EAR.

    Aggravating Factors

    A. Willful or Reckless Violation of Law. OEE will consider a Respondent's apparent willfulness or recklessness in violating, attempting to violate, conspiring to violate, or causing a violation of the law. Generally, to the extent the conduct at issue appears to be the result of willful conduct—a deliberate intent to violate, attempt to violate, conspire to violate, or cause a violation of the law—the OEE enforcement response will be stronger. Among the factors OEE may consider in evaluating apparent willfulness or recklessness are:

    1. Willfulness. Was the conduct at issue the result of a decision to take action with the knowledge that such action would constitute a violation of U.S. law? Did the Respondent know that the underlying conduct constituted, or likely constituted, a violation of U.S. law at the time of the conduct?

    2. Recklessness/gross negligence. Did the Respondent demonstrate reckless disregard or gross negligence with respect to compliance with U.S. regulatory requirements or otherwise fail to exercise a minimal degree of caution or care in avoiding conduct that led to the apparent violation? Were there warning signs that should have alerted the Respondent that an action or failure to act would lead to an apparent violation?

    3. Concealment. Was there a deliberate effort by the Respondent to hide or purposely obfuscate its conduct in order to mislead OEE, federal, state, or foreign regulators, or other parties involved in the conduct, about an apparent violation?

    Note: Failure to voluntarily disclose an apparent violation to OEE does not constitute concealment.

    4. Pattern of Conduct. Did the apparent violation constitute or result from a pattern or practice of conduct or was it relatively isolated and atypical in nature? In determining both whether to bring charges and, once charges are brought, whether to treat the case as egregious, OEE will be mindful of certain situations where multiple recurring violations resulted from a single inadvertent error, such as misclassification. However, for cases that settle before filing of a charging letter with an Administrative Law Judge, OEE will generally charge only the most serious violation per transaction. If OEE issues a proposed charging letter and subsequently files a charging letter with an Administrative Law Judge because a mutually agreeable settlement cannot be reached, OEE will continue to reserve its authority to proceed with all available charges in the charging letter based on the facts presented. When determining a penalty, each violation is potentially chargeable.

    5. Prior Notice. Was the Respondent on notice, or should it reasonably have been on notice, that the conduct at issue, or similar conduct, constituted a violation of U.S. law?

    6. Management Involvement. In cases of entities, at what level within the organization did the willful or reckless conduct occur? Were supervisory or managerial level staff aware, or should they reasonably have been aware, of the willful or reckless conduct?

    B. Awareness of Conduct at Issue:The Respondent's awareness of the conduct giving rise to the apparent violation. Generally, the greater a Respondent's actual knowledge of, or reason to know about, the conduct constituting an apparent violation, the stronger the OEE enforcement response will be. In the case of a corporation, awareness will focus on supervisory or managerial level staff in the business unit at issue, as well as other senior officers and managers. Among the factors OEE may consider in evaluating the Respondent's awareness of the conduct at issue are:

    1. Actual Knowledge. Did the Respondent have actual knowledge that the conduct giving rise to an apparent violation took place, and remain willfully blind to such conduct, and fail to take remedial measures to address it? Was the conduct part of a business process, structure or arrangement that was designed or implemented with the intent to prevent or shield the Respondent from having such actual knowledge, or was the conduct part of a business process, structure or arrangement implemented for other legitimate reasons that consequently made it difficult or impossible for the Respondent to have actual knowledge?

    2. Reason to Know. If the Respondent did not have actual knowledge that the conduct took place, did the Respondent have reason to know, or should the Respondent reasonably have known, based on all readily available information and with the exercise of reasonable due diligence, that the conduct would or might take place?

    3. Management Involvement. In the case of an entity, was the conduct undertaken with the explicit or implicit knowledge of senior management, or was the conduct undertaken by personnel outside the knowledge of senior management? If the apparent violation was undertaken without the knowledge of senior management, was there oversight intended to detect and prevent violations, or did the lack of knowledge by senior management result from disregard for its responsibility to comply with applicable regulations and laws?

    C. Harm to Regulatory Program Objectives: The actual or potential harm to regulatory program objectives caused by the conduct giving rise to the apparent violation. This factor would be present where the conduct in question, in purpose or effect, substantially implicated national security, foreign policy or other essential interests protected by the U.S. export control system, in view of such factors as the reason for controlling the item to the destination in question; the sensitivity of the item; the prohibitions or restrictions against the recipient of the item; and the licensing policy concerning the transaction (such as presumption of approval or denial). OEE, in its discretion, may consult with other U.S. agencies or with licensing and enforcement authorities of other countries in making its determination. Among the factors OEE may consider in evaluating the harm to regulatory program objectives are:

    1. Implications for U.S. National Security: The impact that the apparent violation had or could potentially have on the national security of the United States. For example, if a particular export could undermine U.S. military superiority or endanger U.S. or friendly military forces or be used in a military application contrary to U.S. interests, OEE would consider the implications of the apparent violation to be significant.

    2. Implications for U.S. Foreign Policy: The effect that the apparent violation had or could potentially have on U.S. foreign policy objectives. For example, if a particular export is, or is likely to be, used by a foreign regime to monitor communications of its population in order to suppress free speech and persecute dissidents, OEE would consider the implications of the apparent violation to be significant.

    General Factors

    D. Individual Characteristics: The particular circumstances and characteristics of a Respondent. Among the factors OEE may consider in evaluating individual characteristics are:

    1. Commercial Sophistication: The commercial sophistication and experience of the Respondent. Is the Respondent an individual or an entity? If an individual, was the conduct constituting the apparent violation for personal or business reasons?

    2. Size and Sophistication of Operations: The size of a Respondent's business operations, where such information is available and relevant. At the time of the violation, did the Respondent have any previous export experience and was the Respondent familiar with export practices and requirements? Qualification of the Respondent as a small business or organization for the purposes of the Small Business Regulatory Enforcement Fairness Act, as determined by reference to the applicable standards of the Small Business Administration, may also be considered.

    3. Volume and Value of Transactions: The total volume and value of transactions undertaken by the Respondent on an annual basis, with attention given to the volume and value of the apparent violations as compared with the total volume and value of all transactions. Was the quantity and/or value of the exports high, such that a greater penalty may be necessary to serve as an adequate penalty for the violation or deterrence of future violations, or to make the penalty proportionate to those for otherwise comparable violations involving exports of lower quantity or value?

    4. Regulatory History: The Respondent's regulatory history, including OEE's issuance of prior penalties, warning letters, or other administrative actions (including settlements), other than with respect to antiboycott matters under part 760 of the EAR. OEE will generally only consider a Respondent's regulatory history for the five years preceding the date of the transaction giving rise to the apparent violation. When an acquiring firm takes reasonable steps to uncover, correct, and voluntarily disclose or cause the voluntary self-disclosure to OEE of conduct that gave rise to violations by an acquired business before the acquisition, OEE typically will not take such violations into account in applying these factors in settling other violations by the acquiring firm.

    5. Other illegal conduct in connection with the export. Was the transaction in support of other illegal conduct, for example the export of firearms as part of a drug smuggling operation, or illegal exports in support of money laundering?

    6. Criminal Convictions. Has the Respondent been convicted of an export-related criminal violation?

    Note: Where necessary to effective enforcement, the prior involvement in export violation(s) of a Respondent's owners, directors, officers, partners, or other related persons may be imputed to a Respondent in determining whether these criteria are satisfied.

    E. Compliance Program: The existence, nature and adequacy of a Respondent's risk-based BIS compliance program at the time of the apparent violation. OEE will take account of the extent to which a Respondent complies with the principles set forth in BIS's Export Management System (EMS) Guidelines. Information about the EMS Guidelines can be accessed through the BIS Web site at www.bis.doc.gov. In this context, OEE will also consider whether a Respondent's export compliance program uncovered a problem, thereby preventing further violations, and whether the Respondent has taken steps to address compliance concerns raised by the violation, to include the submission of a VSD and steps to prevent reoccurrence of the violation that are reasonably calculated to be effective.

    Mitigating Factors

    F. Remedial Response: The Respondent's corrective action taken in response to the apparent violation. Among the factors OEE may consider in evaluating the remedial response are:

    1. The steps taken by the Respondent upon learning of the apparent violation. Did the Respondent immediately stop the conduct at issue? Did the Respondent undertake to file a VSD?

    2. In the case of an entity, the processes followed to resolve issues related to the apparent violation. Did the Respondent discover necessary information to ascertain the causes and extent of the apparent violation, fully and expeditiously? Was senior management fully informed? If so, when?

    3. In the case of an entity, whether it adopted new and more effective internal controls and procedures to prevent the occurrence of similar apparent violations. If the entity did not have a BIS compliance program in place at the time of the apparent violation, did it implement one upon discovery of the apparent violation? If it did have a BIS compliance program, did it take appropriate steps to enhance the program to prevent the recurrence of similar violations? Did the entity provide the individual(s) and/or managers responsible for the apparent violation with additional training, and/or take other appropriate action, to ensure that similar violations do not occur in the future?

    4. Where applicable, whether the Respondent undertook a thorough review to identify other possible violations.

    G. Exceptional Cooperation with OEE: The nature and extent of the Respondent's cooperation with OEE, beyond those actions set forth in Factor F. Among the factors OEE may consider in evaluating exceptional cooperation are:

    1. Did the Respondent provide OEE with all relevant information regarding the apparent violation at issue in a timely, comprehensive and responsive manner (whether or not voluntarily self-disclosed), including, if applicable, overseas records?

    2. Did the Respondent research and disclose to OEE relevant information regarding any other apparent violations caused by the same course of conduct?

    3. Did the Respondent provide substantial assistance in another OEE investigation of another person who may have violated the EAR?

    4. Has the Respondent previously made substantial voluntary efforts to provide information (such as providing tips that led to enforcement actions against other parties) to federal law enforcement authorities in support of the enforcement of U.S. export control regulations?

    5. Did the Respondent enter into a statute of limitations tolling agreement, if requested by OEE (particularly in situations where the apparent violations were not immediately disclosed or discovered by OEE, in particularly complex cases, and in cases in which the Respondent has requested and received additional time to respond to a request for information from OEE)? If so, the Respondent's entering into a tolling agreement will be deemed a mitigating factor.

    Note: A Respondent's refusal to enter into a tolling agreement will not be considered by OEE as an aggravating factor in assessing a Respondent's cooperation or otherwise under the Guidelines.

    H. License Was Likely To Be Approved. Would an export license application have likely been approved for the transaction had one been sought? Would the export have qualified for a License Exception? Some license requirements sections in the EAR also set forth a licensing policy (i.e., a statement of the policy under which license applications will be evaluated), such as a general presumption of denial or case by case review. OEE may also consider the licensing history of the specific item to that destination and if the item or end-user has a history of export denials.

    Other Relevant Factors Considered on a Case-by-Case Basis

    I. Related Violations. Frequently, a single export transaction can give rise to multiple violations. For example, an exporter who inadvertently misclassifies an item on the Commerce Control List may, as a result of that error, export the item without the required export license and file Electronic Export Information (EEI) to the Automated Export System (AES) that both misstates the applicable Export Control Classification Number (ECCN) and erroneously identifies the export as qualifying for the designation “NLR” (no license required) or cites a license exception that is not applicable. In so doing, the exporter commits three violations: one violation of § 764.2(a) of the EAR for the unauthorized export and two violations of § 764.2(g) of the EAR for the two false statements on the EEI filing to the AES. OEE will consider whether the violations stemmed from the same underlying error or omission, and whether they resulted in distinguished or separate harm. OEE generally does not charge multiple violations on a single export, and would not consider the existence of such multiple violations as an aggravating factor in and of itself. It is within OEE's discretion to charge separate violations and settle the case for a penalty that is less than would be appropriate for unrelated violations under otherwise similar circumstances, or to charge fewer violations and pursue settlement in accordance with that charging decision. OEE generally will consider inadvertent, compounded clerical errors as related and not separate infractions when deciding whether to bring charges and in determining if a case is egregious.

    J. Multiple Unrelated Violations. In cases involving multiple unrelated violations, OEE is more likely to seek a denial of export privileges and/or a greater monetary penalty than OEE would otherwise typically seek. For example, repeated unauthorized exports could warrant a denial order, even if a single export of the same item to the same destination under similar circumstances might warrant just a civil monetary penalty. OEE takes this approach because multiple violations may indicate serious compliance problems and a resulting greater risk of future violations. OEE may consider whether a Respondent has taken effective steps to address compliance concerns in determining whether multiple violations warrant a denial order in a particular case.

    K. Other Enforcement Action. Other enforcement actions taken by federal, state, or local agencies against a Respondent for the apparent violation or similar apparent violations, including whether the settlement of alleged violations of BIS regulations is part of a comprehensive settlement with other federal, state, or local agencies. Where an administrative enforcement matter under the EAR involves conduct giving rise to related criminal or civil charges, OEE may take into account the related violations, and their resolution, in determining what administrative sanctions are appropriate under part 766 of the EAR. A criminal conviction indicates serious, willful misconduct and an accordingly high risk of future violations, absent effective administrative sanctions. However, entry of a guilty plea can be a sign that a Respondent accepts responsibility for complying with the EAR and will take greater care to do so in the future. In appropriate cases where a Respondent is receiving substantial criminal penalties, OEE may find that sufficient deterrence may be achieved by lesser administrative sanctions than would be appropriate in the absence of criminal penalties. Conversely, OEE might seek greater administrative sanctions in an otherwise similar case where a Respondent is not subjected to criminal penalties. The presence of a related criminal or civil disposition may distinguish settlements among civil penalty cases that appear otherwise to be similar. As a result, the factors set forth for consideration in civil penalty settlements will often be applied differently in the context of a “global settlement” of both civil and criminal cases, or multiple civil cases, and may therefore be of limited utility as precedent for future cases, particularly those not involving a global settlement.

    L. Future Compliance/Deterrence Effect: The impact an administrative enforcement action may have on promoting future compliance with the regulations by a Respondent and similar parties, particularly those in the same industry sector.

    M. Other Factors That OEE Deems Relevant. On a case-by-case basis, in determining the appropriate enforcement response and/or the amount of any civil monetary penalty, OEE will consider the totality of the circumstances to ensure that its enforcement response is proportionate to the nature of the violation.

    IV. Civil Penalties A. Determining What Sanctions Are Appropriate in a Settlement.

    OEE will review the facts and circumstances surrounding an apparent violation and apply the Factors Affecting Administrative Sanctions in Section III above in determining the appropriate sanction or sanctions in an administrative case, including the appropriate amount of a civil monetary penalty where such a penalty is sought and imposed. Penalties for settlements reached after the initiation of litigation will usually be higher than those described by these guidelines.

    B. Amount of Civil Penalty.

    1. Determining Whether a Case is Egregious. In those cases in which a civil monetary penalty is considered appropriate, OEE will make a determination as to whether a case is deemed “egregious” for purposes of the base penalty calculation. If a case is determined to be egregious, OEE also will also determine the appropriate base penalty amount within the range of base penalty amounts prescribed in paragraphs IV.B.2.a.iii and iv below. These determinations will be based on an analysis of the applicable factors. In making these determinations, substantial weight will generally be given to Factors A (“willful or reckless violation of law”), B (“awareness of conduct at issue”), C (“harm to regulatory program objectives”), and D (“individual characteristics”), with particular emphasis on Factors A, B, and C. A case will be considered an “egregious case” where the analysis of the applicable factors, with a focus on Factors A, B, and C, indicates that the case represents a particularly serious violation of the law calling for a strong enforcement response. A determination by OEE that a case is “egregious” must have the concurrence of the Assistant Secretary of Commerce for Export Enforcement.

    2. Monetary Penalties in Egregious Cases and Non-Egregious Cases. The civil monetary penalty amount shall generally be calculated as follows, except that neither the base penalty amount nor the penalty amount will exceed the applicable statutory maximum:

    a. Base Category Calculation and Voluntary Self-Disclosures.

    i. In a non-egregious case, if the apparent violation is disclosed through a voluntary self-disclosure, the base penalty amount shall be one-half of the transaction value, capped at a maximum base penalty amount of $125,000 per violation.

    ii. In a non-egregious case, if the apparent violation comes to OEE's attention by means other than a voluntary self-disclosure, the base penalty amount shall be the “applicable schedule amount,” as defined above (capped at a maximum base penalty amount of $250,000 per violation).

    iii. In an egregious case, if the apparent violation is disclosed through a voluntary self-disclosure, the base penalty amount shall be an amount up to one-half of the statutory maximum penalty applicable to the violation.

    iv. In an egregious case, if the apparent violation comes to OEE's attention by means other than a voluntary self-disclosure, the base penalty amount shall be an amount up to the statutory maximum penalty applicable to the violation.

    The following matrix represents the base penalty amount of the civil monetary penalty for each category of violation:

    Base Penalty Matrix Voluntary Self-Disclosure? Egregious Case? NO YES YES (1)
  • One-Half of the Transaction Value (capped at $125,000 per violation)
  • (3)
  • Up to One-Half of the Applicable Statutory Maximum.
  • NO (2)
  • Applicable Schedule Amount (capped at $250,000 per violation)
  • (4)
  • Up to the Applicable Statutory Maximum.
  • Note to paragraph IV.B.2. The dollar values that appear in IV.B.2.a.i and .ii, and in the Base Penalty Matrix may be adjusted in accordance with U.S. law, e.g., the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (Pub. L. 114-74, sec. 701).

    b. Adjustment for Applicable Relevant Factors.

    In non-egregious cases the base penalty amount of the civil monetary penalty may be adjusted to reflect applicable Factors for Administrative Action set forth in Section III of these Guidelines. In egregious cases the base penalty amount of the civil monetary penalty will be set based on applicable Factors for Administrative Action set forth in Section III of these Guidelines. A Factor may result in a lower or higher penalty amount depending upon whether it is aggravating or mitigating or otherwise relevant to the circumstances at hand. Mitigating factors may be combined for a greater reduction in penalty, but mitigation will generally not exceed 75 percent of the base penalty, except in the case of VSDs, where full suspension is possible with conditions in certain non-egregious cases. Subject to this limitation, as a general matter, in those cases where the following Mitigating Factors are present, OEE will adjust the base penalty amount in the following manner:

    In cases involving exceptional cooperation with OEE as set forth in Mitigating Factor G, but no voluntary self-disclosure as defined in § 764.5 of the EAR, the base penalty amount generally will be reduced between 25 and 40 percent. Exceptional cooperation in cases involving voluntary self-disclosure may also be considered as a further mitigating factor.

    In cases involving a Respondent's first violation, the base penalty amount generally will be reduced by up to 25 percent. An apparent violation generally will be considered a “first violation” if the Respondent has not been convicted of an export-related criminal violation or been subject to a BIS final order in five years, preceding the date of the transaction giving rise to the apparent violation. A group of substantially similar apparent violations addressed in a single Charging Letter shall be considered as a single violation for purposes of this subsection. In those cases where a prior Charging Letter within the preceding five years involved conduct of a substantially different nature from the apparent violation at issue, OEE may consider the apparent violation at issue a “first violation.” Warning Letters issued within the preceding five years are not factored into account for purposes of determining eligibility for “first offense” mitigation. When an acquiring firm takes reasonable steps to uncover, correct, and disclose or cause to be disclosed to OEE conduct that gave rise to violations by an acquired business before the acquisition, OEE typically will not take such violations into account as an aggravating factor in settling other violations by the acquiring firm.

    iii. In cases involving charges pertaining to transactions where a license exception would have been available or a license would likely have been approved had one been sought as set forth in Mitigating Factor H, the base penalty amount generally will be reduced by up to 25 percent.

    In all cases, the penalty amount will not exceed the applicable statutory maximum. Similarly, while mitigating factors may be combined for a greater reduction in penalty, mitigation will generally not exceed 75 percent of the base penalty, except in the case of VSDs, where full suspension is possible with conditions in certain non-egregious cases.

    C. Settlement Procedures.

    The procedures relating to the settlement of administrative enforcement cases are set forth in § 766.18 of the EAR.

    Dated: June 15, 2016. David W. Mills, Assistant Secretary for Export Enforcement.
    [FR Doc. 2016-14770 Filed 6-21-16; 8:45 am] BILLING CODE 3510-33-P
    SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 230, 239 and 249 [Release Nos. 33-10099; 34-78088; File No. S7-08-10] Asset-Backed Securities Disclosure and Registration AGENCY:

    Securities and Exchange Commission.

    ACTION:

    Technical amendment.

    SUMMARY:

    This release makes technical corrections to rules that were published in the Federal Register on September 24, 2014 (79 FR 57184). The Commission adopted revisions to Regulation AB and other rules governing the offering process, disclosure, and reporting for asset-backed securities. These technical amendments are being published to restore rule text that was inadvertently changed, revise outdated cross-references, and make other technical corrections.

    DATES:

    Effective June 22, 2016.

    FOR FURTHER INFORMATION CONTACT:

    Rolaine S. Bancroft, Senior Special Counsel, at (202) 551-3850; Division of Corporation Finance, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-3628.

    SUPPLEMENTARY INFORMATION:

    We are making technical amendments to § 229.1100,1 § 229.1104,2 § 229.1105,3 § 229.1115,4 § 229.1125,5 § 230.405,6 § 230.456,7 Form SF-3,8 Form 8-K 9 and Form 10-D.10

    1 17 CFR 229.1100.

    2 17 CFR 229.1104.

    3 17 CFR 229.1105.

    4 17 CFR 229.1115.

    5 17 CFR 229.1125.

    6 17 CFR 230.405.

    7 17 CFR 230.456.

    8 17 CFR 239.45.

    9 17 CFR 249.308.

    10 17 CFR 249.312.

    List of Subjects 17 CFR Part 230

    Advertising, Reporting and recordkeeping requirements, Securities.

    17 CFR Parts 229, 239 and 249

    Reporting and recordkeeping requirements, Securities.

    Text of Amendments

    For the reasons set out above, Title 17, Chapter II, of the Code of Federal Regulations is amended as follows:

    PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975—REGULATION S-K 1. The authority citation for part 229 continues to read in part as follows: Authority:

    15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq. 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309; and Sec. 84001, Pub. L. 114-94, 129 Stat. 1312.

    § 229.1100 [Amended]
    2. Amend § 229.1100 in paragraph (a) by removing “(§§ 229.1100 through 229.1123)” and adding in its place “(§§ 229.1100 through 229.1125)”.
    § 229.1104 [Amended]
    3. Amend § 229.1104 in paragraph (e)(2) by adding “in response to Rule 15Ga-1” after “(as that term is defined in Section 15G(a) of the Securities Exchange Act of 1934)”.
    § 229.1105 [Amended]
    4. Amend § 229.1105 in paragraph (a)(3)(ii) by removing “135 days after” and adding in its place “135 days of”.
    § 229.1115 [Amended]
    5. Amend § 229.1115 in Instruction 1 to Item 1115 by removing “, 3 and 5 to Item 1114” and adding in its place “and 4 to Item 1114(b)”.
    § 229.1125 [Amended]
    6. Amend Appendix to § 229.1125—Schedule AL in Item 4(i) and Item 4(j) by removing all references to “loan” and adding in their place “lease”; and removing all references to “loans” and adding in their place “leases”.
    PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 7. The authority citation for part 230 continues to read, in part, as follows: Authority:

    15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), 126 Stat. 313 (2012), unless otherwise noted.

    § 230.405 [Amended]
    8. Amend § 230.405 in paragraph (1)(i) of the definition of an Ineligible issuer, by removing the phrase “General Instruction I.A.4 of Form S-3” and adding in its place “General Instruction I.A.2 of Form SF-3”
    § 230.456 [Amended]
    9. Amend § 230.456 in paragraph (c)(3) by removing “post-effective amendment or”.
    PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933 10. The authority citation for part 239 continues to read, in part, as follows: Authority:

    15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29, 80a-30, 80a-37, and Sec. 71003 and Sec. 84001, Pub. L. 114-94, 129 Stat. 1312, unless otherwise noted.

    § 239.45 [Amended]
    11. Amend Form SF-3 (referenced in § 239.45) in Note 2 of Notes to the “Calculation of Registration Fee” Table (“Fee Table”) by removing “in a post-effective amendment to the registration statement or”.
    PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 12. The authority citation for part 249 continues to read, in part, as follows: Authority:

    15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted.

    § 249.308 [Amended]
    13. Amend Form 8-K (referenced in § 249.308) by amending Item 6.05 to remove “Form S-3 (17 CFR 239.13)” and add in its place “Form SF-3 (17 CFR 239.45)”.
    § 249.312 [Amended]
    14. Amend Form 10-D (referenced in § 249.312) by amending Item 1 in Part I: a. to remove all references to the phrase “Item 1121(a) and (b)” and replacing them with the phrase “Item 1121(a), (b) and (c)”; and b. to remove the phrase “17 CFR 229.1121(a) and (b)” and add in its place “17 CFR 1121(a), (b) and (c)”.
    Dated: June 16, 2016. Brent J. Fields, Secretary.
    [FR Doc. 2016-14730 Filed 6-21-16; 8:45 am] BILLING CODE 8011-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Food and Drug Administration 21 CFR Part 1271 [Docket No. FDA-2014-N-1484] Revisions to Exceptions Applicable to Certain Human Cells, Tissues, and Cellular and Tissue-Based Products AGENCY:

    Food and Drug Administration, HHS.

    ACTION:

    Final rule.

    SUMMARY:

    The Food and Drug Administration (FDA or Agency or we) is issuing this final rule to amend certain regulations regarding donor eligibility, including the screening and testing of donors of particular human cells, tissues, and cellular and tissue-based products (HCT/Ps), and related labeling. This final rule is in response to our enhanced understanding in this area and in response to comments from stakeholders regarding the importance of embryos to individuals and couples seeking access to donated embryos.

    DATES:

    This rule is effective August 22, 2016.

    ADDRESSES:

    For access to the docket to read background documents or comments received, go to http://www.regulations.gov and insert the docket number found in brackets in the heading of this final rule into the “Search” box and follow the prompts, and/or go to the Division of Dockets Management, 5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.

    FOR FURTHER INFORMATION CONTACT:

    Jessica T. Walker, Center for Biologics Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 71, Rm. 7301, Silver Spring, MD 20993-0002, 240-402-7911.

    SUPPLEMENTARY INFORMATION:

    Table of Contents I. Executive Summary A. Purpose of the Final Rule B. Summary of the Major Provisions of the Final Rule C. Legal Authority D. Costs and Benefits II. Background A. Need for the Regulation/History of This Rulemaking B. Summary of Comments to the Proposed Rule C. General Overview of the Final Rule III. Legal Authority IV. Comments on the Proposed Rule and FDA Response A. Introduction B. Description of General Comments and FDA Response C. Purpose and Scope of the Final Rule (§ 1271.1) D. Donor Screening (§ 1271.75) E. Exceptions From the Requirement of Determining Donor Eligibility (§ 1271.90) F. Labeling Requirements (§ 1271.370) V. Effective Date VI. Economic Analysis of Impacts VII. Analysis of Environmental Impact VIII. Paperwork Reduction Act of 1995 IX. Federalism I. Executive Summary A. Purpose of the Final Rule

    FDA is issuing this final rule to amend certain regulations regarding donor eligibility, including the screening and testing of donors of particular HCT/Ps, and related labeling. We are finalizing these changes in response to our enhanced understanding in this area and in response to comments from stakeholders regarding the importance of embryos to individuals and couples seeking access to donated embryos.

    B. Summary of the Major Provisions of the Final Rule

    FDA is amending existing regulations to provide additional flexibility to HCT/P establishments to make available for reproductive use embryos originally intended for reproductive use for a specific individual or couple when those embryos are subsequently intended for directed or anonymous donation. Specifically, this rulemaking redesignates the current Title 21 of the Code of Federal Regulations (CFR) 1271.90(b) (§ 1271.90(b)) to new § 1271.90(c), and would insert a new § 1271.90(b) entitled “Exceptions for reproductive use” to clarify that if an embryo was originally intended for reproductive use for a specific individual or couple, its use for directed or anonymous donation, would not be prohibited under § 1271.45(c), even when the applicable donor eligibility requirements under part 1271, subpart C, are not met. FDA also clarifies that we are not creating an exception for deficiencies that occurred in making the donor eligibility determination for either the oocyte donor or the semen donor as required under § 1271.45(b), or for deficiencies in performing donor screening or testing, as required under §§ 1271.75, 1271.80, and 1271.85.

    The final rule also requires appropriate labeling for embryos that would describe the donor eligibility status of the individual donors whose gametes were used to form the embryo. The content of the labeling is not different from that required under current regulations. Consistent with current regulations, the intent of the labeling is to help ensure that physicians have specific and accurate information to provide to recipients for use in making informed medical decisions.

    C. Legal Authority

    FDA has authority for this rulemaking under section 361 of the Public Health Service Act (PHS Act) (42 U.S.C. 264). Under section 361 of the PHS Act, FDA may issue and enforce regulations necessary to prevent the introduction, transmission, or spread of communicable disease between the States or from foreign countries into the States.

    D. Costs and Benefits

    Because this rule imposes no additional regulatory burdens, the costs associated with this rule are expected to be minimal.

    II. Background A. Need for the Regulation/History of This Rulemaking

    Under the authority of section 361 of the PHS Act, by delegation from the Surgeon General and the Secretary of Health and Human Services, FDA may make and enforce regulations necessary to prevent the introduction, transmission, or spread of communicable diseases. Communicable diseases include, but are not limited to, those transmitted by viruses, bacteria, fungi, parasites, and transmissible spongiform encephalopathy agents. Certain diseases are transmissible through implantation, transplantation, infusion, or transfer of HCT/Ps derived from donors infected with those diseases. To prevent the introduction, transmission, or spread of such communicable diseases, we consider it necessary to require establishments to take appropriate measures to prevent the use of HCT/Ps from infected donors. FDA regulates HCT/Ps intended for implantation, transplantation, infusion, or transfer into a human recipient under part 1271 that was issued under the authority of section 361 of the PHS Act. Part 1271 requires HCT/P establishments to screen and test donors for relevant communicable disease agents and diseases, to prepare and follow written standard operating procedures for the prevention of the spread of communicable diseases, and to maintain records. Part 1271 also requires that for most HCT/Ps, the donor must be determined to be eligible, based on the results of screening and testing for relevant communicable disease agents and diseases. In most cases, a donor who tests reactive for a particular communicable disease, or who possesses clinical evidence of, or risk factors for, communicable disease agents and diseases, would be considered ineligible, and HCT/Ps from that donor would not ordinarily be used.

    FDA has published three final rules that make up part 1271. In the Federal Register of January 19, 2001 (66 FR 5447), we published regulations requiring HCT/P establishments to register and list their HCT/Ps with FDA (registration final rule). In the Federal Register of May 25, 2004 (69 FR 29786), we published regulations requiring most donors to be tested and screened for relevant communicable disease agents and diseases (donor eligibility final rule). In the Federal Register of November 24, 2004 (69 FR 68612), we published regulations requiring certain HCT/P establishments to follow current good tissue practice (CGTP), which governs the methods used in, and the facilities and controls used for, the manufacture of HCT/Ps, recordkeeping, and the establishment of a quality program (CGTP final rule). These regulations apply to HCT/Ps recovered on or after May 25, 2005.

    As part of our ongoing effort to implement our framework for regulating HCT/Ps, in the Federal Register of May 25, 2005 (70 FR 29949), we issued an interim final rule entitled “Human Cells, Tissues, and Cellular and Tissue-Based Products; Donor Screening and Testing, and Related Labeling” (2005 interim final rule), which had an effective date simultaneous with publication. This interim final rule was then adopted without change in the Federal Register of June 19, 2007 (72 FR 33667), in the final rule entitled “Human Cells, Tissues, and Cellular and Tissue-Based Products; Donor Screening and Testing, and Related Labeling” (2007 final rule). The 2007 final rule amended regulations regarding the screening and testing of donors of HCT/Ps, timing of specimen collection, record retention requirements, and related labeling requirements in response to public comments concerning the importance of cryopreserved embryos to individuals seeking access to donated embryos. The 2007 final rule also added an exception to the donor eligibility requirements in § 1271.90(a)(4) for cryopreserved embryos that, while originally exempt from the donor eligibility requirements because the donors were sexually intimate partners, are later intended for directed or anonymous donation.

    In recent years, industry and the medical community have expressed concerns that the exception added by the 2007 final rule does not fully address the need for access to cryopreserved embryos. The stakeholders have raised concerns that the current regulations still unduly restrict the use of embryos that were originally intended for personal reproductive use, and therefore impose limitations on individuals and couples involved in family building. In response to these concerns, FDA published the proposed rule “Revisions to Exceptions Applicable to Certain Human Cells, Tissues, and Cellular and Tissue-Based Products” in the Federal Register of December 31, 2014 (79 FR 78744). The proposed rule intended to increase access to embryos for reproductive use by expanding the current exceptions to the prohibitions on use under § 1271.90, providing HCT/P establishments with the flexibility to make available any embryo originally formed for reproductive use for a specific individual or couple and now intended for reproductive use in a directed or anonymous donation, provided that specific criteria are met, including requirements for labeling.

    B. Summary of Comments to the Proposed Rule

    We received approximately 10 comment letters on the proposed rule by the close of the comment period. We received comments from academia, professional organizations, and individuals. The comments were balanced between those expressing support for the proposed rule and those raising concerns about how the proposed exception will impact public health. They addressed the following topics: Purpose and scope of the final rule, donor screening, exceptions from the requirement of determining donor eligibility, and labeling requirements.

    C. General Overview of the Final Rule

    FDA is adopting as final, without material change, the proposed rule to amend certain regulations regarding donor eligibility and related labeling.

    We are making revisions to the following FDA regulations:

    1. Amendments to § 1271.90

    Section 1271.90 sets forth exceptions where HCT/P establishments are not required to make a donor eligibility determination under § 1271.50 or to perform donor screening or testing under §§ 1271.75, 1271.80, and 1271.85. We are adding language to the exceptions listed in this section to provide clarity and update the regulation by allowing for an embryo originally intended for reproductive use for a specific individual or couple, to be subsequently used for directed or anonymous donation, even when the donor eligibility requirements under part 1271, subpart C are not met.

    We are amending § 1271.90 as follows:

    • Changing the heading of this section by deleting “from the requirement of determining donor eligibility,” and inserting “other” before “exceptions.” The heading for § 1271.90 will read “Are there other exceptions and what labeling requirements apply?” We made this change for clarity; the new heading will be more accurate.

    • Changing § 1271.90(a)(3) by replacing “exempt” with “excepted,” which is the term used in the introductory title for this provision. Thus, this change will make the language more consistent. The beginning of § 1271.90(a)(3) will read, “Cryopreserved cells or tissue for reproductive use, other than embryos, originally excepted . . . .”

    • Changing current § 1271.90(a)(4) by replacing “exempt” with “excepted”.

    • Redesignating current § 1271.90(b) as § 1271.90(c) and adding a new paragraph (b) to § 1271.90.

    • Changing newly designated § 1271.90(c) by removing “paragraph (a)” and adding in its place “paragraphs (a) and (b)” in the introductory text, revising § 1271.90(c)(2) to replace “(b)(6)” with “(c)(6)”, and by adding “recovery or” before “cryopreservation” in new § 1271.90(c)(6) to clarify that some testing and screening activities may take place before recovery of the gametes, not just before cryopreservation of the embryos.

    2. Section 1271.90(b)

    We are redesignating the current § 1271.90(b) to § 1271.90(c), and adding a new § 1271.90(b) entitled “Exceptions for reproductive use.” Under finalized § 1271.90(b), an embryo originally intended for reproductive use for a specific individual or couple that is subsequently intended for directed or anonymous donation is excepted from the prohibition on use under § 1271.45(c) even when the applicable donor eligibility requirements under part 1271, subpart C are not met. Accordingly, when an establishment fails to comply with applicable donor eligibility requirements under part 1271, subpart C, the establishment will not be prohibited from making available for reproductive use such embryos for reproductive purposes in accordance with this section. The exception from the prohibition on use does not create an exception for deficiencies that occurred in making the donor eligibility determination for either the oocyte donor or the semen donor as required under § 1271.45(b), or for deficiencies in performing donor screening or testing, as required under §§ 1271.75, 1271.80, and 1271.85.

    We note that the language we are adding to the exceptions currently listed in § 1271.90 is additive. It creates an additional exception for the use of certain reproductive HCT/Ps that are not currently excepted, but it does not impact or restrict the exceptions currently provided for in the regulations.

    3. Section 1271.90(c)

    Under § 1271.90(c), HCT/P establishments must prominently label an HCT/P described in § 1271.90(a) and (b). The labeling requirements are intended to help ensure that physicians have specific and accurate information to provide to recipients for use in making informed medical decisions.

    The nonsubstantive change to § 1271.90(c)(2) clarifies that the labeling requirements contained in § 1271.90(c)(2) do not apply to reproductive cells or tissue labeled in accordance with § 1271.90(c)(6). The change to § 1271.90(c)(6) includes “recovery or” before the word “cryopreservation”. Thus, the § 1271.90(c)(6) provision requires HCT/P establishments to prominently label an HCT/P described in § 1271.90(a)(3) or (a)(4) with “Advise recipient that screening and testing of the donor(s) were not performed at the time of recovery or cryopreservation of the reproductive cells or tissue, but have been performed subsequently” for HCT/Ps described in § 1271.90(a)(3) or (a)(4). This change is made to recognize that some testing and screening activities may take place even before recovery of HCT/Ps, not just before cryopreservation.

    4. Amendment to § 1271.370

    Section 1271.370 sets forth labeling requirements in addition to those that apply under §§ 1271.55, 1271.60, 1271.65, and 1271.90. Because, as discussed previously, this rule redesignates the current labeling requirements under § 1271.90(b) to § 1271.90(c), we are amending § 1271.370(b)(4) to revise the reference from § 1271.90(b) to § 1271.90(c).

    III. Legal Authority

    FDA is issuing this final rule under the authority of section 361 of the PHS Act (42 U.S.C. 264). Under section 361 of the PHS Act, FDA may issue and enforce regulations necessary to prevent the introduction, transmission, or spread of communicable disease between the States or from foreign countries into the States. It is important to recognize that HCT/Ps recovered in one State may be sent to another for processing, and then shipped for use throughout the United States, or beyond. FDA has been involved in many recalls where HCT/Ps processed in a single establishment have been distributed in many States. In any event, intrastate transactions affecting interstate communicable disease transmission may also be regulated under section 361 of the PHS Act. (See Louisiana v. Mathews, 427 F. Supp. 174, 176 (E.D. La. 1977); Independent Turtle Farmers of Louisiana, Inc. v. United States of America, et al., 2010 U.S. Dist. LEXIS 31117). This final rule incorporates changes in response to our enhanced understanding of the uses of certain types of HCT/Ps in specific situations and in response to comments from stakeholders regarding the importance of embryos to individuals and couples seeking access to donated embryos.

    IV. Comments on the Proposed Rule and FDA Response A. Introduction

    We received approximately 10 comment letters on the proposed rule by the close of the comment period, each containing one or more comments on one or more issues. We received comments from academia, professional organizations, and individual consumers.

    We describe and respond to the comments in sections IV.B through IV.F. We have numbered each comment to help distinguish among different comments. We have grouped similar comments together under the same number, and, in some cases, we have separated different issues discussed in the same comment and designated them as distinct comments for purposes of our responses. The number assigned to each comment is purely for organizational purposes and does not signify the comment's value or importance or the order in which the comments were received.

    B. Description of General Comments and FDA Response

    Several comments made general remarks supporting the proposed rule without focusing on a particular proposed provision. In the following paragraphs, we discuss and respond to such general comments.

    (Comment 1) There were several comments that were in support of the proposed rule and suggested that we provide even more guidance on donor eligibility, screening, and testing of donors of reproductive cells. One suggestion was that FDA's donor eligibility, screening, and testing requirements closely parallel American Society of Reproductive Medicine/Society for Assisted Reproductive Technology guidelines.

    (Response) FDA acknowledges and appreciates the supportive comments. We appreciate the interest in additional guidance for the screening and testing of donors of reproductive cells. We continue to review existing regulations with respect to providing additional guidance or modifying these regulations as appropriate, in the future.

    (Comment 2) One comment asked if the final rule would be applied retrospectively to embryos formed and cryopreserved on or after May 25, 2005.

    (Response) Yes, the final rule applies to embryos formed and cryopreserved on or after May 25, 2005.

    C. Purpose and Scope of the Final Rule (§ 1271.1)

    (Comment 3) One comment noted that preventing the spread of communicable disease protects the population and the family receiving the donation. Two comments suggested that the proposed rule conflicts with FDA regulations that serve to prevent the introduction, transmission, and spread of communicable disease. One comment expressed concern that the proposed rule appears to relax the testing requirements for donors and conflicts with the PHS Act, specifically section 361, that provides FDA with the authority to make and enforce regulations “to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the States or possessions, or from State or possession into any other State or possession” (42 U.S.C. 264(a)). This commenter's interpretation of the proposed rule is that it removes the requirement for reproductive tissue donors to be tested, and only requires reproductive tissue donor testing “when possible.” According to the comment, FDA seems to posit informed consent as an adequate response to the health risks faced by recipients of donated embryos. The commenter would like FDA to strike the qualifier “when possible” from the text of the proposed rule because the commenter believes this approach would provide a greater level of protection to the recipient than the proposed rule and preserve FDA's intention of relaxing the current donor eligibility regulations in the interest of family building.

    (Response) As stated previously, we consider it necessary that establishments take appropriate measures to prevent the use of HCT/Ps from donors infected with communicable diseases. Part 1271 requires HCT/P establishments to screen and test donors for relevant communicable disease agents and diseases, and to maintain records. Part 1271 also requires for most HCT/Ps that the donor must be determined to be eligible, based on the results of screening and testing for relevant communicable disease agents and diseases. We have retained the qualifier “when possible” in § 1271.90(a)(4) to provide HCT/P establishments with the flexibility to make available any embryos originally formed for reproductive use for a specific individual or couple and now intended for reproductive use in a directed or anonymous donation, provided that specific criteria are met, including requirements for labeling.

    The final rule provides for the continued applicability of labeling requirements for embryos intended for reproductive use that would be excepted from the prohibition on use. The rule requires prominent labeling that describes the donor eligibility status of the individual donors whose gametes were used to form the embryo. The required labeling will provide information to the treating physician to permit discussion of the potential risks of communicable disease with the recipient.

    D. Donor Screening (§ 1271.75)

    (Comment 4) Some of the comments expressed concern about the risk of accepting an unscreened donation. Another comment noted that eligibility of the HCT/P donor must be assessed prior to usage to ensure the safety of recipients, their offspring, and the public as a whole; and furthermore, ensuring the proper screening of the donor's HCT/P enables the control of the spread of disease.

    (Response) We agree that the proper screening of HCT/P donors minimizes the risk of introducing, transmitting, or spreading communicable diseases. As stated in the proposed rule, we consider it necessary to require establishments to take appropriate measures to prevent the use of HCT/Ps from infected donors. Part 1271 requires HCT/P establishments to screen and test donors for relevant communicable disease agents and diseases, and to maintain records. Part 1271 also requires, for most HCT/Ps, that donor be determined to be eligible, based on the results of screening and testing for relevant communicable disease agents and diseases. In most cases, a donor who tests reactive for a particular communicable disease, or who possesses clinical evidence of, or risk factors for, a communicable disease agent and disease, would be considered ineligible, and cells or tissues from that donor would not ordinarily be used.

    (Comment 5) A few comments expressed the belief that the proposed rule will allow for better genetic profiling. One of those comments stated that labeling will make it easier to identify particular genotypes for research. Another comment stated that genetically profiling all donors and to the extent possible all embryos will reduce the risk of recipients of embryos giving birth to children with serious genetic disorders. The commenter asked FDA to require establishments to genetically screen all donors and the embryo when possible.

    (Response) These comments address a topic that is outside the scope of this rulemaking.

    E. Exceptions From the Requirement of Determining Donor Eligibility (§ 1271.90)

    (Comment 6) One comment sought transparency as to which embryos are excepted and requested specific examples of how the rule provides additional flexibility to make embryos available for directed and anonymous donation. Specifically, the commenter asked whether donation would be allowed when the embryo was originally intended for transfer to a sexually intimate partner, where one of the gamete providers (either a directed or anonymous donor) would be considered ineligible based on screening and testing.

    (Response) The rulemaking provides additional flexibility to make embryos available when there have been changes in the original plans for use of the embryos. Under finalized § 1271.90(b), an embryo originally intended for reproductive use for a specific individual or couple that is subsequently intended for directed or anonymous donation is excepted from the prohibition on use under § 1271.45(c) even when the applicable donor eligibility requirements under part 1271, subpart C are not met. Accordingly, when an establishment fails to comply with applicable donor eligibility requirements under part 1271, subpart C, the establishment will not be prohibited from making available for reproductive use such embryos for reproductive purposes in accordance with this section. The exception from the prohibition on use does not create an exception for deficiencies that occurred in making the donor eligibility determination for either the oocyte donor or the semen donor as required under § 1271.45(b), or for deficiencies in performing donor screening or testing, as required under §§ 1271.75, 1271.80, and 1271.85.

    We note that the change we are making to the exceptions currently listed in § 1271.90 is additive. It creates an additional exception for the use of certain reproductive HCT/Ps that are not currently excepted, but it does not impact or restrict the exceptions currently provided for in the regulations.

    (Comment 7) One comment recommends that the term “embryos formed for autologous use” not be used in conjunction with embryos. The commenter reasons that after a sperm or oocyte form an embryo, the embryo should not be considered autologous, given the definition at § 1271.3(a).

    (Response) We agree with the comment and are not adopting, as part of the final rule, the term “embryos formed for autologous use”. Likewise, we are not adopting, as part of the final rule, the reference to § 1271.90(a)(1) in § 1271.90(a)(4).

    F. Labeling Requirements (§ 1271.370)

    (Comment 8) Several comments were in support of labeling because it allows the physician to fully discuss the risks of any communicable disease and it allows the patient to make a fully informed decision. One commenter noted that factors affecting decisions of an HCT/P recipient may outweigh the expert advice of medical doctors. Another comment referenced § 1271.90(c)(6) of the proposed rule (embryo labeling requirements) that states establishments are required to “advise recipients that screening and testing of the donor(s) were not performed at the time of recovery or cryopreservation of the reproductive cells or tissues, but have been performed subsequently.” The comment further states that “Description of the Proposed Rule” provides that these labeling requirements are “based on the expectation that a physician will be closely involved in the decision of the embryo and the recognition that physicians are under legal and ethical obligations that require them to discuss the risks of communicable disease transmission stemming from the use of HCT/Ps.” The comment asked that FDA revise the rule to expressly require establishments to counsel recipients on the risk of disease.

    (Response) We agree that the recipients should be fully informed about the risk of communicable disease before accepting an embryo for implantation; however, we decline to make the suggested change. As stated in the preamble of the proposed rule, the proposed labeling requirements are based on the expectation that a physician will be closely involved in the decision to use an embryo and the recognition that physicians are under legal and ethical obligations that require them to discuss the risks of communicable disease transmission stemming from the use of HCT/Ps. FDA relies on physicians to meet these obligations when discussing procedures involving HCT/Ps with recipients. Further, we expect that a recipient would be fully informed of the risks involved in using an embryo for reproductive purposes as finalized under § 1271.90(b) even when the donor eligibility requirements under part 1271, subpart C are not met.

    (Comment 9) One comment suggested that while a labeling requirement that is tiered according to the risks may mitigate the risks, it does not go far enough in abolishing the risks.

    (Response) As described under proposed § 1271.90(c)(2) through (6), an embryo originally intended for reproductive use for a specific individual or couple that is subsequently intended for directed or anonymous donation must be labeled as applicable. We acknowledge that the labeling requirement will not abolish all risks of implanting those embryos. Rather, as stated in the proposed rule, the required labeling would provide information to the treating physician to permit discussion of the potential risks of communicable diseases with the recipient. Our expectation is that the recipient will become fully informed of the risk when the donor eligibility requirements under part 1271, subpart C are not met, so that the recipient can make a well informed decision about receiving the embryo.

    V. Effective Date

    This rule is effective August 22, 2016.

    VI. Economic Analysis of Impacts

    We have examined the impacts of the final rule under Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866 and 13563 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We have developed a comprehensive Economic Analysis of Impacts that assesses the impacts of the final rule. We believe that this final rule is not a significant regulatory action as defined by Executive Order 12866.

    The Regulatory Flexibility Act requires us to analyze regulatory options that would minimize any significant impact of a rule on small entities. Because the costs associated with this rule are expected to be minimal, we certify that the rule will not have a significant economic impact on a substantial number of small entities.

    The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before issuing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $146 million, using the most current (2015) Implicit Price Deflator for the Gross Domestic Product. This final rule would not result in an expenditure in any year that meets or exceeds this amount.

    This rule amends certain regulations regarding donor eligibility and labeling related to the screening and testing of donors of particular HCT/Ps. The final rule will provide additional flexibility to HCT/P establishments to make available for reproductive use embryos originally intended for reproductive use for a specific individual or couple and subsequently intended for directed or anonymous donation. Specifically, the final rule will clarify that if an embryo was originally intended for reproductive use for a specific individual or couple, its use for directed or anonymous donation would not be prohibited under § 1271.45 (c), even when the applicable donor eligibility requirements under part 1271, subpart C are not met. This exception from prohibition for use would not create an exception for deficiencies that occurred in making the donor eligibility determination for either the oocyte donor or the semen donor as required under § 1271.45(b), or for deficiencies in performing donor screening or testing, as required under §§ 1271.75, 1271.80, and 1271,85. The final rule also requires appropriate labeling that describes the donor eligibility status of the individual donors whose gametes were used to form the embryo.

    This rule will provide greater accommodation of individuals and couples wanting access to embryos originally intended for reproductive use for a specific individual or couple, while continuing to emphasize the applicability of the donor eligibility screening and testing requirements for individual gamete donors. The final rule will provide HCT/P establishments with the flexibility to make embryos originally intended for reproductive use for a specific individual or couple now available for directed or anonymous donation, provided that specific criteria are met. Consistent with current regulations, the labeling requirements will help ensure that physicians have specific and accurate information to provide to recipients for use in making informed medical decisions. Because this rule imposes no additional regulatory burdens, the costs associated with this rule are expected to be minimal.

    VII. Analysis of Environmental Impact

    We have determined under 21 CFR 25.30(h) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.

    VIII. Paperwork Reduction Act of 1995

    The labeling requirements contained in this final rule are not subject to review by the Office of Management and Budget (OMB) because they do not constitute a “collection of information” under the Paperwork Reduction Act of 1995 (the PRA) (44 U.S.C 3501-3520). Rather, the requirement to label HCT/Ps in accordance with the final rule is a “public disclosure of information originally supplied by the Federal government to the recipient for the purpose of disclosure to the public” (5 CFR 1320.3(c)(2)). Therefore, FDA concludes that these requirements in this document are not subject to review by OMB because they do not constitute a “collection of information” under the PRA.

    IX. Federalism

    We have analyzed this final rule in accordance with the principles set forth in Executive Order 13132. FDA has determined that the rule does not contain policies that have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, we conclude that the rule does not contain policies that have federalism implications as defined in the Executive Order and, consequently, a federalism summary impact statement is not required.

    List of Subjects in 21 CFR Part 1271

    Biologics, Drugs, Human cells and tissue-based products, Medical devices, Reporting and recordkeeping requirements.

    Therefore, under the Public Health Service Act and under authority delegated to the Commissioner of Food and Drugs, 21 CFR part 1271 is amended as follows:

    PART 1271—HUMAN CELLS, TISSUES, AND CELLULAR AND TISSUE-BASED PRODUCTS 1. The authority citation for part 1271 continues to read as follows: Authority:

    42 U.S.C. 216, 243, 263a, 264, 271.

    2. In § 1271.90: a. Revise the heading; b. Revise paragraph (a)(3) introductory text; c. Revise paragraph (a)(4); d. Redesignate paragraph (b) as paragraph (c); e. Add a new paragraph (b); f. Revise newly designated paragraph (c) introductory text; g. Revise newly designated paragraph (c)(2); and h. Revise newly designated paragraph (c)(6).

    The revisions and additions read as follows:

    § 1271.90 Are there other exceptions and what labeling requirements apply?

    (a) * * *

    (3) Cryopreserved cells or tissue for reproductive use, other than embryos, originally excepted under paragraphs (a)(1) or (a)(2) of this section at the time of donation, that are subsequently intended for directed donation, provided that:

    (4) A cryopreserved embryo, originally excepted under paragraph (a)(2) of this section at the time of recovery or cryopreservation, that is subsequently intended for directed or anonymous donation. When possible, appropriate measures should be taken to screen and test the semen and oocyte donors before transfer of the embryo to the recipient.

    (b) Exceptions for reproductive use. An embryo originally intended for reproductive use for a specific individual or couple that is subsequently intended for directed or anonymous donation for reproductive use is excepted from the prohibition on use under § 1271.45(c) even when the applicable donor eligibility requirements under subpart C of this part are not met. Nothing in this paragraph creates an exception for deficiencies that occurred in making the donor eligibility determination for either the oocyte donor or the semen donor as required under § 1271.45(b), or for deficiencies in performing donor screening or testing, as required under §§ 1271.75, 1271.80, and 1271.85.

    (c) Required labeling. As applicable, you must prominently label an HCT/P described in paragraphs (a) and (b) of this section as follows:

    (2) “NOT EVALUATED FOR INFECTIOUS SUBSTANCES,” unless you have performed all otherwise applicable screening and testing under §§ 1271.75, 1271.80, and 1271.85. This paragraph does not apply to reproductive cells or tissue labeled in accordance with paragraph (c)(6) of this section.

    (6) “Advise recipient that screening and testing of the donor(s) were not performed at the time of recovery or cryopreservation of the reproductive cells or tissue, but have been performed subsequently,” for paragraphs (a)(3) or (a)(4) of this section.

    § 1271.370
    3. Amend § 1271.370(b)(4) by removing “§ 1271.90(b)” and by adding in its place “§ 1271.90(c)”.
    Dated: June 16, 2016. Leslie Kux, Associate Commissioner for Policy.
    [FR Doc. 2016-14721 Filed 6-21-16; 8:45 am] BILLING CODE 4164-01-P
    DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9772] RIN 1545-BN15 Modification of Treatment of Certain Health Organizations AGENCY:

    Internal Revenue Service (IRS), Treasury.

    ACTION:

    Final regulations.

    SUMMARY:

    This document contains final regulations that provide guidance to Blue Cross and Blue Shield organizations, and certain other organizations, on computing and applying the medical loss ratio and the consequences for not meeting the medical loss ratio threshold. The final regulations reflect the enactment of a technical correction to section 833(c)(5) of the Internal Revenue Code by the Consolidated and Further Continuing Appropriations Act of 2015. The final regulations affect Blue Cross and Blue Shield organizations, and certain other organizations involved in providing health insurance.

    DATES:

    Effective Date: These regulations are effective on June 22, 2016.

    Applicability Date: For the date of applicability, see § 1.833-1(e).

    FOR FUTHER INFORMATION CONTACT:

    Rebecca L. Baxter, at (202) 317-6995 (not a toll-free number).

    SUPPLEMENTARY INFORMATION:

    Background

    This Treasury decision contains final regulations that amend 26 CFR part 1 under section 833 of the Internal Revenue Code (the Code). Section 833(a) provides that Blue Cross and Blue Shield organizations, and certain other organizations involved in providing health insurance as described in section 833(c), are entitled to: (1) Treatment as stock insurance companies for purposes of sections 831 through 835 (related to taxation of non-life insurance companies generally); (2) a special deduction determined under section 833(b); and (3) computation of unearned premium reserves under section 832(b)(4) based on 100 percent, and not 80 percent, of unearned premiums for purposes of determining “insurance company taxable income” under section 832.

    Section 833(c)(5) was added to the Code by section 9016 of the Patient Protection and Affordable Care Act (Pub. L. 111-148, 124 Stat. 119) (the Affordable Care Act), effective for taxable years beginning after December 31, 2009. Section 833(c)(5), as enacted by the Affordable Care Act, provided that section 833 did not apply to any organization unless the organization's medical loss ratio (MLR) for the taxable year was at least 85 percent. For purposes of section 833, an organization's MLR was its percentage of total premium revenue expended on reimbursement for clinical services provided to enrollees under its policies during such taxable year (as reported under section 2718 of the Public Health Service Act (42 U.S.C. 300gg-18)).

    Section 2718 of the Public Health Service Act (PHSA) was added by section 1001 and amended by section 10101 of the Affordable Care Act. Section 2718 of the PHSA is administered by the Department of Health and Human Services. Section 2718(a) of the PHSA requires a health insurance issuer to submit a report for each plan year to the Secretary of the Department of Health and Human Services concerning the percentage of total premium revenue, after accounting for collections or receipts for risk adjustment and risk corridors and payments of reinsurance, that the issuer expends: (1) On reimbursement for clinical services provided to enrollees under such coverage; (2) for activities that improve health care quality; and (3) on all other non-claims costs, excluding federal and state taxes and licensing or regulatory fees.

    Section 2718(b) of the PHSA requires that a health insurance issuer offering group or individual health insurance coverage, with respect to each plan year, provide an annual rebate to each enrollee under such coverage, on a pro rata basis, if the ratio of the amount of the premium revenue the issuer expends on costs for reimbursement for clinical services provided to enrollees under such coverage and for activities that improve health care quality to the total amount of premium revenue (excluding federal and state taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance under sections 1341, 1342, and 1343 of the Affordable Care Act (42 U.S.C. 18061, 18062, and 18063)) for the plan year is less than a prescribed percentage. Section 2718(b)(1)(B)(ii) of the PHSA provides that beginning on January 1, 2014, the medical loss ratio computed under section 2718(b) of the PHSA shall be based on expenses and premium revenues for each of the previous three years of the plan.

    The Department of Health and Human Services published in the Federal Register (75 FR 74864) an interim final rule under section 2718 of the PHSA on December 1, 2010, an interim final rule and final rule on December 7, 2011 (76 FR 76596 and 76574), and a final rule on May 16, 2012 (77 FR 28790). These rules implementing section 2718 of the PHSA are codified at 45 CFR part 158 (HHS Regulations).

    On December 6, 2010, the Treasury Department and the IRS published Notice 2010-79 (2010-49 I.R.B. 809), which provided interim guidance and transitional relief to organizations under section 833(c)(5). The interim guidance applied to an organization's first taxable year beginning after December 31, 2009.

    The interim guidance provided that for purposes of determining whether an organization's percentage of total premium revenue expended on reimbursement for clinical services provided to enrollees was at least 85 percent (and thus satisfied the requirement of section 833(c)(5)), organizations were required to use the definition of “reimbursement for clinical services provided to enrollees” set forth in the HHS Regulations. In addition, the interim guidance provided that for purposes of determining whether the 85-percent requirement of section 833(c)(5) was satisfied, the IRS would not challenge the inclusion of amounts expended for “activities that improve health care quality” as described in the HHS Regulations.

    Notice 2010-79 also stated that the consequences for an organization with an MLR of less than 85 percent (an insufficient MLR) were as follows: (1) The organization would not be taxable as a stock insurance company by reason of section 833(a)(1) (but may have been taxable as an insurance company if it otherwise met the requirements of section 831(c)); (2) the organization would not be allowed the special deduction set forth in section 833(b); and (3) the organization would only take into account 80 percent, rather than 100 percent, of its unearned premiums for purposes of computing premiums earned on insurance contracts under section 832(b)(4). However, Notice 2010-79 provided that solely for the first taxable year beginning after December 31, 2009, the IRS would not treat an organization as losing its status as a stock insurance company by reason of section 833(c)(5) provided the following conditions were met: (1) The organization was described in section 833(c) in the immediately preceding taxable year; (2) the organization would have been taxed as a stock insurance company for the current taxable year but for the enactment of section 833(c)(5); and (3) the organization would have met the requirements of section 831(c) to be taxed as an insurance company for the current taxable year but for its activities in the administration, adjustment, or settlement of claims under cost-plus or administrative services-only contracts.

    On July 5, 2011, the Treasury Department and the IRS published Notice 2011-51 (2011-27 I.R.B. 36) extending the interim guidance and transitional relief provided in Notice 2010-79 to an organization's first taxable year beginning after December 31, 2010. On June 11, 2012, the Treasury Department and the IRS published Notice 2012-37 (2012-24 I.R.B. 1014) extending the interim guidance and transitional relief provided in Notice 2010-79 and Notice 2011-51 through an organization's first taxable year beginning after December 31, 2012.

    On May 13, 2013, the Treasury Department and the IRS published in the Federal Register (78 FR 27873) a notice of proposed rulemaking (REG-126633-12) addressing the computation of an organization's MLR for purposes of section 833(c)(5) and the consequences of non-application of section 833 if an organization had an insufficient MLR. The proposed regulations provided that the numerator of an organization's MLR is the total premium revenue expended on “reimbursement for clinical services provided to enrollees” under its policies for the taxable year, but does not include amounts expended for “activities that improve health care quality.” In addition, the Treasury Department and the IRS concluded that, for administrative convenience and to be consistent with the MLR calculation under section 2718(b)(1)(B)(ii) of the PHSA, it was appropriate to compute the MLR for a taxable year under section 833(c)(5) using the same three-year period used under section 2718(b) of the PHSA. Therefore, the proposed regulations provided that amounts used for purposes of section 833(c)(5) for each taxable year should be determined based upon amounts reported under section 2718 of the PHSA for that taxable year and the two preceding taxable years, subject to the same adjustments that apply for purposes of the PHSA. The proposed regulations also provided that if an organization has an insufficient MLR, then section 833(a) does not apply to that organization.

    On January 7, 2014, the Treasury Department and the IRS published in the Federal Register (79 FR 755) final regulations (TD 9651) adopting the provisions of the proposed regulations with certain modifications. These modifications included transition rules to phase in the same three-year period used under section 2718(b) of the PHSA to compute the MLR for a taxable year. Accordingly, the final regulations provide that for the first taxable year beginning after December 31, 2013, an organization's MLR is computed on a one-year basis. For the first taxable year beginning after December 31, 2014, an organization's MLR is computed on a two-year basis. Finally, for the first taxable year beginning after December 31, 2015, and for all succeeding taxable years, the final regulations provide that an organization's MLR is determined based on amounts reported under section 2718 of the PHSA for that taxable year and the two preceding taxable years, subject to the same adjustments that apply for purposes of section 2718 of the PHSA. The final regulations apply to taxable years beginning after December 31, 2013.

    Congress subsequently passed the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113-235, 128 Stat. 2130) (the Appropriations Act), which was signed into law by the President on December 16, 2014. Section 102 of Division N of the Appropriations Act made a technical correction to section 833(c)(5) (the Technical Correction). The Technical Correction provides that in calculating its MLR numerator, an organization includes both the cost of reimbursement for clinical services and amounts expended for activities that improve health care quality. In addition, the Technical Correction provides that the consequences for not meeting the MLR threshold are only that section 833(a)(2) and (3) do not apply. Therefore, an organization with an insufficient MLR is treated as if it were a stock insurance company under section 833(a)(1). The Technical Correction applies to taxable years beginning after December 31, 2009.

    Explanation of Provisions

    These final regulations restate § 1.833-1 of the Income Tax Regulations (26 CFR part 1) and incorporate the Technical Correction. As explained in this preamble, the Technical Correction, in effect, retroactively amended the rules in the existing final regulations to determine the MLR and the consequences of an insufficient MLR. In order to avoid any confusion caused by the effect of the Technical Correction on the existing final regulations, the Treasury Department and the IRS are publishing the existing final regulations, as revised by the Technical Correction, in their entirety in this Treasury decision.

    1. Determining the MLR

    Section 1.833-1 of the Income Tax Regulations generally provides that an organization's MLR with respect to a taxable year is the ratio, expressed as a percentage, of the organization's MLR numerator to its MLR denominator. Prior to the Technical Correction, the existing final regulations only included in the MLR numerator an organization's total premium revenue expended on reimbursement for clinical services provided to enrollees. Consistent with the Technical Correction, § 1.833-1(c)(1)(i) of these final regulations describes an organization's MLR numerator as the total premium revenue the organization expended on reimbursement for clinical services and activities that improve health care quality provided to enrollees under its policies for the taxable year. For purposes of section 833(c)(5), these final regulations define the term “activities that improve health care quality” to have the same meaning as the term has in section 2718 of the PHSA and the regulations issued under that section (see 45 CFR 158.150). In addition, consistent with the Technical Correction, the transition rules for computation of the MLR in § 1.833-1(c)(2)(i) and (ii) of these final regulations include the premium revenue expended on activities that improve health care quality.

    2. Consequences of an Insufficient MLR

    Consistent with the Technical Correction, these final regulations provide that the consequences for an organization described in section 833(c) that has an MLR of less than 85 percent are the following: (1) The organization is not allowed the special deduction set forth in section 833(b); and (2) it must take into account 80 percent, rather than 100 percent, of its unearned premiums under section 832(b)(4). Unlike under the rule in the existing final regulations, an organization that has an MLR of less than 85 percent does not lose its eligibility to be treated as a stock insurance company under section 833(a)(1).

    Effective/Applicability Date

    These final regulations apply to taxable years beginning after December 31, 2016. However, taxpayers may rely on these final regulations for taxable years beginning after December 31, 2009.

    Special Analyses

    Certain IRS regulations, including this one, are exempt from the requirement of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (APA) (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

    The Treasury Department and the IRS have determined that section 553(b) of the APA does not apply to these regulations, including because good cause exists under section 553(b)(B) of the APA. Section 553(b)(B) provides that an agency is not required to publish a notice of proposed rulemaking in the Federal Register when the agency, for good cause, finds that notice and public comment thereon are impracticable, unnecessary, or contrary to the public interest. The Treasury Department and the IRS have determined that notice and public comment are unnecessary inasmuch as these revisions (1) merely incorporate the Technical Correction by adding or removing language in the existing final regulations and make nonsubstantive conforming changes to reflect the Technical Correction and (2) provide taxpayers with immediate guidance. For the same reason, a delayed effective date is not required pursuant to section 553(d)(3) of the APA. Pursuant to section 7805(f)(3) of the Code, these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comments on its impact on small businesses, and no comments were received.

    Drafting Information

    The principal author of these regulations is Rebecca L. Baxter, Office of Associate Chief Counsel (Financial Institutions & Products). However, other personnel from the Treasury Department and the IRS participated in their development.

    Availability of IRS Documents

    The IRS notices and Treasury decisions cited in this preamble are made available by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

    List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

    Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

    PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority:

    26 U.S.C. 7805 * * *

    Par. 2. Section 1.833-1 is revised to read as follows:
    § 1.833-1 Medical loss ratio under section 833(c)(5).

    (a) In general. Section 833(a)(2) and (3) do not apply to an organization unless the organization's medical loss ratio (MLR) for a taxable year is at least 85 percent. Paragraph (b) of this section provides definitions that apply for purposes of section 833(c)(5) and this section. Paragraph (c) of this section provides rules for computing an organization's MLR under section 833(c)(5). Paragraph (d) of this section addresses the treatment under section 833 of an organization that has an MLR of less than 85 percent. Paragraph (e) of this section provides the effective/applicability date.

    (b) Definitions. The following definitions apply for purposes of section 833(c)(5) and this section.

    (1) Activities that improve health care quality. The term activities that improve health care quality has the same meaning as that term has in section 300gg-18 of title 42, United States Code and the regulations issued under that section (see 45 CFR 158.150).

    (2) Reimbursement for clinical services. The term reimbursement for clinical services has the same meaning as that term has in section 300gg-18 of title 42, United States Code and the regulations issued under that section (see 45 CFR 158.140).

    (3) Total premium revenue. The term total premium revenue means the total amount of premium revenue (excluding federal and state taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance under sections 1341, 1342, and 1343 of the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)) (42 U.S.C. 18061, 18062, and 18063)) as those terms are used for purposes of section 300gg 18(b) of title 42, United States Code and the regulations issued under that section (see 45 CFR part 158).

    (c) Computation of MLR under section 833(c)(5)—(1) In general. Starting with the first taxable year beginning after December 31, 2015, and for all succeeding taxable years, an organization's MLR with respect to a taxable year is the ratio, expressed as a percentage, of the MLR numerator, as described in paragraph (c)(1)(i) of this section, to the MLR denominator, as described in paragraph (c)(1)(ii) of this section.

    (i) MLR numerator. The numerator of an organization's MLR is the total premium revenue expended on reimbursement for clinical services and activities that improve health care quality provided to enrollees under its policies for the taxable year, computed using a three-year period in the same manner as those expenses are computed for the plan year for purposes of section 300gg-18(b) of title 42, United States Code and regulations issued under that section (see 45 CFR part 158).

    (ii) MLR denominator. The denominator of an organization's MLR is the organization's total premium revenue for the taxable year, computed using a three-year period in the same manner as the total premium revenue is computed for the plan year for purposes of section 300gg-18(b) of title 42, United States Code and regulations issued under that section (see 45 CFR part 158).

    (2) Transition rules. The transition rules in paragraphs (c)(2)(i) and (ii) of this section apply solely for the first taxable year beginning after December 31, 2013, and the first taxable year beginning after December 31, 2014.

    (i) First taxable year beginning after December 31, 2013. For the first taxable year beginning after December 31, 2013, the numerator of an organization's MLR is the total premium revenue expended on reimbursement for clinical services and activities that improve health care quality provided to enrollees under its policies for the first taxable year beginning after December 31, 2013, and the denominator of an organization's MLR is the organization's total premium revenue for the first taxable year beginning after December 31, 2013.

    (ii) First taxable year beginning after December 31, 2014. For the first taxable year beginning after December 31, 2014, the numerator of an organization's MLR is the sum of the total premium revenue expended on reimbursement for clinical services and activities that improve health care quality provided to enrollees under its policies for the first taxable year beginning after December 31, 2013, and for the first taxable year beginning after December 31, 2014, and the denominator of an organization's MLR is the sum of the organization's total premium revenue for the first taxable year beginning after December 31, 2013, and for the first taxable year beginning after December 31, 2014.

    (d) Failure to qualify under section 833(c)(5)—(1) In general. If, for any taxable year, an organization's MLR is less than 85 percent, then beginning in that taxable year and for each subsequent taxable year for which the organization's MLR remains less than 85 percent, paragraphs (d)(1)(i) and (ii) of this section apply.

    (i) Special deduction. The organization is not allowed the special deduction set forth in section 833(b).

    (ii) Premiums earned. The organization must take into account 80 percent, rather than 100 percent, of its unearned premiums under section 832(b)(4) as it applies to other non-life insurance companies.

    (2) No material change. An organization's loss of eligibility for the treatment provided by sections 833(a)(2) and (3) solely by reason of section 833(c)(5) will not be treated as a material change in the operations of such organization or in its structure for purposes of section 833(c)(2)(C).

    (e) Effective/applicability date. This section applies to taxable years beginning after December 31, 2016. However, taxpayers may rely on this section for taxable years beginning after December 31, 2009.

    John Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: May 18, 2016. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy).
    [FR Doc. 2016-14784 Filed 6-21-16; 8:45 am] BILLING CODE 4830-01-P
    DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket No. USCG-2016-0460] RIN 1625-AA00 Safety Zone; Detroit River Days Air Show, Detroit River, Detroit, MI AGENCY:

    Coast Guard, DHS.

    ACTION:

    Temporary final rule.

    SUMMARY:

    The Coast Guard is establishing a temporary safety zone on the waters of the Detroit River in the vicinity of Detroit, MI. This zone is intended to restrict and control movement of vessels in a portion of the Detroit River. This zone is necessary to protect spectators and vessels from potential hazards associated with the Detroit River Days Air Show.

    DATES:

    This temporary final rule is effective from 12:30 p.m. on June 24, 2016 until 6:30 p.m. on June 26, 2016.

    ADDRESSES:

    Documents indicated in this preamble as being available in the docket are part of docket USCG-2016-0460 and are available online by going to www.regulations.gov, type the docket number in the “SEARCH” box and click “SEARCH.” Click on Open Docket Folder on the line associated with this rulemaking. They are also available for inspection or copying at the Docket Management Facility (M-30), U.S. Department of Transportation, West Building Ground floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

    FOR FURTHER INFORMATION CONTACT:

    If you have questions on this temporary final rule, call or email Petty Officer Todd Manow, Prevention Department, Sector Detroit, Coast Guard; telephone 313-568-9508, email [email protected]

    SUPPLEMENTARY INFORMATION:

    I. Table of Abbreviations CFR Code of Federal Regulations COTP Captain of the Port DHS Department of Homeland Security E.O. Executive Order FR Federal Register NAD 83 North American Datum of 1983 NPRM Notice of Proposed Rulemaking U.S.C. United States Code II. Background Information and Regulatory History

    On February 10, 2016, the Tuskegee Airmen National Historical Museum submitted an application for a marine event for an aerial display spanning three days in conjunction with the Detroit River Days Festival on June 24, 25, and 26, 2016. A safety zone is required by the Federal Aviation Administration to separate aircraft from persons and property on the ground or water's surface for all air shows. For the purposes of this event, the Coast Guard is establishing a safety zone around the proposed flight path and a standoff zone between the flight path and the shore, matching the safety zone created for this same event in 2015 [USCG-2015-0491].

    III. Legal Authority and Need for Rule

    The Coast Guard is issuing this rule under authority in 33 U.S.C. 1231, 33 CFR 1.05-1 and 160.5; and Department of Homeland Security Delegation No. 0170.1. Having reviewed the application for a marine event submitted by the sponsor on February 10, 2016, the Captain of the Port Detroit (COTP) has determined that an aircraft aerial display proximate to a gathering of watercraft poses a significant risk to public safety and property. Such hazards include potential aircraft malfunctions, loud noise levels, and waterway distractions. Therefore, the COTP is establishing a safety zone around the event location to help minimize risks to safety of life and property during this event.

    The Coast Guard is issuing this temporary final rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for not publishing a notice of proposed rulemaking with respect to this rule because waiting for a notice and comment period to run would be impracticable, unnecessary, and contrary to the public interest. Although an initial marine event application was submitted on February 10, 2016, final details regarding event area and patrol parameters were not known to the Coast Guard with sufficient time for the Coast Guard to solicit public comments before the start of the event. Thus, delaying the effective date of this rule to wait for a notice and comment period to run would be impracticable and contrary to the public interest because it would inhibit the Coast Guard's ability to protect the public from the hazards associated with this air show.

    Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the Federal Register. For the same reasons discussed in the preceding paragraph, waiting for a 30 day notice period to run would be impracticable and contrary to the public interest.

    IV. Discussion of the Rule

    This rule establishes a safety zone on U.S. waters of the Detroit River, Detroit, MI, from a point on shore in Milliken State Park at 42°19.87′ N., 083°01.65′ W., proceeding South-Southeast approximately 450 yards to a point mid-river corresponding with the international boundary at 42°19.67′ N., 083°01.57′ W., then proceeding approximately 1.3 miles West-Southwest along the international boundary to a point mid-river at 42°19.28′ N., 083°03.03′ W. and then proceeding to a point on shore just west of the Joe Lewis Arena at 42°19.45′ N., 083°03.17′ W., and then following the U.S. bank of the Detroit River upstream to the point of origin (NAD 83).

    Entry into, transiting, or anchoring within this safety zone is prohibited unless authorized by the COTP or his on-scene representative on a case-by-case basis. The COTP or his on-scene representative may be contacted via VHF Channel 16 to coordinate vessel transits during the enforcement period.

    V. Regulatory Analyses

    We developed this rule after considering numerous statutes and executive orders (E.O.) related to rulemaking. Below we summarize our analyses based these statutes or executive orders.

    A. Regulatory Planning and Review

    This rule is not a significant regulatory action under section 3(f) of E.O. 12866, Regulatory Planning and Review, as supplemented by E.O. 13563, Improving Regulation and Regulatory Review, and does not require an assessment of potential costs and benefits under section 6(a)(3) of E.O. 12866 or under section 1 of E.O. 13563. The Office of Management and Budget has not reviewed it under those Orders.

    We conclude that this rule is not a significant regulatory action because we anticipate that it will have minimal impact on the economy, will not interfere with other agencies, will not adversely alter the budget of any grant or loan recipients, and will not raise any novel legal or policy issues. The safety zone created by this rule will be relatively small and enforced for a relatively short duration, and is designed to minimize the impact on navigation. Moreover, under certain conditions, vessels may still transit through the safety zone when permitted by the COTP on a case-by-case basis.

    B. Impact on Small Entities

    The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities.

    This rule will affect the following entities, some of which might be small entities: The owners or operators of vessels intending to transit or anchor in portions of the Detroit River from 12:30 p.m. to 6:30 p.m. on June 24, 25 and 26, 2016.

    This safety zone will not have a significant economic impact on a substantial number of small entities for the reasons cited in the Regulatory Planning and Review section. Additionally, before the enforcement of these zones, Coast Guard Sector Detroit will issue a local Broadcast Notice to Mariners so vessel owners and operators can plan accordingly.

    Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule so that they can better evaluate its effects on them. If this rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the FOR FURTHER INFORMATION CONTACT section above. The Coast Guard will not retaliate against entities that question or complain about this rule or any policy or action of the Coast Guard.

    C. Collection of Information

    This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

    D. Federalism and Tribal Implications

    A rule has implications for federalism under E.O. 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and determined that this rule does not have implications for federalism.

    Also, this proposed rule does not have tribal implications under E.O. 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this proposed rule has implications for federalism or Indian tribes, please contact the person listed in the FOR FURTHER INFORMATION CONTACT section above.

    E. Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such expenditure, we do discuss the effects of this rule elsewhere in this preamble.

    F. Environment

    We have analyzed this rule under Department of Homeland Security Management Directive 023-01 and Commandant Instruction M16475.lD, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (NEPA)(42 U.S.C. 4321-4370f), and have concluded this action is one of a category of actions which do not individually or cumulatively have a significant effect on the human environment. This rule involves the establishment of a safety zone and is therefore categorically excluded from further review under paragraph 34(g) of Figure 2-1 of the Commandant Instruction. An environmental analysis checklist supporting this determination and a Categorical Exclusion Determination are available in the docket where indicated under ADDRESSES. We seek any comments or information that may lead to the discovery of a significant environmental impact from this rule.

    G. Protest Activities

    The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the FOR FURTHER INFORMATION CONTACT section to coordinate protest activities so that your message can be received without jeopardizing the safety or security of people, places, or vessels.

    H. Taking of Private Property

    This rule will not cause a taking of private property or otherwise have taking implications under E.O. 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights.

    I. Civil Justice Reform

    This rule meets applicable standards in sections 3(a) and 3(b)(2) of E.O. 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.

    J. Protection of Children

    We have analyzed this rule under E.O. 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and does not create an environmental risk to health or risk to safety that may disproportionately affect children.

    K. Energy Effects

    This action is not a “significant energy action” under E.O. 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use.

    List of Subjects in 33 CFR Part 165

    Harbors, Marine safety, Navigation (water), Reporting and record keeping requirements, Security measures, Waterways.

    For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 165 as follows:

    PART 165—REGULATED NAVIGATION AREAS AND LIMITED ACCESS AREAS 1. The authority citation for part 165 continues to read as follows: Authority:

    33 U.S.C. 1231; 50 U.S.C. 191; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5; Department of Homeland Security Delegation No. 0170.1.

    2. Add § 165.T09-0460 to read as follows:
    § 165.T09-0460 Safety Zone; Detroit River Days Air Show, Detroit River, Detroit, MI.

    (a) Location. The following area is a temporary safety zone: All U.S. waters of the Detroit River, Detroit, MI from a point on shore in Milliken State Park at 42°19.87′ N., 083°01.65′ W., proceeding South-Southeast approximately 450 yards to a point mid-river on the international boundary at 42°19.67′ N., 083°01.57′ N., then proceeding approximately 1.3 miles West-Southwest along the international boundary to a point mid-river at 42°19.28′ N., 083°03.03′ W., and then proceeding to a point on shore immediately West of the Joe Lewis arena at 42°19.45′ N., 083°03.17′ N., and then following the U.S. bank of the Detroit River upstream to the point of origin (NAD 83).

    (b) Enforcement periods. The safety zone described in paragraph (a) of this section will be enforced from 12:30 p.m. until 6:30 p.m. on June 24, 25, and 26, 2016.

    (c) Regulations. (1) In accordance with the general regulations in § 165.23, entry into, transiting, or anchoring within this safety zone is prohibited unless authorized by the Captain of the Port Detroit (COTP) or his on-scene representative.

    (2) The safety zone is closed to all vessel traffic, except as may be permitted by the COTP or his on-scene representative on a case-by-case basis.

    (3) The “on-scene representative” of the COTP is any Coast Guard commissioned, warrant or petty officer or a Federal, State, or local law enforcement officer designated by or assisting the COTP to act on his behalf.

    (4) Vessel operators must contact the COTP or his on-scene representative to obtain permission to enter or operate within the safety zone. The Captain of the Port Detroit or his on-scene representative may be contacted via VHF Channel 16 or at 313-568-9560. Vessel operators given permission to enter or operate in the safety zone must comply with all directions given to them by the COTP or his on-scene representative.

    Dated: June 14, 2016. Scott B. Lemasters, Captain, U.S. Coast Guard, Captain of the Port Detroit.
    [FR Doc. 2016-14817 Filed 6-21-16; 8:45 am] BILLING CODE 9110-04-P
    DEPARTMENT OF VETERANS AFFAIRS 38 CFR Parts 36 and 42 RIN 2900-AP78 Federal Civil Penalties Adjustment Act Amendments AGENCY:

    Department of Veterans Affairs.

    ACTION:

    Interim final rule.

    SUMMARY:

    The Federal Civil Monetary Penalties Act of 1990, as amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, sets forth a formula increasing the maximum statutory amounts for civil monetary penalties and requires federal agencies to give notice of the new maximum amounts by regulation. Accordingly, this document gives notice that the Department of Veterans Affairs (VA) is increasing maximum civil monetary penalties from $10,000 to $21,563 for false loan guaranty certifications and from $5,500 to $10,781 for fraudulent claims or fraudulent statements in any VA program.

    DATES:

    Effective Date: This interim final rule is effective June 22, 2016.

    Comment Date: Comments must be received on or before August 22, 2016.

    ADDRESSES:

    Written comments may be submitted through www.Regulations.gov; by mail or hand-delivery to Director, Regulation Policy and Management (02REG), Department of Veterans Affairs, 810 Vermont Ave. NW., Room 1068, Washington, DC 20420; or by fax to (202) 273-9026. Comments should indicate that they are submitted in response to “RIN 2900-AP78, Federal Civil Penalties Adjustment Act Amendments.” Copies of comments received will be available for public inspection in the Office of Regulation Policy and Management, Room 1068, between the hours of 8:00 a.m. and 4:30 p.m., Monday through Friday (except holidays). Please call (202) 461-4902 (this is not a toll-free number) for an appointment. In addition, during the comment period, comments may be viewed online through the Federal Docket Management System (FDMS) at www.Regulations.gov.

    FOR FURTHER INFORMATION CONTACT:

    Bill Russo, Director, Office of Regulations Management, Department of Veterans Affairs, 810 Vermont Avenue NW., Washington, DC 20420, (202) 386-6406.

    SUPPLEMENTARY INFORMATION:

    On November 2, 2015, the President signed into law the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the 2015 Act) (Sec. 701 of Pub. L. 114-74), which amended the Federal Civil Penalties Inflation Adjustment Act of 1990 (the Inflation Adjustment Act) (Pub. L. 101-410), to improve the effectiveness of civil monetary penalties and to maintain their deterrent effect.

    The 2015 Act requires agencies to: (1) Adjust the level of civil monetary penalties with an initial “catch-up” adjustment through an interim final rulemaking (IFR); and (2) make subsequent annual adjustments for inflation. Catch-up adjustments are to be based on the percent change between the Consumer Price Index for all Urban Consumers (CPI-U) for the month of October in the year of the previous adjustment, and the October 2015 CPI-U. Annual inflation adjustments are to be based on the percent change between the October CPI-U preceding the date of the adjustment, and the prior year's October CPI-U.

    The Executive Office of the President Office of Management and Budget (OMB) published guidance on February 24, 2016, advising the heads of federal agencies how to implement the 2015 Act. See https://www.whitehouse.gov/sites/default/files/omb/memoranda/2016/m-16-06.pdf. In the guidance, OMB provided the applicable multipliers that federal agencies should use when calculating their first adjustment. Agencies may not increase penalty levels by more than 150 percent of the corresponding levels in effect on November 2, 2015. Note: The 150 percent limitation is on the amount of the increase; therefore, the adjusted penalty level(s) are up to 250 percent of the level(s) in effect on November 2, 2015.

    Civil Monetary Penalties in the Home Loan Guaranty Program

    The Veterans' Benefits Improvement and Health-Care Authorization Act of 1986 authorized VA to levy civil monetary penalties against lenders that make false certifications in VA's home loan guaranty program. Public Law 99-576, sec. 402, Oct. 28, 1986, codified at 38 U.S.C. 3710(g)(4). Any lender that knowingly and willfully makes a false certification related to VA's credit information and loan processing standards is liable to the United States Government for a civil penalty equal to two times the amount of the Secretary's loss on the loan involved or to another appropriate amount, not to exceed $10,000, whichever is greater. See 38 CFR 36.4340(k). The applicable multiplier for a law enacted in 1986 is 2.15628. Therefore, this rule increases the civil penalty found at 38 CFR 36.4340(k)(1)(i) and 36.4340(k)(3) to the greater of two times the amount of the Secretary's loss on the loan involved or to another appropriate amount, not to exceed $21,563.

    Program Fraud Civil Remedies

    The Program Fraud Civil Remedies Act of 1986 authorized federal agencies to establish civil penalties and assessments against persons who commit fraud in federal programs. See Public Law 99-509, secs. 6101-6104, Oct. 21, 1986. For participants in VA's programs, a person is subject to a civil penalty (in addition to any other remedy that may be prescribed by law) for making a fraudulent claim or statement, as described in 38 CFR 42.3. .

    The Program Fraud Civil Remedies Act of 1986 originally established the amount of the civil penalty at $5,000. See Public Law 99-509, secs. 6101-6104, Oct. 21, 1986. VA increased the amount to $5,500 in 1990, in accordance with the Inflation Adjustment Act. VA has not changed the amount other than when it implemented the adjustment due to the Inflation Adjustment Act.

    As stated above, OMB has advised that the applicable multiplier for laws enacted in 1986 is 2.15628. Rather than applying the multiplier to $5,500, however, VA is applying the multiplier to the amount originally established in the Program Fraud Civil Remedies Act of 1986, $5,000. The initial adjustment from $5,000 to $5,500 is not to be taken into account. This is because, under the 2015 Act, agencies are to exclude from the catch-up prior inflationary adjustments implemented under the Inflation Adjustment Act. Therefore, as of the effective date of this rule, the amounts found at 38 CFR 42.3(a)(1) and 38 CFR 42.3(b)(1) are amended from $5,500 to $10,781.

    Updating Authority Section, 38 CFR Part 42

    VA is also updating the language to account for the codification of the authority cited by 38 U.S.C. Ch. I, Pt. 41, Refs & Annos. Currently, the language states that the cited authorities are “. . . to be codified at 31 U.S.C. 3801-3812.” The authorities are now codified at 31 U.S.C. 3801-3812. Consequently, VA is removing “to be codified” and replacing it with “codified”.

    Administrative Procedure Act

    In accordance with 5 U.S.C. 553(b)(B) and (d)(3), the Secretary of Veterans Affairs finds, with good cause, that notice and public procedure thereon are unnecessary. This interim final rule merely calculates the adjustment percentages, specified by the 2015 Act, for codification as a VA regulation.

    This final rule does not impose any additional responsibilities on any entity and therefore requires no adjustment to any entity's current operations, policies, or practices. Instead, it simply adjusts the amount of each civil monetary penalty as prescribed by the 2015 Act.

    Executive Orders 12866 and 13563

    Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, and other advantages; distributive impacts; and equity). Executive Order 13563 (Improving Regulation and Regulatory Review) emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. Executive Order 12866 (Regulatory Planning and Review) defines a “significant regulatory action,” which requires review by OMB, as “any regulatory action that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this Executive Order.”

    The economic, interagency, budgetary, legal, and policy implications of this regulatory action have been examined, and it has been determined that it is not a significant regulatory action under Executive Order 12866.

    Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C. 1532, that agencies prepare an assessment of anticipated costs and benefits before issuing any rule that may result in expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation) in any one year. This interim final rule will have no such effect on State, local, and tribal governments, or on the private sector.

    Paperwork Reduction Act

    This interim final rule contains no provisions constituting a collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521).

    Regulatory Flexibility Act

    The Secretary hereby certifies that this final rule will not have a significant economic impact on a substantial number of small entities as they are defined in the Regulatory Flexibility Act, 5 U.S.C. 601-612. Accordingly, no proposed rulemaking was required in connection with the adoption of this final rule. Pursuant to 5 U.S.C. 605(b), this final rule is exempt from the initial and final regulatory flexibility analyses requirements of sections 603 and 604.

    Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number and title for the program affected by this document is 64.114, Veterans Housing—Guaranteed and Insured Loans.

    Signing Authority

    The Secretary of Veterans Affairs, or designee, approved this document and authorized the undersigned to sign and submit the document to the Office of the Federal Register for publication electronically as an official document of the Department of Veterans Affairs. Robert D. Snyder, Chief of Staff, Department of Veterans Affairs, approved this document on May 31, 2016, for publication.

    Dated: June 16, 2016. Jeffrey Martin, Office Program Manager, Office of Regulation Policy & Management, Office of the Secretary, Department of Veterans Affairs. List of Subjects in 38 CFR Part 36

    Condominiums, Housing, Individuals with disabilities, Loan programs-housing and community development, Loan programs-veterans, Manufactured homes, Mortgage insurance, Reporting and recordkeeping requirements, Veterans.

    For the reasons set out in the preamble, VA amends 38 CFR parts 36 and 42 as follows:

    PART 36—LOAN GUARANTY 1. The authority citation for part 36 continues to read as follows: Authority:

    38 U.S.C. 501 and as otherwise noted.

    2. In § 36.4340, amend paragraphs (k)(1)(i) and (k)(3) by removing “$10,000” and adding, in its place, “$21,563” and by revising the authority citation at the end of the section to read as follows:
    § 36.4340 Underwriting standards, processing procedures, lender responsibility, and lender certification. (Authority: 28 U.S.C. 2461; 38 U.S.C. 3710)
    PART 42—STANDARDS IMPLEMENTING THE PROGRAM FRAUD CIVIL REMEDIES ACT 3. The authority citation for part 42 is revised to read as follows: Authority:

    Pub. L. 99-509, secs. 6101-6104, 100 Stat. 1874, codified at 31 U.S.C. 3801-3812.

    4. In § 42.3, amend paragraphs (a)(1) and (b)(1) by removing “$5,500” and adding, in its place, “$10,781”, and by revising the authority citation at the end of the section, to read as follows:
    § 42.3 Basis for Civil Penalties and Assessments. (Authority: 28 U.S.C. 2461; 31 U.S.C. 3802)
    [FR Doc. 2016-14592 Filed 6-21-16; 8:45 am] BILLING CODE 8320-01-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA-R09-OAR-2015-0187; FRL-9948-01-Region 9] Limited Disapproval of Air Plan Revisions; Arizona; New Source Review; PM2.5 AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Final rule.

    SUMMARY:

    The Environmental Protection Agency (EPA) is finalizing a limited disapproval of a revision to the Arizona Department of Environmental Quality (ADEQ) portion of the Arizona State Implementation Plan (SIP) under the Clean Air Act (CAA or Act). This ADEQ-submitted SIP revision primarily was intended to serve as a replacement of ADEQ's SIP-approved rules for the issuance of New Source Review (NSR) permits for stationary sources, including but not limited to the rules governing the review and permitting of major sources and major modifications under the Act. This action concerns only the major nonattainment NSR provisions in ADEQ's submittal as they pertain to the Nogales and West Central Pinal nonattainment areas for particulate matter with a diameter of 2.5 micrometers or less (PM2.5). The EPA previously finalized a limited approval for these PM2.5 nonattainment areas related to certain major nonattainment NSR permitting requirements for PM2.5 under the CAA. We subsequently proposed a limited disapproval for these PM2.5 nonattainment areas to set the stage for remedying certain deficiencies related to these nonattainment NSR permitting requirements for PM2.5, and this action finalizes this limited disapproval.

    DATES:

    This rule will be effective on July 22, 2016.

    ADDRESSES:

    The EPA has established docket number EPA-R09-OAR-2015-0187 for this action. Generally, documents in the docket for this action are available electronically at http://www.regulations.gov or in hard copy at EPA Region IX, 75 Hawthorne Street, San Francisco, California 94105-3901. While all documents in the docket are listed at http://www.regulations.gov, some information may be publicly available only at the hard copy location (e.g., copyrighted material, large maps, multi-volume reports), and some may not be available in either location (e.g., confidential business information (CBI)). To inspect the hard copy materials, please schedule an appointment during normal business hours with the contact listed in the FOR FURTHER INFORMATION CONTACT section.

    FOR FURTHER INFORMATION CONTACT:

    Lisa Beckham, EPA Region IX, (415) 972-3811, [email protected]

    SUPPLEMENTARY INFORMATION:

    Throughout this document, “we,” “us” and “our” refer to the EPA.

    Table of Contents I. Proposed Action II. Public Comments and EPA Responses III. EPA Action IV. Statutory and Executive Order Reviews I. Proposed Action

    On May 2, 2016, the EPA proposed a limited disapproval of the major nonattainment NSR portion of ADEQ's NSR SIP submittal for PM2.5 as it pertains to the requirements of CAA section 189(e). See 81 FR 26185. ADEQ's NSR SIP submittal generally includes requirements for the PM2.5 nonattainment NSR program for major sources consistent with the provisions promulgated in the EPA's 2008 NSR PM2.5 Rule. Specifically, ADEQ's NSR SIP submittal includes the PM2.5 significant emission rates at R18-2-101(130), regulation of certain PM2.5 precursors (SO2 and NOX) at R18-2-101(130), the regulation of PM10 and PM2.5 condensable emissions at R18-2-101(122)(f), and the emissions offset requirements at R18-2-403(A)(3). The EPA approved these provisions into ADEQ's SIP as part of a limited approval and limited disapproval, and other actions, on November 2, 2015 (80 FR 67319). At that time, we did not determine that the submittal fully addressed section 189(e) in title I, Part D, subpart 4 of the Act, related to NSR permitting requirements for PM2.5 for major stationary sources in PM2.5 nonattainment areas, and instead finalized a limited approval related to the requirements of subpart 4 based on this issue.

    For PM2.5 nonattainment areas, CAA section 189(e) requires that the control requirements applicable under plans in effect under part D of the CAA for major stationary sources of PM2.5 also apply to major stationary sources of PM2.5 precursors, except where the Administrator determines that such sources do not contribute significantly to PM2.5 levels that exceed the standards in the area. In our May 2, 2016 proposed action, we proposed to determine that ADEQ's NSR SIP submittal does not fully satisfy the major nonattainment NSR requirements for PM2.5 under section 189(e) of the Act for the Nogales and West Central Pinal PM2.5 nonattainment areas, based on our finding that the submittal does not include rules regulating VOCs or ammonia as PM2.5 precursors under the major source nonattainment NSR program, nor does it include a demonstration showing that the regulation of VOCs and ammonia is not necessary under section 189(e).

    The preamble in the Federal Register notification for our proposed action contains more information on the basis for this rulemaking and on our evaluation of the submittal.

    II. Public Comments and EPA Responses

    The EPA's May 2, 2016 proposed action provided a 30-day public comment period. During this period, we did not receive any comments on our proposal.

    III. EPA Action

    No comments were submitted on our proposed action. Therefore, as authorized in sections 110(k) of the Act, the EPA is finalizing a limited disapproval of the ADEQ NSR SIP submittal for the Nogales and West Central Pinal PM2.5 nonattainment areas under section 189(e) of the Act related to PM2.5 precursors.

    As a result of this final action, the EPA must promulgate a federal implementation plan (FIP) under section 110(c) to address the deficiencies that are the subject of this action unless we approve subsequent SIP revisions that correct the deficiencies within 24 months. In addition, sanctions will be imposed unless the EPA approves subsequent SIP revisions that correct these deficiencies within 18 months of the effective date of this action. These sanctions would be imposed under section 179 of the Act and 40 CFR 52.31.

    IV. Statutory and Executive Order Reviews

    Additional information about these statutes and Executive Orders can be found at http://www2.epa.gov/laws-regulations/laws-and-executive-orders.

    A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review

    This action is not a significant regulatory action and was therefore not submitted to the Office of Management and Budget (OMB) for review.

    B. Paperwork Reduction Act (PRA)

    This action does not impose an information collection burden under the PRA because this action does not impose additional requirements beyond those imposed by state law.

    C. Regulatory Flexibility Act (RFA)

    I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA. This action will not impose any requirements on small entities beyond those imposed by state law.

    D. Unfunded Mandates Reform Act (UMRA)

    This action does not contain any unfunded mandate as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. This action does not impose additional requirements beyond those imposed by state law. Accordingly, no additional costs to State, local, or tribal governments, or to the private sector, will result from this action.

    E. Executive Order 13132: Federalism

    This action does not have federalism implications. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government.

    F. Executive Order 13175: Coordination With Indian Tribal Governments

    This action does not have tribal implications, as specified in Executive Order 13175, because the SIP is not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction, and will not impose substantial direct costs on tribal governments or preempt tribal law. Thus, Executive Order 13175 does not apply to this action.

    G. Executive Order 13045: Protection of Children From Environmental Health Risks and Safety Risks

    The EPA interprets Executive Order 13045 as applying only to those regulatory actions that concern environmental health or safety risks that the EPA has reason to believe may disproportionately affect children, per the definition of “covered regulatory action” in section 2-202 of the Executive Order. This action is not subject to Executive Order 13045 because it does not impose additional requirements beyond those imposed by state law.

    H. Executive Order 13211: Actions That Significantly Affect Energy Supply, Distribution, or Use

    This action is not subject to Executive Order 13211, because it is not a significant regulatory action under Executive Order 12866.

    I. National Technology Transfer and Advancement Act (NTTAA)

    Section 12(d) of the NTTAA directs the EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. The EPA believes that this action is not subject to the requirements of section 12(d) of the NTTAA because application of those requirements would be inconsistent with the CAA.

    J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Population

    The EPA lacks the discretionary authority to address environmental justice in this rulemaking.

    K. Congressional Review Act (CRA)

    This action is subject to the CRA, and the EPA will submit a rule report to each House of the Congress and to the Comptroller General of the United States. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

    L. Petitions for Judicial Review

    Under section 307(b)(1) of the Clean Air Act, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by August 22, 2016. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this rule for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements (see section 307(b)(2)).

    List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Ozone, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.

    Dated: June 13, 2016. Alexis Strauss, Acting Regional Administrator, Region IX.
    [FR Doc. 2016-14669 Filed 6-21-16; 8:45 am] BILLING CODE 6560-50-P
    FEDERAL COMMUNICATIONS COMMISSION 47 CFR Part 74 [MB Docket No. 03-185; GN Docket No. 12-268; ET Docket No. 14-175; FCC 15-175] Low Power Television Digital Rules AGENCY:

    Federal Communications Commission.

    ACTION:

    Final rule; announcement of effective date.

    SUMMARY:

    In this document, the Federal Communications Commission (Commission) announces that the Office of Management and Budget (OMB) has approved, for a period of three years, certain information collection requirements associated with the Commission's Low Power Television Digital Rules Report and Order, FCC 15-175. This document is consistent with the Low Power Television Digital Rules Report and Order, which stated that the Commission would publish a document in the Federal Register announcing OMB approval and the effective date of the rule.

    DATES:

    47 CFR 74.800, published at 81 FR 5041, February 1, 2016, is effective June 22, 2016.

    FOR FURTHER INFORMATION CONTACT:

    Cathy Williams, [email protected], (202) 418-2918.

    SUPPLEMENTARY INFORMATION:

    This document announces that, on June 15, 2016, OMB approved the information collection requirements contained in the Commission's Low Power Television Digital Rules Report and Order, FCC 15-175, published at 81 FR 5041, February 1, 2016. The OMB Control Number is 3060-1177. The Commission publishes this document as an announcement of the effective date of the requirement. If you have any comments on the burden estimates listed below, or how the Commission can improve the collections and reduce any burdens caused thereby, please contact Cathy Williams, Federal Communications Commission, Room 1-C823, 445 12th Street SW., Washington, DC 20554. Please include the OMB Control Number, 3060-1177, in your correspondence. The Commission will also accept your comments via the Internet if you send them to [email protected].

    To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an email to [email protected] or call the Consumer and Governmental Affairs Bureau at (202) 418-0530 (voice), (202) 418-0432 (TTY).

    Synopsis

    As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507), the FCC is notifying the public that it received OMB approval on June 15, 2016 for the information collection requirements contained in FCC 15-175, 47 CFR 74.800. Under 5 CFR 1320, an agency may not conduct or sponsor a collection of information unless it displays a current, valid OMB Control Number.

    No person shall be subject to any penalty for failing to comply with a collection of information subject to the Paperwork Reduction Act that does not display a current, valid OMB Control Number. The OMB Control Number is 3060-1177. The foregoing document is required by the Paperwork Reduction Act of 1995, Public Law 104-13, October 1, 1995, and 44 U.S.C. 3507.

    The total annual reporting burdens and costs for the respondents are as follows:

    OMB Control No.: 3060-1177.

    OMB Approval Date: June 15, 2016.

    OMB Expiration Date: June 30, 2019.

    Title: 47 CFR 74.800, Channel Sharing Agreement.

    Form Numbers: Not applicable.

    Respondents: Business or other for profit entities; Not for profit institutions; State, local or Tribal government.

    Number of Respondents/Responses: 100 respondents; 100 responses.

    Estimated Hours per Response: 1 hr.

    Frequency of Response: One time reporting requirement.

    Total Annual Burden: 100 hours.

    Total Annual Cost: $54,000.

    Obligation to Respond: Required to obtain benefits. The statutory authority for this information collection is contained in sections 1, 4(i) and (j), 7, 154(i), 301, 302, 303, 307, 308, 309, 312, 316, 318, 319, 324, 325, 336 and 337 of the Communications Act of 1934, as amended.

    Nature and Extent of Confidentiality: There is no need for confidentiality with this collection of information.

    Privacy Act Assessment: No impact(s).

    Needs and Uses: On December 18, 2015, the Commission released a Third Report and Order and Fourth Notice of Proposed Rulemaking, In the Matter of Amendment of Parts 73 and 74 of the Commission's Rules to Establish Rules for Digital Low Power Television and Television Translator Stations, MB Docket No. 03-185, FCC 15-175. Low power television and television translator stations (collectively “LPTV stations”) will be required to include certain terms in their channel sharing agreements (CSAs) and to file their CSAs with the Commission. This new requirement is provided in 47 CFR 74.800.

    Federal Communications Commission.

    Marlene H. Dortch, Secretary, Office of the Secretary.
    [FR Doc. 2016-14804 Filed 6-21-16; 8:45 am] BILLING CODE 6712-01-P
    DEPARTMENT OF TRANSPORTATION National Highway Traffic Safety Administration 49 CFR Part 562 [Docket No. NHTSA-2016-0064] RIN 2127-AL28 Lighting and Marking on Agricultural Equipment AGENCY:

    National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).

    ACTION:

    Final rule.

    SUMMARY:

    Pursuant to the Moving Ahead for Progress in the 21st Century Act (MAP-21), the agency is adding a new regulation to the CFR that sets forth requirements for lighting and marking on agricultural equipment to improve daytime and nighttime visibility. It standardizes lighting and marking requirements for agricultural equipment across the United States.

    DATES:

    Effective Date: June 22, 2016.

    Compliance Date: June 22, 2017.

    The incorporation by reference of certain publications listed in the rule is approved by the Director of the Federal Register as of June 22, 2016.

    ADDRESSES:

    Mail: Docket Management Facility, M-30, U.S. Department of Transportation, 1200 New Jersey Avenue SE., West Building, Ground Floor, Room W12-140, Washington, DC 20590.

    Hand Delivery: U.S. Department of Transportation, 1200 New Jersey Avenue SE., West Building, Ground Floor, Room W12-140, between 9 a.m. and 5 p.m. Eastern Time, Monday through Friday, except Federal holidays.

    Fax: 202-493-2251.

    Docket: For access to the docket to read background documents, go to http://www.regulations.gov, or the street address listed above. Follow the online instructions for accessing the dockets.

    FOR FURTHER INFORMATION CONTACT:

    For technical issues: Mr. Wayne McKenzie, Office of Crash Avoidance Standards, NHTSA, 1200 New Jersey Avenue SE., West Building, Washington, DC 20590 (Telephone: (202) 366-0098) (Fax: (202) 366-7002).

    For legal issues: Ms. Rebecca Yoon, Office of the Chief Counsel, NHTSA, 1200 New Jersey Avenue SE., West Building, Washington, DC 20590 (Telephone: (202) 366-2992) (Fax: (202) 366-3820).

    SUPPLEMENTARY INFORMATION:

    Table of Contents I. Executive Summary II. Background III. Legislative Mandate Under the Moving Ahead for Progress in the 21st Century Act (MAP-21) IV. Notice and Comment Are Unnecessary V. American Society of Agricultural and Biological Engineers (ASABE) Standards Development VI. Summaries of and Availability of ASABE Standards 390.4; “Definitions and Classifications of Agricultural Field Equipment” and 279.14; “Lighting and Marking of Agricultural Equipment on Highways” VII. NHTSA Is Incorporating ASABE Standards by Reference VIII. Costs and Benefits IX. Rulemaking Analyses I. Executive Summary

    On July 6, 2012, the President signed into law the Moving Ahead for Progress in the 21st Century Act (MAP-21), Public Law 112-141. Section 31601 of MAP-21 contains a non-discretionary mandate concerning daytime and nighttime visibility of agricultural equipment that may be operated on public roads.1 It requires NHTSA 2 to establish lighting and marking standards equivalent to an existing industry standard for agricultural equipment that may be operated on public roads.

    1 Section 31601 of MAP-21 was classified as a note to 49 U.S.C. 30111.

    2 Section 31601 of MAP-21 directs the Secretary of Transportation to promulgate this rule. This authority is delegated to the National Highway Traffic Administrator at 49 CFR 1.95.

    This rulemaking implements that mandate by adopting the American Society of Agricultural and Biological Engineers (ASABE) Standard 279.14, a voluntary industry consensus standard, for originally manufactured agricultural equipment.

    II. Background

    NHTSA has not regulated the manufacture of most agricultural equipment in the past, because it did not have specific authority to do so. Under the National Traffic and Motor Vehicle Safety Act (49 U.S.C. Chapter 30101 et. seq.) (Safety Act), NHTSA is authorized to regulate motor vehicles and items of motor vehicle equipment. NHTSA has interpreted most types of agricultural equipment to be outside the definition of “motor vehicle” contained in the Safety Act, and therefore beyond NHTSA's safety authority. As defined in the Safety Act, a motor vehicle means “a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways. . . .” (49 U.S.C. 30102). We have stated that vehicles equipped with tracks, agricultural equipment, and other vehicles incapable of highway travel are not motor vehicles. We have also determined that certain vehicles designed and sold solely for off-road use (e.g., airport runway vehicles and underground mining vehicles) are not motor vehicles, even if they may be operationally capable of highway travel. Also, vehicles are not motor vehicles if they were designed to be used primarily at off-road job sites and, although capable of being operated on public roads from one job site to another, use roads only incidentally to the primary purpose for which they were manufactured (e.g., mobile cranes).3

    3See e.g., letter of interpretation to Ms. Melissa A. Burt on Jan. 12, 2005, available at http://isearch.nhtsa.gov/files/Supreme_intl.html (last accessed May 31, 2016).

    Use of most agricultural equipment on the public roadways is intermittent and merely incidental to its primary off-road use. In a limited number of circumstances NHTSA has determined a piece of agricultural equipment to be a motor vehicle based on the specific factors listed above, such as its necessary and recurring use of public roads.4 However, NHTSA does not consider the vast majority of pieces of agricultural equipment to be motor vehicles within the meaning of the Safety Act.

    4See e.g., id. (determining that the Truck Mount Feed Processor was a motor vehicle based on its more-than-incidental use of public roads and the fact that the vehicle is constructed using a chassis cab, which was not altered in ways that would limit it to off-road use).

    Consequently, States have been the primary sources of regulations for agricultural equipment lighting and marking. The result has been a varied landscape of regulations. NHTSA understands that this has created difficulties for manufacturers seeking to sell and market agricultural equipment that will meet all State on-road use requirements in multiple States. A national requirement for lighting and marking on agricultural equipment may reduce costs and increase efficiency for manufacturers selling agricultural equipment in multiple States.

    As discussed in greater detail in Section VI below, ASABE's development of voluntary standards has begun to standardize the requirements for agricultural equipment. Some States have adopted versions of ASABE Standard 279 as their requirement for lighting and marking on agricultural equipment.

    MAP-21 contains a non-discretionary mandate requiring NHTSA to establish a Federal rule for lighting and marking on agricultural equipment that is equivalent to the ASABE lighting and marking standard. NHTSA is issuing this rule in response to that mandate. This creates a federal, nationwide standard for lighting and marking on agricultural equipment, which may reduce the burden on manufacturers manufacturing agricultural equipment for sale in multiple States.

    III. Legislative Mandate Under MAP-21

    Section 31601 of MAP-21 contains the non-discretionary requirement that NHTSA establish minimum lighting and marking standards for agricultural equipment that may be operated on public roads. Section 31601 requires NHTSA's standards to be equivalent to ASABE 279.14, or any successor standard. The term “agricultural equipment,” as it applies in this section of MAP-21, has the meaning given the term “agricultural field equipment” in ASABE Standard 390.4, entitled “Definitions and Classifications of Agricultural Field Equipment,” or any successor standard. Standard 390.4 defines “agricultural field equipment” as “any agricultural tractor,5 self-propelled machine,6 implement 7 or any combination thereof that is primarily designed for agricultural field operations.” Additionally, “public road” is defined as “any road or street under the jurisdiction of and maintained by a public authority and open to public travel.”

    5 ASABE defines an agricultural tractor as “A traction machine, intended primarily for off-road usage, designed and advertised primarily to supply power to agricultural implements. . . .” ANSI/ASAE S390.4 JAN2005, 3.1.1-3.1.1.12.

    6 ASABE defines a self-propelled machine as “a machine designed with an integral power unit to provide mobility, tractive effort, and process power for performing agricultural operations.” Examples include beet harvesters, combines, cotton pickers, forage harvesters, cotton strippers, and forage balers. ANSI/ASAE S390.4 JAN2005, 3.1.2-3.1.2.3.2.

    7 The ASABE definition further defines and lists agricultural implements as items that are pulled by or mounted on a tractor and used to perform agricultural field operations, such as planters or seed drills. ANSI/ASAE S390.4 JAN2005, 3.1.3-3.1.3.10.

    Given the clear and direct language contained in section 31601, NHTSA does not have the discretion to choose to base its standards on any standard other than ASABE Standard 279.14 or an equivalent standard, or to set a standard that differs in any way from ASABE Standard 279.14 or an equivalent standard.

    NHTSA is required to promulgate the rule required by section 31601 within two years of MAP-21's enactment. At least once every five years after promulgating the rule, NHTSA is required to review it and update it consistent with the most recent revision of ASABE Standard 279.

    Section 31601 also specifies that the promulgated rule may not prohibit the operation on public roads of agricultural equipment that is equipped with lighting and marking materials and equipment that comply with revisions of ASABE Standard 279 that are later than the one reflected in the rule. The promulgated rule also may not prohibit the operation on public roads of agricultural equipment that is equipped with lighting and marking materials and equipment in addition to those required by the rule.

    The promulgated rule may not require retrofitting of agricultural equipment manufactured before the effective date of the rule.

    Section 31601 also contains the requirement that NHTSA establish such standards at least one year after the date on which the rule establishing such standards is promulgated. Accordingly, the compliance date for this rule is June 22, 2017.

    Finally, section 31601(b)(1) requires that NHTSA consult with representatives from ASABE, appropriate Federal agencies, and with other appropriate persons prior to promulgating this rule. NHTSA met with representatives from ASABE, the Association of Equipment Manufacturers, and AGCO in April 2013 to consult with them regarding this rulemaking. We have also reached out to other agricultural equipment manufacturers. Additionally, NHTSA has identified the following appropriate Federal agencies and consulted with them regarding this rulemaking: the Federal Motor Carrier Safety Administration, the Occupational Safety and Health Administration, and the United States Department of Agriculture.

    IV. Notice and Comment Are Unnecessary

    Generally, agencies may promulgate final rules only after issuing a notice of proposed rulemaking and providing an opportunity for public comment under procedures required by the Administrative Procedure Act (APA), as provided in 5 U.S.C. 553(b) and (c). However, 5 U.S.C. 553(b)(3)(B) provides an exception to these requirements when notice and public comment procedures are “impracticable, unnecessary, or contrary to the public interest.”

    NHTSA finds that notice and comment is unnecessary prior to adoption of this final rule because Congress statutorily mandated that NHTSA adopt specific existing lighting and agricultural marking standards. By incorporating these standards into federal regulation, NHTSA is performing a non-discretionary act.

    MAP-21 expressly requires NHTSA to establish lighting and marking standards for agricultural equipment that are equivalent to ASABE Standard 279.14, or any successor standard. NHTSA is not aware of any other lighting and marking standard for agricultural equipment that is equivalent to ASABE Standard 279.14 or any successor standard. Because NHTSA's statutory authority is limited to either incorporating ASABE Standard 279.14, or an equivalent standard, NHTSA is unable to amend the rule to address any comments it may receive during a comment period. For this reason, a notice and comment period is unnecessary for this rulemaking.

    Therefore, NHTSA may adopt this rule without issuing a notice of proposed rulemaking and receiving public comment, in accordance with the APA. For these same reasons, the rule will be effective on June 22, 2016.

    V. ASABE Standards Development

    Since its inception in 1907, ASABE 8 has been an educational and scientific organization in the areas of agricultural, food and biological systems. Over the years, membership has grown to over 8,000 members in over 100 countries. Its involvement in the industry has evolved to include the creation and development of its own voluntary standards that have become widely accepted. Many States use ASABE standards as the basis for their own regulations. ASABE has developed a comprehensive standards development process that gives its Standards Committee members as well as the general membership population ample involvement and input in the journey from proposal to final adopted standard.

    8 ASABE was founded as the American Society of Agricultural Engineers. The society changed its name to the American Society of Agricultural and Biological Engineers in 2005 to reflect its representation of biological engineers. ASABE: Engineering a Sustainable Tomorrow, available at http://www.asabe.org/media/67573/timeline_reverse.pdf (last accessed May 31, 2016).

    ASABE's standard creation is a 12 step process from start to finish that is supervised by ASABE's Standards Development and Oversight Committees.9 After making it through the proposal phase, a draft standard is created that is voted on by all members of the Standards Development Committee. In order for it to be approved, at least 50% of the total Standards Development Committee must vote and it must receive 75% of those votes in favor. Upon receiving approval from the Standards Development Committee, it is sent to the Oversight Committee, which reviews both the standard and the voting results of the Standards Committee. After receiving approval from the Oversight Committee the standard is approved and published.10

    9 ASABE Staff. (n.d.). Standards. In Standards Development Tools—Standardization Procedures, available at http://www.asabe.org/standards.aspx (last accessed May 31, 2016).

    10 ASABE Staff. (n.d.). Standards. In Standards Development Tools-•Flow chart of the ASABE Standards Process, available at http://www.asabe.org/standards.aspx (last accessed May 16, 2016).

    VI. Summaries of and Availability of ASABE Standards 390.4; “Definitions and Classifications of Agricultural Field Equipment” and 279.14; “Lighting and Marking of Agricultural Equipment on Highways”

    ASABE initially developed Standard 279, “Lighting and Marking of Agricultural Equipment on Highways,” in 1954. Since then, the standard has been modified and revised numerous times. ASABE continues to update it. It contains voluntary standards specified for lighting and marking for all types of agricultural field equipment (as defined in ASABE Standard 390) that may be operated on public highways and roads. ASABE defines “agricultural field equipment” as “any agricultural tractor, self-propelled machine, implement or any combination thereof that is primarily designed for agricultural field operations.” Section 31601 of MAP-21 defines “agricultural equipment,” for purposes of this rulemaking, to be the same as ASABE's definition for “agricultural field equipment.”

    ASABE Standard 279.14 and the definition of “agricultural field equipment” at 390.4 are the versions of the standards that are expressly identified in MAP-21. MAP-21 states that NHTSA may establish a rule that is equivalent to these or any successor standards. MAP-21 additionally states that NHTSA may not prohibit the operation on public roads of agricultural equipment that is equipped with lighting and marking in accordance with later versions of the ASABE standard than the one incorporated at promulgation.

    ASABE has updated both Standard 279, which is currently on version 279.18, and the definition section, which is currently on version 390.5, since MAP-21 became effective. Based on our review, NHTSA does not believe that ASABE's updates to these standards are significant for purposes of this rulemaking.

    ASABE Standard 390.4 defines agricultural field equipment as “Agricultural tractors, self-propelled machines, implements, and combinations thereof designed primarily for agricultural field operations.”

    At the present time, many States use various versions of the standard. States do not always incorporate the latest version of Standard 279 or update their standards to reflect the latest version. This has created a landscape with a variety of slightly differing standards by State. Adopting ASABE Standard 279.14, as mandated by Congress, may help standardize lighting and marking requirements for agricultural field equipment by establishing one federal requirement.

    The lighting and marking 11 parameters of ASABE Standard 279.14 are as follows:

    11 Photometry testing, details, and limits are not reproduced here. To review these requirements, please see ASABE Standard 279.14, available in the DOT reading room.

    Category Requirements Tractors and Self-Propelled Equipment Two head lamps, two red tail lamps and at least two flashing amber warning lights must be mounted at the same height and spaced laterally as wide as possible. At least two flashing amber warning lights visible from both front and rear must be used when the machine is at least 3.7 m wide. Turn signals must be provided. For machines designed to exceed 40 km/h, at least two red rear facing stop lamps must be mounted that illuminate when operator has activated the brake control. If the machine is less than 1200 mm wide, only one stop lamp may be used. Machines that travel at less than 40 km/h may be equipped with red rear facing stop lamps. If equipped, then two red tail lamps must be mounted at the same height and spaced laterally as wide as possible. Two red retro reflective devices must be visible from the rear. Machines wider than 3.7 m shall have conspicuity material visible from both the front and rear. There are requirements for rotating beacons, if the agricultural equipment is equipped with them. One slow moving vehicle (SMV) identification emblem must be installed on the machine. There are CAN bus terminal receptacle requirements, if the agricultural equipment is equipped with them. Non Self-Propelled Equipment Equipment that obscures the SMV emblem of the propelling machine shall be equipped with an additional visible SMV emblem. Equipment that extends more than 1.2 m to the left or right of the propelling machine shall have at least one strip of yellow retro reflective material visible from the front and at least one strip of red retro reflective material visible from the rear applied to indicate the extreme projections of the equipment. Equipment more than 3.7 m wide must have at least two strips of yellow retro reflective material visible to the front and at least two strips of red retro reflective material visible to the rear of the machine. Equipment extending more than 5 m to the rear of the propelling vehicle shall be equipped with at least one SMV emblem and shall have yellow retro reflective material visible from the left and right sides. Equipment that obscures the tail lamps, flashing warning lamp, or stop lamp of the propelling machine, shall be fitted as appropriate with lighting to take the place of the lamp(s) obscured. Equipment that obscures the front or rear flashing lamps of the propelling machine shall have at least two amber flashing lamps symmetrically mounted to the machine, visible from the front or rear of the machine. Turn indicators shall be provided if necessary due to obstruction of turn indicators on the tow vehicle. Stop lamps shall be provided for machines designed to travel at speeds above 40 km/h if necessary due to obstruction of turn indicators on the tow vehicle. All required lamps on non-self-propelled equipment shall be connected to a seven terminal plug conforming to SAE J560.

    Both of these ASABE standards are reasonably available to the public. You may obtain a copy from ASABE through their Web site at http://www.asabe.org/publications/publications/standards.aspx and by mail at ASABE, 2950 Niles Road, St. Joseph, Michigan 49085-9659. Additionally, you may inspect a copy at the National Highway Traffic Safety Administration, 1200 New Jersey Avenue SE., Washington, DC 20590 or at the National Archives and Records Administration.

    VII. NHTSA Is Incorporating ASABE Standards by Reference

    To meet the statutory requirement to set standards, NHTSA is establishing a new standard at 49 CFR part 562. Section 31601 of MAP-21 requires that the lighting and marking standards established under that section be equivalent to ASABE Standard 279.14, or any successor standard. In response, NHTSA is incorporating ASABE Standard 279.14 in part 562 in its entirety.

    NHTSA believes that it can provide a limited amount of compliance flexibility by incorporating version 279.14 into our standard, rather than the most current version of 279, because MAP-21 does not allow NHTSA to prevent operation on public roads of equipment meeting later versions of the standard. In other words, by incorporating version 279.14, we are allowing compliance with the version identified by Congress or any later version. We believe this approach is consistent with Congress's intent, because it incorporates the version identified by Congress, while also providing some limited compliance flexibility.

    Section 31601 of MAP-21 gives the term “agricultural equipment” the same meaning as the term “agricultural field equipment” in ASABE Standard 390.4, or any successor standard. Accordingly, NHTSA is incorporating the ASABE Standard 390.4 definition of “agricultural field equipment” by reference. The ASABE definition for “agricultural field equipment,” which is the statutory definition for “agricultural equipment” under section 31601, includes tractors,12 self-propelled machines 13 and implements.14 Part 562 will apply to new agricultural equipment that may be operated on a public road, specifically defined as “any road or street under the jurisdiction of and maintained by a public authority and open to public travel.” 15 Personal equipment used primarily by homeowners, such as lawn tractors, and lawnmowers, is beyond the scope of this rulemaking.

    12 ASABE defines an agricultural tractor as “a traction machine, intended primarily for off-road usage, designed and advertised primarily to supply power to agricultural implements . . . .” ANSI/ASAE S390.5 JAN2011, 3.1.1-3.1.1.12.

    13 ASABE defines a self-propelled machine as “a machine designed with an integral power unit to provide mobility, tractive effort, and process power for performing agricultural operations.” Examples include beet harvesters, combines, cotton pickers, forage harvesters, cotton strippers, and forage balers. ANSI/ASAE S390.5 JAN2011, 3.1.2-3.1.2.3.2.

    14 The ASABE definition further defines and lists agricultural implements as items that are pulled by or mounted on a tractor and used to perform agricultural field operations, such as seed drills and planters. ANSI/ASAE S390.5 JAN2011, 3.1.3-3.1.3.10.

    15 This is more precise than the general description under the Safety Act that “motor vehicles” and “motor vehicle equipment” are those that are for use on “public streets, roads, and highways.” See 49 U.S.C. 30102(a)(6) and (7).

    Section 31601 of MAP-21 also requires that NHTSA establish these lighting and marking standards for applicable agricultural equipment manufactured at least one year after the date on which the rule establishing such standards is promulgated. Accordingly, the date on which agricultural equipment subject to this rule must be compliant is June 22, 2017.

    VIII. Costs and Benefits

    The majority of agricultural equipment that will be subject to the rule is produced by large, full-line equipment manufacturers, such as John Deere, Agco and Kubota. NHTSA believes that many of these large agricultural equipment manufacturers already build their products to comply with the latest version of ASABE Standard 279. As a result, NHTSA believes that the majority of pieces of agricultural equipment manufactured in the United States are already in compliance with ASABE Standard 279.14 or a successor standard.

    Those that are not already compliant with ASABE Standard 279 could easily be made so for a very low cost or at no cost. For example, the reflective conspicuity tape necessary for compliance can be purchased for as low as 75 cents per foot. More expensive components, such as head and tail lights, which are required for some pieces of equipment, can be sourced on the open market for less than $50.00 per set.

    NHTSA believes that manufacturers may benefit from this rulemaking because it seeks to federally standardize lighting and marking requirements for agricultural equipment that may be operated on public roads. We acknowledge that manufacturers may still need to equip their pieces of agricultural equipment with additional lighting and marking, as required by State laws. Equipping agricultural equipment subject to this rulemaking with additional lighting and marking than that required by part 562 is expressly allowed by section 31601 of MAP-21, and accordingly by NHTSA's rule.

    IX. Rulemaking Analyses A. Executive Orders 12866 and 13563 and DOT Regulatory Policies and Procedures

    Executive Order 12866, Executive Order 13563, and the Department of Transportation's regulatory policies require this agency to make determinations as to whether a regulatory action is “significant” and therefore subject to OMB review and the requirements of the aforementioned Executive Orders. Executive Order 12866 defines a “significant regulatory action” as one that is likely to result in a rule that may:

    (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or Tribal governments or communities;

    (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

    (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or

    (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

    We have considered the potential impact of this rulemaking under Executive Order 12866, Executive Order 13563, and the Department of Transportation's regulatory policies and procedures. This action was not reviewed by the Office of Management and Budget under E.O. 12866 and E.O. 13563. The agency has considered the impact of this action under the Department of Transportation's regulatory policies and procedures (44 FR 11034; February 26, 1979) and has determined that it is not “significant” under them.

    This rule creates a standard based on a Congressional mandate for agricultural equipment. It does not impose any additional requirements. The agency concludes that the impacts of the changes are not significant and that a preparation of a full regulatory evaluation is not required.

    B. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. 601 et seq., as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996), whenever an agency is required to publish a notice of proposed rulemaking or final rule, it must prepare and make available for public comment a regulatory flexibility analysis that describes the effect of the rule on small entities (i.e., small businesses, small organizations, and small governmental jurisdictions) unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. No regulatory flexibility analysis is required if the head of an agency certifies the proposal or rulemaking will not have a significant economic impact on a substantial number of small entities. SBREFA amended the Regulatory Flexibility Act to require Federal agencies to provide a statement of the factual basis for certifying that a proposal or rulemaking effort will not have a significant economic impact on a substantial number of small entities.

    NHTSA has considered the effects of this rule under the Regulatory Flexibility Act. This rule establishes lighting and marking standards for agricultural equipment that may be operated on public roads, by adopting ASABE Standard 279.14, pursuant to section 31601 of MAP-21. NHTSA believes that a large number of agricultural equipment manufacturers are already in compliance with the requirements due to the existing ASABE industry standard and State regulations. Furthermore, those that are not already compliant with the requirements could easily be made so for a very low cost or at no cost. For example, the reflective conspicuity tape necessary for compliance can be purchased for as low as 75 cents per foot. Slightly more expensive components such as head and tail lights, which are required for some pieces of equipment, can be sourced on the open market for less than $50.00 per set.

    Because the materials needed to comply with ASABE Standard 279 are inexpensive and the majority of the market is already in compliance, the cost of this rule is expected to be minimal and it should not adversely affect small agricultural equipment manufacturers in a material way. Accordingly, NHTSA certifies that this FR will not have a significant economic impact on a substantial number of small entities.

    C. Executive Order 13132 (Federalism)

    NHTSA has examined this FR pursuant to Executive Order 13132 and concluded that the rulemaking will not have sufficient federalism implications to warrant consultation with State and local officials, nor the preparation of a federalism summary impact statement. The rule will not have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.”

    Section 31601 of MAP-21 does not have an express savings or preemption provision; therefore general principles of preemption apply to the regulation. Principles of preemption provide that State standards are preempted to the extent that they conflict with Federal regulations, and they are preempted if the State regulations frustrate the purpose of the Federal regulation.

    NHTSA believes that most State lighting and marking requirements for agricultural equipment incorporate or are based on a version of ASABE Standard 279. This is the standard that NHTSA is adopting in this rulemaking. Therefore, we do not expect that the regulation will significantly differ from existing lighting requirements.

    Under general principles of preemption, if it would not be possible to comply with the requirements of both the federal requirements and a State standard, the federal requirements would prevail. We believe that agricultural equipment operators and manufacturers will be able to comply with both State and federal standards in instances in which they differ. Moreover, as required by section 31601(d)(3) of MAP-21, this regulation does not prohibit the operation on public roads of agricultural equipment that is equipped with materials or equipment that are in addition to the minimum materials and equipment specified in this rule. ASABE Standard 279.14 provides a range of places on agricultural equipment for mounting lighting and marking materials and equipment in compliance with that standard. As a result, individuals may mount lighting and marking materials and equipment in addition to that required by this rule in order to comply with any differing State standard. For these reasons, the rule will not have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.”

    D. Executive Order 12988 (Civil Justice Reform)

    When promulgating regulations, agencies are required by Executive Order 12988 to make every reasonable effort to ensure that the regulation, as appropriate: (1) Specifies in clear language the preemptive effect; (2) specifies in clear language the effect on existing Federal law or regulation, including all provisions repealed, circumscribed, displaced, impaired, or modified; (3) provides a clear legal standard for affected conduct rather than a general standard, while promoting simplification and burden reduction; (4) specifies in clear language the retroactive effect; (5) specifies whether administrative proceedings are to be required before parties may file suit in court; (6) explicitly or implicitly defines key terms; and (7) addresses other important issues affecting clarity and general draftsmanship of regulations.

    Pursuant to this Order, NHTSA notes as follows. The fact that this rulemaking will not have a preemptive effect is discussed above in connection with Executive Order 13132. There is no requirement that individuals submit a petition for reconsideration or pursue other administrative proceeding before they may file suit in court.

    E. Executive Order 13609 (Promoting International Regulatory Cooperation)

    The policy statement in section 1 of Executive Order 13609 provides, in part:

    The regulatory approaches taken by foreign governments may differ from those taken by U.S. regulatory agencies to address similar issues. In some cases, the differences between the regulatory approaches of U.S. agencies and those of their foreign counterparts might not be necessary and might impair the ability of American businesses to export and compete internationally. In meeting shared challenges involving health, safety, labor, security, environmental, and other issues, international regulatory cooperation can identify approaches that are at least as protective as those that are or would be adopted in the absence of such cooperation. International regulatory cooperation can also reduce, eliminate, or prevent unnecessary differences in regulatory requirements.

    NHTSA reiterates that its discretion is very limited under section 31601 of MAP-21. NHTSA is specifically required to adopt a standard equivalent to ASABE Standard 279.14 or a successor standard. F. National Technology Transfer and Advancement Act

    Under the National Technology Transfer and Advancement Act of 1995 (NTTAA) (Pub. L. 104-113), “all Federal agencies and departments shall use technical standards that are developed or adopted by voluntary consensus standards bodies, using such technical standards as a means to carry out policy objectives or activities determined by the agencies and departments.” Voluntary consensus standards are technical standards (e.g., materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus standards bodies, such as SAE International (SAE).

    Per section 31601 of MAP-21, NHTSA is incorporating ASABE Standard 279.14, in its entirety. ASABE is a voluntary consensus standards body, as described in Section V.

    G. Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 requires agencies to prepare a written assessment of the costs, benefits and other effects of proposed or final rules that include a Federal mandate likely to result in the expenditure by State, local or tribal governments, in the aggregate, or by the private sector, of more than $100 million annually (adjusted for inflation with base year of 1995). In 2010 dollars, this threshold is $136 million.16 This rule is not expected to result in the expenditure by State, local, or tribal governments, in the aggregate, of more than $136 million annually.

    16 Adjusting this amount by the implicit gross domestic product price deflator for the year 2010 results in $136 million (110.644/81.533 = 1.36).1

    H. National Environmental Policy Act

    NHTSA has analyzed this rulemaking action for the purposes of the National Environmental Policy Act. The agency has determined that implementation of this action will not have any significant adverse impact on the quality of the human environment.

    I. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501, et. seq.), Federal agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct, sponsor, or require through regulations. This rulemaking does not establish any new information collection requirements.

    J. Plain Language

    Executive Order 12866 requires each agency to write all rules in plain language. Application of the principles of plain language includes consideration of the following questions:

    • Have we organized the material to suit the public's needs?

    • Are the requirements in the rule clearly stated?

    • Does the rule contain technical language or jargon that isn't clear?

    • Would a different format (grouping and order of sections, use of headings, paragraphing) make the rule easier to understand?

    • Would more (but shorter) sections be better?

    • Could we improve clarity by adding tables, lists, or diagrams?

    • What else could we do to make the rule easier to understand?

    NHTSA considered and applied these plain language principles in the drafting of this FR.

    K. Regulation Identifier Number (RIN)

    The Department of Transportation assigns a regulation identifier number (RIN) to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in April and October of each year. You may use the RIN contained in the heading at the beginning of this document to find this action in the Unified Agenda.

    Regulatory Text List of Subjects in 49 CFR Part 562

    Agricultural equipment, Highway safety, Incorporation by reference.

    In consideration of the foregoing, NHTSA amends 49 CFR Chapter IV, Subchapter B by adding part 562 as follows: PART 562—LIGHTING AND MARKING OF AGRICULTURAL EQUIPMENT Sec. 562.1 Scope and purpose. 562.3 Definitions. 562.5 Applicability. 562.7 Lighting and marking requirements for new agricultural equipment. 562.9 Compliance not affected by addition of certain materials and equipment. 562.11 Incorporation by reference. Authority:

    Sec. 31601, Pub. L. 112-141, 126 Stat. 405; 49 U.S.C. 30111 note; delegation of authority at 49 CFR 1.95.

    § 562.1 Scope and purpose.

    This part establishes minimum lighting and marking standards for new agricultural equipment as required by the Moving Ahead for Progress in the 21st Century Act (Sec. 31601, Pub. L. 112-141).

    § 562.3 Definitions.

    Agricultural equipment has the meaning given the term “agricultural field equipment” in the ANSI/ASAE 390.4 JAN2005, “Definitions and Classifications of Agricultural Field Equipment” (incorporated by reference, see § 562.11).

    Public road means any road or street under the jurisdiction of and maintained by a public authority and open to public travel.

    § 562.5 Applicability.

    This standard applies to new agricultural equipment that may be operated on a public road.

    § 562.7 Lighting and marking requirements for new agricultural equipment.

    New agricultural equipment that may be operated on a public road must meet the lighting and marking standards set forth in ANSI/ASAE 279.14 JUL2008, “Lighting and Marking of Agricultural Equipment on Highways” (incorporated by reference, see § 562.11).

    § 562.9 Compliance not affected by addition of certain materials and equipment.

    (a) Successor standards. Equipping new agricultural equipment that may be operated on a public road with lighting and marking materials and equipment that comply with a revision of ANSI/ASAE Standard 279 adopted after the version cited in § 562.7 does not affect compliance with the requirements of this part.

    (b) Additional materials and equipment. Equipping new agricultural equipment that may be operated on a public road with lighting and marking materials and equipment that are in addition to the minimum requirements specified in § 562.7 does not affect compliance with the requirements of this part.

    § 562.11 Incorporation by reference.

    Certain material is incorporated by reference into this part with the approval of the Director of the Federal Register under 5 U.S.C. 552(a) and 1 CFR part 51. You may inspect approved material at the National Highway Traffic Safety Administration, 1200 New Jersey Avenue SE., Washington, DC 20590 or at the National Archives and Records Administration. For information on the availability of this material at NARA, call 202‐741‐6030, or go to: http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.

    (a) American Society of Agricultural and Biological Engineers (ASABE) 2950 Niles Road, St. Joseph, Michigan 49085-9659, (269) 429-0300. http://www.asabe.org/publications/publications/standards.aspx.

    (1) ANSI/ASABE 279.14 JUL2008, “Lighting and Marking of Agricultural Equipment on Highways,” approved August 2008, into § 562.7.

    (2) ANSI/ASAE 390.4 JAN2005, “Definitions and Classifications of Agricultural Field Equipment,” approved February 2005, into § 562.3.

    (b) [Reserved].

    Issued on June 14, 2016, in Washington, DC, under authority delegated in 49 CFR 1.95 and 501.5. Mark R. Rosekind, Administrator.
    [FR Doc. 2016-14571 Filed 6-21-16; 8:45 am] BILLING CODE 4910-59-P
    DEPARTMENT OF THE INTERIOR Fish and Wildlife Service 50 CFR Part 17 [Docket No. FWS-R4-ES-2015-0144; 4500030113] RIN 1018-BA94 Endangered and Threatened Wildlife and Plants; Threatened Species Status for the Elfin-Woods Warbler With 4(d) Rule AGENCY:

    Fish and Wildlife Service, Interior.

    ACTION:

    Final rule.

    SUMMARY:

    We, the U.S. Fish and Wildlife Service (Service), determine threatened species status under the Endangered Species Act (Act), as amended, for the elfin-woods warbler (Setophaga angelae), a bird species in Puerto Rico. This rule will add this species to the List of Endangered and Threatened Wildlife. We are also adopting a rule under the authority of section 4(d) of the Act (a “4(d) rule”) that is necessary and advisable to provide for the conservation of the elfin-woods warbler.

    DATES:

    This rule is effective July 22, 2016.

    ADDRESSES:

    This final rule is available on the Internet at http://www.regulations.gov and http://www.fws.gov/caribbean. Comments and materials we received, as well as supporting documentation we used in preparing this rule, are available for public inspection at http://www.regulations.gov. Comments, materials, and documentation that we considered in this rulemaking will be available by appointment, during normal business hours, at: U.S. Fish and Wildlife Service, Caribbean Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT).

    FOR FURTHER INFORMATION CONTACT:

    Marelisa Rivera, Deputy Field Supervisor, U.S. Fish and Wildlife Service, Caribbean Ecological Services Field Office, P.O. Box 491, Road 301 Km. 5.1, Boquerón, PR 00622; telephone 787-851-7297; facsimile 787-851-7440. Persons who use a telecommunications device for the deaf (TDD) may call the Federal Information Relay Service (FIRS) at 800-877-8339.

    SUPPLEMENTARY INFORMATION: Executive Summary

    Why we need to publish a rule. Under the Endangered Species Act, a species may warrant protection through listing if it is endangered or threatened throughout all or a significant portion of its range. Listing a species as an endangered or threatened species can only be completed by issuing a rule.

    This rule finalizes the listing of the elfin-woods warbler (Setophaga angelae) as a threatened species. It includes provisions under the authority of section 4(d) of the Act that are necessary and advisable for the conservation needs of the elfin-woods warbler.

    The basis for our action. Under the Act, we may determine that a species is a threatened species based on any of five factors: (A) The present or threatened destruction, modification, or curtailment of its habitat or range; (B) overutilization for commercial, recreational, scientific, or educational purposes; (C) disease or predation; (D) the inadequacy of existing regulatory mechanisms; or (E) other natural or manmade factors affecting its continued existence. We have determined that this species is currently at risk throughout all of its range due to threats related to habitat modification on private lands under agricultural and other land use requiring vegetation clearance (Factor A) and to other natural or manmade factors, such as restricted distribution and lack of connectivity, genetic drift, hurricanes, and the effects of climate change (Factor E).

    Under section 4(d) of the Act, the Secretary of the Interior has discretion to issue such regulations she deems necessary and advisable to provide for the conservation of the species. The Secretary also has the discretion to prohibit by regulation, with respect to a threatened species, any act prohibited by section 9(a)(1) of the Act.

    Habitats within some of the physically degraded private lands adjacent to elfin-woods warbler existing populations must be improved before they are suitable for the species; therefore, some activities that would normally be prohibited under 50 CFR 17.31 and 17.32 will contribute to the conservation of the elfin-woods warbler. For the elfin-woods warbler, the Service has determined that species-specific regulations authorized by section 4(d) of the Act are necessary and advisable to provide for the conservation of this species.

    Peer review and public comment. We sought comments from independent specialists to ensure that our determination is based on scientifically sound data, assumptions, and analyses. We invited these peer reviewers to comment on the listing proposal. We considered all comments and information we received during the comment period.

    Previous Federal Action

    Please refer to the proposed listing rule (80 FR 58674, September 30, 2015) for a detailed description of previous Federal actions concerning the elfin-woods warbler.

    Summary of Comments and Recommendations

    In the proposed rule published on September 30, 2015 (80 FR 58674), we requested that all interested parties submit written comments on the proposal by November 30, 2015. We also contacted appropriate Federal and State agencies, scientific experts and organizations, and other interested parties and invited them to comment on the proposal. On October 3, 2015, we published a newspaper notice in the Primera Hora inviting general public comment. We did not receive any requests for a public hearing.

    Peer Reviewer Comments

    In accordance with our peer review policy published on July 1, 1994 (59 FR 34270), we solicited expert opinion from six knowledgeable individuals with scientific expertise that included familiarity with the elfin-woods warbler and its habitat, biological needs, and threats. We received responses from four of the peer reviewers.

    We reviewed all comments we received from the peer reviewers for substantive issues and new information regarding the listing of elfin-woods warbler. The peer reviewers generally concurred with our methods and conclusions, and provided additional information, clarifications, and suggestions to improve this final rule. Substantive peer reviewer comments are addressed in the following summary and incorporated into the final rule as appropriate.

    (1) Comment: One peer reviewer stated that the proposed listing rule did not include references to the Puerto Rico Breeding Bird Atlas Project of the Sociedad Ornitológica Puertorriqueña, Inc. (SOPI; http://www.aosbirds.org/prbba/SpeciesEWWA.html). The peer reviewer noted there is one record of the elfin-woods warbler being detected during this project on March 31, 2005, in an area between Jayuya and Adjuntas (hexagon 913) in the central mountains of Puerto Rico by Bailey McKay and Richard West. The peer reviewer also indicated that during a Bicknell's thrush study conducted by the Vermont Center for Ecostudies between January and March, 2015, elfin-woods warblers were detected in the Maricao Commonwealth Forest (MCF) and El Yunque National Forest (EYNF), but were not detected in the Carite Commonwealth Forest (CCF) or in the municipalities of Jayuya and Adjuntas.

    Our Response: We appreciate these comments. We have added the new information regarding the observation of the elfin-woods warbler between Jayuya and Adjuntas to this final rule. The information available from the Web site provided by this reviewer classified this report as a possible observation of the elfin-woods warbler (identified with Code X (seen or heard within safe dates) in the database).

    (2) Comment: A peer reviewer provided information about a nest-building activity by the elfin-woods warbler at the MCF recorded on May 5, 2002. The peer reviewer also provided information about the location and description of the nest.

    Our Response: We appreciate this information, and have included the new nesting record in this final rule.

    (3) Comment: A peer reviewer stated that bird enthusiasts and wildlife photographers may pose a problem to the elfin-woods warbler, as some of them use recordings to attract these birds, probably altering their normal behavior. The peer reviewer indicated this situation appears to be increasing, and the existing regulations do not clearly address this potential harassment.

    Our Response: We appreciate this new information. At this time the Service does not have sufficient information to consider this action as a threat to the elfin-woods warbler. However, we will be monitoring the species and will keep track of the effect of these actions. When this final rule is effective (see DATES), regulations issued by the Service under the Act and by the Commonwealth of Puerto Rico under its laws will address actions that may result in take of the species.

    (4) Comment: One peer reviewer emphasized the need for research on the elfin-woods warbler and its status to inform managers and to facilitate the species' future delisting. He indicated that automated recording units (ARUs), which automatically record sounds for later computer analyses, suggest tremendous potential for surveying the more inaccessible sites in CCF, Toro Negro, and EYNF.

    Our Response: We acknowledge this comment and will develop recovery actions, including research needs, in the recovery plan for the species. The Service concurs with the peer reviewer on the use of ARUs to survey for the elfin-woods warbler in inaccessible sites. We have already initiated a project with academia and local nongovernmental organizations using ARUs to assess the presence of the elfin-woods warbler at the CCF and EYNF.

    (5) Comment: One peer reviewer made reference to the description of the elfin-woods warbler included in the proposed listing rule, indicating that adult and sub-adult elfin-woods warbler do not have a stripe above the eyes.

    Our Response: We appreciate this information. We described the elfin-woods warbler in the proposed listing rule based on Raffaele 1989 (p. 168). However, considering the expertise of this peer reviewer on the elfin-woods warbler, we included this detailed information and specified that adult and sub-adult elfin-woods warbler do not have a stripe above the eyes.

    (6) Comment: One per reviewer indicated that the breeding season of the elfin-woods warbler should be extended to include the entire months of July and August because during these months the family groups stay together as a cohesive unit, which is essential for the survival of fledglings.

    Our Response: We concur with this rationale and have made changes to the “Life History” and 4(d) Rule sections of this final rule to reflect the peer reviewer's input.

    (7) Comment: A peer reviewer indicated that disturbances such as shade and coffee tree seasonal pruning and other activities described in the proposed 4(d) rule should be conducted from September 1 through February 28, which is the time period that the peer reviewer suggests is outside the breeding season of the elfin-woods warbler.

    Our Response: The proposed 4(d) rule that was published with the proposed listing rule indicated that coffee tree seasonal pruning and other activities would be conducted from July 1 through February 28. However, we concur with the information presented by the peer reviewer, and have made changes to this final rule to reflect the peer reviewer's input.

    (8) Comment: One peer reviewer warned about the potential of chemicals used for agriculture (such as pesticides, herbicides, and fertilizers) gaining access to the food chain and eventually to arthropods feeding birds such as the elfin-woods warbler.

    Our Response: Under the proposed and this final 4(d) rule, pest control substances (e.g., pesticides, herbicides) and fertilizers will be applied only twice a year during the establishment period of shade and coffee trees (i.e., the first 2 years). The Service believes that during this period, the structure of the agroforestry system is not mature enough to sustain the occurrence of elfin-woods warblers within these areas. Therefore, we do not expect that the elfin-woods warbler will be negatively affected by these actions.

    (9) Comment: A peer reviewer suggested modifying the following sentence in the Proposed Determination section: “Current available information indicates that the elfin-woods warbler has a limited distribution, with only two known populations occurring within EYNF and MCF, including the private lands adjacent to MCF, and at least one extirpated population from CCF.” The suggested modification is as follows: “Current available information indicates that the elfin-woods warbler has a limited distribution, with only two known populations occurring within EYNF and MCF, including the private lands adjacent to MCF, and at least one possibly extirpated population from CCF.”

    Our Response: Based on the best available information, the elfin-woods warbler appears to be extirpated from CCF. However, we do not discard the possibility that the species still occurs in this forest. Therefore, we accept the peer reviewer's comment and have modified this rule accordingly.

    Federal Agency Comments

    Three of the peer reviewers consulted are also from Federal agencies. Only two provided peer review of the proposed rule, and their comments are addressed above under Peer Reviewer Comments. One additional Federal agency commented during the open comment period, but did not provide substantive information regarding the proposed listing.

    Comments From the Commonwealth of Puerto Rico

    (10) Comment: One Commonwealth agency indicated it does not expect any significant impacts on the elfin-woods warbler as a result of the projects it conducts. However, the agency asked to be contacted should additional information on the habitat and location of the species become available in order to prevent potential impacts from future projects.

    Our Response: We appreciate these comments. Any new information about the species' distribution and habitat will be available to Commonwealth and Federal agencies via the Service's Environmental Conservation Online System (ECOS) Web site (http://ecos.fws.gov/ecp/) to be considered in future projects. For projects with a Federal nexus, consultations under section 7 of the Act address potential impacts to federally listed species.

    Public Comments

    We received three public comments. While all indicated support for the listing of the elfin-woods warbler as a threatened species, none provided substantive comments requiring the Service's response.

    Summary of Changes From the Proposed Rule

    Based upon our review of the comments from peer reviewers, other Federal and Commonwealth agencies, and the public, as summarized above, we reevaluated our proposed rule and incorporated the following changes into this final rule.

    (1) We modified the information in the species description to specify that adult and sub-adult elfin-woods warbler do not have a stripe above the eyes (see “Species Description and Taxonomy,” below).

    (2) We added information regarding the report of the elfin-woods warbler between the municipalities of Adjuntas and Jayuya as part of the species' range (see “Historical and Current Distribution,” below).

    (3) We modified the information regarding the breeding season of the elfin-woods warbler to include the entire months of July and August (see “Life History,” below).

    (4) We modified the provisions of the 4(d) rule to set forth that coffee tree seasonal pruning and other activities must be conducted from September 1 to February 28 (see 4(d) Rule, below).

    (5) We added information regarding an additional elfin-woods warbler's nest-building activity at the Maricao Commonwealth Forest (see “Life History,” below).

    Background Species Information Species Description and Taxonomy

    The elfin-woods warbler was originally classified under the genus Dendroica, but is now recognized as Setophaga (Lovette et al. 2010, p. 765). Angela and Cameron Kepler discovered the species in 1971, in the Dwarf forest type at El Yunque National Forest (EYNF) (Kepler and Parkes 1972, p. 3-5). The bird is about 12.5 centimeters (cm) (5 inches (in)) in length (Raffaele 1998, p. 406). The adult's upper body is predominantly black and white, with conspicuous white patches on the ear coverts and sides of the neck (Raffaele 1989, p. 168; Delannoy 2015, pers. comm.). The elfin-woods warbler is often mistaken for the black and white warbler (Mniotilta varia), but the elfin-woods warbler is distinguished by its incomplete white eye-ring and entirely black crown. Immature elfin-woods warblers are similar to adults, except that they are grayish-green on the back, and yellowish-green on the head and underparts (Raffaele 1989, p. 168). The bird's call comprises a series of short, rapidly uttered, unmusical notes in one pitch, increasing in volume and ending with a short series of distinct double notes (Curson et al. 1994, p. 156).

    Life History

    Little detailed information has been published on the life history of the elfin-woods warbler. Some authors noted that the elfin-woods warbler is an extremely active warbler, moving among the dense vines of forest strata with more foliage cover or smaller branch tips, foraging insects, usually at intermediate foliage heights of 3 to 15 meters (m) (10 to 50 feet (ft)) (Colón-Merced 2013, p. 2). Opportunistic observations indicate the elfin-woods warbler feeds on moths, dragonflies, and other types of insects; however, its specific diet remains unknown (Colón-Merced 2013, p. 2). Raffaele et al. (1998, p. 406) indicated that the breeding season of the species occurs from March to June. However, Delannoy (2015, pers. comm.) stated that based on available information (i.e., Delannoy 2009), the breeding season of the elfin-woods warbler should include the entire months of July and August because family groups stay together as a cohesive unit during May, June, July, and August. Delannoy (2009, p. 1) reported that four pairs of elfin-woods warblers banded between 2004 and 2008 remained together in their territories in the Maricao Commonwealth Forest (MCF), suggesting that the species is monogamous. In addition, he reported that the elfin-woods warbler maintained territorial defense throughout the year and documented that calling activity increases from January to April and declines considerably during the time pairs are incubating eggs or brooding nestlings.

    Arroyo-Vázquez (1992, p. 363) reported the first detailed observation of two nests found in March and April of 1990 in aerial leaf litter at heights between 1.3 to 7.6 m (4.3 to 25 ft) and documented a clutch size of two to three eggs. Also, he observed that the pair's cup nest was woven from rootlets and fibers obtained from tree ferns and lined with grass leaves and down feathers. Raffaele et al. (1998, p. 406) further described the nest of the elfin-woods warbler as a compact cup, usually close to the trunk and well-hidden among epiphytes of a small tree. Salguero (2015, pers. comm.) indicated that on May 5, 2002, he and Carina Roig recorded a pair of elfin-woods warblers constructing a nest on a fork tip branch of a Pinus caribaea (Caribbean pine) about 5.0 m (16.4 ft) above ground at the former camping area near the MCF offices. Rodríguez-Mojica (2004, p. 22) reported the first nesting event inside a rotten tree stump of Palo Colorado (Cyrilla racemiflora) 7.0 m (23.3 ft) above ground in an abandoned camping area at the MCF. He described the nest structure as consisting of a tightly woven cup of fine plant fibers with dry leaves on its outside and noted that cavity-nesting is not common in warblers.

    Arroyo-Vázquez (1992, p. 363) and Rodríguez-Mojica (2004, p. 22) suggested that the species selected aerial leaf litter and cavity-nesting sites to avoid predation. Some authors have suggested that elfin-woods warbler nest predators may include the pearly-eyed thrasher (Margarops fuscatus), Puerto Rican tanager (Nesospingus speculiferus), Puerto Rican screech owls (Megascops nudipes), Puerto Rican boa (Chilabothrus inornatus, listed as Epicrates inornatus), Puerto Rican racer (Alsophis portoricensis), and feral cats (Felis catus) (Delannoy 2009, p. 2). Other potential predators of immature and adult individuals include the Indian mongoose (Herpestes auropunctatus) and black rat (Rattus rattus) (Arroyo-Vázquez 1992, p. 364).

    Historical and Current Distribution

    The elfin-woods warbler is endemic to the island of Puerto Rico and was initially thought to occur only in the Luquillo Mountains at EYNF in eastern Puerto Rico (Kepler and Parks 1972, pp. 5-6; Pérez-Rivera 1979, p. 58). During the early 1970s, the species was reported in the MCF in western Puerto Rico (Pérez-Rivera 1979, p. 58; Cruz and Delannoy 1984, p. 92). In addition, the elfin-woods warbler was reported in the Toro Negro Commonwealth Forest in the Cordillera Central (central mountain range) (Pérez-Rivera 1979, p. 58), and in the area of Guavate in the Carite Commonwealth Forest in east-central Puerto Rico (Pérez-Rivera and Maldonado 1977, p. 134). More recently, Miranda-Castro et al. (2000, pp. 119-123) and Anadón-Irizarry (2006, p. 34) conducted elfin-woods warbler surveys in other forests of the Cordillera Central (i.e., Tres Picachos, Carite, Toro Negro, Susúa, and Guilarte Commonwealth Forests, and Bosque del Pueblo in Adjuntas), but did not detect the species. However, on March 31, 2005, Bailey McKay and Richard West recorded a possible observation of the elfin-woods warbler between the municipalities of Adjuntas and Jayuya while collecting breeding bird data for the Puerto Rico Breeding Bird Atlas Project (Salguero 2015, pers. comm.; SOPI 2005).

    Between 2011 and 2013, the Service, in collaboration with the Puerto Rican Ornithological Society, Inc., and BirdLife International, conducted a study using a habitat suitability model and a single-season occupancy modeling approach to assess the current geographic distribution of the elfin-woods warbler. The project included surveys between January and July during the species' breeding season within habitat currently occupied by the species in the MCF and predicted habitat within the Cordillera Central (Anadón-Irizarry 2013, p. 2). The predicted habitat included public and private lands within the municipalities of Jayuya, Ciales, Adjuntas, Ponce, Orocovis, and Juana Díaz. The species was detected only in the MCF and adjacent private lands (Service 2014, p. 12).

    The elfin-woods warbler is particularly difficult to survey because of its small size, its constant moving behavior, and the dense vegetation of areas where it is found (Raffaele 1989, p. 168). In fact, Kepler and Parkes (1972, pp. 5-6) attribute the belated discovery of elfin-woods warbler to the above factors and their similarity to the black and white warbler. Even the vocalization of the elfin-woods warbler can be easily mistaken with other species. Although the presence of the elfin-woods warbler in the forests of the Cordillera Central of Puerto Rico cannot be disregarded based on the previous facts, the available information suggests that the current distribution of the species is now restricted to two populations in (1) EYNF and (2) MCF and adjacent private lands (Anadón-Irizarry 2006, p. 5; Delannoy 2007, p. 4; González 2008, p. 19). The EYNF and the MCF are located about 150 kilometers (km) (93 miles (mi)) from each other (Arendt et al. 2013, p. 2). These habitats are considered essential to elfin-woods warbler abundance and are very important for maintaining healthy populations of the species (Delannoy 2007, p. 24), as they are the only currently known areas where the species still occurs. Although there is suitable habitat for the species between these two forests (Colón-Merced 2013, p.51), the probability of dispersal for the species is low because EYNF is isolated from the central mountain range of Puerto Rico. Urban areas around EYNF increased by more than 2,000 percent between 1936 and 1988, and continue to encroach on forested areas today (Thomlinson and Rivera 2000, p. 17). Between 1988 and 1993, urbanization around this forest increased by 31 percent and represented a 5 percent loss in vegetative cover, more than 80 percent of which was dense forest (Thomlinson and Rivera 2000, p. 17).

    Habitat

    El Yunque National Forest—EYNF is located in the Sierra de Luquillo in eastern Puerto Rico and covers 11,310 hectares (ha) (28,000 acres (ac)) of the island's area (Weaver 2012, p. 1). This forest was proclaimed as a Crown Reserve by Spain in 1876, and as a Forest Reserve by the U.S. Government since 1903. It is considered the oldest forest reserve and largest protected area in Puerto Rico, and is managed by the U.S. Forest Service (USFS). Elevations of this forest range from 100 to 1,075 m (328 to 3,526 ft) and temperatures change with altitude, ranging between 23.5 and 27 degrees Celsius (°C) (74 to 81 degrees Fahrenheit (°F)) at the base of the mountain to between 17 and 20 °C (63 to 68 °F) on the mountain peaks (García-Martinó et al. 1996, p. 414). Mean annual rainfall ranges from approximately 245 cm/year (96 in/year) at lower elevations to approximately 400 cm/year (157 in/year) at higher elevations (Brown et al. 1983, p. 11). The EYNF contains five of the six Holdridge Life Zones found in Puerto Rico (Ewel and Whitmore 1973, pp. 32-49). These five zones are the lower montane wet forest, lower montane rain forest, subtropical moist forest, subtropical wet forest, and subtropical rain forest. In 1951, Wadsworth recognized four major forest types at EYNF: Dwarf, Palo Colorado, Tabonuco, and Sierra Palm (Anadón-Irizarry 2006, p. 9).

    At EYNF, the elfin-woods warbler was originally discovered in the Dwarf forest (Kepler and Parkes 1972, pp. 3-5). This forest type falls within the lower montane rain forest life zone (Ewel and Whitmore 1973, p. 49) and occupies 368 ha (909 ac) of EYNF (Weaver 2012, p. 5). It is found on exposed peaks with short, stunted vegetation above 900 m (2,952 ft) elevation (Weaver 2012, p. 58). In general, the Dwarf forest is not well populated with birds (Snyder et al. 1987, p. 61).

    Later, the species was documented at lower elevations in the Palo Colorado, Tabonuco, and Sierra Palm forests (Wiley and Bauer 1985, pp. 12-18). The Palo Colorado forest occurs within the lower montane rain forest life zone, between approximately 600 and 900 m (1,968 and 2,952 ft) (Weaver 2012, p. 1). This forest type covers about 3,441 ha (8,502 ac) of the EYNF (Weaver 2012, p. 5). This forest is mainly composed of fast-growing trees with height not more than 24 m (78 ft) (Lugo 2005, p. 506).

    The Tabonuco forest is found between 150 and 600 m (492 and 1,968 ft) elevation, and occupies 5,663 ha (13,993 ac) of the EYNF (Weaver 2012, p. 5). This forest is dominated by the Tabonuco tree (Dacryodes excelsa), which grows primarily on the subtropical wet forest life zones (Ewel and Whitmore 1973, p. 32). The understory of this forest is sparsely vegetated, and the canopy is rich in aerial plants (e.g., bromeliads, orchids, vines, and arboreal ferns) (Ewel and Whitmore 1973, p. 32).

    The Sierra Palm forest (also known as palm breaks) may reach canopy heights of 15 m (50 ft) with 17 cm (7 in) average diameters at breast height (dbh) and grows mainly on steep slopes at approximately 450 m (1,476 ft) elevation, covering about 1,838 ha (4,541 ac) of the EYNF (Weaver 2012, pp. 5 and 56). The Sierra Palm forest occurs on steep windward slopes and poorly drained riparian areas (Lugo 2005, p. 496). This forest is dominated by the Sierra palm (Prestoea montana) and occurs within the subtropical rain forest life zone (Ewel and Whitmore 1973, p. 4).

    Maricao Commonwealth Forest and Adjacent Lands—The main population of the elfin-woods warbler in western Puerto Rico occurs within the MCF, located between the municipalities of Maricao, San Germán, Sabana Grande, and Mayagüez (Ricart-Pujals and Padrón-Vélez 2010, p. 1). This forest is currently administered by the Puerto Rico Department of Natural and Environmental Resources (PRDNER) and covers about 4,168 ha (10,543 ac) with elevations ranging between 150 and 875 m (492 and 2,870 ft) above sea level. Annual average temperature is 21.7 °C (71 °F), and annual average rainfall is 233 cm/year (92 in/year) (Silander et al. 1986, p. 210). Three of the six life zones reported for Puerto Rico occur on the MCF: Subtropical moist forest, subtropical wet forest, and lower montane wet forest (Ricart-Pujals and Padrón-Vélez 2010, p. 8). The habitats where the elfin-woods warbler has been found within the MCF include Podocarpus Forest, Exposed Woodland Forest, Timber Plantations, and Dry Slopes Forest.

    The Podocarpus Forest occupies only 80 ha (197 ac) of the MCF and is located on the slopes and highest peaks (600-900 m (1,968-2,952 ft)) within the lower montane wet forest life zone (Department of Natural Resources (DNR) 1976, p. 185). Podocarpus Forest is dominated by Podocarpus coriaceus trees and has closed canopies and well-developed understories composed of tree ferns (Cyathea spp.), Sierra palms, and vines (Tossas and Delannoy 2001, pp. 47-53; Anadón-Irizarry 2006, p. 53; González 2008, pp. 15-16).

    The Exposed Woodland Forest occupies 2,711 ha (6,700 ac) of the MCF and is found in valleys, slopes, and shallow soils with a more or less continuous canopy (González 2008, pp. 15-16). These forest associations are found at elevations ranging from 470 to 800 m (1,542 to 2,624 ft) within the subtropical wet forest life zone (DNR 1976, p. 185).

    Timber Plantations occupy approximately 1,111 ha (2,745 ac) of the MCF in elevations ranging from 630 to 840 m (2,066 to 2,755 ft) within the subtropical wet forest and the subtropical moist forest life zones (DNR 1976, p. 185). This habitat—dominated by the María trees (Calophyllum calaba), eucalyptus (Eucalyptus robusta), and Caribbean pine (Pinus caribaea)—was planted in areas that were completely deforested for agriculture (Delannoy 2007, p. 9; González 2008 p. 5).

    Dry Slopes Forest occupies approximately 1,367.3 ha (3,377 ac) of the MCF in elevations ranging from 120 to 300 m (394 to 984 ft) within the subtropical moist forest life zone (DNR 1976, p. 185). This habitat is found in shallow and excessively drained serpentine-derived soils dominated by xerophytic vegetation, thin trees, and a low open canopy. This forest type is more common in the southern and southeastern slopes of the MCF (DNR 1976, p. 185).

    Outside the MCF, the elfin-woods warbler has been detected within secondary forests and existing shade-grown coffee plantations (González 2008, pp. 15-16). Secondary forests are found at elevations ranging from 130 to 750 m (426 to 2,460 ft), and the shade-grown coffee plantations are found at elevations ranging from 300 to 600 m (984 to 1,968 ft) (Gonzalez 2008, p. 59; Puerto Rico Planning Board 2015). Also, the elfin-woods warbler has been documented at very low densities outside the MCF in pasturelands, Gallery forests, and rural residential areas, but not in sun-grown (unshaded) coffee plantations (González 2008, pp. 15-16). Young secondary forests developed as a result of abandonment of agriculture during the 20th century. These forests are less than 25 years old with an open canopy height of 12 to 15 m (40 to 50 ft) (González 2008, p. 6) and are found within the subtropical moist and subtropical wet forest life zones (DNR 1976, p. 185). Their understories are well-developed and dominated by grasses, vines, and other early-successional species (González 2008, p. 6). Mature secondary forests are over 25 years old and develop on humid to very humid, moderate to steep slopes. They are characterized by their closed canopies, reaching heights of 20 to 30 m (66 to 100 ft), and sparse to abundant understories (González 2008, p. 6). Some of these forests were used in the past for cultivation of shade-grown coffee and survived untouched because landowners abandoned agriculture activities (Delannoy 2007, p. 10). The shade-grown coffee plantations are covered with tall mature forests dominated mostly by guaba (Inga vera) and guaraguao (Guarea guidonia) trees. Found on moderate to steep, humid mountain sides, these trees reach heights of 15 to 20 m (50 to 66 ft), and their understories constantly develop without grasses (González 2008, p. 6). Shade-grown coffee plantations are stable agro-ecosystems that provide habitat, nesting, and feeding for many native, endemic, and migratory species. Some of the best examples of this habitat are found in north, northwest, and northeast MCF (Delannoy 2007, p. 10). Studies have shown that biodiversity of plants, insects, reptiles, birds, and some mammals are higher in shade-grown than in sun-grown coffee plantations (Borkhataria et al. 2012, p. 165).

    Carite Commonwealth Forest—The Carite Commonwealth Forest (CCF) is within the known historical range of the elfin-woods warbler; however, the species was last observed in this forest about 15 years ago (Pérez-Rivera 2014, pers. comm.). The CCF has been managed for conservation by PRDNER since 1975 (DNR 1976, p. 169). This forest covers about 2,709 ha (6,695 ac), and ranges between 620 and 900 m (2,034 and 2,952 ft) in elevation (DNR 1976, p. 169). The CCF contains four forest types: Dwarf, Palo Colorado, Plantations, and Secondary (Silander et al. 1986, p. 188). These forest types are similar to the forests utilized by the elfin-woods warbler in EYNF and MCF.

    Although the elfin-woods warbler has not been recently observed in this forest (Anadón-Irizarry 2006, p. 54; Anadón-Irizarry 2014, pers. comm.), the habitat suitability model developed for the species (Colón-Merced 2013, p. 51) suggests CCF still provides suitable habitat for the species due to its similarity in elevation, climatic conditions, and vegetation associations with EYNF and MCF. The CCF's similarity to EYNF and MCF suggests that this forest could provide habitat for the expansion of the elfin-woods warbler's current range to maintain the species' historical, geographical, and ecological distribution.

    Population Status

    El Yunque National Forest—Kepler and Parkes (1972, p. 15) estimated the elfin-woods warbler population at fewer than 300 pairs occurring in 450 ha (1,111 acres) at EYNF. Waide (1995, p. 9) reported an estimated population of 138 pairs in 329 ha (812 ac) in the Dwarf forest at EYNF. According to Anadón-Irizarry (2006, p. 24), the species' mean abundance was highest (0.48 individuals (ind)/point count) in the Palo Colorado forest, slightly lower (0.42 ind/point count) in the Dwarf forest, lowest (0.01 ind/point count) in the Tabonuco forest, and none were recorded in Sierra Palm forest. Arendt et al. (2013, p. 8) conducted bird surveys approximately monthly from 1989 to 2006, and reported a decline of the elfin-woods warbler population in EYNF over that period of 17 years. The species showed a significant general decline from 0.2 ind/ha to 0.02 ind/ha in the Dwarf forest, and from 1 ind/ha to 0.2 ind/ha in the Palo Colorado forest (Arendt et al. 2013, p. 9).

    Maricao Commonwealth Forest and Adjacent Lands—Cruz and Delannoy (1984, p. 92) suggested that the elfin-woods warbler was not uniformly distributed throughout the MCF and that it was found in different habitats within three studied sites. Anadón-Irizarry (2006, p. 27) conducted a survey from 2003 to 2004, in 102.4 ha (253 ac) of MCF and recorded 778 elfin-woods warblers in 18 counts for an average of 0.42 ind/ha/count. González (2008, pp. 23-28) reported the most recent population estimate for the elfin-woods warbler at the MCF and adjacent areas. González (2008, p. 18) estimated 97.67 elfin-woods warbler individuals in an area of 203.2 ha (0.48 ind/ha) within the MCF. In areas adjacent to the MCF, he estimated 43.02 individuals in an area of 374.4 ha (0.11 ind/ha).

    Additionally, González (2008, p. 27) reported that the highest densities of elfin-woods warbler recorded per point-count stations in MCF were within the Podocarpus Forest (0.88 ind/ha). Moderate densities were recorded in Exposed Woodland (0.53 ind/ha), Timber Plantations (0.38 ind/ha), and Dry Slope Forest (0.06 ind/ha) (González 2008 p. 27). González (2008 p. 27) stated these results are similar to estimates obtained by previous studies in the same type of forests. In lands adjacent to the MCF, the shade-grown coffee plantations exhibited the highest elfin-woods warbler abundance (0.24 ind/ha) (González 2008, p. 24).

    Based on the studies mentioned above, in 2010, BirdLife International estimated the overall elfin-woods warbler population in Puerto Rico to be at least 1,800 mature individuals (Arendt et al. 2013, p. 2).

    Carite Commonwealth Forest—In 1977, Pérez-Rivera and Maldonado (1977, p. 134) reported the species for the first time in the CCF. Two years later, Pérez-Rivera (1979, pp. 5-8) indicated that the species was more common than was expected when discovered. However, he mentioned that because the species appeared to be specialized to certain types of habitats, any kind of habitat disturbance or modification would cause a rapid decline of the species (Pérez-Rivera 1979, p. 58). The species was later recorded by Pérez-Rivera during the 1980s and 1990s in the following areas: Cerro La Santa, Camino El Seis, first recreation area near the forest entrance, private land near Barrio Farallón, and Fincas Las 300 (Delannoy 2007, pp. 22-23). Based on Pérez-Rivera's observations within these areas, the species seemed to be an uncommon and rare in CCF (i.e., 1 or 2 sightings every 10 visits) (Delannoy 2007, pp. 22-23). The species was later detected occasionally by Pérez-Rivera within the same areas until it was last observed by him more than 15 years ago (Pérez-Rivera 2014, pers. comm.).

    The surveys conducted by Anadón-Irizarry between 2003 and 2004, and between 2012 and 2013, failed to detect the species within the CCF. The study conducted during the period of 2003-2004 (Anadón-Irizarry 2006, p. 54) included traditional areas previously searched by Pérez-Rivera, and the surveys were conducted along 5.0 km (3.1 mi) of existing trails. The most recent surveys, conducted between 2012 and 2013, avoided the use of existing trails and included nontraditional areas, but they also failed to detect the species (Anadón-Irizarry 2014, pers. comm.). However, during these surveys, the amount of surveyed area within nontraditional habitat was not significant (i.e., 15 survey stations).

    Although these studies failed to detect the species, Anadón-Irizarry (2006, p. 54; 2014, pers. comm.) suggested the possibility that the species is still present in isolated pockets of forest that were not searched during the studies (Delannoy 2007, p. 22). The apparent persistent and relatively sedentary behavior of this species to inhabit certain small and isolated pockets of the forest might have led these authors to suggest that it is possible that CCF may harbor undetected elfin-woods warblers (Anadón-Irizarry 2006, p. 54; Delannoy 2007, pp. 22-23; Pérez-Rivera 2014, pers. comm.). Anadón-Irizarry (2006, p. 54), Delannoy (2007, pp. 22-23), and Pérez-Rivera (2014, pers. comm.) have suggested that the species was extirpated from the traditional areas searched by them during the 1980s, 1990s, and between 2003 and 2004 due to habitat modification activities (i.e., transmission antenna development and road development) that occurred in those years. If this is the case, a comprehensive assessment of the status of this population would require extensive searches covering a much larger area into the fragmented landscape of the CCF (Delannoy 2007, pp. 22-23). Therefore, during early 2016 the Service contracted for a survey to include traditional and nontraditional areas within and beyond CCF's boundaries. A total of 60 sites were surveyed between March and April 2016 using ARBIMON portable recorders (Aide and Campos 2016). Surveyed areas also included suitable habitat identified by the habitat suitability model developed by Colón-Merced (2013). None of the 23,944 1-minute recordings analyzed for the presence of the elfin-woods warbler resulted in positive detection, indicating the species is not present in CCF (Aide and Campos 2016).

    Summary of Factors Affecting the Species

    Section 4 of the Act, and its implementing regulations at 50 CFR part 424, set forth the procedures for adding species to the Federal Lists of Endangered and Threatened Wildlife and Plants. Under section 4(a)(1) of the Act, we may list a species based on:

    (A) The present or threatened destruction, modification, or curtailment of its habitat or range;

    (B) Overutilization for commercial, recreational, scientific, or educational purposes;

    (C) Disease or predation;

    (D) The inadequacy of existing regulatory mechanisms; or

    (E) Other natural or manmade factors affecting its continued existence.

    Listing actions may be warranted based on any of the above threat factors, singly or in combination.

    Factor A. The Present or Threatened Destruction, Modification, or Curtailment of Its Habitat or Range

    The majority of extant elfin-woods warbler populations are restricted to two disjunct primary habitats in montane forests at EYNF and at MCF and private lands adjacent to MCF. Although the elfin-woods warbler has not been recently observed in CCF, this forest and adjacent lands still contains suitable habitat for the species. The elfin-woods warbler needs suitable forested habitats for essential behaviors such as foraging, breeding, and sheltering (Anadón-Irizarry 2006, pp. 5-8).

    In the past, the majority of the forested areas in Puerto Rico—EYNF, MCF, and CCF—were impacted by agricultural practices; extraction of timber for construction and charcoal (Dominguez-Cristobal 2000, pp. 370-373; Dominguez-Cristobal 2008, pp. 100-103); development of infrastructure for utilities and communications; and construction of roads, recreational facilities, and trails, negatively affecting elfin-woods warbler habitat (DNR 1976, p. 169; Waide 1995, p. 17; Delannoy 2007, p. 4; Anadón-Irizarry 2006, p. 28; Pérez-Rivera 2014, pers. comm.). Currently, each agency manages these forests for conservation purposes under its authorities and mandates to promote habitat conservation (see Factor D. The Inadequacy of Existing Regulatory Mechanisms, below); habitat modification pressures from agriculture practices and the development of new infrastructure within the forests are currently very low. However, typical forest management of existing disturbed areas (e.g., trail maintenance, road maintenance, transmission antenna maintenance, and recreational facility improvements) and research activities (e.g., species surveys, endangered species reintroductions) still occur within these forests. The maintenance performed on roads, trails, transmission antenna facilities, and recreational facilities is not presently affecting elfin-woods warbler habitat within these forests. When a management or research activity is conducted, both USFS and PRDNER closely coordinate with the Service during design and planning stages. These planning efforts minimize possible adverse effects on the species and its habitat. In contrast, the expansion of existing facilities (i.e., transmission antennas, access roads, access gates, administration buildings, utilities) within the forests is still a possibility and may result in the degradation of suitable habitat of elfin-woods warbler.

    Although the threats to the species and its habitat have been minimized within the lands managed and administrated by USFS and PRDNER within EYNF, MCF, and CCF, respectively, the species is still also threatened with habitat destruction, fragmentation, and degradation in 15 percent of its suitable occupied habitat within private lands adjacent to MCF. These private lands are known to be susceptible to habitat modification caused by unsustainable agricultural practices and other land uses requiring vegetation clearance (e.g., deforestation, monoculture of minor fruits, livestock related activities, human-induced fires, residential use, road improvements). Although not known to be currently occupied, the areas outside EYNF and CCF are also vulnerable to these threats because they are not within the protected lands. In the Municipality of Maricao, the Puerto Rico Department of Agriculture (PRDA) has identified 301 properties (8,442 acres) with potential to be developed as agricultural lands for coffee and citrus plantations (Resolución Conjunta del Senado 2014, p. 2). Although the conversion of forested areas to sun-grown coffee plantations is still occurring on private lands adjacent to MCF, the magnitude of this activity is localized and at a lower level than it was in the past. However, PRDA has expressed its intention to increase the acreages of coffee plantations in Puerto Rico to 16,000 acres by 2016 (PRDA 2015, no page number). PRDA's goal is to provide incentives to landowners (i.e., $1,300/acre) for the establishment of new planting areas of sun-grown or partially shaded coffee (i.e., 1,000 coffee trees per acre) (Regulation 6372, p. 3-6; Regulation Governing the Incentives Programs of the Coffee Production Industry in Puerto Rico). Some of these areas, previously used for agriculture, were abandoned and are currently forested. The majority of the sun-grown coffee plantations were converted several decades ago, resulting in the elimination of native forest, thus reducing the habitat value for wildlife, including the elfin-woods warbler (Delannoy 2007, p. 20). The most recent studies conducted in MCF and adjacent lands (i.e., Delannoy 2007, p. 15; González 2008, p. 59) did not detect elfin-woods warblers in sun-grown coffee plantations on privately owned lands adjacent to the forest. The establishment of a sun-grown coffee plantation requires the deforestation of the area, removing habitat that elfin-woods warblers are or could be using.

    The increase of urban development in private lands adjacent to EYNF and CCF has negatively affected elfin-woods warbler suitable habitat around these forests. Gould et al. (2007, pp. 29-31) suggested there is an increasing urbanization trend of the limited land area of eastern Puerto Rico where these forests are located. Urban development in this region increased more than 15 percent between 1991 and 2003 (Gould et al. 2007, pp. 29-31). Martinuzzi et al. (2007, pp. 294-296) reported that almost 52 percent of the island is classified under either “Urban” use (i.e., 16 percent; 142,562 ha) or “Densely Populated Rural” use (i.e., 36 percent; 320,219 ha) classes. The Urban-use class enhances the contiguity between the compact urban areas across the island, and gives an accurate view of how an “urban ring” encircles interior mountainous and protected areas like EYNF and CCF (Martinuzzi et al. 2007, p. 294). The Densely Populated Rural-use class surrounds the urban-use areas and represents most of the territory where human developments expand out from the urban centers following secondary routes (Martinuzzi et al. 2007, p. 294). Although the most evident land-use changes in the last 25 years have been the intensification of urbanization that surrounds these forests (Helmer 2004, pp. 33-35, Gould et al. 2007, pp. 29-31, Martinuzzi et al. 2007, p. 294), it is not known how much of these lands currently contain habitat suitable for the elfin-woods warbler.

    Conservation Efforts To Reduce the Present or Threatened Destruction, Modification, or Curtailment of Its Habitat or Range

    In 2014, the Service developed a candidate conservation agreement (CCA) with USFS and PRDNER to promote the conservation of the elfin-woods warbler. The purpose of the CCA is to implement measures to conserve, restore, and improve the elfin-woods warbler's habitat and populations within EYNF and MCF (Service 2014, p. 6). The CCA provides that PRDNER and USFS will promote, develop, and implement the best management practices to avoid any potential threat to suitable and occupied elfin-wood warbler habitat and populations. It also provides that both agencies will implement restoration and habitat enhancement efforts within degraded areas of EYNF and MCF. The agencies will also (1) determine the habitat use, movement, and activity patterns of the species; (2) design and establish long-term population monitoring programs; and (3) develop outreach and education programs to improve mechanisms to promote habitat conservation and restoration within private lands adjacent to both forests.

    Although the elfin-woods warbler also occurs on privately owned lands adjacent to MCF that are not covered by the CCA, these areas are part of a habitat restoration initiative in southwestern Puerto Rico implemented by the Service since 2010, through the Partners for Fish and Wildlife (PFW) and Coastal (CP) Programs. The PFW and CP are voluntary programs that provide technical and financial assistance to landowners to implement restoration and conservation practices on their lands for a particular amount of time. These programs promote the restoration of degraded habitat that was likely occupied by the species before the conversion to agricultural lands and that may be restored as suitable elfin-woods warbler habitat in the future. In some cases, occupied suitable habitat for the species is enhanced and protected through cooperative agreements with the private landowners.

    Between 2010 and 2014, a total of 522 ha (1,290 acres) of degraded tropical upland forest and 21 km (13 miles) of riparian buffers have been restored and conserved through these programs in collaboration with the Natural Resources Conservation Service (NRCS), Farm Service Agency (FSA), PRDNER, Envirosurvey Inc. (a local nongovernmental organization), and other partners. Although this initiative promotes the restoration and enhancement of degraded habitat adjacent to the MCF and may potentially provide suitable habitat for the elfin-woods warbler, challenges such as limited resources and uncertainty about landowner participation may affect the implementation of management practices that mitigate impacts of agricultural practices.

    Summary of Factor A

    The elfin-woods warbler's restricted distribution makes it vulnerable to habitat destruction and modification. The majority of extant elfin-woods warbler populations occur on public lands managed for conservation purposes where activities that may affect the species or its habitat are regulated, and measures to minimize or avoid those impacts are being implemented based on management plans or agencies' management mandates. The elfin-woods warbler has been reported on private lands only outside MCF. Private lands adjacent to EYNF have not been surveyed, and recent surveys conducted within the CCF and adjacent private lands did not detect the elfin-woods warbler (Aide and Campos 2016). Nonetheless, the agricultural activities and development projects on private lands adjacent to EYNF, MCF, and CCF may result in the loss or fragmentation of habitat that may be suitable for the species as has been suggested by some researchers. Therefore, we believe that habitat curtailment or modification is a threat to the elfin-woods warbler.

    Factor B. Overutilization for Commercial, Recreational, Scientific, or Educational Purposes

    Based on the available information, overutilization has not been documented as a threat to the elfin-woods warbler.

    Factor C. Disease or Predation

    Delannoy (2009, p. 2) indicated that the Puerto Rican sharp-shinned hawk (Accipiter striatus venator) infrequently preys on the elfin-woods warbler. Other potential elfin-woods warbler nest predators may include the pearly-eyed thrasher, Puerto Rican tanager, Puerto Rican screech owl, Puerto Rican boa, Puerto Rican racer, and feral cat (Delannoy 2009, p. 2). Additionally, Arroyo-Vázquez (1992, p. 364) noted that the Indian mongoose and black rat are potential egg and nestling predators. Nonetheless, we are not aware of any scientific or commercial information that predation of elfin-woods warblers is having an adverse effect on the species, and therefore we believe that predation is not a threat to the elfin-woods warbler. Similarly, we have no evidence of any disease affecting the species.

    Factor D. The Inadequacy of Existing Regulatory Mechanisms

    In 1999, the Commonwealth of Puerto Rico approved Law No. 241-1999, known as the New Wildlife Law of Puerto Rico (Nueva Ley de Vida Silvestre de Puerto Rico). The purpose of this law is to, among other things, protect, conserve, and enhance both native and migratory wildlife species; declare as property of Puerto Rico all wildlife species within its jurisdiction; issue permits; regulate hunting activities; and regulate exotic species. In 2004, the Commonwealth of Puerto Rico approved the Regulation Governing the Management of Vulnerable and Endangered Species on the Commonwealth of Puerto Rico (Regulation 6766; Reglamento para Regir el Manejo de las Especies Vulnerables y en Peligro de Extinción en el Estado Libre Asociado de Puerto Rico). Regulation 6766 prohibits collecting, killing, or harming species listed under Territorial law, as well as possessing, transporting, or selling items derived from listed species, and requires authorization from the PRDNER Secretary for any action that may affect designated critical habitat of listed species under this regulation (Departamento de Recursos Naturales y Ambientales 2004, pp. 9, 18). In 2004, the Commonwealth of Puerto Rico included the elfin-woods warbler in Regulation 6766 as a “vulnerable species” (a species that, although is not listed as endangered or critically endangered, faces a high risk of extinction in a foreseeable future).

    In addition to laws that specifically protect the elfin-woods warbler, MCF and CCF are protected under Puerto Rico's Forests Law (Law No. 133-1975; Ley de Bosques de Puerto Rico), as amended in 2000, which prohibits causing damage to and collection of flora and fauna in public forests. Moreover, all Commonwealth forests are designated as Critical Wildlife Areas (CWA) by PRDNER. The CWA designation constitutes a special recognition by this agency with the purpose of providing information to other Commonwealth and Federal agencies about the conservation needs of these areas, and assisting permitting agencies in precluding negative impacts as a result of permit approvals or endorsements (PRDNER 2005, p. 6).

    The Migratory Bird Treaty Act (MBTA) (16 U.S.C. 703-712) provides protection for the elfin-woods warbler, which is defined as a migratory bird under the MBTA. The MBTA makes it unlawful to pursue; hunt; take; capture; kill; attempt to take, capture, or kill; possess; offer for sale; sell; offer to barter; barter; offer to purchase; purchase; deliver for shipment; ship; export; import; cause to be shipped, exported, or imported; deliver for transportation; transport or cause to be transported; carry or cause to be carried; or receive for shipment, transportation, carriage, or export, any migratory bird, or any part, nest, or egg of such bird, or any product, whether or not manufactured, which consists of, or is comprised in whole or part, of any such bird, or any part, nest, or egg thereof. However, no provisions in the MBTA prevent habitat destruction unless direct mortality or destruction of active nests occurs.

    Finally, the elfin-woods warbler co-occurs with other species that are listed under the Act. In the EYNF, the species co-occurs with the Puerto Rican sharp-shinned hawk (Accipiter striatus venator), Puerto Rican boa, Puerto Rican broad-winged hawk (Buteo platypterus brunnescens), Puerto Rican parrot (Amazona vittata), and several federally listed plants: Styrax portoricensis, uvillo (Eugenia haematocarpa), Lepanthes eltoroensis, chupacallos (Pleodendron macranthum), capa rosa (Callicarpa ampla), palo colorado (Ternstroemia luquillensis), Ternstroemia subsessilis, and Ilex sintenisii. In the MCF, the species co-occurs with the Puerto Rican sharp-shinned hawk, Puerto Rican boa, and several federally listed plants: Cranichis ricartii, Gesneria pauciflora, palo de rosa (Ottoschulzia rhodoxylon), palo colorado (Ternstroemia luquillensis), higuero de sierra (Crescentia portoricensis), and Cordia bellonis. Because of the occurrence of these federally listed species within the same habitat where the elfin-woods warblers occurs, any Federal action, funding, or permit within these forests or in private lands adjacent to these forests that may affect these listed species requires a section 7 consultation under the Act. Therefore, the elfin-woods warbler may benefit from indirect protection of these listed species (i.e., implementation of habitat restoration practices and habitat protection).

    Summary of Factor D

    Based on the information currently available to us, the Federal and Commonwealth regulatory mechanisms are being implemented and are functioning as designed. Lack of enforcement of these laws and regulations has not been identified as having a negative impact to the species or exacerbating other negative effects to the species. Therefore, we do not find existing regulations to be inadequate.

    Factor E. Other Natural or Manmade Factors Affecting Its Continued Existence Hurricanes and the Effects of Climate Change

    The geographic location of islands in the Caribbean Sea makes them prone to hurricane impacts (Wiley and Wunderle 1993, p. 320). In fact, the frequency of hurricane occurrences is higher in the southeastern United States and the Caribbean than other regions of the world (Wiley and Wunderle 1993, p. 320). Hurricanes can have both direct and indirect effects on bird populations, which may determine the characteristics of local avifauna (Wauer and Wunderle 1992, p. 656; Wunderle et al. 1992, p. 323). Arendt et al. (2013, p. 2) suggested that catastrophic weather events such as hurricanes can negatively affect the elfin-woods warbler due to its restricted distribution and low number of individuals. Some species may cope with hurricane-induced changes by selecting different prey items, while others may switch their foraging behavior and locations (Wauer and Wunderle 1992, p. 657; Wunderle et al. 1992, pp. 323-326).

    The frequency of hurricane-induced damage equivalent to F3 (severe) on the Fujita scale (Fujita 1971) is at least three times greater in the northeastern quadrant of Puerto Rico, where EYNF and CCF are located, compared to the rest of the island (White et al. 2014, p. 30). In contrast, the western side of Puerto Rico, where MCF is located, is subject to different hurricane trajectories and risks than the eastern portion of the island (White et al. 2010, p. 16). For example, in 1998, Hurricane Georges struck MCF, which previously had been spared from hurricanes since 1932 (Tossas 2006, p. 81). Hence, studies of the effects of hurricanes on bird populations in Puerto Rico are limited to the northeastern region and little is known about how bird species are affected elsewhere on the island (Tossas 2006, p. 81).

    Delannoy (2007, p. 24) suggested that elfin-woods warbler populations at MCF appeared to be stable. However, studies conducted from 1989 to 2006 at EYNF documented a declining trend in the elfin-woods warbler population during the study period (Arendt et al. 2013, pp. 8-9). Arendt et al. (2013, p. 8) stated that this documented downward population trend could be related to intrinsic causes (e.g., physiological, genetic). Nonetheless, they further suggest that it is more likely that natural habitat conversion and degradation, resulting from cyclonic events, are playing an important role in the species' decline at EYNF. Direct effects of hurricanes on habitat include massive defoliation, snapped and wind-thrown trees, massive tree mortality, and landslides (Lugo 2008, p. 368). For example, Hurricane Hugo (1989) and Hurricane Georges (1998) caused extensive damage in EYNF, which damage may have adversely impacted the elfin-woods warbler's primary habitat (Arendt et al. 2013, pp. 8-9). Arroyo (1991, p. 55) noted that the species was not recorded during 1990 from areas it was reported from previously at EYNF. This forest was heavily damaged by Hurricane Hugo, with more than 80 percent of the forest completely defoliated (Boucher 1990, p. 164). In contrast, at the MCF, Arroyo (1991, pp. 55-56) recorded an apparent vertical migration pattern of the species during months of heaviest rains. Moreover, Tossas (2006, p. 84) found that the elfin-woods warbler was one of two species that recovered within a year to pre-hurricane population levels after Hurricane Georges. This finding suggested that warblers abandoned defoliated sites immediately after the hurricane and shifted to protected patches with adequate foraging substrate and prey until the defoliated sites recovered (Tossas 2006, p. 84). Arendt et al. (2013, p. 9) indicated that these contrasting findings may be the result of disproportionate damage caused by storms in the respective forests. Moreover, the landscape at EYNF is different from that of the MCF in that at EYNF there is no continuous forested vegetation beyond the forest boundaries mainly due to conversion of agricultural lands and lowland broadleaf forests to urbanized areas (Lugo et al. 2004, p. 29). Therefore, the probability of dispersion to undamaged areas within and outside EYNF could be reduced for the elfin-woods warbler depending on the damages to the vegetation. The lack of suitable habitat around the EYNF also reduces the probability of elfin-woods warbler re-colonization from the MCF, which is 150 km (93 mi) away (Arendt et al. 2013, p. 2).

    As discussed above, Anadón-Irizarry (2006, p. 54), Delannoy (2007, p. 24), and Anadón-Irizarry (2014, pers. comm.) have suggested the elfin-woods warbler no longer exists within CCF. Pérez-Rivera (2014, pers. comm.) has suggested that the habitat modification caused by Hurricane Hugo and Hurricane Georges at CCF may have had a negative effect on the elfin-woods warbler. However, he acknowledged that before concluding the species was extirpated from the forest due to these climatological events, a formal and extensive survey should be conducted to include nontraditional areas within and outside of CCF (Pérez-Rivera 2014, pers. comm.). He suggested hurricanes might be detrimental to low densities and habitat-specialized species, but at the same time might benefit insectivorous species like the elfin-woods warbler. In 1989, a month after Hurricane Hugo, Pérez-Rivera (1991, pp. 474-475) recorded the Antillean euphonia (Euphonia musica) shifting its feeding and foraging behavior in CCF as a result of the habitat disturbance following the hurricane. Some authors (i.e., Wauer and Wunderle 1992, p. 657; Wunderle et al. 1992, pp. 323-326) have suggested that the frequency of hurricanes in the Caribbean may be determining some of the characteristics of the local avifauna, such as the shifting into new habitats due to hurricane-induced changes.

    Hurricanes can have positive effects on forest and bird ecology by temporarily increasing forest productivity (Wiley and Wunderle 1993, p. 337), particularly for species with ample distribution (White et al. 2014, p. 31). However, the immediate negative effects of these powerful atmospheric events for a species with demographically vulnerable populations, such as the elfin-woods warbler, outweigh the benefits accrued via short-term primary productivity of vegetation (White et al. 2014, p. 31). This might explain the declining elfin-woods warbler population trend documented by Arendt et al. (2013, pp. 8-9) at EYNF.

    Studies predict an increase in hurricane intensity in the Atlantic, with higher wind speeds and greater amounts of precipitation, but a reduction in the overall number of storms (Jennings et al. 2014, p. 8). As mentioned above, hurricanes may result in direct negative effects to the species and its habitat.

    Based on the above information, it is possible that the elfin-woods warbler could experience local extinction due to these catastrophic weather events. While the species appears to have the ability to temporarily move to undisturbed areas and survive in MCF, such dispersal ability has not been documented at EYNF. Having two geographically separate populations on both ends of Puerto Rico may benefit the elfin-woods warbler since, based on the history of hurricanes striking the island, it is unlikely for both EYNF and MCF to be impacted by the same weather system at once. However, the fact that there are only two known populations left makes the species more vulnerable to extinction if one is lost due to a catastrophic weather event. It is important to note, however, that there are no specific studies corroborating hurricanes as a main cause of elfin-woods warbler population declines at EYNF and MCF, nor that hurricanes caused the apparent extirpation of the species from CCF.

    Regarding climate, general long-term changes have been observed, including changes in amount of precipitation, wind patterns, and extreme weather events (e.g., droughts, heavy precipitation, heat waves, and the intensity of tropical cyclones) (Intergovernmental Panel on Climate Change (IPCC) 2007, p. 30). For example, projected decreases in precipitation in the Caribbean suggest drier wet seasons, and even drier dry seasons (Jennings et al. 2014, p. 1).

    As previously mentioned, the elfin-woods warbler is currently known only from specific habitat types at EYNF and MCF, which makes the species susceptible to the effects of climate change. It has been stated that higher temperatures, changes in precipitation patterns, and any alteration in cloud cover will affect plant communities and ecosystem processes in EYNF (Lasso and Ackerman 2003, pp. 101-102). In fact, the distribution of tropical forest life zones in the Caribbean is expected to be altered due to both intensified extreme weather events and progressively drier summer months (Wunderle and Arendt 2011, p. 44). At EYNF, such alteration may allow low-elevation Tabonuco forest species to colonize areas currently occupied by Palo Colorado forest (Scatena and Lugo1998, p. 196). Dwarf forests at EYNF also are very sensitive to the effects of climate change because of their occurrence in narrowly defined environmental conditions (Lasso and Ackerman 2003, p. 95). Dwarf forest epiphytes may experience moisture stress due to higher temperatures and less cloud cover with a rising cloud base, affecting epiphyte growth and flowering (Nadkarni and Solano 2002, p. 584). As previously mentioned, both the Palo Colorado and Dwarf forests have been reported to have the highest elfin-woods warbler mean abundance (Anadón-Irizarry 2006, p. 24). Although the available information predicting changes in habitat due to the effects of climate change pertains to EYNF, similar changes would be expected for the MCF and CCF, which lies within two of the same life zones as EYNF.

    As indicated above, such climate changes are likely to alter the structure and distribution of the habitat used by the elfin-woods warbler. According to Arendt et al. (2013, p. 9), approximately 50 percent of the Caribbean birds show medium to high vulnerability to the effects of climate change. Based on that information, species that are dependent on specific habitat types, and that have limited distribution or have become restricted in their range, like the elfin-woods warbler, will be most susceptible to the effects of climate change. However, while continued change is expected, the magnitude and rate of that change is unknown in many cases. In tropical and subtropical forests, significant knowledge gaps exist in predicting the response of natural systems to the effects of climate change, and uncertainties exist with studies forecasting trends in climate (Jennings et al. 2014, p. 33). Moreover, regionally downscaled climate models projecting temperature and precipitation patterns at fine scales are not readily available for locations within the Caribbean region, including Puerto Rico (Jennings et al. 2014, p. 33). While existing large-scale global climate models are useful in determining potential future trends (Angeles et al. 2007, p. 556), the lack of fine-scale data in Puerto Rico's mountainous regions is especially troublesome, as variations in climate with elevation over short horizontal distances cannot be captured by existing climate models, especially in predictions of extreme events (Meehl et al. 2007, p. 477).

    Human-Induced Fires

    Fires are not part of the natural processes for subtropical and moist forests in Puerto Rico (Santiago-Garcia et al. 2008, p. 604). In fact, Méndez-Tejeda et al. (2015, p. 363) concluded that the majority of forests fires in Puerto Rico are produced by human actions. However, as annual rainfall decreases over time in the Caribbean region, longer periods of drought are expected in the future (Breshears et al. 2005, pp. 146-147; Larsen 2000, pp. 510-512). In 2000, Flannigan et al. (2000, pp. 225-226) projected an increase of the global fire occurrence over the next century due to the effects of climate change. In Puerto Rico, historical evidence suggests fire frequency is increasing (Burney et al. 1994, p. 277; Robbins et al. 2008, pp. 530-531). Moreover, the interactions between climate warming and drying, and increased human development, are considered to have the potential to increase the effects of fires (Robbins et al. 2008, pp. 530-531).

    In EYNF, CCF, and adjacent lands, fires are not considered common. The tropical rain and moist forest conditions of EYNF and CCF (i.e., average annual rainfall of 304.8 cm (120 in) or more) and the very high humidity during most of the year are not conditions conducive to fires as they are in the dry, temperate climates encountered in other regions. The last fire incident in EYNF, recorded in 1994, was categorized as a “minimal fire” that was quickly controlled by USFS staff (USFS 2015, no page number). In the CCF area, fires are considered human-induced and occur in a low frequency along the road PR-184 (Monsegur 2015, pers. comm.). Although the road-side fires are considered minimal, they have the potential to extend to forested lands within CCF and adjacent private lands affecting suitable elfin-woods warbler habitat.

    In the Maricao area (i.e., Municipalities of Sabana Grande and San Germán), fires occur more frequently on the southern dry slopes of MCF and adjacent private lands, particularly during the dry season (Avila 2014, pers. comm.). Human-induced fires modify the landscape and ecological conditions of the habitat by promoting growth of nonnative trees and grasses (Brandeis and Woodall 2008, p. 557). These landscape modifications may reduce the quality and quantity of potential elfin-woods warbler habitat. Moreover, these fires alter the habitat, decreasing the ability of the species to disperse to other forested habitats. Although the primary habitat for the species in MCF (i.e., Podocarpus forest) (González 2008, pp. 20-21) is not prone to fire disturbance because it is located on the highest peaks within the lower montane wet forest life zone, suitable habitat at lower elevations might be in danger if these fires extend to forested lands within the forest or private lands. Severe fires in moist tropical forests have the potential to alter microclimates, allowing atypical forest species to invade, increasing the chance of recurrent fires (Sherman et al. 2008, p. 536).

    Conservation Efforts To Reduce Other Natural or Manmade Factors Affecting the Continued Existence of the Species

    As discussed under Factor A above, the Service, USFS, and PRDNER signed a CCA in 2014, to implement strategic conservation actions. In the context of Factor E, these actions include the development and implementation of programmatic reforestation and habitat enhancement efforts within areas degraded by hurricanes to improve the recovery of the elfin-woods warbler within EYNF and MCF (Service 2014, pp. 18-19). Additionally, the CCA will help develop and design studies to gather information on the elfin-woods warbler (e.g., habitat needs, habitat use, movement and activity patterns, responses to biotic and abiotic factors, and genetic variation) in order to better design and implement conservation strategies for the recovery of the species.

    Summary of Factor E

    Based on the information available and limited distribution of the elfin-woods warbler, we believe that this species is currently threatened by natural or manmade factors such as hurricanes and human-induced fire. The effects of climate change may exacerbate these threats by increasing intensity and frequency of hurricanes and environmental effects, although information is lacking on the specific extent of these effects. Thus, we consider these other natural and manmade factors to be threats to this species.

    Determination

    We have carefully assessed the best scientific and commercial information available regarding the past, present, and future threats to elfin-woods warbler. Current available information indicates that the elfin-woods warbler has a limited distribution, with only two known populations occurring within EYNF and MCF, including the private lands adjacent to MCF, and at least one possibly extirpated population from CCF. As discussed in the Summary of Factors Affecting the Species section of this rule, threats to the elfin-woods warbler include loss, fragmentation, and degradation of habitat on private lands adjacent to MCF (Factor A). Some of these lands are subjected to habitat modification caused by unsustainable agricultural practices (i.e., sun-grown coffee plantations), small residential development, and livestock related activities. Moreover, the increase of urban development on private lands adjacent to EYNF and CCF has also negatively affected suitable elfin-woods warbler habitat around these forests. The activities result in the elimination of native forest, thus reducing the suitable habitat available and the habitat value for the elfin-woods warbler.

    Other natural or manmade factors (i.e., hurricanes, the effects of climate change, human-induced fires; Factor E) also have been identified as threats to the species. There are only two known remaining populations making the species more vulnerable to extinction if one population is lost due to a catastrophic weather event. The effects of climate change also are expected to alter the structure and distribution of the habitat used by the elfin-woods warbler, which may be particularly susceptible because of the limited distribution and specific forest types used by the species. Human-induced fires have been reported in the Maricao area mostly within the lower southern slopes of the MCF and adjacent private lands, particularly during the dry season, and occasionally in the CCF area. Habitat disturbance caused by human-induced fires may also affect the ability of the species to disperse to other forested habitats.

    The Act defines an endangered species as any species that is “in danger of extinction throughout all or a significant portion of its range” and a threatened species as any species “that is likely to become endangered throughout all or a significant portion of its range within the foreseeable future.” We find that the elfin-woods warbler is not presently in danger of extinction throughout its entire range based on the low to moderate severity and non-immediacy of threats currently impacting the species. The available information indicates that elfin-woods warbler populations appear to be stable in MCF and that there are no immediate threats precipitating a demographic decline of the elfin-woods warbler in that forest. In Maricao, the species has been reported adjacent to the Commonwealth forest in shade-grown coffee plantations, demonstrating that the species may tolerate some degree of habitat disturbance. At EYNF, the most current information reported a declining trend of the elfin-woods warbler population, mainly attributed to hurricanes striking that forest. However, there are no specific studies corroborating that hurricanes are in fact the main cause of elfin-woods warbler population declines at EYNF and other factors may be influencing the decline (e.g., population low densities and patchy spatial arrangement). Although the species appears to be stable at the MCF, it may be declining at EYNF and extirpated from CCF. The cumulative effects of habitat modification by human actions (e.g., unsustainable agricultural practices) and natural events such as hurricanes would make the two known populations more vulnerable to extinction due to their restricted distribution, limited population numbers, and specific ecological requirements. Therefore, on the basis of the best available scientific and commercial information, we list the elfin-woods warbler as threatened in accordance with sections 3(20) and 4(a)(1) of the Act. We find that an endangered species status is not appropriate for elfin-woods warbler because the species is not currently in imminent danger of extinction throughout all of its range.

    Available Conservation Measures

    Conservation measures provided to species listed as endangered or threatened under the Act include recognition, recovery actions, requirements for Federal protection, and prohibitions against certain practices. Recognition through listing results in public awareness, and conservation by Federal, State, Tribal, and local agencies; private organizations; and individuals. The Act encourages cooperation with the States and other countries and calls for recovery actions to be carried out for listed species. The protection required by Federal agencies and the prohibitions against certain activities are discussed, in part, below.

    The primary purpose of the Act is the conservation of endangered and threatened species and the ecosystems upon which they depend. The ultimate goal of such conservation efforts is the recovery of these listed species, so that they no longer need the protective measures of the Act. Subsection 4(f) of the Act calls for the Service to develop and implement recovery plans for the conservation of endangered and threatened species. The recovery planning process involves the identification of actions that are necessary to halt or reverse the species' decline by addressing the threats to its survival and recovery. The goal of this process is to restore listed species to a point where they are secure, self-sustaining, and functioning components of their ecosystems.

    Recovery planning includes the development of a recovery outline shortly after a species is listed and preparation of a draft and final recovery plan. The recovery outline guides the immediate implementation of urgent recovery actions and describes the process to be used to develop a recovery plan. The plan may be revised to address continuing or new threats to the species, as new substantive information becomes available. The recovery plan identifies site-specific management actions that set a trigger for review of the five factors that control whether a species remains endangered or may be downlisted or delisted, and methods for monitoring recovery progress. Recovery plans also establish a framework for agencies to coordinate their recovery efforts and provide estimates of the cost of implementing recovery tasks. Recovery teams (composed of species experts, Federal and State agencies, nongovernmental organizations, and stakeholders) are often established to develop recovery plans. When completed, the recovery outline, draft recovery plan, and the final recovery plan will be made available on our Web site (http://www.fws.gov/endangered), or from our Caribbean Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT).

    Implementation of recovery actions generally requires the participation of a broad range of partners, including other Federal agencies, States, Tribes, nongovernmental organizations, businesses, and private landowners. Examples of recovery actions include habitat restoration (e.g., restoration of native vegetation), research, captive propagation and reintroduction, and outreach and education. The recovery of many listed species cannot be accomplished solely on Federal lands because their range may occur primarily or solely on non-Federal lands. To achieve recovery of these species requires cooperative conservation efforts on private, State, and Tribal lands.

    Following publication of this final listing rule, funding for recovery actions will be available from a variety of sources, including Federal budgets, State programs, and cost share grants for non-Federal landowners, the academic community, and nongovernmental organizations. In addition, pursuant to section 6 of the Act, the Commonwealth of Puerto Rico would be eligible for Federal funds to implement management actions that promote the protection or recovery of the elfin-woods warbler. Information on our grant programs that are available to aid species recovery can be found at: http://www.fws.gov/grants.

    Please let us know if you are interested in participating in recovery efforts for this species. Additionally, we invite you to submit any new information on this species whenever it becomes available and any information you may have for recovery planning purposes (see FOR FURTHER INFORMATION CONTACT).

    Section 7(a) of the Act requires Federal agencies to evaluate their actions with respect to any species that is proposed or listed as an endangered or threatened species and with respect to its critical habitat, if any is designated. Regulations implementing this interagency cooperation provision of the Act are codified at 50 CFR part 402. Section 7 (a)(1) of the Act directs all Federal agencies to “utilize their authorities in furtherance of the purposes of the Act by carrying out programs for the conservation of” endangered and threatened species. Section 7(a)(2) of the Act requires Federal agencies to ensure that activities they authorize, fund, or carry out are not likely to jeopardize the continued existence of any endangered or threatened species or destroy or adversely modify its critical habitat. If a Federal action may affect a listed species or its critical habitat, the responsible Federal agency must enter into consultation with the Service.

    Federal agency actions within the species' habitat that may require consultation as described in the preceding paragraph include management and any other landscape-altering activities on Federal lands administered by the USFS; issuance of section 404 Clean Water Act (33 U.S.C. 1251 et seq.) permits by the U.S. Army Corps of Engineers; and construction and maintenance of roads or highways by the Federal Highway Administration.

    4(d) Rule

    Under section 4(d) of the Act, the Service has discretion to issue regulations that we find necessary and advisable to provide for the conservation of threatened wildlife. We may also prohibit by regulation, with respect to threatened wildlife, any action prohibited by section 9(a)(1) of the Act for endangered wildlife. 50 CFR 17.31(a) applies all the general prohibitions for endangered wildlife set forth at 50 CFR 17.21 to threatened wildlife; 50 CFR 17.31(c) states that whenever a 4(d) rule applies to a threatened species, the provisions of § 17.31(a) do not apply to that species. Permit provisions for threatened species are set forth at 50 CFR 17.32.

    Some activities that would normally be prohibited under 50 CFR 17.31 and 17.32 will contribute to the conservation of the elfin-woods warbler because habitats within some of the physically degraded private lands adjacent to elfin-woods warbler existing populations must be improved before they are suitable for the species. Therefore, for the elfin-woods warbler, the Service has determined that species-specific exceptions authorized under section 4(d) of the Act are necessary and advisable to promote the conservation of this species.

    As discussed above in the Summary of Factors Affecting the Species section of this listing rule, threats to the species include loss, fragmentation, and degradation of habitat due to unsustainable agricultural practices and land use requiring vegetation clearance. Agricultural practices occurring on private lands adjacent to MCF, especially those involving habitat modification (e.g., deforestation and conversion of shade-grown coffee to sun-grown coffee plantations), can result in vegetation removal and habitat alteration, thereby degrading habitats used by the elfin-woods warbler for feeding, sheltering, and reproduction.

    The private lands surrounding MCF are considered the most active coffee production lands in Puerto Rico. Sun-grown coffee plantations adjacent to MCF were converted several decades ago, resulting in the elimination of native forest overstory, reducing the habitat value for wildlife, including the elfin-woods warbler. Although the majority of the coffee-related agricultural lands were converted to sun-grown coffee plantations, several parcels of land surrounding MCF are currently part of a multi-agency habitat restoration initiative in southwestern Puerto Rico implemented by the Service and NRCS since 2010, through the PFW, CP, and U.S. Department of Agriculture Farm Bill Programs. Activities that improve or restore physical habitat quality, such as the conversion of sun-grown coffee to shade-grown coffee, reforestation with native trees, riparian buffering, and forested habitat enhancement (i.e., exotic species removal, and native tree planting), would have a positive effect on elfin-woods warbler populations and would provide an overall conservation benefit to the species. The NRCS conservation practices promoted under this initiative are the Multi-Story Cropping (Practice 379) and Tree/Shrub Establishment (Practice 612) (USFWS 2011). The Multi-Story Cropping practice promotes the establishment of stands of trees or shrubs that are managed as overstory with an understory of woody and/or non-woody plants that are grown for a variety of products. The purpose of this practice is to improve crop diversity by growing mixed but compatible crops having different heights in the same area. This will improve soil quality, reduce erosion, enhance degraded areas, and provide habitat for wildlife species such as the elfin-woods warbler. The Tree/Shrub Establishment Practice promotes the establishment of woody plants by planting seedlings or cuttings, direct seeding, or natural regeneration. The purpose is to promote forest products such as timber, wildlife habitat, long-term erosion control, and improvement of water quality, and to improve or restore natural diversity.

    Provisions of the 4(d) Rule

    Under this 4(d) rule, all of the prohibitions set forth at 50 CFR 17.31 and 17.32 apply to the elfin-woods warbler, except that incidental take caused by the following activities conducted within habitats currently occupied by the elfin-woods warbler on private, Commonwealth, and Federal lands would not be prohibited, provided those activities both abide by the conservation measures in the rule and are conducted in accordance with applicable Commonwealth, Federal, and local laws and regulations:

    (1) The conversion of sun-grown coffee to shade-grown coffee plantations by the restoration and maintenance (i.e., removal of invasive, exotic, and feral species; shade and coffee tree seasonal pruning; shade and coffee tree planting and replacement; coffee bean harvest by hands-on methods; and the use of standard pest control methods and fertilizers within the plantations) of shade-grown coffee plantations and native forests associated with this type of crop. To minimize disturbance to the elfin-woods warbler, shade and coffee tree seasonal pruning must be conducted between September 1 and February 28, which is outside the peak of the elfin-woods warbler's breeding season. The Service considers the use of pest control methods (e.g., pesticides, herbicides) and fertilizers “standard” when it is used only twice a year during the establishment period of shade and coffee trees (i.e., the first 2 years). During this period, the structure of the agroforestry system is not mature enough to sustain the occurrence of elfin-woods warblers within these areas.

    Once the shade-grown coffee system reaches its full functionality and structure (i.e., 3 to 4 years), few or no chemical fertilizers, herbicides, or pesticides are required, and their use would be restricted under the 4(d) rule. This is the time period when the shade-grown coffee system is mature enough to support the presence of wildlife species. Researchers have found that the number of species of birds in coffee plantations with structurally and floristically diverse canopies is similar to the number of species in natural forest habitat and is higher than other agricultural landscapes without trees (Perfecto et al. 1996, pp. 603-605).

    The restoration of agricultural lands due to the planting of native trees to provide shade to coffee trees or by selective removal of exotic species creates physically stable and suitable habitats for the elfin-woods warbler. Moreover, the cultivation of shade-grown coffee has many other ecological and human-health benefits such as the reduction of soil erosion, moderation of soil temperatures, and reduced need for fertilizers and pesticides (Borkhataria et al. 2012, p.168). Therefore, restoration, conservation, and protection of shade-grown coffee plantations would provide suitable habitat for the feeding, sheltering, and reproduction activities of this species and may provide habitat to promote the elfin-woods warblers' dispersal and recolonization of lands adjacent to the existing populations.

    (2) Riparian buffer establishment through the planting of native vegetation and removal of exotic species may improve the habitat conditions of Gallery forests along the sub-watersheds associated with lands adjacent to the elfin-woods warbler's existing populations. Gallery forests serve as biological corridors that maintain connectivity between forested lands and associated agricultural lands, reducing the fragmentation in the landscape.

    (3) Reforestation and forested habitat enhancement projects within secondary forests (i.e., young and mature) that promote the establishment or improvement of habitat conditions for the species by the planting of native trees, selective removal of native and exotic trees, seasonal pruning of native and exotic trees, or a combination of these.

    The intent of these exceptions is to provide incentive for landowners to carry out these activities in a manner which we believe will provide benefits to the species such as: (1) Maintaining connectivity of suitable elfin-woods warbler habitats, allowing for dispersal between forested and agricultural lands; (2) minimizing habitat disturbance by conducting certain activities outside the peak of the elfin-woods warbler's breeding season (i.e., pruning between September 1 to February 28); (3) maximizing the amount of habitat that is available for the species; and (4) improving habitat quality. While these activities may cause some temporary disturbance to the elfin-woods warbler or its habitat, we do not expect these activities to adversely affect the species' conservation efforts. In fact, we expect they will have a net beneficial effect on the species.

    Based on the rationale above, the provisions included in this rule authorized under section 4(d) of the Act are necessary and advisable to provide for the conservation of the elfin-woods warbler. Nothing in this 4(d) rule would change in any way the recovery planning provisions of section 4(f) of the Act, the consultation requirements under section 7 of the Act, or the ability of the Service to enter into partnerships for the management and protection of the elfin-woods warbler.

    We may issue permits to carry out otherwise prohibited activities involving threatened wildlife under certain circumstances. Under regulations governing permits for threatened wildlife species, which are codified at 50 CFR 17.32, a permit may be issued for the following purposes: For scientific purposes, to enhance the propagation or survival of the species, economic hardship, zoological exhibition, educational purposes, and for incidental take in connection with otherwise lawful activities. There are also certain statutory exemptions from the prohibitions, which are found in sections 9 and 10 of the Act.

    It is our policy, as published in the Federal Register on July 1, 1994 (59 FR 34272), to identify to the maximum extent practicable at the time a species is listed, those activities that would or would not constitute a violation of section 9 of the Act (for this species, those section 9 prohibitions that would be adopted through the 4(d) rule). The intent of this policy is to increase public awareness of the effect of a final listing on proposed and ongoing activities within the range of a listed species. Based on the best available information, the following actions are unlikely to result in a violation of section 9, if these activities are carried out in accordance with existing regulations and permit requirements. This list is not comprehensive:

    (1) Activities authorized, funded, or carried out by Federal or Commonwealth agencies (e.g., expansion or construction of communication facilities; expansion of recreational facilities; pipeline construction; bridge construction; road rehabilitation and maintenance; expansion, construction, or maintenance of aqueduct facilities; habitat management; Federal and Commonwealth trust species reintroductions; trail maintenance; camping areas maintenance; research, repair, and restoration of landslides; etc.), when such activities are conducted in accordance with the consultation and planning requirements for listed species under section 7 of the Act; and

    (2) Agricultural and silviculture practices implemented within existing agricultural lands (i.e., degraded habitat not suitable for the species) other than sun- to shade-grown coffee conversion and maintenance, including herbicide, pesticide, and fertilizer use outside of coffee plantations, which are carried out in accordance with any Commonwealth and Federal existing regulations, permit and label requirements, and best management practices.

    We believe the following activities may potentially result in a violation of section 9 the Act. This list is not comprehensive:

    (1) Unauthorized collecting or handling of the species;

    (2) Destruction/alteration/fragmentation of habitat essential to fulfilling the lifecycle of the species; and

    (3) Introduction of nonnative species that compete with or prey upon the elfin-woods warbler.

    Questions regarding whether specific activities would constitute a violation of section 9 of the Act should be directed to the Caribbean Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT).

    Critical Habitat

    Section 3(5)(A) of the Act defines critical habitat as (i) the specific areas within the geographical area occupied by the species, at the time it is listed on which are found those physical or biological features (I) essential to the conservation of the species and (II) which may require special management considerations or protection; and (ii) specific areas outside the geographical area occupied by the species at the time it is listed upon a determination by the Secretary that such areas are essential for the conservation of the species. Elsewhere in this issue of the Federal Register we have published a proposed rule to designate critical habitat for the elfin-woods warbler.

    Required Determinations National Environmental Policy Act (42 U.S.C. 4321 et seq.)

    We have determined that environmental assessments and environmental impact statements, as defined under the authority of the National Environmental Policy Act, need not be prepared in connection with listing a species as an endangered or threatened species under the Endangered Species Act. We published a notice outlining our reasons for this determination in the Federal Register on October 25, 1983 (48 FR 49244).

    References Cited

    A complete list of references cited in this rulemaking is available on the Internet at http://www.regulations.gov and upon request from the Caribbean Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT).

    Authors

    The primary authors of this final rule are the staff members of the Caribbean Ecological Services Field Office.

    List of Subjects in 50 CFR Part 17

    Endangered and threatened species, Exports, Imports, Reporting and recordkeeping requirements, Transportation.

    Regulation Promulgation

    Accordingly, we amend part 17, subchapter B of chapter I, title 50 of the Code of Federal Regulations, as set forth below:

    PART 17—ENDANGERED AND THREATENED WILDLIFE AND PLANTS 1. The authority citation for part 17 continues to read as follows: Authority:

    16 U.S.C. 1361-1407; 1531-1544; and 4201-4245, unless otherwise noted.

    2. Amend § 17.11(h) by adding an entry for “Warbler, elfin-woods” to the List of Endangered and Threatened Wildlife in alphabetical order under BIRDS to read as follows:
    § 17.11 Endangered and threatened wildlife.

    (h) * * *

    Species Common name Scientific name Historic range Vertebrate population where endangered or threatened Status When listed Critical habitat Special rules *         *         *         *         *         *         * Birds *         *         *         *         *         *         * Warbler, elfin-woods Setophaga angelae U.S.A. (PR) Entire T 866 NA 17.41(e) *         *         *         *         *         *         *
    3. Amend § 17.41 by adding paragraph (e) to read as follows:
    § 17.41 Special rules—birds.

    (e) Elfin-woods warbler (Setophaga angelae). (1) Prohibitions. Except as noted in paragraph (e)(2) of this section, all prohibitions and provisions of 50 CFR 17.31 and 17.32 apply to the elfin-woods warbler.

    (2) Exemptions from prohibitions. Incidental take of the elfin-woods warbler will not be considered a violation of section 9 of the Act if the take results from any of the following when conducted within habitats currently occupied by the elfin-woods warbler provided these activities abide by the conservation measures set forth in this paragraph (e) and are conducted in accordance with applicable State, Federal, and local laws and regulations:

    (i) The conversion of sun-grown coffee to shade-grown coffee plantations by the restoration and maintenance (i.e., removal of invasive, exotic, and feral species; shade and coffee tree seasonal pruning; shade and coffee tree planting and replacement; coffee bean harvest by hands-on methods; and the use of standard pest control methods and fertilizers within the plantations) of shade-grown coffee plantations and native forests associated with this type of crop. To minimize disturbance to the elfin-woods warbler, shade and coffee tree seasonal pruning must be conducted between September 1 and February 28, which is the time period outside the peak of the elfin-woods warbler's breeding season. The Service considers the use of pest control methods (e.g., pesticides, herbicides) and fertilizers “standard” when it is used only twice a year during the establishment period of shade and coffee trees (i.e., the first 2 years). Once the shade-grown coffee system reaches its functionality and structure (i.e., 3 to 4 years), little or no chemical fertilizers, herbicides, or pesticides may be used.

    (ii) Riparian buffer establishment though the planting of native vegetation and selective removal of exotic species.

    (iii) Reforestation and forested habitat enhancement projects within secondary forests (i.e., young and mature) that promote the establishment or improvement of habitat conditions for the species by the planting of native trees, selective removal of native and exotic trees, seasonal pruning of native and exotic trees, or a combination of these.

    Dated: June 6, 2016. Stephen Guertin, Acting Director, U.S. Fish and Wildlife Service.
    [FR Doc. 2016-14540 Filed 6-21-16; 8:45 am] BILLING CODE 4333-15-P
    81 120 Wednesday, June 22, 2016 Proposed Rules DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-147196-07] RIN 1545-BH72 Deferred Compensation Plans of State and Local Governments and Tax-Exempt Entities AGENCY:

    Internal Revenue Service (IRS), Treasury.

    ACTION:

    Notice of proposed rulemaking and notice of public hearing.

    SUMMARY:

    This document contains proposed regulations prescribing rules under section 457 of the Internal Revenue Code for the taxation of compensation deferred under plans established and maintained by State or local governments or other tax exempt organizations. These proposed regulations include rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules. The proposed regulations would affect participants, beneficiaries, sponsors, and administrators of certain plans sponsored by State or local governments or tax-exempt organizations that provide for a deferral of compensation. This document also provides a notice of a public hearing on the proposed regulations.

    DATES:

    Written or electronic comments on these proposed regulations must be received by September 20, 2016. Outline of topics to be discussed at the public hearing scheduled for October 18, 2016 at 10 a.m. must be received by September 20, 2016.

    ADDRESSES:

    Send submissions to: CC:PA:LPD:PR (REG-147196-07), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday, between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-147196-07), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224 or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-147196-07). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC 20224.

    FOR FURTHER INFORMATION CONTACT:

    Concerning the proposed regulations under section 457, Keith Kost at (202) 317-6799 or Cheryl Press at (202) 317-4148, concerning submission of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Regina Johnson at (202) 317-6901 (not toll-free numbers).

    SUPPLEMENTARY INFORMATION:

    Background

    This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 457(a), (b), and (f) of the Internal Revenue Code (Code), as well as proposed regulations under section 457(e)(11), (e)(12), and (g)(4). Generally, if a deferred compensation plan of a State or local government or tax-exempt entity does not satisfy the requirements of section 457(b), (c), (d), and, in the case of a plan that is maintained by a State or local government, (g), compensation deferred under the plan will be included in income in accordance with section 457(f) unless the plan is not subject to section 457 or is treated as not providing for a deferral of compensation for purposes of section 457. Section 457(e) includes certain definitions and special rules for purposes of section 457 and describes certain plans that either are not subject to section 457 or are treated as not providing for a deferral of compensation under section 457.1

    1 Plans described in certain statutes that are not incorporated into the Code are not subject to section 457. See sections 1107(c)(3)(B), 1107(c)(4), and 1107(c)(5) of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2494 (1986)), as amended, and sections 1101(e)(6), 6064(d)(2), and 6064(d)(3) of the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342 (1988)).

    Section 457(a)(1) provides that any amount of compensation deferred under an eligible deferred compensation plan as defined in section 457(b) (an eligible plan), and any income attributable to the amounts so deferred, is includible in gross income only for the taxable year in which the compensation or other income is paid to the participant or beneficiary in the case of an eligible employer described in section 457(e)(1)(A) or is paid or otherwise made available to the participant or beneficiary in the case of an eligible employer described in section 457(e)(1)(B). An eligible employer described in section 457(e)(1)(A) means a State, a political subdivision of a State, or any agency or instrumentality of a State or political subdivision of a State (a governmental entity). An eligible employer described in section 457(e)(1)(B) means any organization other than a governmental entity that is exempt from tax under subtitle A (a tax-exempt entity).

    Section 457(f)(1)(A) provides that, in the case of a plan of an eligible employer providing for a deferral of compensation, if the plan is not an eligible plan, the compensation is included in gross income when the rights to payment of the compensation are not subject to a substantial risk of forfeiture, as defined in section 457(f)(3)(B).2 Section 457(f)(1)(B) provides that the tax treatment of any amount made available under the plan will be determined under section 72. Section 457(f)(2) provides that section 457(f)(1) does not apply to a plan that is described in section 401(a) or an annuity plan or contract described in section 403, the portion of any plan that consists of a transfer of property described in section 83, the portion of a plan that consists of a trust described in section 402(b), a qualified governmental excess benefit arrangement described in section 415(m), or the portion of any applicable employment retention plan described in section 457(f)(4).

    2 In Notice 2007-62 (2007-2 CB 331 (August 6, 2007)), the Treasury Department and the IRS announced the intent to issue guidance under section 457, including providing definitions of a bona fide severance pay plan under section 457(e)(11) and substantial risk of forfeiture under section 457(f)(3)(B). In response to comments received in response to a request in Notice 2007-62 (on subjects including but not limited to severance pay, covenants not to compete, and the definition of substantial risk of forfeiture), the rules in these proposed regulations have been modified from the proposals announced in that notice.

    Section 457(e)(11) provides that certain plans are treated as not providing for a deferral of compensation. These plans include any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan, as well as any plan paying solely length of service awards to certain bona fide volunteers (or their beneficiaries) and certain voluntary early retirement incentive plans.3 Section 457(e)(12) provides that section 457 does not apply to certain nonelective deferred compensation of nonemployees.

    3 Announcement 2000-1 (2000-1 CB 294 (January 1, 2000)), provides transitional guidance on the reporting requirements for certain broad-based, nonelective deferred compensation plans maintained by State or local governments. The announcement states that, pending the issuance of further guidance, a State or local government should not report amounts for any year before the year in which a participant or beneficiary is in actual or constructive receipt of those amounts if the amounts are provided under a plan that the State or local government has been treating as a bona fide severance pay plan under section 457(e)(11) for years before calendar year 1999. To be eligible for this transitional relief, the plan must satisfy certain requirements described in the announcement.

    On July 11, 2003, the Treasury Department and the IRS issued final regulations under section 457 (TD 9075) (68 FR 41230) (2003 final regulations). The 2003 final regulations provide guidance on deferred compensation plans of eligible employers, including eligible plans under section 457(b). The 2003 final regulations also reflect the changes made to section 457 by the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2494), the Small Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 1755), the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788), the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38), and the Job Creation and Worker Assistance Act of 2002, Public Law 107-147 (116 Stat. 21). The proposed amendments to the 2003 final regulations under section 457(a), (b), and (g) contained in this document include amendments to reflect subsequent statutory changes made to section 457. The following sections of this preamble provide a chronological description of the relevant changes made after the 2003 final regulations were issued. (For a summary of the proposed changes to the 2003 final regulations, see the Explanation of Provisions section of this preamble.)

    I. American Jobs Creation Act of 2004

    Section 885 of the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418), added section 409A to the Code. Section 409A generally provides that, if at any time during a taxable year a nonqualified deferred compensation plan fails to meet the requirements of section 409A or is not operated in accordance with those requirements, all amounts deferred under the plan for the taxable year and all preceding taxable years are includible in gross income to the extent the amounts are not subject to a substantial risk of forfeiture and were not previously included in gross income.

    On April 17, 2007, the Treasury Department and the IRS issued final regulations under section 409A (TD 9312) at 72 FR 19234 (final section 409A regulations). The final section 409A regulations provide guidance on the definition of certain terms and the types of plans covered under section 409A, permissible deferral elections under section 409A, and permissible payments under section 409A. The final section 409A regulations provide that a deferred compensation plan of a governmental entity or a tax-exempt entity that is subject to section 457(f) may constitute a nonqualified deferred compensation plan for purposes of section 409A and that the rules of section 409A apply separately and in addition to any requirements applicable to these plans under section 457(f).

    On December 8, 2008, proposed regulations under section 409A were published in the Federal Register (73 FR 74380) (proposed section 409A regulations) that provide guidance on the calculation of amounts includible in income under section 409A(a) and the additional taxes imposed by that section with respect to arrangements that do not comply with the requirements of section 409A(a).

    In Notice 2008-62 (2008-29 IRB 130 (July 21, 2008)), the Treasury Department and the IRS provided guidance under sections 409A and 457(f) regarding recurring part-year compensation. For this purpose, recurring part-year compensation is compensation paid for services rendered in a position that the employer and employee reasonably anticipate will continue under similar terms and conditions in subsequent years, and under which the employee will be required to provide services during successive service periods each of which comprises less than 12 months (for example, a teacher providing services during a school year comprised of 10 consecutive months) and each of which begins in one taxable year of the employee and ends in the next taxable year. Notice 2008-62 provides that an arrangement under which an employee or independent contractor receives recurring part-year compensation does not provide for the deferral of compensation for purposes of section 409A or for purposes of section 457(f) if (A) the arrangement does not defer payment of any of the recurring part-year compensation beyond the last day of the 13th month following the beginning of the service period, and (B) the arrangement does not defer from one taxable year to the next taxable year the payment of more than the applicable dollar amount under section 402(g)(1)(B) ($18,000 for 2016). The notice provides that taxpayers may rely on this rule beginning in the first taxable year that includes July 1, 2008.

    II. Pension Protection Act of 2006

    The Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780) (PPA '06), permits a participant's designated beneficiary who is not a surviving spouse to roll over, in a direct trustee-to-trustee transfer, distributions from an eligible plan maintained by a governmental entity (an eligible governmental plan) to an individual retirement account or annuity (IRA). Section 829 of PPA '06 added section 402(c)(11) to the Code, which provides that this type of transfer is treated as an eligible rollover distribution for purposes of section 402(c).

    Section 845(b)(3) of PPA '06 added section 457(a)(3) to the Code, which provides an exclusion from gross income for amounts that are distributed from an eligible governmental plan to the extent provided in section 402(l). Section 402(l) provides that distributions from certain governmental retirement plans are excluded from the gross income of an eligible retired public safety officer to the extent the distributions do not exceed the amount paid by the retired officer for qualified health insurance premiums for the year, up to a maximum of $3,000. See Notice 2007-7, part IV (2007-1 CB 395 (January 29, 2007)), as well as Notice 2007-99 (2007-2 CB 1243 (December 26, 2007)), for guidance on the application of section 402(l).

    Section 1104(a)(1) of PPA '06 added section 457(e)(11)(D) to the Code, which treats applicable voluntary early retirement incentive plans as bona fide severance pay plans that do not provide for a deferral of compensation under section 457 with respect to payments or supplements that are an early retirement benefit, a retirement-type subsidy, or a social security supplement in coordination with a defined benefit pension plan. This treatment applies only to the extent the payments otherwise could have been provided under the defined benefit plan (determined as if section 411 applied to the defined benefit plan). Under section 457(e)(11)(D)(ii), an applicable voluntary early retirement incentive plan may be maintained only by a local educational agency or a tax-exempt education association.4

    4 A local education agency is defined in section 9101 of the Elementary and Secondary Education Act of 1965, Public Law 89-10 (79 Stat. 27), as a public board of education or other public authority legally constituted within a State for either administrative control or direction of, or to perform a service function for, public elementary schools or secondary schools in a city, county, township, school district, or other political subdivision of a State, or of or for a combination of school districts or counties that is recognized in a State as an administrative agency for its public elementary schools or secondary schools. A tax-exempt education association is an association that principally represents employees of one or more local education agencies and is an entity described in section 501(c)(5) or (6) that is exempt from tax under section 501(a).

    Section 1104(b)(1) of PPA '06 added section 457(f)(2)(F) to the Code, which provides that section 457(f)(1) does not apply to an applicable employment retention plan. Under section 457(f)(4), an applicable employment retention plan is a plan maintained by a local educational agency or a tax-exempt education association to pay additional compensation upon severance from employment for purposes of employee retention or rewarding employees to the extent that the benefits payable under the plan do not exceed twice the applicable annual dollar limit on deferrals in section 457(e)(15).5

    5 See also section 1104(c) of PPA '06, which amended section 3(2) of the Employee Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829) (ERISA), to provide that applicable voluntary early retirement incentive plans and applicable employment retention plans are treated as welfare plans (and not pension plans) for purposes of ERISA.

    III. Heroes Earnings Assistance and Relief Tax Act of 2008

    Section 104(c) of the Heroes Earnings Assistance and Relief Tax Act of 2008, Public Law 110-245 (122 Stat. 1624) (HEART Act), amended section 457 to add section 457(g)(4) regarding benefits payable upon death during qualified active military service under the Uniformed Services Employment and Reemployment Rights Act of 1994, Public Law 103-353 (108 Stat. 3149). Section 457(g)(4) provides that an eligible governmental plan must meet the requirements of section 401(a)(37). Under section 401(a)(37), a plan is not treated as a qualified retirement plan unless the plan provides that, in the case of a participant who dies while performing qualified military service, the survivors of the participant are generally entitled to any additional benefits that would have been provided under the plan if the participant had resumed and then terminated employment on account of death. Section 105(b) of the HEART Act added section 414(u)(12) to the Code, which provides rules regarding (A) the treatment of differential wage payments as compensation and (B) the treatment of service in the uniformed services (as described in section 3401(h)(2)(A)) as a severance from employment for purposes of plan distribution requirements, including the distribution requirements of section 457(d)(1)(A)(ii).

    IV. Small Business Jobs Act of 2010 and American Taxpayer Relief Act of 2012

    Section 2111 of the Small Business Jobs Act of 2010, Public Law 111-240 (124 Stat. 2504) (SBJA), amended section 402A of the Code to allow an eligible governmental plan to include a qualified Roth contribution program, effective for taxable years beginning after December 31, 2010. SBJA also amended section 402A to permit taxable in-plan rollovers to qualified Roth accounts under eligible governmental plans. Section 902 of the American Taxpayer Relief Act of 2012, Public Law 112-240 (126 Stat. 2313), expanded the types of amounts eligible for an in-plan Roth rollover. For guidance relating to in-plan rollovers to qualified Roth accounts, see Notice 2013-74 (2013-52 IRB 819 (December 23, 2013)) and Notice 2010-84 (2010-51 IRB 872 (July 19, 2010)).

    Explanation of Provisions I. Overview

    These proposed regulations make certain changes to the 2003 final regulations under sections 457(a), 457(b), and 457(g) to reflect statutory changes to section 457 since the publication of those regulations. In addition, these proposed regulations provide guidance on certain issues under sections 457(e)(11) and 457(e)(12) that are not addressed in the 2003 final regulations and provide additional guidance under section 457(f). Consistent with the 2003 final regulations, although the rules under section 457 apply to plan participants and beneficiaries without regard to whether the related services are provided by an employee or independent contractor, these proposed regulations often use the terms employee and employer to describe a service provider and a service recipient, respectively, without regard to whether the service provider is an independent contractor.6

    6 Section 457(e)(2) provides that the performance of services for purposes of section 457 includes the performance of services as an independent contractor and that the person (or governmental entity) for whom these services are performed is treated as an employer.

    II. Regulatory Amendments To Reflect Statutory Changes to Section 457 A. Qualified Roth Contribution Program

    Section 1.457-4 of the 2003 final regulations provides that annual deferrals to an eligible plan that satisfy certain requirements are excluded from the gross income of the participant in the year deferred or contributed and are not includable in gross income until paid to the participant, in the case of an eligible governmental plan, or until paid or otherwise made available to the participant, in the case of an eligible plan of a tax-exempt entity. These proposed regulations amend § 1.457-4(a) and (b) to reflect the change made by SBJA to allow an eligible governmental plan to include a qualified Roth contribution program, as defined in section 402A(c)(1), under which designated Roth contributions are included in income in the year of deferral. Consistent with section 402A(b)(2), these proposed regulations provide that contributions and withdrawals of a participant's designated Roth contributions must be credited and debited to a designated Roth account maintained for the participant, and that the plan must maintain a record of each participant's investment in the contract with respect to the account. In addition, the proposed regulations provide that no forfeitures may be allocated to a designated Roth account and that no contributions other than designated Roth contributions and rollover contributions described in section 402A(c)(3)(A) may be made to the account.

    These proposed regulations also amend § 1.457-7(b)(1), which provides guidance regarding the circumstances under which amounts are included in income under an eligible governmental plan, to specify that qualified distributions from a designated Roth account are excluded from gross income.

    B. Certain Distributions for Qualified Accident and Health Insurance Premiums

    The proposed regulations amend the rules for the taxation of eligible governmental plan distributions under § 1.457-7(b) to reflect the change made by PPA '06 with respect to certain amounts distributed to an eligible public safety officer. The proposed regulations provide that distributions from an eligible governmental plan meeting the requirements of section 402(l) are excluded from gross income and are not subject to the general rule providing that amounts deferred under an eligible governmental plan are includable in the gross income of a participant or beneficiary for the taxable year in which they are paid. For this purpose, see section 402(l) for rules regarding the extent to which this income exclusion applies to a distribution (including the dollar limitation on the exclusion) and section 402(l)(4)(C) for the meaning of the term public safety officer.

    C. Rules Related to Qualified Military Service

    The proposed regulations amend § 1.457-2(f) to implement the requirements of section 457(g)(4), which was added by the HEART Act and which provides that an eligible governmental plan must meet the requirements of section 401(a)(37) (providing that, in the case of a participant who dies while performing qualified military service, the survivors of the participant generally are entitled to any additional benefits that would have been provided under the plan if the participant had resumed and then terminated employment on account of death). In addition the proposed regulations amend § 1.457-6(b)(1) to provide a cross reference to the rules under section 414(u)(12)(B) (providing that leave for certain military service is treated as a severance from employment for purposes of the plan distribution restrictions that apply to eligible plans).

    III. Certain Plans That Are Not Subject to Section 457 or Are Not Treated as Providing for a Deferral of Compensation Under Section 457 A. In General

    Section 1.457-2(k) of the 2003 final regulations defines the term plan for purposes of section 457 to include any plan, agreement, method, program, or other arrangement, including an individual employment agreement, of an eligible employer under which the payment of compensation is deferred. Section 1.457-2(k) of the 2003 regulations also identifies certain plans that are not subject to section 457 (pursuant to section 457(e)(12) and (f)(2) and statutes not incorporated into the Code) and certain plans that are treated as not providing for a deferral of compensation for purposes of section 457 (pursuant to section 457(e)(11)). These proposed regulations amend the definition of plan for purposes of section 457 to remove from § 1.457-2(k) the provisions identifying plans that are not subject to section 457 and plans that are treated as not providing for a deferral of compensation for purposes of section 457, and move the provisions regarding most of these plans to § 1.457-11 of the proposed regulations. In addition, § 1.457-11 provides additional guidance on:

    • Bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, and death benefit plans, as described in section 457(e)(11)(A)(i), which are treated as not providing for a deferral of compensation for purposes of section 457; and

    • plans paying solely length of service awards to bona fide volunteers (or their beneficiaries), as described in section 457(e)(11)(A)(ii), that also are treated as not providing for a deferral of compensation for purposes of section 457.7

    7 See section 457(e)(11)(B) for special rules relating to length of service award plans.

    The proposed regulations also provide guidance in a new § 1.457-12 on plans described in section 457(f)(2), to which section 457(f)(1) does not apply.

    B. Bona Fide Severance Pay Plans 1. General Requirements

    The proposed regulations provide that a plan must meet certain requirements to be a bona fide severance pay plan that is treated under section 457(e)(11)(A)(i) as not providing for the deferral of compensation (and therefore not subject to section 457). First, the benefits provided under the plan must be payable only upon a participant's involuntary severance from employment or pursuant to a window program or voluntary early retirement incentive plan. Second, the amount payable under the plan with respect to a participant must not exceed two times the participant's annualized compensation based upon the annual rate of pay for services provided to the eligible employer for the calendar year preceding the calendar year in which the participant has a severance from employment (or the current calendar year if the participant had no compensation from the eligible employer in the preceding calendar year), adjusted for any increase in compensation during the year used to measure the rate of pay that was expected to continue indefinitely if the participant had not had a severance from employment. Third, pursuant to the written terms of the plan, the severance benefits must be paid no later than the last day of the second calendar year following the calendar year in which the severance from employment occurs. The rules in these proposed regulations for severance pay plans are similar to the rules for separation pay plans in § 1.409A-1(b)(9) of the final section 409A regulations.

    2. Involuntary Severance From Employment a. In General

    The proposed regulations require that benefits under a bona fide severance pay plan be payable only upon an involuntary severance from employment or pursuant to a window or voluntary early retirement incentive program. For this purpose, an involuntary severance from employment is a severance from employment due to the eligible employer's independent exercise of its authority to terminate the participant's services, other than due to the participant's implicit or explicit request, if the participant is willing and able to continue to perform services. The determination of whether a severance from employment is involuntary is based on the relevant facts and circumstances. If a severance from employment is designated as an involuntary severance from employment, but the facts and circumstances indicate otherwise, the severance from employment will not be treated as involuntary for purposes of section 457.

    b. Severance From Employment for Good Reason

    The proposed regulations provide that an employee's voluntary severance from employment may be treated as an involuntary severance from employment for purposes of section 457 if the severance from employment is for good reason. A severance from employment is for good reason if it occurs under certain bona fide conditions that are pre-specified in writing under circumstances in which the avoidance of section 457 is not the primary purpose of the inclusion of these conditions in the plan or of the actions by the employer in connection with the satisfaction of those conditions. Notwithstanding the previous sentence, once the bona fide conditions have been established, the elimination of one or more of the conditions may result in the extension of a substantial risk of forfeiture, the recognition of which would be subject to the rules discussed in section III.E of this preamble.

    To be treated as an involuntary severance from employment, a severance from employment for good reason must result from unilateral action taken by the eligible employer resulting in a material adverse change to the working relationship (such as a material reduction in the employee's duties, working conditions, or pay). Other factors that may be taken into account in determining whether a termination for good reason effectively constitutes an involuntary severance from employment include the following:

    • Whether the payments upon severance from employment for good reason are in the same amount and paid at the same time as payments conditioned upon an employer-initiated severance from employment without cause; and

    • whether the employee is required to give notice to the employer of the material adverse change in conditions and provide the employer with an opportunity to remedy the adverse change.

    The proposed regulations also provide a safe harbor under which a plan providing for the payment of amounts upon a voluntary severance from employment under certain conditions, that are specified in writing by the time the legally binding right to the payment arises, will be treated as providing for a payment upon a severance from employment for good reason.

    c. Window Programs

    The proposed regulations provide that the involuntary severance from employment requirement does not apply to window programs. The proposed regulations define the term window program to mean a program established by an employer to provide separation pay in connection with an impending severance from employment. To be a window program, the program must be offered for a limited period of time (typically no longer than 12 months), and the eligible employer must make the program available to employees who have a severance from employment during that period or who have a severance from employment during that period under specified circumstances. A program is not offered for a limited period of time (and, therefore, is not a window program) if there is a pattern of repeatedly providing similar programs. Whether the recurrence of programs constitutes a pattern of repeatedly providing similar programs is based on all of the relevant facts and circumstances, including whether the benefits are on account of a specific reduction in workforce (or other operational conditions), whether there is a relationship between the separation pay and an event or condition, and whether the event or condition is temporary and discrete or is a permanent aspect of the employer's operations.

    d. Voluntary Early Retirement Incentive Plans

    The proposed regulations also provide that the involuntary severance from employment requirement does not apply to an applicable voluntary early retirement incentive plan described in section 457(e)(11)(D)(ii). That section describes an applicable voluntary early retirement incentive plan as a bona fide severance pay plan for purposes of section 457 with respect to payments or supplements that are made as an early retirement benefit, a retirement-type subsidy, or an early retirement benefit that is greater than a normal retirement benefit, as described in section 411(a)(9), and that are paid in coordination with a defined benefit pension plan that is qualified under section 401(a) and maintained by an eligible employer that is a governmental entity or a tax-exempt education association as described in section 457(e)(11)(D)(ii)(II). Section 457(e)(11)(D) provides that these payments or supplements are treated as provided under a bona fide severance pay plan only to the extent that they otherwise could have been provided under the defined benefit plan with which the applicable voluntary early retirement incentive plan is coordinated (determined as if the rules in section 411 applied to the defined benefit plan).

    e. Transitional Relief in Announcement 2000-1

    Announcement 2000-1 provides transitional guidance on certain broad-based nonelective plans of State or local governments that were in existence before December 22, 1999, and were treated as bona fide severance pay plans for years before 1999. Under the announcement, an eligible employer that is a governmental entity is not required to report, including on Form W-2, “Wage and Tax Statement,” or Form 1099-R “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” amounts payable under plans that meet certain requirements until the amounts are actually or constructively received. The rules described in these proposed regulations regarding bona fide severance pay plans, as modified when these proposed regulations are finalized and become applicable, will supersede the transitional guidance in Announcement 2000-1. See section V.B of this preamble for special applicability dates for governmental plans.

    C. Bona Fide Death Benefit Plan

    The proposed regulations provide that a bona fide death benefit plan, which is treated as not providing for the deferral of compensation pursuant to section 457(e)(11)(A)(i), is a plan providing for death benefits as defined in § 31.3121(v)(2)-1(b)(4)(iv)(C) (relating to the application of the Federal Insurance Contributions Act to nonqualified deferred compensation). The proposed regulations further provide that benefits under a bona fide death benefit plan may be provided through insurance and that any lifetime benefits payable under the plan that may be includible in gross income will not be treated as including the value of any term life insurance coverage provided under the plan.

    D. Bona Fide Disability Pay Plan

    The proposed regulations provide that a bona fide disability pay plan, which is treated as not providing for the deferral of compensation pursuant to section 457(e)(11)(A)(i), is a plan that pays benefits only in the event of a participant's disability. For this purpose, the value of any taxable disability insurance coverage under the plan that is included in gross income is disregarded. These proposed regulations provide that a participant is disabled for this purpose if the participant meets any of the following three conditions:

    • The participant is unable to engage in substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months;

    • the participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, receiving income replacement benefits for a continuous period of not less than three months under an accident or health plan covering employees of the eligible employer; or

    • the participant is determined to be totally disabled by the Social Security Administration or the Railroad Retirement Board.

    E. Bona Fide Sick Leave and Vacation Leave Plans 1. General Requirements

    Under the proposed regulations, whether a sick or vacation leave plan is a bona fide sick or vacation leave plan, and therefore treated as not providing for the deferral of compensation under section 457(e)(11)(A)(i), is determined based on the facts and circumstances. A sick or vacation leave plan is generally treated as bona fide, and not as a plan providing for the deferral of compensation, if the facts and circumstances demonstrate that the primary purpose of the plan is to provide employees with paid time off from work because of sickness, vacation, or other personal reasons. Factors used in determining whether a plan is a bona fide sick or vacation leave plan include the following:

    • Whether the amount of leave provided could reasonably be expected to be used by the employee in the normal course (and before the cessation of services);

    • limits, if any, on the ability to exchange unused accumulated leave for cash or other benefits and any applicable accrual restrictions (for example, where permissible under applicable law, the use of forfeiture provisions often referred to as use-or-lose rules);

    • the amount and frequency of any in-service distributions of cash or other benefits offered in exchange for accumulated and unused leave;

    • whether the payment of unused sick or vacation leave is made promptly upon severance from employment (or, instead, is paid over a period of time after severance from employment); and

    • whether the sick leave, vacation leave, or combined sick and vacation leave offered under the plan is broadly applicable or is available only to certain employees.

    2. Delegation of Authority to Commissioner

    The Treasury Department and the IRS recognize that eligible employers sponsor a wide variety of sick and vacation leave plans and that additional rules on more specific arrangements or features of these plans may be beneficial. Accordingly, the proposed regulations provide that the Commissioner may issue additional rules regarding bona fide sick or vacation leave plans in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin, as the Commissioner determines to be necessary or appropriate.

    F. Constructive Receipt

    Bona fide sick or vacation leave plans (and certain other plans) are treated as not providing for the deferral of compensation for purposes of section 457, and the general federal tax principles for determining the timing and amount of income inclusion, including the constructive receipt rules of section 451, apply to these plans. See §§ 1.451-1 and 1.451-2 for rules regarding constructive receipt of income.

    IV. Ineligible Plans Under Section 457(f) A. Tax Treatment of Amounts Deferred Under Section 457(f)

    Consistent with section 457(f)(1)(A), the proposed regulations provide that if a plan of an eligible employer provides for a deferral of compensation for the benefit of a participant or beneficiary and the plan is not an eligible plan (an ineligible plan), the compensation deferred under the plan is includible in the gross income of the participant or beneficiary under section 457(f)(1)(A) on the date (referred to in this preamble and the proposed regulations as the applicable date) that is the later of the date the participant or beneficiary obtains a legally binding right to the compensation or, if the compensation is subject to a substantial risk of forfeiture at that time, the date the substantial risk of forfeiture lapses. Generally, the amount of the compensation deferred under the plan that is includible in gross income on the applicable date is the present value, as of that date, of the amount of compensation deferred. For this purpose, the amount of compensation deferred under a plan as of an applicable date includes any earnings as of that date on amounts deferred under the plan.

    Consistent with section 457(f)(1)(B), the proposed regulations provide that any earnings credited thereafter on compensation that was included in gross income under section 457(f)(1)(A) are includible in the gross income of a participant or beneficiary when paid or made available to the participant or beneficiary and are taxable under section 72. For purposes of section 72, the participant (or beneficiary) is treated as having an investment in the contract equal to the amount actually included in gross income on the applicable date.

    Consistent with section 457(f)(2), the proposed regulations provide that section 457(f)(1) does not apply to a qualified plan described in section 401(a), an annuity plan or contract described in section 403, the portion of a plan that consists of a trust to which section 402(b) applies, a qualified governmental excess benefit arrangement described in section 415(m), the portion of a plan that consists of a transfer of property to which section 83 applies, or the portion of an applicable employment retention plan described in section 457(f)(4) with respect to any participant.

    B. Calculation of the Present Value of Compensation Deferred Under an Ineligible Plan 1. Overview

    The proposed regulations provide general rules for determining the present value of compensation deferred under an ineligible plan. The proposed regulations also include specific rules for determining the present value of compensation deferred under ineligible plans that are account balance plans. The rules for determining present value in the proposed regulations are similar to the rules for determining present value in the proposed section 409A regulations.8

    8 One difference between these proposed regulations and the proposed section 409A regulations is that income inclusion under section 457(f) and § 1.457-12(a)(2), and the present value calculation under these proposed regulations, is determined as of the applicable date, whereas income inclusion under section 409A, and the present value calculation under the proposed § 1.409A-4, is determined as of the end of the service provider's taxable year.

    The Treasury Department and the IRS expect that these regulations will be finalized after the proposed section 409A regulations are finalized and that these proposed regulations, when finalized, will adopt many provisions of § 1.409A-4 for ease of administration. Accordingly, these proposed regulations include cross references to certain provisions of § 1.409A-4 as currently proposed, including rules for determining present value under certain specific types of plans, such as reimbursement and in-kind benefit arrangements 9 and split-dollar life insurance arrangements,10 and rules regarding the treatment of payment restrictions and alternative times and forms of a future payment. The Treasury Department and the IRS request comments on whether it is appropriate to provide any additional exceptions from the application of the rules currently described in the proposed section 409A regulations to amounts includible in income under section 457(f), to account for the different manners in which the two provisions apply to an amount deferred.

    9 A reimbursement or in-kind benefit arrangement is an arrangement in which benefits for a participant are provided under a nonqualified deferred compensation arrangement described in § 1.409A-1(c)(2)(i)(E).

    10 A split-dollar insurance arrangement is an arrangement in which benefits for a participant are provided under a nonqualified deferred compensation plan described in § 1.409A-1(c)(2)(i)(F).

    2. Present Value of Compensation Deferred Under an Account Balance Plan

    The proposed regulations provide specific rules for calculating the present value of compensation deferred under an ineligible plan that is an account balance plan (as defined in § 31.3121(v)(2)-1(c)(1)(ii) and (iii)).11 Provided that the account balance is determined using a predetermined actual investment or a reasonable rate of interest, the present value of an amount payable under an account balance plan as of an applicable date is generally the amount credited to the account, which includes both the principal and any earnings or losses through the applicable date. If the account balance is not determined using a predetermined actual investment or a reasonable rate of interest, the present value of compensation deferred under the plan as of an applicable date is equal to the amount credited to the participant's account as of that date, plus the present value of the excess (if any) of the earnings to be credited under the plan after the applicable date and through the projected payment date over the earnings that would be credited during that period using a reasonable rate of interest. If the present value of compensation deferred under the plan is not determined and is not taken into account by the taxpayer in this manner, the present value of the compensation deferred under the plan as of the applicable date will be treated as equal to the amount credited to the participant's account as of that date, plus the present value of the excess (if any) of the earnings to be credited under the plan through the projected payment date over the earnings that would be credited using the applicable Federal rate. The proposed regulations also provide that if the amount of earnings or losses credited under an account balance plan is based on the greater of the earnings on two or more investments or interest rates, then the amount included in income on the applicable date is the sum of the amount credited to the participant's account as of the applicable date and the present value (determined as described in section IV.B.3 of this preamble) of the right to future earnings.

    11 The rules in these regulations, however, do not apply with respect to Federal Insurance Contributions Act and Federal Unemployment Tax Act taxation liability under sections 3121(v)(2) and 3306(r)(2), respectively, and the regulations thereunder.

    3. Present Value of Compensation Deferred Under a Plan That Is Not an Account Balance Plan a. Reasonable Actuarial Assumptions

    The proposed regulations also set forth rules for calculating the present value of compensation deferred under an ineligible plan that is not an account balance plan. Under the proposed regulations, the present value of an amount deferred under such a plan as of an applicable date is the value, as of that date, of the right to receive payment of the compensation in the future, taking into account the time value of money and the probability that the payment will be made. Any actuarial assumptions used to calculate the present value of the compensation deferred must be reasonable as of the applicable date, determined based on all of the relevant facts and circumstances. For this purpose, taking into account the probability that a participant might die before receiving certain benefits is a reasonable actuarial assumption only if the plan provides that the benefits will be forfeited upon death. Discounts based on the probability that payments will not be made due to the unfunded status of the plan, the risk that the eligible employer or another party may be unwilling or unable to pay, the possibility of future plan amendments or changes in law, and other similar contingencies are not permitted for purposes of determining present value under the proposed regulations.

    b. Treatment of Severance From Employment

    If the present value of an amount depends on the time when a severance from employment occurs and the severance from employment has not occurred by the applicable date, then, for purposes of determining the present value of the amount, the severance from employment generally may be treated as occurring on any date on or before the fifth anniversary of the applicable date, unless, as of the applicable date, it would be unreasonable to use such an assumption. For example, if the applicable date occurs in 2017 and the employer knows on the applicable date that the severance from employment will occur in 2018, it would be unreasonable to use a date after the expected severance from employment date to determine the present value of the compensation.

    c. Treatment of Payments Based on Formula Amounts

    Some ineligible plans may provide that all or part of the amount payable under the plan is determined by reference to one or more factors that are indeterminable on the applicable date. For example, an amount payable may be dependent on a participant's final average compensation and total years of service. These proposed regulations refer to such an amount as a formula amount. The proposed regulations provide that the determination of the present value of a formula amount under an ineligible plan must be based on reasonable, good faith assumptions with respect to any contingencies as to the amount of the payment, with the assumptions based on all the facts and circumstances existing on the applicable date. The proposed regulations also provide that, if only a portion of the compensation deferred under the plan consists of a formula amount, the amount payable with respect to that portion is determined under the rules applicable to formula amounts, and the remaining balance is determined under the rules applicable to amounts that are not formula amounts.

    d. Unreasonable Actuarial Assumptions

    If the Commissioner determines that the actuarial assumptions used by an employer in determining present value are not reasonable, the proposed regulations provide that the Commissioner will determine the present value of the compensation deferred using actuarial assumptions and methods that the Commissioner determines to be reasonable based on all of the facts and circumstances.

    4. Loss Deduction Rules

    The proposed regulations contain rules similar to the loss deduction rules in the proposed section 409A regulations. Under the rules in these proposed regulations, if a participant includes an amount of deferred compensation in income under section 457(f)(1)(A), but the compensation that is subsequently paid or made available is less than the amount included in income because the participant has forfeited or lost some or all of the compensation due to death or some other reason (for example, due to investment performance), the participant is entitled to a deduction for the taxable year in which any remaining right to the amount is permanently forfeited under the plan's terms or otherwise permanently lost. The deduction allowed for the taxable year in which the permanent forfeiture or loss occurs is equal to the amount previously included in income under section 457(f)(1)(A), less the total amount of compensation that is actually paid or made available under the plan that constitutes a return of investment in the contract. In the case of an employee, the available deduction generally would be treated as a miscellaneous itemized deduction, subject to the deduction limitations applicable to such expenses under sections 67 and 68.12

    12 Section 1341 would not be applicable to this type of loss because inclusion of an amount in income as a result of section 457(f) would not constitute receipt of an amount to which it appeared that the taxpayer had an unrestricted right in the taxable year of inclusion.

    5. Examples Illustrating the Present Value Rules

    The proposed regulations include several examples illustrating the application of the present value rules to the more common types of plans providing for the deferral of compensation under section 457(f). The regulations do not illustrate the application of these valuation rules to plans that are more unusual for employees of governmental and tax-exempt entities, such as compensatory options to acquire stock or other property. The amount includible in income on the applicable date under these less common types of plans would be determined under the general rules for plans that are not account balance plans.

    C. Definition of Deferral of Compensation 1. In General

    The proposed regulations define the term deferral of compensation for purposes of determining whether section 457(f) applies to an arrangement because it provides for a deferral of compensation. In general, a plan provides for a deferral of compensation if a participant has a legally binding right during a taxable year to compensation that, pursuant to the terms of the plan, is or may be payable in a later taxable year. However, the proposed regulations generally provide that a participant does not have a legally binding right to compensation to the extent that it may be unilaterally reduced or eliminated by the employer after the services creating the right have been performed.

    Whether a plan provides for a deferral of compensation is generally based on the terms of the plan and the relevant facts and circumstances at the time that the participant obtains a legally binding right to the compensation, or, if later, when a plan is amended to convert a right that does not provide for a deferral of compensation into a right that does provide for a deferral of compensation. For example, if a plan providing retiree health care does not initially provide for a deferral of compensation but is later amended to provide the ability to receive future cash payments instead of health benefits, it may become a plan that provides for the deferral of compensation at the time of the amendment.

    Under the proposed regulations, an amount of compensation deferred under a plan that provides for the deferral of compensation does not cease to be an amount subject to section 457(f) by reason of any change to the plan that would recharacterize the right to the amount as a right that does not provide for the deferral of compensation. In addition, any change under the plan that results in an exchange of an amount deferred under the plan for some other right or benefit that would otherwise be excluded from the participants' gross income does not affect the characterization of the plan as one that provides for a deferral of compensation. Thus, for example, if a plan that provides for a deferral of compensation is amended to provide health benefits instead of cash, it will retain its character as a plan that provides for a deferral of compensation.

    2. Short-Term Deferrals

    The proposed regulations provide that a deferral of compensation does not occur with respect to any amount that would be a short-term deferral under § 1.409A-1(b)(4), substituting the definition of a substantial risk of forfeiture provided under these proposed regulations for the definition under § 1.409A-1(d). Accordingly, a deferral of compensation does not occur with respect to any payment that is not a deferred payment, provided that the participant actually or constructively receives the payment on or before the last day of the applicable 21/2 month period. For this purpose, the applicable 21/2 month period is the period ending on the later of the 15th day of the third month following the end of the first calendar year in which the right to the payment is no longer subject to a substantial risk of forfeiture or the 15th day of the third month following the end of the eligible employer's first taxable year in which the right to the payment is no longer subject to a substantial risk of forfeiture.

    Because there is considerable overlap between the definition of substantial risk of forfeiture for purposes of section 457(f) and the definition of substantial risk of forfeiture for purposes of section 409A, in many cases amounts that, under this rule, are not deferred compensation subject to section 457(f) are also not deferred compensation subject to section 409A. For example, if an arrangement provides for the payment of a bonus on or before March 15 of the year following the calendar year in which the right to the bonus is no longer subject to a substantial risk of forfeiture (within the meaning of both these proposed regulations and § 1.409A-1(d)) and the bonus is paid on or before that March 15, the arrangement would not be a plan providing for a deferral of compensation to which section 457(f) (or section 409A) applies. For circumstances in which a payment under a plan made after that March 15 may still qualify as a short-term deferral for purposes of sections 409A and 457(f) (due to incorporation of the section 409A regulatory provisions into these proposed regulations under section 457(f)), see § 1.409A-1(b)(4)(ii).

    3. Recurring Part-Year Compensation

    After issuance of the final section 409A regulations, commenters expressed concerns about the application of section 409A to situations involving certain recurring part-year compensation. For this purpose, recurring part-year compensation is compensation paid for services rendered in a position that the employer and employee reasonably anticipate will continue under similar terms and conditions in subsequent years, and under which the employee will be required to provide services during successive service periods each of which comprises less than 12 months (for example, a teacher providing services during a school year comprised of 10 consecutive months) and each of which begins in one taxable year of the employee and ends in the next taxable year. In general, commenters asserted that section 409A should not apply to situations involving recurring part-year compensation because the amount being deferred from one taxable year to the next taxable year is typically small and because most taxpayers view that type of arrangement as a method of managing cash flow, rather than a tax-deferral opportunity.

    In response to these comments, Notice 2008-62 provided that an arrangement under which an employee or independent contractor receives recurring part-year compensation does not provide for the deferral of compensation for purposes of section 409A or for purposes of section 457(f) if (i) the arrangement does not defer payment of any of the recurring part-year compensation beyond the last day of the 13th month following the beginning of the service period, and (ii) the arrangement does not defer from one taxable year to the next taxable year the payment of more than the applicable dollar amount under section 402(g)(1)(B) ($18,000 for 2016).

    Some commenters, however, subsequently expressed concerns that Notice 2008-62 does not adequately address some teaching positions, such as those of college and university faculty members. They asserted that, depending on several variables (such as the month in which the service period begins), the dollar limitation in the notice could result in adverse tax consequences to teachers with academic year compensation as low as $80,000. Commenters further observed that some of these arrangements are nonelective and, therefore, some employees cannot opt out of a recurring part-year compensation arrangement. Some commenters also contended that the rules set forth in the notice were difficult to apply.

    To simplify the rule set forth in Notice 2008-62, and recognizing that educational employers frequently structure their pay plans to include recurring part-year compensation and that the main purpose of this design is to achieve an even cash flow for employees who do not work for a portion of the year, these proposed regulations modify the recurring part-year compensation rule for purposes of section 457(f). The proposed regulations provide that a plan or arrangement under which an employee receives recurring part-year compensation that is earned over a period of service does not provide for the deferral of compensation if the plan or arrangement does not defer payment of any of the recurring part-year compensation to a date beyond the last day of the 13th month following the first day of the service period for which the recurring part-year compensation is paid, and the amount of the recurring part-year compensation (not merely the amount deferred) does not exceed the annual compensation limit under section 401(a)(17) ($265,000 for 2016) for the calendar year in which the service period commences. A conforming change is included in proposed regulations under section 409A that are also published in the Proposed Rules section of this issue of the Federal Register.

    D. Interaction of Section 457 With Section 409A

    The proposed regulations also address the interaction of the rules under section 457(f) and section 409A. Section 409A(c) provides that nothing in section 409A is to be construed to prevent the inclusion of amounts in gross income under any other provision of chapter 1 of subtitle A of the Code (Normal taxes and surtaxes) or any other rule of law earlier than the time provided in section 409A. In addition, it provides that any amount included in gross income under section 409A is not required to be included in gross income under any other provision of chapter 1 of subtitle A or any other rule of law later than the time provided in section 409A. The proposed regulations provide that the rules under section 457(f) apply to plans separately and in addition to the requirements under section 409A.13 Thus, a deferred compensation plan of an eligible employer that is subject to section 457(f) may also be a nonqualified deferred compensation plan that is subject to section 409A. Section 1.457-12(d)(5)(iii) of the proposed regulations provides an example of the interaction of sections 409A and 457(f), and it is intended that this example will also be included in § 1.409A-4 when those currently proposed regulations are finalized.

    13 See also § 1.409A-1(a)(4).

    E. Rules Relating to Substantial Risk of Forfeiture

    The proposed regulations provide rules regarding the conditions that constitute a substantial risk of forfeiture for purposes of section 457(f). As discussed in section IV.A of this preamble, an amount to which an employee has a legally binding right under an ineligible plan is generally includible in gross income on the later of the date the employee obtains the legally binding right to the compensation or, if the compensation is subject to a substantial risk of forfeiture, the date the substantial risk of forfeiture lapses. The proposed regulations provide that an amount is generally subject to a substantial risk of forfeiture for this purpose only if entitlement to that amount is conditioned on the future performance of substantial services, or upon the occurrence of a condition that is related to a purpose of the compensation if the possibility of forfeiture is substantial. A special rule applies to determine whether initial deferrals of current compensation may be treated as subject to a substantial risk of forfeiture and whether a substantial risk of forfeiture can be extended. For this purpose, current compensation refers to compensation that is payable on a current basis such as salary, commissions, and certain bonuses, and does not include compensation that is deferred compensation.

    Whether an amount is conditioned on the future performance of substantial services is based on all of the relevant facts and circumstances, such as whether the hours required to be performed during the relevant period are substantial in relation to the amount of compensation. A condition is related to a purpose of the compensation only if the condition relates to the employee's performance of services for the employer or to the employer's tax exempt or governmental activities, as applicable, or organizational goals. A substantial risk of forfeiture exists based on a condition related to the purpose of the compensation only if the likelihood that the forfeiture event will occur is substantial. Also, an amount is not subject to a substantial risk of forfeiture if the facts and circumstances indicate that the forfeiture condition is unlikely to be enforced. Factors considered for purposes of determining the likelihood that the forfeiture will be enforced include, but are not limited to, the past practices of the employer, the level of control or influence of the employee with respect to the organization and the individual(s) who would be responsible for enforcing the forfeiture, and the enforceability of the provisions under applicable law.

    Under these proposed regulations, if a plan provides that entitlement to an amount is conditioned on an involuntary severance from employment without cause, the right is subject to a substantial risk of forfeiture if the possibility of forfeiture is substantial. For this purpose, a voluntary severance from employment that would be treated as an involuntary severance from employment under a bona fide severance pay plan for purposes of section 457(e)(11)(A)(i) (that is, a severance from employment for good reason) is also treated as an involuntary severance from employment without cause. See section III.B.2 of this preamble for a discussion of circumstances under which a severance from employment for good reason may be treated as an involuntary severance from employment for purposes of section 457(e)(11)(A)(i).

    The proposed regulations provide that compensation is not considered to be subject to a substantial risk of forfeiture merely because it would be forfeited if the employee accepts a position with a competing employer unless certain conditions are satisfied. First, the right to the compensation must be expressly conditioned on the employee refraining from the performance of future services pursuant to a written agreement that is enforceable under applicable law. Second, the employer must consistently make reasonable efforts to verify compliance with all of the noncompetition agreements to which it is a party (including the noncompetition agreement at issue). Third, at the time the noncompetition agreement becomes binding, the facts and circumstances must show that the employer has a substantial and bona fide interest in preventing the employee from performing the prohibited services and that the employee has a bona fide interest in engaging, and an ability to engage, in the prohibited services. The proposed regulations identify several factors that are relevant for this purpose.

    Additional conditions apply with respect to the ability to treat initial deferrals of current compensation as being subject to a substantial risk of forfeiture. Similarly, an attempt to extend the period covered by a risk of forfeiture, often referred to as a rolling risk of forfeiture, is generally disregarded under the proposed regulations unless certain conditions are met.

    Specifically, the proposed regulations permit initial deferrals of current compensation to be subject to a substantial risk of forfeiture and also allow an existing risk of forfeiture to be extended only if all of the following requirements are met. First, the present value of the amount to be paid upon the lapse of the substantial risk of forfeiture (as extended, if applicable) must be materially greater than the amount the employee otherwise would be paid in the absence of the substantial risk of forfeiture (or absence of the extension). The proposed regulations provide that an amount is materially greater for this purpose only if the present value of the amount to be paid upon the lapse of the substantial risk of forfeiture, measured as of the date the amount would have otherwise been paid (or in the case of an extension of the risk of forfeiture, the date that the substantial risk of forfeiture would have lapsed without regard to the extension), is more than 125 percent of the amount the participant otherwise would have received on that date in the absence of the new or extended substantial risk of forfeiture. (No implication is intended that this standard would also apply for purposes of § 1.409A-1(d)(1).)

    Second, the initial or extended substantial risk of forfeiture must be based upon the future performance of substantial services or adherence to an agreement not to compete. It may not be based solely on the occurrence of a condition related to the purpose of the transfer (for example, a performance goal for the organization), though that type of condition may be combined with a sufficient service condition.

    Third, the period for which substantial future services must be performed may not be less than two years (absent an intervening event such as death, disability, or involuntary severance from employment).

    Fourth, the agreement subjecting the amount to a substantial risk of forfeiture must be made in writing before the beginning of the calendar year in which any services giving rise to the compensation are performed in the case of initial deferrals of current compensation or at least 90 days before the date on which an existing substantial risk of forfeiture would have lapsed in the absence of an extension. Special rules apply to new employees. The proposed regulations do not extend these special rules for new employees to employees who are newly eligible to participate in a plan. The Treasury Department and the IRS request comments on whether special provisions for newly eligible employees are needed in the context of arrangements subject to section 457(f), and if so whether the rules under §§ 1.409A-1(c)(2) and 1.409A-2(a)(7) would be a useful basis for similar rules under section 457(f) and how an aggregated single plan (versus multiple plans) should be defined for this purpose to ensure that the rules are not subject to manipulation.

    V. Proposed Applicability Dates A. General Applicability Date

    Generally, these regulations are proposed to apply to compensation deferred under a plan for calendar years beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, including deferred amounts to which the legally binding right arose during prior calendar years that were not previously included in income during one or more prior calendar years. No implication is intended regarding application of the law before these proposed regulations become applicable. Taxpayers may rely on these proposed regulations until the applicability date.

    B. Special Applicability Dates

    These regulations are proposed to include three special applicability dates for specific provisions. First, in the case of a plan that is maintained pursuant to one or more collective bargaining agreements that have been ratified and are in effect on the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, these regulations would not apply to compensation deferred under the plan before the earlier of (1) the date on which the last of the collective bargaining agreements terminates (determined without regard to any extension thereof after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, or (2) the date that is three years after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

    Second, for all plans, with respect to the rules regarding recurring part-year compensation for periods before the applicability date of these regulations, taxpayers may rely on either the rules set forth in these proposed regulations or the rules set forth in Notice 2008-62.

    Third, to the extent that legislation is required to amend a governmental plan, the proposed regulations would apply only to compensation deferred under the plan in calendar years beginning on or after the close of the second regular legislative session of the legislative body with the authority to amend the plan that begins after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

    Special Analyses

    Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact 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 on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

    Comments and Public Hearing

    Before the proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules, including whether special transition rules are needed for plans established before the proposed applicability dates of these regulations (including sick and vacation leave or severance pay plans that may be treated as providing deferred compensation subject to section 457, but that, under the proposed regulations, may be treated as providing deferred compensation subject to section 457(f), whether additional exceptions are appropriate to the general application of the rules currently described in the proposed section 409A regulations to determine the amounts includible in income under section 457(f), and whether special provisions for newly eligible employees are needed in the context of arrangements subject to section 457(f) (and if so whether the rules under §§ 1.409A-1(c)(2) and 1.409A-2(a)(7) would be a useful basis for similar rules under section 457(f)). All comments submitted by the public will be available at www.regulations.gov or upon request.

    A public hearing has been scheduled for October 18, 2016, beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by September 20, 2016 and an outline of the topics to be discussed and the amount of time to be devoted to each topic (a signed original and eight (8) copies) by September 20, 2016. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

    Statement of Availability of IRS Documents

    For copies of recently issued revenue procedures, revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin, please visit the IRS Web site at http://www.irs.gov or contact the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

    Drafting Information

    The principal author of the proposed regulations is Keith R. Kost, Office of Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the Treasury Department and the IRS participated in their development.

    List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

    Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

    PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority:

    26 U.S.C. 7805 * * *

    Par. 2. Section 1.457-1 is revised to read as follows:
    § 1.457-1 General overview of section 457.

    Section 457 provides rules for nonqualified deferred compensation plans established by eligible employers as defined under § 1.457-2(d). Eligible employers may establish either deferred compensation plans that are eligible plans that meet the requirements of section 457(b) and §§ 1.457-3 through 1.457-10, or deferred compensation plans that do not meet the requirements of section 457(b) and §§ 1.457-3 through 1.457-10 (and therefore are ineligible plans which are generally subject to federal income tax treatment under section 457(f) and § 1.457-12(a)). Plans described in § 1.457-11 are not subject to section 457 or are treated as not providing for a deferral of compensation for purposes of section 457 (and, accordingly, the rules under §§ 1.457-3 through 1.457-10 and § 1.457-12(a) do not apply to these plans).

    Par. 3. Section 1.457-2 is amended by: 1. Revising the introductory text. 2. Revising the second sentence of paragraph (f). 3. Revising the last sentence of paragraph (i). 4. Revising paragraph (k).

    The revisions read as follows:

    § 1.457-2 Definitions.

    This section sets forth the definitions that are used under §§ 1.457-1 through 1.457-12.

    (f) * * * An eligible governmental plan is an eligible plan that is established and maintained by a State as defined in paragraph (l) of this section and that meets the requirements of section 401(a)(37). * * *

    (i) * * * Solely for purposes of section 457 and §§ 1.457-2 through 1.457-12, the term nonelective employer contribution includes employer contributions that would be described in section 401(m) if they were contributions to a qualified plan.

    (k) Plan. Plan includes any agreement, method, program, or other arrangement (including an individual employment agreement) under which the payment of compensation for services rendered to an eligible employer is deferred (whether by salary reduction, nonelective employer contribution, or otherwise). However, the plans described in § 1.457-11 are either not subject to section 457 or are treated as not providing for a deferral of compensation for purposes of section 457, even if the payment of compensation is deferred under the plan.

    Par. 4. Section 1.457-4 is amended by: 1. Revising paragraphs (a), (b), and the last sentence of (e)(1). 2. Removing the language “§ 1.457-11” wherever it appears in paragraphs (e)(1), (e)(2), (e)(3), and (e)(5) Example 1 and adding the language “§ 1.457-12” in its place.

    The revisions read as follows:

    § 1.457-4 Annual deferrals, deferral limitations, and deferral agreements under eligible plans.

    (a) Taxation of annual deferrals. With the exception of designated Roth contributions (which are not excludable from gross income), annual deferrals that satisfy the requirements of paragraphs (b) and (c) of this section are excluded from the gross income of a participant in the year deferred or contributed and are not includible in gross income until paid to the participant in the case of an eligible governmental plan, or until paid or otherwise made available to the participant in the case of an eligible plan of a tax-exempt entity. See § 1.457-7.

    (b) Agreement for deferral—(1) In general. To be an eligible plan, the plan must provide that compensation for any calendar month may be deferred by salary reduction only if an agreement providing for the deferral has been entered into before the first day of the month in which the compensation to be deferred under the agreement would otherwise be paid or made available, and any modification or revocation of such an agreement may not become effective before the first day of the month following the month in which the modification or revocation occurs. However, a new employee may defer compensation in the first calendar month of employment if an agreement providing for the deferral is entered into on or before the first day the participant performs services for the eligible employer. An eligible plan may provide that if a participant enters into an agreement providing for deferral by salary reduction under the plan, the agreement will remain in effect until the participant revokes or alters the terms of the agreement. Nonelective employer contributions to an eligible plan are not subject to the timing rules for salary reduction agreements described in this paragraph (b)(1).

    (2) Designated Roth contributions in plans maintained by eligible governmental employers—(i) Elections. An election by a participant to make a designated Roth contribution (as defined in section 402A(c)(1)) to an eligible governmental plan in lieu of all or a portion of the amount that the participant could elect to contribute to the plan on a pre-tax basis must be irrevocably designated as an elective deferral that is not excludable from gross income in accordance with the timing rules under paragraph (b)(1) of this section. Designated Roth contributions are treated the same as pre-tax contributions for purposes of §§ 1.457-1 through 1.457-10, except as otherwise specifically provided in those sections.

    (ii) Separate accounting. Contributions and withdrawals of a participant's designated Roth contributions must be credited and debited to a designated Roth account maintained for the participant, and the plan must maintain a record of the participant's investment in the contract (that is, designated Roth contributions that have not been distributed) with respect to the participant's designated Roth account. In addition, gains, losses, and other credits or charges must be separately allocated on a reasonable and consistent basis to the designated Roth account and other accounts under the plan. However, forfeitures may not be allocated to the designated Roth account, and no contributions other than designated Roth contributions and rollover contributions described in section 402A(c)(3)(B) may be allocated to such account. The separate accounting requirement described in this paragraph applies to a plan at the time a designated Roth contribution is contributed to the plan and continues to apply until all designated Roth contributions (and the earnings attributable thereto) are distributed from the plan. See A-13 of § 1.402A-1 for additional requirements for separate accounting.

    (e) * * *

    (1) * * * Thus, an excess deferral is includible in gross income when deferred or, if later, when the excess deferral first ceases to be subject to a substantial risk of forfeiture, under the rules described in § 1.457-12(e).

    Par. 5. Section 1.457-6 is amended by revising the first sentence of paragraph (b)(1) to read as follows:
    § 1.457-6 Timing of distributions under eligible plans.

    (b) * * *

    (1) * * * An employee has a severance from employment with the eligible employer if the employee dies, retires, or otherwise has a severance from employment (including as described in section 414(u)(12)(B)) with the eligible employer.* * *

    Par. 6. Section 1.457-7 is amended by revising the section heading and paragraph (b)(1), redesignating paragraph (b)(4) as (b)(5), and adding a new paragraph (b)(4) to read as follows:
    § 1.457-7 Taxation of distributions under eligible plans.

    (b) * * *

    (1) Amounts included in gross income in year paid under an eligible governmental plan. Except as provided in paragraphs (b)(2), (3), and (4) of this section (or in § 1.457-10(c) relating to payments to a spouse or former spouse pursuant to a qualified domestic relations order), amounts deferred under an eligible governmental plan are includible in the gross income of a participant or beneficiary for the taxable year in which paid to the participant or beneficiary under the plan. Distributions from designated Roth accounts are excludable from gross income to the extent provided in section 402A and §§ 1.402A-1 and 1.402A-2.

    (4) Certain amounts from an eligible governmental plan not in excess of the amount paid for qualified health insurance premiums. Amounts paid to a participant who is an eligible retired public safety officer from an eligible governmental plan are excludible from gross income to the extent provided in section 402(l).

    Par. 7. Section 1.457-9 is amended by revising the third sentence of paragraph (a) and the last sentence of paragraph (b) to read as follows:
    § 1.457-9 Effect on eligible plans when not administered in accordance with eligibility requirements.

    (a) * * * If a plan ceases to be an eligible governmental plan, amounts subsequently deferred by participants are includible in gross income when deferred, or, if later, when the amounts deferred first cease to be subject to a substantial risk of forfeiture, under the rules described in § 1.457-12(e). * * *

    (b) * * * See § 1.457-12 for rules regarding the treatment of an ineligible plan.

    § 1.457-10 [Amended]
    Par. 8. Section 1.457-10 is amended by removing the language “§ 1.457-11” wherever it appears in paragraphs (a)(2)(i), (a)(3) Example 2 (ii), (c)(2) Example 1 (ii) and Example 2 (ii) and adding the language “§ 1.457-12” in its place.
    §§ 1.457-11 and 1.457-12 [Redesignated as §§ 1.457-12 and 1.457-13]
    Par. 9. Redesignate §§ 1.457-11 and 1.457-12 as §§ 1.457-12 and 1.457-13, respectively. Par. 10. Add a new § 1.457-11 to read as follows:
    § 1.457-11 Exclusions and exceptions for certain plans.

    (a) In general. The plans described in paragraphs (b) and (c) of this section either are not subject to section 457 or are treated as not providing for a deferral of compensation for purposes of section 457, and, accordingly, the provisions of §§ 1.457-3 through 1.457-10 and 1.457-12(a) do not apply to these plans.

    (b) Plans not subject to section 457. The following plans are not subject to section 457:

    (1) Any plan satisfying the conditions in section 1107(c)(4) of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2494) (TRA '86) (relating to certain plans for State judges);

    (2) Any of the following plans (to which specific transitional statutory exclusions apply):

    (i) A plan of a tax-exempt entity in existence prior to January 1, 1987, if the conditions of section 1107(c)(3)(B) of the TRA '86, as amended by section 1011(e)(6) of the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342) (TAMRA), are satisfied (see § 1.457-2(b)(4) for a different rule that may apply to the annual deferrals permitted under this type of plan);

    (ii) A collectively bargained nonelective deferred compensation plan in effect on December 31, 1987, if the conditions of section 6064(d)(2) of TAMRA are satisfied;

    (iii) Amounts deferred under plans described in section 6064(d)(3) of TAMRA (relating to amounts deferred under certain nonelective deferred compensation plans in effect before 1989); and

    (iv) Any plan satisfying the conditions in section 1107(c)(4) and (5) of TRA '86 (relating to certain plans for certain individuals with respect to which the IRS issued guidance before 1977); and

    (3) Any plan described in section 457(e)(12) that provides only nonelective deferred compensation attributable to services not performed as an employee (for example, a plan providing nonelective deferred compensation attributable to services performed by independent contractors). For this purpose, deferred compensation is nonelective only if all individuals, other than those who have not satisfied any applicable initial service requirement, with the same relationship to the payor are covered under the same plan with no individual variations or options under the plan.

    (c) Plans treated as not providing for a deferral of compensation. The following plans are treated as not providing for a deferral of compensation for purposes of section 457, §§ 1.457-1 through 1.457-10, and § 1.457-12:

    (1) A bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan, as described in section 457(e)(11)(A)(i) (see paragraph (d) of this section for the definition of a bona fide severance pay plan, paragraph (e) of this section for the definitions of a bona fide death benefit plan and a bona fide disability pay plan, and paragraph (f) of this section for the requirements for a bona fide sick or vacation leave plan); and

    (2) A plan described in section 457(e)(11)(A)(ii) paying solely length of service awards that are based on service accrued after December 31,1996, to bona fide volunteers (and their beneficiaries) on account of qualified services performed by those volunteers.

    (d) Definition of bona fide severance pay plan—(1) In general. A bona fide severance pay plan is an arrangement that meets the following requirements:

    (i) Except as provided in paragraph (d)(3) of this section, benefits are payable only upon involuntary severance from employment, as defined in paragraph (d)(2) of this section (see § 1.457-6(b) for the meaning of severance from employment);

    (ii) The amount payable does not exceed two times the participant's annualized compensation based upon the annual rate of pay for services provided to the eligible employer for the calendar year preceding the calendar year in which the participant has a severance from employment with the eligible employer (or the current calendar year if the participant had no compensation for services provided to the eligible employer in the preceding calendar year), adjusted for any increase during the year used to measure the rate of pay that was expected to continue indefinitely if the participant had not had a severance from employment; and

    (iii) The entire severance benefit must be paid to the participant no later than the last day of the second calendar year following the calendar year in which the severance from employment occurs, pursuant to a requirement contained in a written plan document.

    (2) Involuntary severance from employment—(i) In general. For purposes of paragraph (d)(1)(i) of this section, an involuntary severance from employment means a severance from employment due to the independent exercise of the eligible employer's unilateral authority to terminate the participant's services, other than due to the participant's implicit or explicit request, if the participant was willing and able to continue performing services. An involuntary severance from employment may include an eligible employer's failure to renew a contract at the time the contract expires, provided that the employee was willing and able to execute a new contract providing terms and conditions substantially similar to those in the expiring contract and to continue providing such services. The determination of whether a severance from employment is involuntary is based on all the facts and circumstances without regard to any characterization of the reason for the payment by the employer or participant.

    (ii) Severance from employment for good reason—(A) In general. Notwithstanding paragraph (d)(2)(i) of this section, a participant's voluntary severance from employment will be treated as an involuntary severance from employment, for purposes of paragraph (d)(1)(i) of this section, if the severance occurs under certain bona fide conditions that are pre-specified in writing (referred to herein as a severance from employment for good reason), provided that the avoidance of the requirements of section 457 is not the primary purpose of the inclusion of the conditions or of the actions by the employer in connection with the satisfaction of the conditions, and a voluntary severance from employment under such conditions effectively constitutes an involuntary severance from employment. Notwithstanding the previous sentence, once the bona fide conditions have been established, the elimination of one or more of the conditions may result in the extension of a substantial risk of forfeiture, the recognition of which would be subject to the rules discussed in § 1.457-12(e)(2).

    (B) Material negative change required. A severance from employment for good reason will be treated as an involuntary severance from employment only if the relevant facts and circumstances demonstrate that it was the result of unilateral employer action that caused a material negative change to the participant's relationship with the eligible employer. Some factors that may provide evidence of such a material negative change include a material reduction in the duties to be performed, a material negative change in the conditions under which the duties are to be performed, or a material reduction in the compensation to be received for performing such services. Other factors to be considered in determining whether a severance from employment due to good reason will be treated as an involuntary severance from employment include the extent to which the payments upon a severance from employment for good reason are in the same amount and made at the same time and in the same form as payments that would be made upon an actual involuntary severance from employment, and whether the employee is required to give the employer notice of the existence of the condition that would result in the treatment of a severance from employment as being for good reason and a reasonable opportunity to remedy the condition.

    (C) Safe harbor. The requirements of paragraph (d)(2)(ii)(B) of this section are deemed to be satisfied if a severance from employment occurs under the conditions described in paragraph (d)(2)(ii)(C)(1) of this section, those conditions are specified in writing by the time the legally binding right to the payment arises, and the plan also satisfies the requirements in paragraphs (d)(2)(ii)(C)(2) and (3) of this section.

    (1) The severance from employment occurs during a limited period of time not to exceed two years following the initial existence of one or more of the following conditions arising without the consent of the participant:

    (i) A material diminution in the participant's base compensation;

    (ii) A material diminution in the participant's authority, duties, or responsibilities;

    (iii) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the participant is required to report, including a requirement that a participant report to a corporate officer or employee instead of reporting directly to the board of directors (or similar governing body) of an organization;

    (iv) A material diminution in the budget over which the participant retains authority;

    (v) A material change in the geographic location at which the participant must perform services; or

    (vi) Any other action or inaction that constitutes a material breach by the eligible employer of the agreement under which the participant provides services.

    (2) The amount, time, and form of payment upon the severance from employment is substantially the same as the amount, time, and form of payment that would have been made upon an actual involuntary severance from employment, to the extent such right to payment exists.

    (3) The participant is required to provide notice to the eligible employer of the existence of the applicable condition(s) described in paragraph (d)(2)(ii)(C)(1) of this section within a period not to exceed 90 days after the initial existence of the condition(s), upon the notice of which, the employer must be provided a period of at least 30 days during which it may remedy the condition(s) and not be required to pay the amount.

    (3) Window programs. The requirement in paragraph (d)(1)(i) of this section that benefits be payable only upon involuntary severance from employment does not apply to a bona fide severance pay plan that provides benefits upon a severance from employment pursuant to a window program. For this purpose, a window program means a program established by an employer to provide separation pay in connection with an impending severance from employment, if the program is made available by the employer for a limited period of time (typically no longer than 12 months) to participants who have a severance from employment during that period or to participants who have a severance from employment during that period under specified circumstances. A program is not considered a window program for purposes of this paragraph if it is part of a pattern of multiple similar programs that, if offered as a single program, would not be a window program under this paragraph. Whether multiple programs constitute a pattern of similar programs is determined based on the relevant facts and circumstances. Although no one factor is determinative, relevant factors include whether the benefits are on account of a specific reduction in workforce (or some other entity-related operational condition), the degree to which the separation pay relates to an event or condition, and whether the event or condition is temporary or discrete or is a permanent aspect of the employer's practices.

    (4) Voluntary early retirement incentive plans—(i) In general. Notwithstanding paragraph (d)(1) of this section, an applicable voluntary early retirement incentive plan (as defined in section 457(e)(11)(D)(ii)) is treated as a bona fide severance pay plan for purposes of this section with respect to payments or supplements made as an early retirement benefit, a retirement-type subsidy, or an early retirement benefit described in the last sentence of section 411(a)(9), if the payments or supplements are made in coordination with a defined benefit pension plan that is qualified under section 401(a) maintained by an eligible employer described in section 457(e)(1)(A) or by an education association described in section 457(e)(11)(D)(ii)(II). See section 1104(d)(4) of the Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780), regarding the application of the Internal Revenue Code and certain other laws to any plan, arrangement, or conduct to which section 457(e)(11)(D) does not apply.

    (ii) Definitions. The definitions in § 1.411(d)-3(g)(6)(i) and (iv) apply for purposes of determining whether payments or supplements are an early retirement benefit or a retirement-type subsidy, and the definition in § 1.411(a)-7(c)(4) applies for purposes of determining whether payments or supplements are an early retirement benefit described in the last sentence of section 411(a)(9).

    (e) Bona fide death benefit or disability pay plans—(1) Bona fide death benefit plan. For purposes of section 457(e)(11)(A)(i) and this section, a bona fide death benefit plan is a plan providing death benefits as defined in § 31.3121(v)(2)-1(b)(4)(iv)(C) of this chapter, provided that, for purposes of this paragraph (e)(1), the death benefits may be provided through insurance and the lifetime benefits payable under the plan are not treated as including the value of any term life insurance coverage provided under the plan that is includible in gross income.

    (2) Bona fide disability pay plan. For purposes of section 457(e)(11)(A)(i) and this section, a bona fide disability pay plan is a plan that pays benefits (whether or not insured) only in the event that a participant is disabled, provided that, for purposes of this paragraph (e)(2), the value of any disability insurance coverage provided under the plan that is included in gross income is disregarded. For this purpose, a participant is considered disabled only if the participant meets one of the following conditions:

    (i) The participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months;

    (ii) The participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the eligible employer; or

    (iii) The participant is determined to be totally disabled by the Social Security Administration or Railroad Retirement Board.

    (f) Bona fide sick and vacation leave plans—(1) In general. For purposes of section 457(e)(11)(A)(i) and this section, the determination of whether a sick or vacation leave plan is a bona fide sick or vacation leave plan is made based on the relevant facts and circumstances. In general, a plan is treated as a bona fide sick or vacation leave plan, and not an arrangement to defer compensation, if the facts and circumstances demonstrate that the primary purpose of the plan is to provide participants with paid time off from work because of sickness, vacation, or other personal reasons. Factors used in determining whether a plan is a bona fide sick or vacation leave plan include whether the amount of leave provided could reasonably be expected to be used in the normal course by an employee (before the employee ceases to provide services to the eligible employer) absent unusual circumstances, the ability to exchange unused accumulated leave for cash or other benefits (including nontaxable benefits and the use of leave to postpone the date of termination of employment), the applicable restraints (if any) on the ability to accumulate unused leave and carry it forward to subsequent years in circumstances in which the accumulated leave may be exchanged for cash or other benefits, the amount and frequency of any in-service distributions of cash or other benefits offered in exchange for accumulated and unused leave, whether any payment of unused leave is made promptly upon severance from employment (or instead is paid over a period after severance from employment), and whether the program (or a particular feature of the program) is available only to a limited number of employees.

    (2) Delegation of authority to Commissioner. The Commissioner may provide additional rules regarding the requirements of a bona fide sick or vacation leave plan under section 457, in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter), as the Commissioner determines to be necessary or appropriate.

    Par. 11. Newly-designated § 1.457-12 is revised to read as follows:
    § 1.457-12 Tax treatment of participants if plan is not an eligible plan.

    (a) Tax treatment of an ineligible plan under section 457(f)—(1) In general. Pursuant to section 457(f)(1), if an eligible employer provides for a deferral of compensation under an ineligible plan, amounts will be included in income in accordance with paragraphs (a)(2) through (4) of this section, except as otherwise provided in this paragraph (a) or paragraph (b) of this section. See § 1.457-11 for plans that are not subject to section 457 or are not treated as providing for a deferral of compensation for purposes of section 457.

    (2) Income inclusion. The present value of compensation deferred under an ineligible plan is includible in the gross income of a participant or beneficiary under section 457(f) on the applicable date. For this purpose, the applicable date is the later of the first date on which there is a legally binding right to the compensation or, if the compensation is subject to a substantial risk of forfeiture, the first date on which the substantial risk of forfeiture (within the meaning of section 457(f)(3)(B) and paragraph (e) of this section) lapses. Paragraph (c) of this section provides rules for determining the present value of the compensation deferred under the plan, including a requirement that the amount of compensation deferred under an ineligible plan as of an applicable date includes any earnings on the compensation as of that date.

    (3) Treatment of earnings after income inclusion. Earnings credited on compensation deferred under an ineligible plan after the date on which the compensation is includible in gross income under section 457(f)(1) pursuant to paragraph (a)(2) of this section are includible in the gross income of a participant or beneficiary when paid or made available to the participant or beneficiary.

    (4) Income inclusion when compensation is paid or made available. Amounts paid or made available to a participant or beneficiary under an ineligible plan are includible in the gross income of the participant or beneficiary under section 72, relating to annuities. For this purpose, an amount is paid or made available if there is actual or constructive receipt (within the meaning of § 1.451-2) of any taxable or nontaxable benefit, including a transfer of cash, a transfer of property includible in income under section 83, any other event that results in the inclusion in income under the economic benefit doctrine, a contribution to (or transfer or creation of a beneficial interest in) a trust described in section 402(b) at a time when contributions to the trust are includible in income under section 402(b), or inclusion of an amount in income under section 457A. An amount is also paid or made available for this purpose if there is a transfer, cancellation, or reduction of an amount of deferred compensation in exchange for benefits under a welfare benefit plan, a fringe benefit excludible under section 119 or section 132, or any other benefit that is excludible from gross income.

    (5) Investment in the contract. For purposes of applying section 72 to amounts that are paid or made available as described in paragraph (a)(4) of this section, a participant is treated as having an investment in the contract to the extent that compensation has been included in gross income by the participant in accordance with paragraph (a)(2) of this section. An amount is treated as included in income for a taxable year only to the extent that the amount was properly includible in income and the participant actually included the amount in income (including on an original or amended federal income tax return or as a result of an IRS examination or a final decision of a court of competent jurisdiction).

    (b) Exceptions—(1) In general. Section 457(f)(1) and paragraph (a) of this section do not apply to a plan or a portion of a plan described in this paragraph (b). The determination of whether a plan or a portion of a plan is described in this paragraph (b) is made as of the date on which the legally binding right to an amount arises. However, a plan or portion of a plan will cease to be a plan that is described in this paragraph (b) on the first date that it no longer meets the requirements described in this paragraph (b).

    (2) Certain retirement plans. Annuity plans and contracts described in section 403 and plans described in section 401(a) are not subject to the provisions of section 457(f)(1) and paragraph (a) of this section.

    (3) Section 402(b) trusts—(i) Section 402(b). The portion of a plan that consists of a trust to which section 402(b) applies is not subject to the provisions of section 457(f)(1) and paragraph (a) of this section.

    (ii) Example. The provisions of this paragraph (b)(3) are illustrated in the following example:

    Example.

    (i) Facts. On October 1, 2017, an eligible employer establishes an ineligible plan covering only one participant (a highly compensated employee under section 414(q)) under which the participant obtains an unconditional right to be paid $150,000 (plus interest at a specified reasonable rate) on October 1, 2021. As part of the plan, the employer simultaneously establishes a trust described in section 402(b) in the United States for the sole benefit of the participant. Under the terms of the plan and trust, the assets of the trust are also payable to the participant on October 1, 2021, and the amount that the employer is otherwise obligated to pay under the plan will be reduced (offset) by the amount paid to the participant from the trust. Section 402(b)(4) applies to the trust, and the trust has assets of $98,000 on October 1, 2017 and $100,000 on December 31, 2017.

    (ii) Conclusion. Section 457(f) and this section apply only to the portion of the plan that is not funded through the section 402(b) trust. Thus, the participant has income under section 457(f) equal to the present value of the portion of the compensation deferred under the plan that is not funded through the section 402(b) trust on the date on which there is a legally binding right to the compensation (October 1, 2017). This present value is equal to $52,000 ($150,000—$98,000), which is included in the participant's gross income on October 1, 2017. The participant must also include $100,000 in gross income on December 31, 2017 pursuant to section 402(b)(4)(A).

    (4) Qualified governmental excess benefit arrangements under section 415(m). A qualified governmental excess benefit arrangement described in section 415(m) is not subject to the provisions of section 457(f)(1) and paragraph (a) of this section.

    (5) Nonqualified annuities under section 403(c)—(i) Section 403(c) annuities. The portion of a plan in which premiums are paid by an employer for an annuity contract to which section 403(c) applies is not subject to the provisions of section 457(f)(1) and paragraph (a) of this section.

    (ii) Examples. The provisions of this paragraph (b)(5) are illustrated by the following examples:

    Example 1.

    (i) Facts. A tax-exempt entity pays a premium for an annuity contract (described in section 403(c)) for the benefit of a participant. The annuity contract has a value of $135,000, and the participant is substantially vested (as defined in § 1.83-3(b)) at the time the premium is paid. The participant includes the full value ($135,000) in income under section 403(c) in the year the employer pays the premium.

    (ii) Conclusion. Although the participant has a legally binding right to payments under the annuity contract that will be made in a subsequent taxable year, the participant's interest in the annuity contract is not subject to section 457(f)(1) and paragraph (a) of this section.

    Example 2.

    (i) Facts. The facts are the same as in Example 1 of this paragraph (b)(5), except the participant's rights in the annuity contract are not substantially vested (as defined in § 1.83-3(b)) at the time the premium is paid and do not become substantially vested until a future taxable year. The participant does not include the full value of the contract in income under section 403(c) in the year the employer pays the premium.

    (ii) Conclusion. Neither the payment of the premium nor the participant's interest in the annuity contract is subject to section 457(f)(1) or paragraph (a) of this section.

    (6) Transfer of property under section 83—(i) Section 83. The portion of a plan that consists of a transfer of property to which section 83 applies is not subject to the provisions of section 457(f)(1) and paragraph (a) of this section. Specifically, section 457(f)(1) and paragraph (a) of this section do not apply if, on or before the first date on which compensation deferred under a plan is not subject to a substantial risk of forfeiture (within the meaning of section 457(f)(3)(B) and paragraph (e) of this section), the amount is paid through a transfer of property described in section 83. However, section 457(f)(1) and paragraph (a) of this section do apply if the first date on which compensation deferred under a plan is not subject to a substantial risk of forfeiture (as defined in section 457(f)(3)(B) and paragraph (e) of this section) precedes the date on which the amount is paid through a transfer of property described in section 83. If deferred compensation payable in property is includible in gross income under section 457(f)(1)(A), then, as provided in section 72, the amount includible in gross income when that property is later transferred or made available to the participant or beneficiary is the excess of the value of the property at that time over the amount previously included in gross income under section 457(f)(1)(A).

    (ii) Examples. The provisions of this paragraph (b)(6) are illustrated by the following examples:

    Example 1.

    (i) Facts. On December 1, 2017, an eligible employer agrees to transfer property that is substantially vested (within the meaning of § 1.83-3(b)) and has a fair market value equal to a specified dollar amount, to a participant on January 15, 2020. The participant's rights under the agreement are not subject to a substantial risk of forfeiture (within the meaning of section 457(f)(3)(B) and paragraph (e) of this section).

    (ii) Conclusion. Because there is no substantial risk of forfeiture (within the meaning of section 457(f)(3)(B) and paragraph (e) of this section) with respect to the agreement to transfer property in 2020, the present value of the amount on the applicable date (December 1, 2017) is includible in the participant's gross income under section 457(f)(1)(A). Under paragraph (a)(4) of this section, when the substantially vested property is transferred to the participant on January 15, 2020, the amount includible in the participant's gross income is equal to the excess of the fair market value of the property on that date over the amount that was included in gross income for 2017.

    Example 2.

    (i) Facts. Under a bonus plan, an eligible employer agrees in 2021 to transfer property that is substantially nonvested (within the meaning of § 1.83-3(b)) to Participants A and B in 2023 if they are continuously employed by the eligible employer through the date of the transfer (which condition constitutes a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) and paragraph (e) of this section). In 2023, the eligible employer transfers the property to Participants A and B, subject to a substantial risk of forfeiture (within the meaning of § 1.83-3(c)), that lapses in 2025. Participant A makes a timely election to include the fair market value of the property in gross income under section 83(b). Participant B does not make this election.

    (ii) Conclusion. The compensation deferred for both Participants A and B is not subject to section 457(f)(1) or paragraph (a) of this section because section 83 applies to the transfer of property on or before the date on which the property is not subject to a substantial risk of forfeiture (within the meaning of section 457(f)(3)(B) and paragraph (e) of this section). Because of the section 83(b) election, Participant A includes the fair market value of the property (disregarding lapse restrictions) in gross income for 2023 under section 83(b)(1). Participant B includes the value of the property in gross income when the substantial risk of forfeiture lapses in 2025 under section 83(a).

    (7) Applicable employment retention plan. The portion of a plan that is an applicable employment retention plan as described in section 457(f)(4) with respect to any participant is not subject to the provisions of section 457(f)(1) and paragraph (a) of this section. See also section 1104(d)(4) of the Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780), regarding the application of the Internal Revenue Code and certain other laws to any plan, arrangement, or conduct to which section 457(f)(2)(F) does not apply.

    (c) Amount included in income—(1) Calculation of present value—(i) In general. Except as otherwise provided in this paragraph (c), the present value of compensation deferred under an ineligible plan as of an applicable date equals the present value of the future payments to which the participant has a legally binding right (as described in paragraph (d) of this section). For this purpose, present value is determined in accordance with the provisions of this paragraph (c)(1)(i) by multiplying the amount of a payment (or the amount of each payment in a series of payments) by the probability that any condition or conditions on which the payment is contingent will be satisfied and discounting the amount using an assumed rate of interest to reflect the time value of money.

    (ii) Actuarial assumptions—(A) In general—(1) Reasonable actuarial assumptions. For purposes of paragraph (c)(1)(i) of this section, present value is determined using actuarial assumptions and methods that, based on all of the facts and circumstances, are reasonable as of the applicable date, including an interest rate that is reasonable as of that date and other assumptions necessary to determine the present value (without regard to whether the present value of the compensation deferred under the plan is reasonably ascertainable as described in § 31.3121(v)(2)-1(e)(4)(i)(B) of this chapter).

    (2) Probability of death before the payment of benefits. For purposes of paragraph (c)(1)(i) of this section, the probability that a participant will die before a payment is made is permitted to be taken into account only to the extent that the payment is forfeitable upon death.

    (3) Probability that the payment will not be made. For purposes of paragraph (c)(1)(i) of this section, the probability that payments will not be made (or will be reduced) because of the unfunded status of a plan, the risk associated with any deemed or actual investment of compensation deferred under the plan, the risk that the eligible employer or another party will be unwilling or unable to pay, the possibility of future plan amendments, the possibility of a future change in the law, or similar risks or contingencies are not taken into account.

    (B) Payments made in foreign currency. The rules in § 1.409A-4(b)(2)(i) apply for purposes of determining the treatment of payments in foreign currency.

    (C) Treatment of payment triggers based upon events—(1) In general. Except as provided in paragraph (c)(1)(ii)(C)(2) of this section, the rules in § 1.409A-4(b)(2)(vii) apply for purposes of determining the treatment of payment triggers based upon events.

    (2) Treatment of severance from employment. If the date on which a payment will be made depends on the date the participant has a severance from employment (as described in § 1.457-6(b)) and the participant has not had a severance from employment by the applicable date, then for purposes of paragraph (c)(1)(ii)(A)(1) of this section, the severance from employment may be treated as occurring on any date that is not later than the fifth anniversary of the applicable date, unless this assumption would be unreasonable under the facts and circumstances.

    (iii) Unreasonable assumptions. If any actuarial assumption or method used to determine the present value of compensation deferred under the plan is not reasonable, as determined by the Commissioner, then the Commissioner will determine the present value using actuarial assumptions and methods that the Commissioner determines to be reasonable, including the AFR and the applicable mortality table under section 417(e)(3)(B) as of the applicable date. For purposes of this section, AFR means the mid-term applicable federal rate (as defined pursuant to section 1274(d)) for January 1 of the relevant calendar year, compounded annually.

    (iv) Account balance plans—(A) In general. To the extent benefits are provided under an account balance plan, as defined in § 31.3121(v)(2)-1(c)(1)(ii) and (iii) of this chapter, to which earnings (or losses, if applicable) are credited at least annually, the present value of compensation deferred under the plan as of an applicable date is the amount credited to the participant's account, including both the principal amount credited to the account and any earnings or losses attributable to the principal amount that have been credited to the account, as of that date.

    (B) Unreasonable rates of return. This paragraph (c)(1)(iv)(B) applies to an account balance plan under which the income credited is based on neither a predetermined actual investment, within the meaning of § 31.3121(v)(2)-1(d)(2)(i)(B) of this chapter, nor a rate of interest that is reasonable, within the meaning of § 31.3121(v)(2)-1(d)(2)(i)(C) of this chapter, as determined by the Commissioner. The present value of compensation deferred under that type of plan as of an applicable date is equal to the amount credited to the participant's account as of that date, plus the present value of the excess (if any) of the earnings to be credited under the plan over the earnings that would be credited through the projected payment date using a reasonable rate of interest. If the present value of compensation deferred under the plan is not determined and is not taken into account by the taxpayer in this manner, the present value of the compensation deferred under the plan will be treated as equal to the amount credited to the participant's account as of the applicable date, plus the present value of the excess (if any) of the earnings to be credited under the plan through the projected payment date over the earnings that would be credited using the AFR.

    (C) Combinations of predetermined actual investments or interest rates. If the amount of earnings or losses credited under an account balance plan is based on the greater of two or more rates of return (each of which would be a predetermined actual investment or a reasonable interest rate if the earnings or losses credited were based on only one of those rates of return), then the amount included in income on the applicable date is the sum of the amount credited to the participant's account as of the applicable date and the present value (determined under paragraph (c)(1)(i) of this section) of the right to future earnings.

    (D) Examples. The following examples illustrate the provisions of paragraphs (c)(1)(i) through (iv) of this section. For purposes of these examples, assume that the arrangements are either not subject to section 409A or 457A or otherwise comply with the requirements of those provisions, and that the parties are not under examination for any of the tax years in question.

    Example 1.

    (i) Facts. On October 1, 2017, an eligible employer agrees to pay $100,000 to a participant on January 1, 2024, if the participant is alive on that date. The employer determines that the October 1, 2017 present value of that payment is $75,000 based on the second segment rate used for purposes of section 417(e)(3)(C) on October 1, 2017, and using the mortality table applicable under section 417(e)(3)(B) on October 1, 2017.

    (ii) Conclusion. The present value has been determined in accordance with paragraph (c)(1)(i) of this section.

    Example 2.

    (i) Facts. On October 1, 2018, an eligible employer agrees to pay $100,000 to a participant at severance from employment. The assumptions that the employer uses to determine the present value are that the participant will have a severance from employment on October 1, 2023 (the fifth anniversary of the date the participant obtains the right to the payment in accordance with paragraph (c)(1)(ii)(C)(2) of this section) and that the present value will be determined using a rate of 4.5% compounded monthly.

    (ii) Conclusion. Assuming, solely for purposes of this example, that the employer's severance from employment date and interest rate assumptions are reasonable, the value included in income on the applicable date (October 1, 2018) is $79,885.

    Example 3.

    (i) Facts. On October 1, 2017, an eligible employer agrees to pay $100,000 to a participant at severance from employment, but no payment will be made if the severance from employment occurs on or after October 1, 2021.

    (ii) Conclusion. Although paragraph (c)(1)(ii)(C)(2) of this section provides that for purposes of determining when a payment will be made, severance may be treated as if it occurred on the fifth anniversary of the applicable date, that assumption would be unreasonable under these facts and circumstances and would not be permitted under paragraph (c)(1)(ii)(C)(2) of this section. Accordingly, for purposes of determining the present value, an assumption that severance from employment would occur after September 30, 2021 would be unreasonable.

    Example 4.

    (i) Facts. An eligible employer maintains a supplemental executive retirement plan that provides a subsidized early retirement benefit payable to participants between age 60 and 65. A 60 year old participant becomes vested in the right to the subsidized early retirement benefit on December 31, 2017.

    (ii) Conclusion. The assumption under paragraph (c)(1)(ii)(C)(2) of this section would not be permitted for purposes of determining the amount to be included in income because the nature of the subsidized early retirement benefit causes it to decline in value until it becomes worthless upon attainment of age 65. In other words, the value of the subsidized early retirement benefit using the assumption permitted in paragraph (c)(1)(ii)(C)(2) of this section would result in a value of $0 and would be unreasonable under the facts and circumstances.

    Example 5.

    (i) Facts. On October 1, 2017, an eligible employer agrees to provide compensation to an employee for prior services in an amount equal to $100,000, plus interest at a reasonable rate, with payment to be made at the time of the employee's severance from employment. The participant's right to the compensation is not subject to a substantial risk of forfeiture at any time.

    (ii) Conclusion. Because the agreement provides for a reasonable rate of interest, the amount included in income on the applicable date (October 1, 2017) is $100,000.

    Example 6.

    (i) Facts. The facts are the same as in Example 5 of this paragraph (c)(1)(iv)(D), except that the right is subject to a requirement that the participant continue to provide substantial services for three additional years (which constitutes a substantial risk of forfeiture as described in paragraph (e) of this section). On October 1, 2020, when the substantial risk of forfeiture lapses, the account balance is $116,147.

    (ii) Conclusion. The amount included in income on the applicable date (October 1, 2020) is $116,147.

    Example 7.

    (i) Facts. The facts are the same as in Example 5 of this paragraph (c)(1)(iv)(D), except that the rate of interest credited on the account is 5% above a reasonable rate of interest. On October 1, 2017, the sum of the $100,000 account balance, plus the present value of the right to receive the difference between a reasonable rate of return and the rate of return being credited on the account (from October 1, 2017 until October 1, 2022) is $128,336. The participant has a severance from employment on October 16, 2020, and is paid $135,379 on that date.

    (ii) Conclusion. The amount included in income on the applicable date (October 1, 2017) is $128,336. Pursuant to paragraph (a)(5) of this section, the $128,336 is treated as investment in the contract for purposes of section 72 and, pursuant to paragraph (a)(4) of this section, the participant recognizes an additional $7,043 ($135,379, minus the $128,336 that was previously included in gross income for 2017) in income attributable to the payment on October 16, 2020.

    Example 8.

    (i) Facts. The facts are the same as in Example 5 of this paragraph (c)(1)(iv)(D), except that the employer also agrees to pay the participant an amount that is estimated to be equal to the federal, state, and local income taxes due (based on a fixed percentage that is pre-specified in the agreement) attributable to the amount included in income on the applicable date (October 1, 2017). In exchange for that tax payment, the amount payable upon severance from employment is to be reduced by an amount equal to the federal, state, and local income taxes for the taxable year of payment that the employer estimates would otherwise have been due but for the income inclusion in 2017. In satisfaction of this obligation to make the tax payment, the employer pays the participant $66,667 on April 15, 2018.

    (ii) Conclusion. The present value on the applicable date (October 1, 2017) is $100,000, plus the present value of the $66,667 payment to be made on April 15, 2018, minus the present value of the reduction that will be applied at the time of payment (which, if reasonable, may be assumed to be October 1, 2022 in accordance with paragraph (c)(1)(ii)(C)(2) of this section).

    Example 9.

    (i) Facts. An eligible employer credits $100,000 on December 31, 2017, to the account of a participant under an ineligible plan, subject to the condition that the amount will be forfeited if the participant voluntarily terminates employment before December 31, 2019. The account balance will be credited with notional annual earnings based on the greater of the return of a designated S&P 500 index fund or a specified rate of interest and will be paid on December 31, 2025.

    (ii) Conclusion. Under paragraph (c)(1)(iv)(C) of this section, the sum of the amount credited to the participant's account as of the applicable date (December 31, 2019) and the present value (determined under paragraph (c)(1)(i) of this section) of the right to future earnings based on the greater of the return of the designated S&P 500 index fund or the specified rate of interest must be included in the participant's gross income on the applicable date.

    (v) Application of the general calculation rules to formula amounts. With respect to a right to receive a formula amount, the amount or amounts of future payments under the plan, for purposes of determining the present value as of an applicable date, is determined based on all of the facts and circumstances existing as of that date. This determination must reflect reasonable, good faith assumptions with respect to any contingencies as to the amount of the payment, both with respect to each contingency and with respect to all contingencies in the aggregate. An assumption based on the facts and circumstances as of the applicable date may be reasonable even if the facts and circumstances change in the future so that when the amount payable is determined in a subsequent year, the amount payable is a greater (or lesser) amount. In such a case, the increase (or decrease) due to the change in the facts and circumstances is treated as earnings (or losses). For purposes of this paragraph (c)(1)(v), an amount payable is a formula amount to the extent that the amount payable in a future taxable year is dependent upon factors that, after applying the assumptions and other rules set forth in this section, are not determinable as of the applicable date, such that the amount payable may not be readily determined as of that date under the other provisions of this section. If some portion of an amount payable is not a formula amount, the amount payable with respect to such portion is determined under the rules applicable to amounts that are not formula amounts, and only the balance of the amount payable is determined under the rules applicable to formula amounts.

    (vi) Treatment of payment restrictions. The rules in § 1.409A-4(b)(2)(v) apply for purposes of determining the treatment of payment restrictions.

    (vii) Treatment of alternative times and forms of a future payment. The rules in § 1.409A-4(b)(2)(vi) apply for purposes of determining the treatment of alternative times and forms of a future payment.

    (viii) Reimbursement and in-kind benefit arrangements. The rules in § 1.409A-4(b)(4) apply for purposes of determining the present value of reimbursement and in-kind benefit arrangements.

    (ix) Split-dollar life insurance arrangements. The rules in § 1.409A-4(b)(5) apply for purposes of determining the present value of benefits provided under a split-dollar life insurance arrangement.

    (2) Forfeiture or other permanent loss of right to compensation previously included in income—(i) In general. If a participant has included compensation under a plan in income pursuant to paragraph (a)(2) or (4) of this section, but all or a portion of that compensation is never paid under the plan, the participant is entitled to a deduction for the taxable year in which the entire remaining right to the payment of the compensation is permanently forfeited under the plan's terms or otherwise permanently lost. The deduction to which the participant is entitled equals the excess of the amounts included in income under paragraphs (a)(2) and (4) of this section with respect to the compensation over the total amount of the compensation actually received that constitutes investment in the contract under paragraph (a)(5) of this section.

    (ii) Forfeiture or permanent loss of right. For purposes of this paragraph (c)(2), a mere diminution in the amount payable under the plan due to a deemed investment loss, an actuarial reduction, or any other decrease in the amount deferred under the plan is not treated as a forfeiture or permanent loss of the right if the participant retains the right to any payment under the plan (whether or not such right is subject to a substantial risk of forfeiture as described in paragraph (e) of this section). In addition, an amount payable under a plan is not treated as forfeited or otherwise permanently lost if another amount or an obligation to make a payment in a future year is substituted for the original amount. However, an amount payable under a plan is treated as permanently lost if the participant's right to receive payment of the amount becomes wholly worthless during the taxable year. Whether the right to receive payment has become wholly worthless is determined based on the relevant facts and circumstances existing as of the last day of the relevant taxable year.

    (iii) Examples. The provisions of this paragraph (c)(2) are illustrated in the following examples:

    Example 1.

    (i) Facts. On October 1, 2017, an eligible employer establishes an ineligible plan for a participant under which the employer agrees to pay the amount credited to the participant's account when the participant has a severance from employment. The obligation to make the payment is not subject to a substantial risk of forfeiture. The account balance on October 1, 2017 is $125,000, and the participant includes $125,000 in income in 2017. The plan subsequently experiences notional investment losses, and the participant receives $75,000 from the plan in a lump-sum distribution in 2024, when the participant has a severance from employment. The $75,000 lump-sum distribution represents all amounts due to the participant under the plan.

    (ii) Conclusion. For 2024, the participant is entitled to deduct $50,000 (the excess of the amount included in income under paragraph (a)(2) of this section ($125,000) over the amount actually received that constitutes investment in the contract under paragraph (a)(5) of this section ($75,000)).

    Example 2.

    (i) Facts. The facts are the same facts as in Example 1 of this paragraph (c)(2)(iii), except that the plan provides that the participant will receive the deferred compensation in three installments (1/3 of the account balance in 2024, 1/2 of the then remaining account balance in 2025, and the remaining balance in 2026), and that the sum of all three installments is $75,000.

    (ii) Conclusion. The participant is entitled to deduct $50,000 in the taxable year of the last installment payment (2026) ($125,000, reduced by the sum of the amounts received in 2024, 2025, and 2026 ($75,000)).

    (d) Definition of deferral of compensation—(1) In general—(i) Legally binding right. A plan provides for the deferral of compensation with respect to a participant for purposes of section 457(f) and this section if, under the terms of the plan and the relevant facts and circumstances, the participant has a legally binding right during a calendar year to compensation that, pursuant to the terms of the plan, is or may be payable to (or on behalf of) the participant in a later calendar year. Whether a plan provides for the deferral of compensation for purposes of section 457(f) and this section is determined based on the relevant facts and circumstances at the time that the participant obtains a legally binding right to the compensation, or, if later, when a plan is amended to convert a right that does not provide for a deferral of compensation into a right that does provide for a deferral of compensation. For example, if a plan providing for retiree health care does not initially provide for a deferral of compensation but is later amended to provide the ability to receive future cash payments instead of health benefits, it may become a plan that provides for the deferral of compensation at the time of the amendment. An amount of compensation deferred under a plan that provides for the deferral of compensation within the meaning of section 457(f) and this section does not cease to be an amount subject to section 457(f) and this section by reason of any change to the plan that would otherwise recharacterize the right to the amount as a right that does not provide for the deferral of compensation with respect to such amount. In addition, any change under the plan that results in an exchange of an amount deferred under the plan for some other right or benefit that would otherwise be excluded from the participant's gross income does not affect the characterization of the plan as one that provides for a deferral of compensation.

    (ii) Discretion to reduce or eliminate compensation. A participant does not have a legally binding right to compensation to the extent that the compensation may be reduced or eliminated unilaterally by the employer or another person after the services creating the right to the compensation have been performed. However, if the facts and circumstances indicate that the discretion to reduce or eliminate the compensation is available or exercisable only upon a condition, or the discretion to reduce or eliminate the compensation lacks substantive significance, a participant is considered to have a legally binding right to the compensation. Whether the discretion to reduce or eliminate compensation lacks substantive significance depends on all the relevant facts and circumstances. However, if the participant to whom the compensation may be paid has effective control of the person retaining the discretion to reduce or eliminate the compensation, or has effective control over any portion of the compensation of the person retaining the discretion to reduce or eliminate the compensation, or is a member of the family (as defined in section 267(c)(4) but also including the spouse of any member of the family) of the person retaining the discretion to reduce or eliminate the compensation, the discretion to reduce or eliminate the compensation is not treated as having substantive significance. Compensation is not considered subject to unilateral reduction or elimination merely because it may be reduced or eliminated by operation of the objective terms of the plan, such as the application of a nondiscretionary, objective provision creating a substantial risk of forfeiture or the application of a formula that provides for benefits to be offset by benefits provided under another plan (such as a plan that is qualified under section 401(a)).

    (2) Short-term deferrals. For purposes of section 457(f) and this section, a deferral of compensation does not occur under a plan with respect to any payment for which a deferral of compensation does not occur under section 409A pursuant to § 1.409A-1(b)(4) (short-term deferrals), except that, for purposes of this paragraph, in applying the rules provided in § 1.409A-1(b)(4) the meaning of substantial risk of forfeiture under § 1.457-12(e) applies in each place that term is used (and not the meaning of substantial risk of forfeiture provided under § 1.409A-1(d)).

    (3) Recurring part-year compensation. For purposes of section 457(f) and this section and notwithstanding paragraph (d)(2) of this section, a deferral of compensation does not occur under a plan with respect to an amount that is recurring part-year compensation (as defined in § 1.409A-2(a)(14)), if the plan does not defer payment of any of the recurring part-year compensation to a date beyond the last day of the 13th month following the first day of the service period for which the recurring part-year compensation is paid, and the amount of the recurring part-year compensation does not exceed the annual compensation limit under section 401(a)(17) for the calendar year in which the service period commences.

    (4) Certain other exceptions. For purposes of section 457(f) and this section, a deferral of compensation does not occur to the extent that a plan provides for:

    (i) The payment of expense reimbursements, medical benefits, or in-kind benefits, as described in § 1.409A-1(b)(9)(v)(A), (B), or (C);

    (ii) Certain indemnification rights, liability insurance, or legal settlements, as described in § 1.409A-1(b)(10), or (11); or

    (iii) Taxable educational benefits for an employee (which, for this purpose, means solely benefits consisting of educational assistance, as defined in section 127(c)(1) and the regulations thereunder, attributable to the education of an employee, and does not include any benefits provided for the education of any other person, including any spouse, child, or other family member of the employee).

    (5) Interaction with section 409A—(i) In general. The rules of section 457(f) apply to an ineligible plan separately and in addition to any requirements applicable to the plan under section 409A.

    (ii) Acceleration of the time or schedule of a payment. Although section 457(f) and this section do not preclude the acceleration of payments, see § 1.409A-3(a) for the general rules and exceptions relating to the acceleration of payments that are subject to section 409A.

    (iii) Example. The provisions of this paragraph (d)(5) are illustrated in the following example:

    Example.

    (i) Facts. On December 1, 2017, an eligible employer establishes an account balance plan for an employee that is subject to section 457(f), under which an initial amount is credited to the account and is increased periodically by earnings based on a reasonable specified rate of interest. The entire account balance is subject to a substantial risk of forfeiture until December 1, 2021. Under the terms of the plan, the account balance will be paid in three annual installments on each January 15, beginning in 2024 (one third of the balance for the first installment, one half of the then remaining balance for the second installment, and the remaining balance for the third installment). However, in 2022, the plan is amended to provide for payments to begin in 2023, such that the plan fails to comply with the requirements of section 409A during 2022. The account balance is: $100,000 on December 1, 2021; $118,000 on December 31, 2022; $120,000 on January 15, 2023 (so that the payment made that day is $40,000 ($120,000/3)); $88,000 on January 15, 2024 (so that the payment made that day is $44,000 ($88,000/2)); and $50,000 on January 15, 2025 (so that the payment made that day is $50,000).

    (ii) Conclusion: Federal income tax treatment in 2021. The plan provides for a deferral of compensation to which section 457(f) applies. Under section 457(f) and paragraph (a)(2) of this section, the $100,000 amount of the account balance on December 1, 2021, when the benefits cease to be subject to a substantial risk of forfeiture, is included in the employee's gross income on that date.

    (iii) Conclusion: Federal income tax treatment after 2021—(1) Treatment in 2022 under section 409A. Because the arrangement fails to meet the requirements of section 409A in 2022, the employee has gross income under section 409A equal to the account balance on December 31, 2022, reduced by the amount previously included in income. Accordingly, the amount included in gross income under section 409A is equal to $18,000 (the $118,000 account balance on December 31, 2022, reduced by the $100,000 previously included in income under section 457(f) for 2021). The amount included in gross income under section 409A is subject to an additional 20 percent tax under section 409A(a)(1)(B)(i)(II) and a premium interest tax under section 409A(a)(1)(B)(i)(I).

    (2) Federal income tax treatment of first installment payment in 2023—(i) Earnings previously included under section 409A. The first $18,000 of the $40,000 payment in 2023 is excluded from gross income under section 409A as a result of the earlier inclusion of that amount in income in 2022 due to the section 409A violation. See § 1.409A-4(f).

    (ii) Deferral of compensation under section 457(f). The amount of the investment in the contract (described in paragraph (a)(5) of this section) allocated to the remaining $22,000 of the installment paid in 2023 is $33,333 ($100,000/3), so no amount is included in gross income for 2023.

    (3) Federal income tax treatment of second installment payment in 2024. The employee has unused investment in the contract from 2023 in the amount of $11,333 ($33,333-$22,000). Assuming that the employee elects to redetermine the amount recognized for the current and subsequent years in 2024 pursuant to § 1.72-4(d)(3)(ii), the amount included in gross income for 2024 is $5,000 (the payment of $44,000, reduced by the portion of the remaining investment in the contract that is allocable to the installment, which is $39,000 (($100,000-$22,000)/2)).

    (4) Federal income tax treatment of third installment payment in 2025. The amount included in gross income for 2025 is $11,000 (the payment of $50,000, reduced by the remaining investment in the contract of $39,000).

    (e) Rules relating to substantial risk of forfeiture—(1) Substantial risk of forfeiture—(i) In general. An amount of compensation is subject to a substantial risk of forfeiture only if entitlement to the amount is conditioned on the future performance of substantial services, or upon the occurrence of a condition that is related to a purpose of the compensation if the possibility of forfeiture is substantial. An amount is not subject to a substantial risk of forfeiture if the facts and circumstances demonstrate that the forfeiture condition is unlikely to be enforced (see paragraph (e)(1)(v) of this section). If a plan provides that entitlement to an amount is conditioned on involuntary severance from employment without cause (which includes, for this purpose, a voluntary severance from employment that is treated as involuntary under § 1.457-11(d)(2)(ii)), the right is subject to a substantial risk of forfeiture if the possibility of forfeiture is substantial.

    (ii) Substantial future services. For purposes of paragraph (e)(1)(i) of this section, the determination of whether an amount of compensation is conditioned on the future performance of substantial services is based on the relevant facts and circumstances, such as whether the hours required to be performed during the relevant period are substantial in relation to the amount of compensation.

    (iii) Condition related to a purpose of the compensation. For purposes of paragraph (e)(1)(i) of this section, a condition related to a purpose of the compensation must relate to the participant's performance of services for the employer or to the employer's governmental or tax-exempt activities (as applicable) or organizational goals.

    (iv) Noncompetition conditions. For purposes of paragraph (e)(1)(i) of this section, an amount of compensation will not be treated as subject to a substantial risk of forfeiture merely because the right to payment of the amount is conditioned, directly or indirectly, upon the employee refraining from the future performance of certain services, unless each of the of the following conditions is satisfied:

    (A) The right to payment of the amount is expressly conditioned upon the employee refraining from the future performance of services pursuant to an enforceable written agreement.

    (B) The employer makes reasonable ongoing efforts to verify compliance with noncompetition agreements (including the noncompetition agreement applicable to the employee).

    (C) At the time that the enforceable written agreement becomes binding, the facts and circumstances demonstrate that the employer has a substantial and bona fide interest in preventing the employee from performing the prohibited services and that the employee has bona fide interest in, and ability to, engage in the prohibited competition. Factors taken into account for this purpose include the employer's ability to show significant adverse economic consequences that would likely result from the prohibited services; the marketability of the employee based on specialized skills, reputation, or other factors; and the employee's interest, financial need, and ability to engage in the prohibited services.

    (v) Enforcement of forfeiture condition. To constitute a substantial risk of forfeiture, the possibility of actual forfeiture in the event that the forfeiture condition occurs must be substantial based on the relevant facts and circumstances. Factors to be considered for this purpose include, but are not limited to, the extent to which the employer has enforced forfeiture conditions in the past, the level of control or influence of the employee with respect to the organization and the individual(s) who would be responsible for enforcing the forfeiture condition, and the likelihood that such provisions would be enforceable under applicable law.

    (2) Addition or extension of risk of forfeiture—(i) General rule. The initial addition or extension of any risk of forfeiture after a legally binding right to compensation arises, including the application of a risk of forfeiture to a plan providing for deferrals of current compensation (an additional or extended risk of forfeiture), will be disregarded unless the plan meets the requirements of paragraphs (e)(2)(ii) through (v) of this section.

    (ii) Benefit must be materially greater. A deferred amount will not be subject to a substantial risk of forfeiture for purposes of section 457 and this section after the date on which an employee could have received the amount, unless the present value of the amount made subject to the additional or extended substantial risk of forfeiture (disregarding the risk of forfeiture in determining the present value of the amount) is materially greater than the present value of the amount the employee otherwise would have received absent the initial or extended risk of forfeiture. For purposes of this paragraph (e)(2)(ii), present value is determined in accordance with the rules described in paragraph (c) of this section as of the applicable date for the amount the employee otherwise would have received absent the initial or extended risk of forfeiture. In addition, an amount is materially greater for purposes of this paragraph (e)(2)(ii) only if the present value of the amount subject to the additional or extended substantial risk of forfeiture is more than 125 percent of the present value of the amount that the employee would have received absent the additional or extended risk of forfeiture. For this purpose, compensation that the participant would receive for continuing to perform services, regardless of whether the deferred amount is subjected to an additional or extended substantial risk of forfeiture, is not taken into account.

    (iii) Minimum two years of substantial future services. The employee must be required to perform substantial services in the future, or refrain from competing pursuant to an agreement that meets the requirements of paragraph (e)(1)(iv) of this section, for a minimum of two years after the date that the employee could have received the compensation in the absence of the additional or extended substantial risk of forfeiture. For example, if an employee elects to defer a fixed percentage from each semi-monthly payroll, the two year minimum applies to each semi-monthly payroll amount that would otherwise have been paid. Notwithstanding the two year minimum, a plan may provide that that the substantial future service condition will lapse upon death, disability, or involuntary severance from employment without cause.

    (iv) Timing. The parties must agree in writing to any addition or extension of a substantial risk of forfeiture under this paragraph (e)(2). In the case of an initial addition of a substantial risk of forfeiture if none previously existed (for example, in the case of a deferral of current compensation), this written agreement must be entered into before the beginning of the calendar year in which any services that give rise to the compensation are performed, and, in the case of an extension of a substantial risk of forfeiture, the written agreement must be entered into at least 90 days before an existing substantial risk of forfeiture would have lapsed. If an employee with respect to whom compensation is made subject to an initial or extended substantial risk of forfeiture was not providing services to the employer at least 90 days before the addition or extension, the addition or extension may be agreed to in writing within 30 days after commencement of employment but only with respect to amounts attributable to services rendered after the addition or extension is agreed to in writing.

    (v) Substitutions. For purposes of paragraph (e)(2) of this section, if an amount is forfeited or relinquished and replaced, in whole or part, with a right to another amount (or benefit) that is a substitute for the amount that was forfeited or relinquished and that is subject to a risk of forfeiture, the risk of forfeiture will be disregarded unless the requirements of paragraphs (e)(2)(ii) through (iv) of this section are satisfied.

    (3) Examples. The provisions of this paragraph (e) are illustrated in the following examples:

    Example 1.

    (i) Facts. On January 15, 2017, an employee has a severance from employment with an eligible employer and enters into an agreement with the eligible employer under which the eligible employer agrees to pay the employee $250,000 on January 15, 2018, if the employee provides consulting services to the employer until that date. The consulting services required are insubstantial in relation to the payment. The employee provides the required consulting services for the employer through January 15, 2018.

    (ii) Conclusion. The consulting services provided by the former employee do not constitute substantial services because they are insubstantial in relation to the payment. Accordingly, the present value of $250,000 payable on January 15, 2018 is includible in the employee's gross income on January 15, 2017.

    Example 2.

    (i) Facts. On January 27, 2020, an eligible employer agrees to pay an employee an amount equal to $120,000 on January 1, 2023, provided that the employee continues to provide substantial services to the employer through that date. In 2021, the parties enter into a written agreement to extend the date through which substantial services must be performed to January 1, 2025, in which event, the employer will pay an amount that has a present value of $145,000 on January 1, 2023.

    (ii) Conclusion. As of the date the initial risk of forfeiture would have lapsed, the present value of the compensation subject to the extended substantial risk of forfeiture is not materially greater than the present value of the amount previously deferred under the plan ($145,000 is not more than 125% of $120,000) and, therefore, the intended extension of the substantial risk of forfeiture is disregarded under the provisions of paragraph (e)(2) of this section. Accordingly, the employee will recognize income, on the applicable date (January 1, 2023) in an amount equal to $120,000 (the amount that is not subject to a substantial risk of forfeiture on that date, disregarding the intended extension). With respect to the amount that is ultimately paid under the plan on January 1, 2025, the employee is treated as having investment in the contract of $120,000 (pursuant to paragraph (a)(5) of this section).

    Example 3.

    (i) Facts. On December 31, 2017, a participant enters into an agreement to defer $15,000 of the participant's current compensation that would otherwise be paid during 2018, with payment of the deferred amounts to be made on December 31, 2024, but only if the participant continues to provide substantial services until December 31, 2024. Under the terms of the agreement, the participant's periodic payments of current compensation are reduced, and a corresponding amount is credited (with a 30% employer match) to an account earning a reasonable rate of interest. The present value of the amount payable on December 31, 2024 is 130% of the present value of the amount deferred.

    (ii) Conclusion. The amounts deferred are subject to a substantial risk of forfeiture because the plan satisfies the requirements of paragraphs (e)(2)(ii) through (v) of this section.

    Example 4.

    (i) Facts. Employee A is a well-known college sports coach with a long history of success in a sports program at University X. University X reasonably expects that the loss of Employee A would be substantially detrimental to its sports program and would result in significant financial losses. Employee A has bona fide interest in continuing to work as a college sports coach and is highly marketable. On June 1, 2020, Employee A and University X enter into a written agreement under which Employee A agrees to provide substantial services to University X until June 1, 2023. The parties further agree that University X will pay $500,000 to Employee A on June 1, 2025 if Employee A has not performed services as a sports coach before that date for any other college or university with a sports program similar to that of University X. The agreement is enforceable under applicable law and University X would be reasonably expected to enforce it.

    (ii) Conclusion. The $500,000 payable under the agreement is subject to a substantial risk of forfeiture until June 1, 2025, and includible in Employee A's gross income on that date.

    Par. 12. Newly-designated § 1.457-13 is revised to read as follows:
    § 1.457-13 Applicability dates.

    (a) General applicability date. Except as otherwise provided in paragraph (b) of this section, §§ 1.457-1 through 1.457-12 apply to compensation deferred under a plan for calendar years beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, including deferred amounts to which the legally binding right arose during prior calendar years that were not previously included in income during one or more prior calendar years.

    (b) Special applicability dates—(1) Plans maintained pursuant to collective bargaining agreements. In the case of a plan maintained pursuant to one or more collective bargaining agreements that have been ratified and are in effect on the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, these regulations will not apply with respect to compensation deferred under the plan before the earlier of:

    (i) The date on which the last of the collective bargaining agreements terminates (determined without regard to any extension thereof after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register); or

    (ii) The first day of the third calendar year beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

    (2) Governmental plans. If legislation is required to amend a governmental plan, these regulations will not apply to compensation deferred under that plan in taxable years ending before the day following the end of the second legislative session of the legislative body with the authority to amend the plan that begins after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

    John Dalrymple, Deputy Commissioner for Services and Enforcement.
    [FR Doc. 2016-14329 Filed 6-21-16; 8:45 am] BILLING CODE 4830-01-P
    DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-123854-12] RIN 1545-BL25 Application of Section 409A to Nonqualified Deferred Compensation Plans AGENCY:

    Internal Revenue Service (IRS), Treasury.

    ACTION:

    Partial withdrawal of notice of proposed rulemaking; notice of proposed rulemaking.

    SUMMARY:

    This document contains proposed regulations that would clarify or modify certain specific provisions of the final regulations under section 409A (TD 9321, 72 FR 19234). This document also withdraws a specific provision of the notice of proposed rulemaking (REG-148326-05) published in the Federal Register on December 8, 2008 (73 FR 74380) regarding the calculation of amounts includible in income under section 409A(a)(1) and replaces that provision with revised proposed regulations. These proposed regulations would affect participants, beneficiaries, sponsors, and administrators of nonqualified deferred compensation plans.

    DATES:

    Comments and requests for a public hearing must be received by September 20, 2016.

    ADDRESSES:

    Send submissions to: CC:PA:LPD:PR (REG-123854-12), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday, between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-123854-12), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224 or sent electronically, via the Federal Rulemaking Portal at www.regulations.gov (IRS REG-123854-12).

    FOR FURTHER INFORMATION CONTACT:

    Concerning these proposed regulations under section 409A, Gregory Burns at (202) 927-9639, concerning submission of comments and/or requests for a hearing, Regina Johnson at (202) 317-6901 (not toll-free numbers).

    SUPPLEMENTARY INFORMATION:

    Background

    Section 885 of the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418) (AJCA '04) added section 409A to the Internal Revenue Code (Code). Section 409A(a)(1)(A) generally provides that, if certain requirements are not met at any time during a taxable year, amounts deferred under a nonqualified deferred compensation plan for that year and all previous taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.

    On April 17, 2007 (72 FR 19234), the Treasury Department and the IRS issued final regulations under section 409A (TD 9321), which include §§ 1.409A-1, 1.409A-2, 1.409A-3, and 1.409A-6 (the final regulations). The final regulations define certain terms used in section 409A and in the final regulations, set forth the requirements for deferral elections and for the time and form of payments under nonqualified deferred compensation plans, and address certain other issues under section 409A.

    On December 8, 2008 (73 FR 74380), the Treasury Department and the IRS issued additional proposed regulations under section 409A (REG-148326-05), which include proposed § 1.409A-4 (the proposed income inclusion regulations). The proposed income inclusion regulations provide guidance regarding the calculation of amounts includible in income under section 409A(a)(1) and the additional taxes imposed by section 409A with respect to service providers participating in certain nonqualified deferred compensation plans and other arrangements that do not comply with the requirements of section 409A(a).

    Explanation of Provisions I. Overview

    The Treasury Department and the IRS have concluded that certain clarifications and modifications to the final regulations and the proposed income inclusion regulations will help taxpayers comply with the requirements of section 409A. These proposed regulations address certain specific provisions of the final regulations and the proposed income inclusion regulations and are not intended to propose a general revision of, or broad changes to, the final regulations or the proposed income inclusion regulations. The narrow and specific purpose of these proposed regulations should be taken into account when submitting comments on these proposed regulations. As provided in the section of this preamble titled “Proposed Effective Dates,” taxpayers may rely upon these proposed regulations immediately.

    These proposed regulations:

    (1) Clarify that the rules under section 409A apply to nonqualified deferred compensation plans separately and in addition to the rules under section 457A.

    (2) Modify the short-term deferral rule to permit a delay in payments to avoid violating Federal securities laws or other applicable law.

    (3) Clarify that a stock right that does not otherwise provide for a deferral of compensation will not be treated as providing for a deferral of compensation solely because the amount payable under the stock right upon an involuntary separation from service for cause, or the occurrence of a condition within the service provider's control, is based on a measure that is less than fair market value.

    (4) Modify the definition of the term “eligible issuer of service recipient stock” to provide that it includes a corporation (or other entity) for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right.

    (5) Clarify that certain separation pay plans that do not provide for a deferral of compensation may apply to a service provider who had no compensation from the service recipient during the year preceding the year in which a separation from service occurs.

    (6) Provide that a plan under which a service provider has a right to payment or reimbursement of reasonable attorneys' fees and other expenses incurred to pursue a bona fide legal claim against the service recipient with respect to the service relationship does not provide for a deferral of compensation.

    (7) Modify the rules regarding recurring part-year compensation.

    (8) Clarify that a stock purchase treated as a deemed asset sale under section 338 is not a sale or other disposition of assets for purposes of determining whether a service provider has a separation from service.

    (9) Clarify that a service provider who ceases providing services as an employee and begins providing services as an independent contractor is treated as having a separation from service if, at the time of the change in employment status, the level of services reasonably anticipated to be provided after the change would result in a separation from service under the rules applicable to employees.

    (10) Provide a rule that is generally applicable to determine when a “payment” has been made for purposes of section 409A.

    (11) Modify the rules applicable to amounts payable following death.

    (12) Clarify that the rules for transaction-based compensation apply to stock rights that do not provide for a deferral of compensation and statutory stock options.

    (13) Provide that the addition of the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to a payment due to a service provider's death as a potentially earlier or intervening payment event will not violate the prohibition on the acceleration of payments.

    (14) Modify the conflict of interest exception to the prohibition on the acceleration of payments to permit the payment of all types of deferred compensation (and not only certain types of foreign earned income) to comply with bona fide foreign ethics or conflicts of interest laws.

    (15) Clarify the provision permitting payments upon the termination and liquidation of a plan in connection with bankruptcy.

    (16) Clarify other rules permitting payments in connection with the termination and liquidation of a plan.

    (17) Provide that a plan may accelerate the time of payment to comply with Federal debt collection laws.

    (18) Clarify and modify § 1.409A-4(a)(1)(ii)(B) of the proposed income inclusion regulations regarding the treatment of deferred amounts subject to a substantial risk of forfeiture for purposes of calculating the amount includible in income under section 409A(a)(1).

    (19) Clarify various provisions of the final regulations to recognize that a service provider can be an entity as well as an individual.

    II. Deferral of Compensation A. Section 457(f) and Section 457A Plans

    Section 457(f) generally provides that compensation deferred under a plan of an eligible employer (as that term is defined under section 457) is included in gross income in the first taxable year in which there is no substantial risk of forfeiture of the rights to the compensation. The final regulations provide that a deferred compensation plan subject to section 457(f) may be a nonqualified deferred compensation plan for purposes of section 409A and that the rules of section 409A apply to deferred compensation plans separately and in addition to any requirements applicable to such plans under section 457(f).

    Similarly, section 457A, which was enacted more than a year after publication of the final regulations, generally provides that any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity (as these terms are defined under section 457A) is includible in gross income when there is no substantial risk of forfeiture of the rights to the compensation. These proposed regulations clarify that a nonqualified deferred compensation plan under section 457A, like a deferred compensation plan under section 457(f), may be a nonqualified deferred compensation plan for purposes of section 409A and that the rules of section 409A apply to such a plan separately and in addition to any requirements applicable to the plan under section 457A.

    B. Short-Term Deferral Rule

    The final regulations provide that a deferral of compensation does not occur for purposes of section 409A under a plan with respect to any payment that is not a deferred payment 1 provided that the service provider actually or constructively receives the payment on or before the later of: (1) The 15th day of the third month following the end of the service provider's first taxable year in which the right to the payment is no longer subject to a substantial risk of forfeiture, or (2) the 15th day of the third month following the end of the service recipient's first taxable year in which the right to the payment is no longer subject to a substantial risk of forfeiture (the applicable 21/2 month period). A payment that meets these requirements of the short-term deferral rule (described more fully in § 1.409A-1(b)(4)) is referred to as a short-term deferral and is generally exempt from the requirements applicable to plans that provide for a deferral of compensation.

    1 Under § 1.409A-1(b)(4)(i)(D), a payment is a deferred payment if it is made pursuant to a provision of a plan that provides for the payment to be made or completed on or after any date, or upon the occurrence of any event, that will or may occur later than the end of the applicable 21/2 month period.

    The final regulations provide that a payment that otherwise qualifies as a short-term deferral, but is made after the applicable 21/2 month period, may continue to qualify as a short-term deferral if the payment is delayed for one of three reasons: (1) The taxpayer establishes that it was administratively impracticable for the service recipient to make the payment by the end of the applicable 21/2 month period; (2) making the payment by the end of the applicable 21/2 month period would have jeopardized the service recipient's ability to continue as a going concern; or (3) the service recipient reasonably anticipates that a deduction for the payment would not be permitted under section 162(m).

    Similar exceptions apply under the general time and form of payment rules of section 409A. Under § 1.409A-3(d), a payment is treated as made on the date specified under the plan if the payment is delayed due to administrative impracticability or because making the payment would jeopardize the ability of the service recipient to continue as a going concern. Under § 1.409A-2(b)(7), a payment may be delayed to a date after the payment date designated in a plan without failing to meet the requirements of section 409A(a) if the service recipient reasonably anticipates that a deduction for the payment would not be permitted under section 162(m) or if making the payment would violate Federal securities laws or other applicable law. Together, these rules generally permit payments under section 409A to be delayed due to administrative impracticability or because making the payment would jeopardize the ability of the service recipient to continue as a going concern, the payment would not be deductible under section 162(m), or making the payment would violate Federal securities laws or other applicable law.

    Some commenters have suggested that the exception for payments that would violate Federal securities laws or other applicable law should also apply to payments that are intended to be short-term deferrals. These commenters have noted that the policy reasons for excusing a timely payment when the payment would violate Federal securities laws or other applicable law apply equally to the general time and form of payment rules under section 409A and the short-term deferral rule. In response to these comments, the Treasury Department and the IRS have determined that it is appropriate to extend this exception to the short-term deferral rule. Accordingly, these proposed regulations provide that a payment that otherwise qualifies as a short-term deferral, but is made after the end of the applicable 21/2 month period, may still qualify as a short-term deferral if the service recipient reasonably anticipates that making the payment during the applicable 21/2 month period will violate Federal securities laws or other applicable law and the payment is made as soon as reasonably practicable following the first date on which the service recipient anticipates or reasonably should anticipate that making the payment would not cause a violation. For this purpose, making a payment that would cause inclusion in gross income or the application of any penalty provision or other provision of the Code is not treated as a violation of applicable law.

    C. Stock Rights 1. Service Recipient Stock

    The final regulations provide that certain stock options and stock appreciation rights (collectively, stock rights) granted with respect to service recipient stock do not provide for the deferral of compensation. The term “service recipient stock” means a class of stock that, as of the date of grant, is common stock for purposes of section 305 and the regulations thereunder of a corporation that is an eligible issuer of service recipient stock. For this purpose, service recipient stock does not include any stock that is subject to a mandatory repurchase obligation (other than a right of first refusal), or a permanent put or call right, if the stock price under such right or obligation is based on a measure other than the fair market value (disregarding lapse restrictions) of the equity interest in the corporation represented by the stock.

    Commenters have noted that employers often want to deter employees from engaging in behavior that could be detrimental to the employer and have customarily reduced the amount that an employee receives under a stock rights arrangement if the employee is dismissed for cause or violates a noncompetition or nondisclosure agreement. These commenters have observed that this type of reduction is generally prohibited under the definition of service recipient stock in the final regulations but have argued that neither the statutory language nor the underlying policies of section 409A should prohibit a reduction under these circumstances. The Treasury Department and the IRS agree with these conclusions. Accordingly, these proposed regulations provide that a stock price will not be treated as based on a measure other than fair market value if the amount payable upon a service provider's involuntary separation from service for cause, or the occurrence of a condition that is within the control of the service provider, such as the violation of a covenant not to compete or a covenant not to disclose certain information, is based on a measure that is less than fair market value.

    2. Eligible Issuer of Service Recipient Stock

    Under the final regulations, the term “eligible issuer of service recipient stock” means the corporation or other entity for which the service provider provides direct services on the date of grant of the stock right and certain affiliated corporations or entities. Some commenters have asserted that this definition of “eligible issuer of service recipient stock” hinders employment negotiations because it prevents service recipients from granting stock rights to service providers before they are employed by the service recipient. In response to these comments, these proposed regulations provide that, if it is reasonably anticipated that a person will begin providing services to a corporation or other entity within 12 months after the date of grant of a stock right, and the person actually begins providing services to the corporation or other entity within 12 months after the date of grant (or, if services do not begin within that period, the stock right is forfeited), the corporation or other entity will be an eligible issuer of service recipient stock.

    D. Separation Pay Plans

    Under the final regulations, separation pay plans that provide for payment only upon an involuntary separation from service or pursuant to a window program do not provide for a deferral of compensation to the extent that they meet certain requirements. One of these requirements is that the separation pay generally not exceed two times the lesser of (1) the service provider's annualized compensation based upon the annual rate of pay for the service provider's taxable year preceding the service provider's taxable year in which the separation from service occurs, or (2) the limit under section 401(a)(17) for the year in which the service provider separates from service.

    Some commenters have questioned whether this exception for separation pay plans is available for a service provider whose employment begins and ends during the same taxable year because the service provider was not employed by, and did not receive any compensation from, the service recipient for the taxable year preceding the taxable year in which the separation from service occurs. These proposed regulations clarify that the separation pay plan exception is available for service providers whose employment begins and ends in the same taxable year. In that circumstance, these proposed regulations provide that the service provider's annualized compensation for the taxable year in which the service provider separates from service may be used for purposes of this separation pay plan exception if the service provider had no compensation from the service recipient in the taxable year preceding the year in which the service provider separates from service.

    E. Employment-Related Legal Fees and Expenses

    Under the final regulations, an arrangement does not provide for a deferral of compensation to the extent that it provides for amounts to be paid as settlements or awards resolving bona fide legal claims based on wrongful termination, employment discrimination, the Fair Labor Standards Act, or workers' compensation statutes, including claims under applicable Federal, state, local, or foreign laws, or for reimbursements or payments of reasonable attorneys' fees or other reasonable expenses incurred by the service provider related to such bona fide legal claims.

    Commenters have requested guidance on the application of section 409A(a) to provisions commonly included in employment agreements that provide for the reimbursement of attorneys' fees in connection with employment-related disputes and have asserted that there is no reason to distinguish between arrangements that provide for payment of reasonable attorneys' fees and expenses for the types of legal claims currently specified in the final regulations and any other bona fide legal claim with respect to the service relationship between a service provider and a service recipient. In response to these comments, these proposed regulations provide that an arrangement does not provide for a deferral of compensation to the extent that it provides for the payment or reimbursement of a service provider's reasonable attorneys' fees and other expenses incurred to enforce a claim by the service provider against the service recipient with respect to the service relationship.

    F. Recurring Part-Year Compensation

    After publication of the final regulations, commenters have expressed concerns about the application of section 409A to recurring part-year compensation. The final regulations define recurring part-year compensation as compensation paid for services rendered in a position that the service recipient and service provider reasonably anticipate will continue on similar terms and conditions in subsequent years, and will require services to be provided during successive service periods each of which comprises less than 12 months and each of which begins in one taxable year of the service provider and ends in the next taxable year. For example, a teacher providing services during school years comprised of 10 consecutive months would have recurring part-year compensation. See § 1.409A-2(a)(14). In general, commenters have asserted that section 409A should not apply to this situation because the amount being deferred from one taxable year to a subsequent taxable year is typically only a small amount and because most service providers who receive recurring part-year compensation (typically teachers and other educational workers) view an election to annualize this compensation as a cash flow decision, rather than a tax-deferral opportunity.

    In response, the Treasury Department and the IRS issued Notice 2008-62 (2008-29 IRB 130), which provides that arrangements involving recurring part-year compensation do not provide for a deferral of compensation for purposes of section 409A or section 457(f) if: (1) The arrangement does not defer payment of any of the recurring part-year compensation beyond the last day of the 13th month following the beginning of the service period, and (2) the arrangement does not defer from one taxable year to the next taxable year the payment of more than the applicable dollar amount under section 402(g)(1)(B) in effect for the calendar year in which the service period begins ($18,000 for 2016). Notice 2008-62 also states that a conforming change is intended be made to the final regulations to reflect these rules.

    Commenters have expressed concerns that Notice 2008-62 would not adequately address some teaching positions, such as college and university faculty members. They have noted that, depending on several variables (such as the calendar month in which a service provider commences service or the length of the service period), the dollar limitation in the notice may result in adverse tax consequences to service providers with annual compensation as low as $80,000. Commenters have further observed that some of these arrangements are nonelective, and therefore some service providers cannot opt out of a recurring part-year compensation arrangement. In recognition that service recipients in the field of education frequently structure their pay plans to include recurring part-year compensation and that the main purpose of this design is to provide uninterrupted cash flow for service providers who do not work for a portion of the year, these proposed regulations modify the recurring part-year compensation rule. These proposed regulations provide that a plan or arrangement under which a service provider receives recurring part-year compensation that is earned over a period of service does not provide for the deferral of compensation if the plan does not defer payment of any of the recurring part-year compensation to a date beyond the last day of the 13th month following the first day of the service period for which the recurring part-year compensation is paid, and the amount of the service provider's recurring part-year compensation (not merely the amount deferred) does not exceed the annual compensation limit under section 401(a)(17) ($265,000 for 2016) for the calendar year in which the service period commences. A conforming change is being made for purposes of section 457(f) under proposed section 457(f) regulations (REG-147196-07) that are also published in the Proposed Rules section of this issue of the Federal Register.

    III. Separation From Service Definition A. Asset Purchase Transactions

    The final regulations permit the seller and an unrelated buyer in an asset purchase transaction to specify whether a person who is a service provider of the seller immediately before the transaction is treated as separating from service if the service provider provides services to the buyer after and as a result of the transaction. Commenters have asked whether this rule may be used with respect to a transaction that is treated as a deemed asset sale under section 338.

    The provision of the final regulations giving buyers and sellers in asset transactions the discretion to treat employees as separating from service is based on the recognition that, while employees formally terminate employment with the seller and immediately recommence employment with the buyer in a typical asset transaction, the employees often experience no change in the type or level of services they provide. In a deemed asset sale under section 338, however, employees do not experience a termination of employment, formal or otherwise. Accordingly, the Treasury Department and the IRS have determined that it would be inconsistent with section 409A to permit the parties to a deemed asset sale to treat service providers as having separated from service upon the occurrence of the transaction. These proposed regulations affirm and make explicit that a stock purchase transaction that is treated as a deemed asset sale under section 338 is not a sale or other disposition of assets for purposes of this rule under section 409A.

    B. Dual Status as Employee and Independent Contractor and Changes in Status From Employee to Independent Contractor (or Vice Versa)

    The final regulations provide that an employee separates from service with an employer if the employee dies, retires, or otherwise has a termination of employment with the employer. Under the final regulations, a termination of employment generally occurs if the facts and circumstances indicate that the employer and employee reasonably anticipate that no further services would be performed after a certain date or that the level of bona fide services the employee would perform after that date (whether as an employee or as an independent contractor) would permanently decrease to no more than 20 percent of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or if the employee has been providing services to the employer for less than 36 months, the full period of services). The final regulations provide that an independent contractor separates from service with a service recipient upon the expiration of the contract (or, if applicable, all contracts) under which services are performed for the service recipient if the expiration is a good-faith and complete termination of the contractual relationship.

    The final regulations also provide that if a service provider provides services both as an employee and an independent contractor of a service recipient, the service provider must separate from service both as an employee and as an independent contractor to be treated as having separated from service. The final regulations further provide that “[i]f a service provider ceases providing services as an independent contractor and begins providing services as an employee, or ceases providing services as an employee and begins providing services as an independent contractor, the service provider will not be considered to have a separation from service until the service provider has ceased providing services in both capacities.”

    Some commenters have observed that the quoted sentence could be read to provide that a service provider who performs services for a service recipient as an employee, but who becomes an independent contractor for the same service recipient and whose anticipated level of services upon becoming an independent contractor are 20 percent or less than the average level of services performed during the immediately preceding 36-month period, would not have a separation from service because a complete termination of the contractual relationship with the service recipient has not occurred and, therefore, there is no separation from service as an independent contractor. Such a reading, however, would be inconsistent with the more specific rule that a service provider who is an employee separates from service if the employer and employee reasonably anticipate that the level of services to be performed after a certain date (whether as an employee or as an independent contractor) would permanently decrease to no more than 20 percent of the average level of services performed (whether as an employee or an independent contractor) over the immediately preceding 36-month period. To avoid potential confusion, these proposed regulations delete the quoted sentence from the regulations.

    However, if a service provider, who performs services for a service recipient as an employee, becomes an independent contractor for the same service recipient but does not have a separation from service when he or she becomes an independent contractor (because at that time it is not reasonably anticipated that the level of services that would be provided by the service provider in the future would decrease to no more than 20 percent of the average level of services performed over the immediately preceding 36-month period), the service provider will have a separation from service in the future when the service provider has a separation from service based on the rules that apply to independent contractors.

    IV. References to a Payment Being Made

    As discussed in section II.B of this preamble entitled “Short-term Deferral Rule,” the final regulations provide that a deferral of compensation does not occur under a plan if the service provider actually or constructively receives a payment that is not a deferred payment on or before the last day of the applicable 21/2 month period. The final regulations further provide that, for this purpose, a payment is treated as actually or constructively received if the payment is includible in income, including if the payment is includible under the economic benefit doctrine, section 83, section 402(b), or section 457(f). Further, § 1.409A-2(b)(2) of the final regulations provides that, for purposes of subsequent changes in the time or form of payment, the term “payment” generally refers to each separately identified amount to which a service provider is entitled to payment under a plan on a determinable date. This section of the final regulations provides that a payment includes the provision of any taxable benefit, including cash or property. It also provides that a payment includes, but is not limited to, the transfer, cancellation, or reduction of an amount of deferred compensation in exchange for benefits under a welfare plan, a fringe benefit excludible from income, or any other benefit excludible from income. The final regulations, however, do not include a rule that is generally applicable for all purposes under section 409A to determine when a payment is made.

    These proposed regulations add a generally applicable rule to determine when a payment has been made for all provisions of the regulations under section 409A. Under these proposed regulations, a payment is made, or the payment of an amount occurs, when any taxable benefit is actually or constructively received. Consistent with the final regulations, these proposed regulations provide that a payment includes a transfer of cash, any event that results in the inclusion of an amount in income under the economic benefit doctrine, a transfer of property includible in income under section 83, a contribution to a trust described in section 402(b) at the time includible in income under section 402(b), and the transfer or creation of a beneficial interest in a section 402(b) trust at the time includible in income under section 402(b). In addition, a payment is made upon the transfer, cancellation, or reduction of an amount of deferred compensation in exchange for benefits under a welfare plan, a non-taxable fringe benefit, or any other nontaxable benefit.

    The final regulations generally provide that the inclusion of an amount in income under section 457(f)(1)(A) is treated as a payment under section 409A for purposes of the short-term deferral rule under § 1.409A-1(b)(4), but is generally not treated as a payment for other purposes under section 409A. Commenters, however, have observed that this treatment of income inclusion under section 457(f)(1)(A) is inconsistent with the rules under section 409A that generally treat the inclusion of any amount in income as a payment for all purposes under section 409A. These commenters have also noted that a primary purpose of section 409A is to limit the ability of a service provider or service recipient to change the time at which deferred compensation is included in income after the time of payment is established and that the failure to treat income inclusion under section 457(f)(1)(A) as a payment would be inconsistent with this purpose. In response to these observations, these proposed regulations provide that the inclusion of an amount in income under section 457(f)(1)(A) is treated a payment for all purposes under section 409A.

    Under this rule, if the plan provides for a deferral of compensation under section 409A: (1) Plan terms that specify the conditions to which the payment is subject and thus when a substantial risk of forfeiture lapses for purposes of section 457(f)(1)(A) (and, consequently, determine when an amount is includible in income) would be treated as plan terms providing for the payment of the amount includible in income, and (2) all rules under section 409A applicable to the payment of an amount would apply to the inclusion of an amount under section 457(f)(1)(A). A plan would not be a deferred compensation plan within the meaning of section 409A to the extent that the amounts payable under the plan are short-term deferrals under § 1.409A-1(b)(4). However, in certain limited circumstances, amounts includible in income under section 457(f)(1)(A) may not be short-term deferrals under § 1.409A-1(b)(4). For example, under the proposed section 457(f) regulations (REG-147196-07), which are also published in the Proposed Rules section of this issue of the Federal Register, in certain circumstances conditioning a payment upon compliance with a noncompetition agreement will result in the payment being subject to a substantial risk of forfeiture for purposes of section 457(f)(1)(A), but that payment would not be treated as subject to a substantial risk of forfeiture for purposes of section 409A. In such cases, the amount payable at the end of the term of the noncompetition agreement upon compliance with the noncompete will be includible in income under section 457(f)(1)(A) only at the end of the term of the agreement under the section 457(f) regulations as proposed, but for purposes of section 409A will be deferred compensation (and not a short-term deferral), the payment of which is subject to the rules of section 409A.2 See proposed § 1.457-12(e) (REG-147196-07); see also proposed § 1.457-12(a)(4) (REG-147196-07).

    2 There may also be instances in which a portion of an amount payable under an arrangement that is subject to section 457(f) is a short-term deferral for purposes of both section 409A and section 457(f)(1)(A), while another portion of the amount is a deferral of compensation for purposes of section 409A. For example, assume an arrangement subject to section 457(f) provides for payment of a specified dollar amount plus earnings upon separation from service, with vesting to occur when the service provider has completed three years of service. The specified dollar amount plus earnings to date is includible in income under section 457(f)(1)(A) when the service provider completes three years of service, and that amount will be a short-term deferral under section 409A if the service provider includes it in income at that time. The service provider's right to receive a payment of additional earnings accruing after the vesting date is a deferred compensation plan under section 409A.

    The Treasury Department and the IRS request comments on whether rules similar to those applicable to amounts included in income under section 457(f) should be adopted for amounts included in income under section 457A.

    These proposed regulations also clarify that a transfer of property that is substantially nonvested (as defined under § 1.83-3(b)) to satisfy an obligation under a nonqualified deferred compensation plan is not a payment for purposes of section 409A unless the recipient makes an election under section 83(b) to include in income the fair market value of the property (disregarding lapse restrictions), less any amount paid for the property. These proposed regulations also make conforming clarifications to rules under § 1.409A-1(a)(4) regarding nonqualified deferred compensation plans subject to sections 457(f) and 457A, § 1.409A-1(b)(4) regarding the short-term deferral rule, and § 1.409A-2(b)(2) regarding the separate payment rule.

    V. Permissible Payments A. Death

    The final regulations provide that an amount deferred under a nonqualified deferred compensation plan may be paid only at a specified time or upon an event set forth under the regulations. One of the permissible events upon which an amount may be paid is the service provider's death. The final regulations also provide that a payment is treated as made upon a date specified under the plan (including at the time a specified event occurs) if the payment is made on that date or on a later date within the same taxable year of the service provider or, if later, by the 15th day of the third calendar month following the date specified under the plan, provided that the service provider is not permitted, directly or indirectly, to designate the taxable year of the payment.

    Some commenters have questioned whether these and other rules in the final regulations applicable to amounts payable upon the death of a service provider also apply in the case of the death of a beneficiary who has become entitled to the payment of an amount due to a service provider's death. These proposed regulations clarify that the rules applicable to amounts payable upon the death of a service provider also apply to amounts payable upon the death of a beneficiary.

    Also, some commenters have indicated that the time periods for the payment of amounts following death often are not long enough to resolve certain issues related to the death (for example, confirming the death and completing probate). In view of the practical issues that often arise following a death, these proposed regulations provide that an amount payable following the death of a service provider, or following the death of a beneficiary who has become entitled to payment due to the service provider's death, that is to be paid at any time during the period beginning on the date of death and ending on December 31 of the first calendar year following the calendar year during which the death occurs is treated as timely paid if it is paid at any time during this period. A plan is not required to specify any particular date within this period as the payment date and may rely on this rule if the plan provides that an amount will be paid at some time during this period, including if the plan provides that payment will be made upon death without defining the period for payment following death in any other manner, and including if the plan provides that payment will be made on a date within this period determined in the discretion of the beneficiary. These proposed regulations further provide that a plan providing for the payment of an amount at any time during this specified period may be amended to provide for the payment of that amount (or the payment of that amount may be made without amending the plan) at any other time during this period (including a time determined in the discretion of a beneficiary) without failing to meet the requirements of the deferral election provisions of § 1.409A-2 or the permissible payment provisions of § 1.409A-3, including the prohibition on the acceleration of payments under § 1.409A-3(j). For example, a plan that provides for a payment to be made during the first calendar year beginning after the death of a service provider may be amended to provide for the payment of the amount (or the payment may be made under the plan without such amendment) at any time during the period beginning on the date of death and ending on December 31 of the first calendar year following the calendar year during which the death occurs. For additional rules concerning payments due upon a beneficiary's death, see section VI.A of this preamble.

    B. Certain Transaction-Based Compensation

    The final regulations provide special rules for payments of transaction-based compensation. Transaction-based compensation payments are payments related to certain types of changes in control that (1) occur because a service recipient purchases its stock held by a service provider or because the service recipient or a third party purchases a stock right held by a service provider, or (2) are calculated by reference to the value of service recipient stock. Under the final regulations, transaction-based compensation may be treated as paid at a designated date or pursuant to a payment schedule that complies with the requirements of section 409A(a) if it is paid on the same schedule and under the same terms and conditions as apply to payments to shareholders generally with respect to stock of the service recipient pursuant to the change in control. Likewise, transaction-based compensation meeting these requirements will not fail to meet the requirements of the initial or subsequent deferral election rules under section 409A if it is paid not later than five years after the change in control event. These proposed regulations clarify that the special payment rules for transaction-based compensation apply to a statutory stock option or a stock right that did not otherwise provide for deferred compensation before the purchase or agreement to purchase the stock right. Accordingly, the purchase (or agreement to purchase) such a statutory stock option or stock right in a manner consistent with these rules does not result in the statutory stock option or stock right being treated as having provided for the deferral of compensation from the original grant date.

    VI. Prohibition on Acceleration of Payments A. Payments to Beneficiaries Upon Death, Disability, or Unforeseeable Emergency

    Under the final regulations, a prohibited acceleration of a payment does not result from the addition of death, disability, or unforeseeable emergency as a potentially earlier alternative payment event for an amount previously deferred. However, under the final regulations, this exception applies only with respect to a service provider's death, disability, or unforeseeable emergency and does not apply with respect to the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to a payment due to the service provider's death. These proposed regulations provide that this exception also applies to the payment of deferred amounts upon the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to payment due to a service provider's death. These proposed regulations also clarify that a schedule of payments (including payments treated as a single payment) that has already commenced prior to a service provider's or a beneficiary's death, disability, or unforeseeable emergency may be accelerated upon the death, disability, or unforeseeable emergency.

    B. Compliance With Bona Fide Foreign Ethics Laws or Conflicts of Interest Laws

    Under the final regulations, a plan may provide for acceleration of the time or schedule of a payment, or a payment may be made under a plan, to the extent reasonably necessary to avoid the violation of a Federal, state, local, or foreign ethics or conflicts of interest law. However, with respect to a foreign ethics or conflicts of interest law, this exception applies only to foreign earned income from sources within the foreign country that promulgated the law. Commenters have suggested that this provision should not be limited to foreign earned income because the requirements of foreign ethics or conflicts of interest laws may affect both the payment of foreign and United States earned income. These proposed regulations expand the scope of this provision to permit the acceleration of any nonqualified deferred compensation if the acceleration is reasonably necessary to comply with a bona fide foreign ethics or conflicts of interest law.

    C. Plan Terminations and Liquidations

    Under the final regulations, a plan may provide for the acceleration of a payment made pursuant to the termination and liquidation of a plan under certain circumstances. Specifically, a plan may provide for the acceleration of a payment if the plan is terminated and liquidated within 12 months of a corporate dissolution taxed under section 331, or with the approval of a bankruptcy court pursuant to 11 U.S.C. 503(b)(1)(A) if certain other conditions are satisfied. The citation to 11 U.S.C. 503(b)(1)(A) is erroneous. These proposed regulations correct this provision by retaining the operative rule but deleting the section reference.

    The final regulations also provide that a payment may be accelerated pursuant to a change in control event as described under § 1.409A-3(j)(4)(ix)(B) or in other circumstances provided certain requirements are satisfied, as described under § 1.409A-3(j)(4)(ix)(C). To terminate a plan pursuant to § 1.409A-3(j)(4)(ix)(C), the final regulations provide that the service recipient must terminate and liquidate all plans sponsored by the service recipient that would be aggregated with the terminated plan under the plan aggregation rules under § 1.409A-1(c) of the final regulations if the same service provider had deferrals of compensation under all such plans. The final regulations also provide that for three years following the date on which the service recipient took all necessary action to irrevocably terminate and liquidate the plan the service recipient cannot adopt a new plan that would be aggregated with the terminated and liquidated plan if the same service provider participated in both plans. Some commenters have asked whether these rules mean that only the plans of a particular category in which a particular service provider actually participates must be terminated if a plan in which that service provider participates is terminated.

    The plan aggregation rules under § 1.409A-1(c)(2) of the final regulations identify nine different types of nonqualified deferred compensation plans—account balance plans providing for elective deferrals, account balance plans that do not provide for elective deferrals, nonaccount balance plans, separation pay plans, plans providing for in-kind benefits or reimbursements, split-dollar plans, foreign earned income plans, stock right plans, and plans that are not any of the foregoing. All plans of the same type in which the same service provider participates are treated as a single plan. The rule set forth under § 1.409A-3(j)(4)(ix)(C) that requires the termination and liquidation of all plans sponsored by the service recipient that would be aggregated with the terminated plan “if the same service provider had deferrals of compensation” under all of those plans is intended to require the termination of all plans in the same plan category sponsored by the service recipient. The reference to the “same service provider” having deferrals of compensation under all of those plans refers to participation of a hypothetical service provider in all such plans, which would be required to aggregate all of the plans under the section 409A plan aggregation rules.

    The Treasury Department and the IRS have concluded that the meaning of the plan termination rule under § 1.409A-3(j)(4)(ix)(C) is not ambiguous. However, to address the questions raised by commenters, these proposed regulations further clarify that the acceleration of a payment pursuant to this rule is permitted only if the service recipient terminates and liquidates all plans of the same category that the service recipient sponsors, and not merely all plans of the same category in which a particular service provider actually participates. These proposed regulations also clarify that under this rule, for a period of three years following the termination and liquidation of a plan, the service recipient cannot adopt a new plan of the same category as the terminated and liquidated plan, regardless of which service providers participate in the plan.

    D. Offset Provisions

    The final regulations provide that the payment of an amount as a substitute for a payment of deferred compensation is generally treated as a payment of the deferred compensation. They also provide that when the payment of an amount results in an actual or potential reduction of, or current or future offset to, an amount of deferred compensation, the payment is a substitute for the deferred compensation. Further, the final regulations provide that if a service provider's right to deferred compensation is made subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the service provider's creditors, the deferred compensation is treated as having been paid. Under certain circumstances, these provisions may result in an amount being paid (or treated as paid) before the payment date or event specified in the plan in violation of the prohibition on the acceleration of payments under section 409A. The final regulations, however, include a de minimis exception to these rules pursuant to which a plan may provide for the acceleration of the time or schedule of a payment, or a payment may be made under a plan, in satisfaction of a debt of the service provider if the debt is incurred in the ordinary course of the service relationship, the entire offset in any taxable year does not exceed $5,000, and the offset is taken at the same time and in the same amount as the debt otherwise would have been due from the service provider.

    Stakeholders have observed that the prohibition on offsets may conflict with certain laws regarding debt collection by the Federal government (for example, 31 U.S.C. 3711, et. seq.), and that the exception for small debts is insufficient to permit the enforcement of these laws. Because these laws would effectively prevent certain government entities from providing nonqualified deferred compensation in a manner that complies with the requirements of section 409A(a) and because of the limited applicability of Federal debt collection laws, the Treasury Department and the IRS have determined that it is appropriate to expand the current exception to the prohibition on accelerated payments for certain offsets to permit a plan to provide for the acceleration of the time or schedule of a payment, or to make a payment, to the extent reasonably necessary to comply with Federal laws regarding debt collection.

    VII. Amount Includible in Income Under Section 409A

    The proposed income inclusion regulations provide that the amount includible in income for a taxable year if a nonqualified deferred compensation plan fails to meet the requirements of section 409A(a) at any time during that taxable year equals the excess of (1) the total amount deferred under the plan for that taxable year, including any payments under the plan during that taxable year, over (2) the portion of that amount, if any, that is either subject to a substantial risk of forfeiture or has been previously included in income. The proposed income inclusion regulations, however, include an anti-abuse provision under § 1.409A-4(a)(1)(ii)(B), which provides that an amount otherwise subject to a substantial risk of forfeiture for purposes of determining the amount includible in income under a plan will be treated as not subject to a substantial risk of forfeiture for these purposes if the facts and circumstances indicate that a service recipient has a pattern or practice of permitting impermissible changes in the time or form of payment with respect to nonvested deferred amounts under one or more nonqualified deferred compensation plans and either (i) an impermissible change in the time or form of payment applies to the amount or (ii) the facts and circumstances indicate that the amount would be affected by the pattern or practice.

    Although these rules permit the correction of certain plan provisions that fail to comply with the requirements of section 409A(a) while amounts are nonvested without including the amounts in income or incurring an additional tax, they were not intended to allow service recipients to change time or form of payment provisions that otherwise meet the requirements of section 409A(a) in a manner that fails to comply with section 409A(a), and they were not intended to permit service recipients to create errors in nonqualified deferred compensation plans with respect to nonvested amounts with the intention of using those errors as a pretext for establishing or changing a time or form of payment in a manner that fails to comply with section 409A(a). Accordingly, these proposed regulations clarify and modify the anti-abuse rule under § 1.409A-4(a)(1)(ii)(B) of the proposed income inclusion regulations to preclude changes of this nature.

    First, these proposed regulations clarify that a deferred amount that is otherwise subject to a substantial risk of forfeiture is treated as not subject to a substantial risk of forfeiture for a service provider's taxable year during which there is a change in a plan provision (including an initial deferral election provision) that is not otherwise permitted under section 409A and the final regulations and that affects the time or form of payment of the amount if there is no reasonable, good faith basis for concluding that the original provision failed to meet the requirements of section 409A(a) and that the change is necessary to bring the plan into compliance with the requirements of section 409A(a).

    Second, these proposed regulations provide examples of the types of facts and circumstances that indicate whether a service recipient has a pattern or practice of permitting impermissible changes in the time or form of payment with respect to nonvested deferred amounts under one or more plans. If the service recipient has such a pattern or practice that would affect a nonvested deferred amount, that amount is treated as not subject to a substantial risk of forfeiture. The facts and circumstances include: Whether a service recipient has taken commercially reasonable measures to identify and correct substantially similar failures promptly upon discovery; whether substantially similar failures have occurred with respect to nonvested deferred amounts to a greater extent than with respect to vested deferred amounts; whether substantially similar failures occur more frequently with respect to newly adopted plans; and whether substantially similar failures appear intentional, are numerous, or repeat common past failures that have since been corrected.

    Third, these proposed regulations provide that, to the extent generally applicable guidance regarding the correction of section 409A failures prescribes a particular correction method (or methods) for a type of plan failure, that correction method (or one of the permissible correction methods) must be used if a service recipient chooses to correct that type of a failure with respect to a nonvested deferred amount. In addition, these proposed regulations provide that substantially similar failures affecting nonvested deferred amounts must be corrected in substantially the same manner.

    A service recipient correcting a plan failure affecting a nonvested deferred amount is not required, solely with respect to the nonvested deferred amount, to comply with any requirement under generally applicable guidance regarding the correction of section 409A failures that is unrelated to the method for correcting the failure, such as general eligibility requirements, income inclusion, additional taxes, premium interest, or information reporting by the service recipient or service provider. Accordingly, a service recipient may amend a noncompliant plan term in a manner permitted under applicable correction guidance even though the failure may not have been eligible for correction under that guidance (for example, due to applicable timing requirements). In addition, the portion of the nonvested deferred amount that is affected by the correction is not subject to income inclusion, additional taxes, or applicable premium interest under section 409A(a)(1), and neither the service recipient nor the service provider is required to notify the IRS of the correction. For a description of the currently available corrections methods, see Notice 2008-113 (2008-51 IRB 1305), Notice 2010-6 (2010-3 IRB 275), and Notice 2010-80 (2010-51 IRB 853).

    VIII. Individual and Entity Service Providers

    Under the final regulations, the term service provider includes an individual, corporation, subchapter S corporation, partnership, personal service corporation, noncorporate entity that would be a personal service corporation if it were a corporation, qualified personal service corporation, and noncorporate entity that would be a qualified personal service corporation if it were a corporation. These proposed regulations clarify §§ 1.409A-1(b)(5)(vi)(A), 1.409A-1(b)(5)(vi)(E), 1.409A-1(b)(5)(vi)(F), and 1.409A-3(i)(5)(iii) of the final regulations to reflect that a service provider can be an entity as well as an individual. These proposed regulations also clarify § 1.409A-1(b)(3) of the final regulations to correct an erroneous reference to “service provider” that should be “service recipient.”

    Proposed Effective Dates General Applicability Date for Amendments to Final Regulations

    The provisions of these proposed regulations amending the final regulations are proposed to be applicable on or after the date on which they are published as final regulations in the Federal Register. For periods before this date, the existing final regulations and other applicable guidance apply (without regard to these proposed regulations). The applicability date for the existing final regulations in § 1.409A-6(b) is accordingly amended to reflect extension of certain transition relief through 2008 under Notice 2007-86, 2007-46 IRB 990. Taxpayers may, however, rely on these proposed regulations before they are published as final regulations, and until final regulations are published the IRS will not assert positions that are contrary to the positions set forth in these proposed regulations.

    Certain provisions of these proposed amendments to the final regulations are not intended as substantive changes to the current requirements under section 409A. Accordingly, the Treasury Department and the IRS have concluded that the following positions may not properly be taken under the existing final regulations: (1) That the transfer of restricted stock for which no section 83(b) election is made or the transfer of a stock option that does not have a readily ascertainable fair market value would result in a payment under a plan; (2) that a contribution to a section 402(b) trust includible in income under section 402(b) to fund an obligation under a plan would not result in a payment under a plan; (3) that a stock purchase treated as a deemed asset sale under section 338 is a sale or other disposition of assets for purposes of determining when a service provider separates from service as a result of an asset purchase transaction; or (4) that the exception to the prohibition on acceleration of a payment upon a termination and liquidation of a plan pursuant to § 1.409A-3(j)(4)(ix)(C) applies if the service recipient terminates and liquidates only the plans of the same category in which a particular service provider participates, rather than all plans of the same category that the service recipient sponsors.

    General Applicability Date for Amendments to Proposed Income Inclusion Regulations

    The proposed income inclusion regulations are proposed to be applicable on or after the date on which they are published as final regulations in the Federal Register. Notice 2008-115 provides that, until the Treasury Department and the IRS issue further guidance, compliance with the provisions of the proposed income inclusion regulations with respect to the calculation of the amount includible in income under section 409A(a)(1) and the calculation of the additional taxes under section 409A(a)(1) will be treated as compliance with the requirements of section 409A(a), provided that the taxpayer complies with all of the provisions of the proposed regulations. Until the Treasury Department and the IRS issue further guidance, taxpayers may rely on the proposed income inclusion regulations, as modified by the amendment of § 1.409A-4(a)(1)(ii)(B) in these proposed regulations, for purposes of calculating the amount includible in income under section 409A(a)(1) (including the identification and treatment of deferred amounts subject to a substantial risk of forfeiture) and the calculation of the additional taxes under section 409A(a)(1), and the IRS will not assert positions with respect to periods before the date final regulations are published in the Federal Register that are contrary to the positions set forth in the proposed income inclusion regulations as amended by these proposed regulations.

    Special Applicability Dates for Amendments to Recurring Part-Year Compensation Rules

    The rules set forth in these proposed regulations regarding recurring part-year compensation are proposed to be applicable on and after the date on which these proposed regulations are published as final regulations in the Federal Register. However, taxpayers may rely on either the rules in these proposed regulations or the rules in Notice 2008-62 relating to recurring part-year compensation for the taxable year in which these proposed regulations are published as final regulations and all prior taxable years.

    Effect on Other Documents

    These proposed regulations do not affect the applicability of other guidance issued with respect to section 409A, including Notice 2008-115, except that, for the permitted reliance on the proposed income inclusion regulations, these proposed regulations withdraw § 1.409A-4(a)(1)(ii)(B) of the proposed income inclusion regulations and replace it with a new § 1.409A-4(a)(1)(ii)(B).

    Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov. (See § 601.601(d)(2)(ii)(b) of this chapter.)

    Special Analyses

    Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact 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 proposed regulations. It is hereby certified that the collection of information in these proposed regulations would not have a significant impact on a substantial number of small entities. This certification is based on the fact that these proposed regulations only provide guidance on how to satisfy existing collection of information requirements. Accordingly, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, these proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

    Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the rules proposed by these proposed regulations. All comments will be available at www.regulations.gov or upon request. A public hearing may be scheduled if requested by any person who timely submits 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 Gregory Burns, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the Treasury Department and the IRS participated in their development.

    List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

    Partial Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, § 1.409A-4(a)(1)(ii)(B) of the notice of proposed rulemaking (REG-148326-05) that was published in the Federal Register on December 8, 2008 (73 FR 74380) is withdrawn.

    Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 is proposed to be amended as follows:

    PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority:

    26 U.S.C. 7805 * * *

    Par. 2. Section 1.409A-0 is amended by: 1. Revising the entry for § 1.409A-1 by adding paragraph (b)(13). 2. Redesignating paragraph (q) as paragraph (r), and revising paragraph (q) in § 1.409A-1. 3. Revising the entry to paragraph (d) in § 1.409A-3. 4. Revising the entry to (j)(4)(xiii) in § 1.409A-3.

    The revisions and addition read as follows:

    § 1.409A-0 Table of contents.
    § 1.409A-1 Definitions and covered plans.

    (b) * * *

    (13) Recurring part-year compensation.

    (q) References to a payment being made.

    (r) Application of definitions and rules.

    § 1.409A-3 Permissible Payments.

    (d) * * *

    (1) In general.

    (2) Payments due following death.

    (j) * * *

    (4) * * *

    (xiii) Certain offsets.

    (A) De minimis offset.

    (B) Compliance with Federal debt collection laws.

    Par. 3. Section 1.409A-1 is amended by: 1. Revising paragraph (a)(4). 2. Revising the first sentence of paragraph (b)(1). 3. Revising paragraphs (b)(3) and (b)(4)(i)(B). 4. Revising paragraph (b)(4)(ii). 5. Adding a last sentence to paragraph (b)(5)(iii)(A). 6. Revising paragraph (b)(5)(iii)(E)(1). 7. Revising the first sentence of paragraph (b)(5)(vi)(A). 8. Revising paragraphs (b)(5)(vi)(E) and (b)(5)(vi)(F). 9. Revising paragraph (b)(9)(iii)(A). 10. Adding a last sentence to paragraph (b)(11). 11. Adding paragraph (b)(13). 12. Revising paragraphs (h)(4) and (h)(5). 13. Redesignating paragraph (q) as paragraph (r) and revising paragraphs (q) and (r).

    The revisions and additions read as follows:

    § 1.409A-1 Definitions and covered plans.

    (a) * * *

    (4) Section 457(f) and section 457A plans. A deferred compensation plan under section 457(f) or a nonqualified deferred compensation plan under section 457A may be a nonqualified deferred compensation plan for purposes of this paragraph (a). The rules of section 409A apply to nonqualified deferred compensation plans separately and in addition to any requirements applicable to such plans under section 457(f) or section 457A. In addition, nonelective deferred compensation of non-employees described in section 457(e)(12) and a grandfathered plan or arrangement described in § 1.457-2(k)(4) may be a nonqualified deferred compensation plan for purposes of this paragraph (a). The term nonqualified deferred compensation plan does not include a length of service award to a bona fide volunteer under section 457(e)(11)(A)(ii).

    (b) * * *

    (1) * * Except as otherwise provided in paragraphs (b)(3) through (b)(13) of this section, a plan provides for the deferral of compensation if, under the terms of the plan and the relevant facts and circumstances, the service provider has a legally binding right during a taxable year to compensation that, pursuant to the terms of the plan, is or may be payable to (or on behalf of) the service provider in a later taxable year. * * *

    (3) Compensation payable pursuant to the service recipient's customary payment timing arrangement. A deferral of compensation does not occur solely because compensation is paid after the last day of the service provider's taxable year pursuant to the timing arrangement under which the service recipient normally compensates service providers for services performed during a payroll period described in section 3401(b), or with respect to a non-employee service provider, a period not longer than the payroll period described in section 3401(b) or if no such payroll period exists, a period not longer than the earlier of the normal timing arrangement under which the service recipient normally compensates non-employee service providers or 30 days after the end of the service provider's taxable year.

    (4) * * *

    (i) * * *

    (B) A payment is treated as actually or constructively received for purposes of this paragraph (b)(4) if it is made in accordance with the rules in § 1.409A-1(q).

    (ii) Certain delayed payments. A payment that otherwise qualifies as a short-term deferral under paragraph (b)(4)(i) of this section but is made after the applicable 21/2 month period may continue to qualify as a short-term deferral if the taxpayer establishes that it was administratively impracticable for the service recipient to make the payment by the end of the applicable 21/2 month period and, as of the date upon which the legally binding right to the compensation arose, such impracticability was unforeseeable, or the taxpayer establishes that making the payment by the end of the applicable 21/2 month period would have jeopardized the ability of the service recipient to continue as a going concern, and provided further that the payment is made as soon as administratively practicable or as soon as the payment would no longer have such effect. For purposes of this paragraph (b)(4)(ii), an action or failure to act of the service provider or a person under the service provider's control, such as a failure to provide necessary information or documentation, is not an unforeseeable event. In addition, a payment that otherwise qualifies as a short-term deferral under paragraph (b)(4)(i) of this section but is made after the applicable 21/2 month period may continue to qualify as a short-term deferral if the taxpayer establishes that the service recipient reasonably anticipated that the service recipient's deduction with respect to such payment otherwise would not be permitted by application of section 162(m), and, as of the date the legally binding right to the payment arose, a reasonable person would not have anticipated the application of section 162(m) at the time of the payment, and provided further that the payment is made as soon as reasonably practicable following the first date on which the service recipient anticipates or reasonably should anticipate that, if the payment were made on such date, the service recipient's deduction with respect to such payment would no longer be restricted due to the application of section 162(m). Further, a payment that otherwise qualifies as a short-term deferral under paragraph (b)(4)(i) of this section but is made after the applicable 21/2 month period may continue to qualify as a short-term deferral if the taxpayer establishes that the service recipient reasonably anticipated that making the payment by the end of the applicable 21/2 month period would have violated Federal securities laws or other applicable law, provided that the payment is made as soon as reasonably practicable following the first date on which the service recipient anticipates or reasonably should anticipate that making the payment would not cause such violation. The making of a payment that would cause inclusion in gross income or the application of any penalty provision or other provision of the Internal Revenue Code is not treated as a violation of applicable law. For additional rules applicable to certain transaction-based compensation, see § 1.409A-3(i)(5)(iv)(A).

    (5) * * *

    (iii) * * *

    (A) * * * The stock price will not be treated as based on a measure other than the fair market value to the extent that the amount payable upon the service provider's involuntary separation from service for cause, or the occurrence of a condition within the service provider's control such as noncompliance with a noncompetition or nondisclosure agreement (whether or not the condition is specified at the time the stock right is granted), is based on a measure that results in a payment of less than fair market value.

    (E) Eligible issuer of service recipient stock—(1) In general. The term eligible issuer of service recipient stock means the corporation or other entity for which the service provider provides direct services on the date of grant of the stock right or a corporation or other entity for which it is reasonably anticipated that the service provider will begin providing direct services within 12 months after the date of grant, and any corporation or other entity (a related corporation or other entity) in a chain of corporations or other entities in which each corporation or other entity has a controlling interest in another corporation or other entity in the chain, ending with the corporation or other entity that has a controlling interest in the corporation or other entity for which the service provider provides direct services on the date of grant of the stock right or the corporation or other entity for which it is reasonably anticipated that the service provider will begin providing direct services within 12 months after the date of grant. If it is reasonably anticipated that a service provider will begin providing services for a corporation or other entity within 12 months after the date of grant, that corporation or other entity (or a related corporation or other entity) will be an eligible issuer of service recipient stock only if the services in fact commence within 12 months after the date of grant and the stock otherwise is service recipient stock at the time the services begin or, if services do not commence within that 12 month period, the right is forfeited. For this purpose, the term controlling interest has the same meaning as provided in § 1.414(c)-2(b)(2)(i), substituting the language “at least 50 percent” for “at least 80 percent” each place it appears in § 1.414(c)-2(b)(2)(i). In addition, if the use of such stock with respect to the grant of a stock right to a service provider is based upon legitimate business criteria, the term controlling interest has the same meaning as provided in § 1.414(c)-2(b)(2)(i), substituting the language “at least 20 percent” for “at least 80 percent” each place it appears in § 1.414(c)-2(b)(2)(i). For purposes of determining ownership of an interest in an organization, the rules of §§ 1.414(c)-3 and 1.414(c)-4 apply. The determination of whether a grant is based on legitimate business criteria is based on the facts and circumstances, focusing primarily on whether there is a sufficient nexus between the service provider and the issuer of the stock right so that the grant serves a legitimate non-tax business purpose other than simply providing compensation to the service provider that is excluded from the requirements of section 409A. For example, when stock of a corporation that owns an interest in a joint venture involving an operating business is granted to service providers of the joint venture who are former service providers of such corporation, that use is generally based upon legitimate business criteria, and therefore could be service recipient stock with respect to such service providers if the corporation owns at least 20 percent of the joint venture and the other requirements of this paragraph (b)(5)(iii) are met. Similarly, the legitimate business criteria requirement generally would be met if the corporate venturer issued such a right to a service provider of the joint venture who it reasonably expected would become a service provider of the corporate venturer. However, if a service provider has no real nexus with a corporate venturer, such as generally happens when the corporate venturer is a passive investor in the service recipient joint venture, a stock right issued to the service provider on the investor corporation's stock generally would not be based upon legitimate business criteria. Similarly, if a corporation holds only a minority interest in an entity that in turn holds a minority interest in the entity for which the service provider performs services, such that the corporation holds only an insubstantial indirect interest in the entity receiving the services, legitimate business criteria generally would not exist for issuing a stock right on the corporation's stock to the service provider.

    (vi) * * *

    (A) * * * The term option means the right or privilege of a person to purchase stock from a corporation by virtue of an offer of the corporation continuing for a stated period of time, whether or not irrevocable, to sell such stock at a price determined under paragraph (b)(5)(vi)(D) of this section, such person being under no obligation to purchase.

    (E) Exercise. The term exercise, when used in reference to an option, means the act of acceptance by the holder of the option of the offer to sell contained in the option. In general, the time of exercise is the time when there is a sale or a contract to sell between the corporation and the holder. A promise to pay the exercise price is not an exercise of the option unless the holder of the option is subject to personal liability on such promise. An agreement or undertaking by the service provider to make payments under a stock purchase plan is not the exercise of an option to the extent the payments made remain subject to the withdrawal by or refund to the service provider.

    (F) Transfer. The term transfer, when used in reference to the transfer to a person of a share of stock pursuant to the exercise of an option, means the transfer of ownership of such share, or the transfer of substantially all the rights of ownership. Such transfer must, within a reasonable time, be evidenced on the books of the corporation. A transfer may occur even if a share of stock is subject to a substantial risk of forfeiture or is not otherwise transferable immediately after the date of exercise. A transfer does not fail to occur merely because, under the terms of the arrangement, the person may not dispose of the share for a specified period of time, or the share is subject to a right of first refusal or a right to acquire the share at the share's fair market value at the time of the sale.

    (9) * * *

    (iii) * * *

    (A) The separation pay (other than amounts described in paragraphs (b)(9)(iv) and (v) of this section) does not exceed two times the lesser of—

    (1) The service provider's annualized compensation based upon the annual rate of pay for services provided to the service recipient for the service provider's taxable year preceding the taxable year in which the service provider has a separation from service with such service recipient (or for the taxable year in which the service provider has a separation from service if the service provider had no compensation from the service recipient in the preceding taxable year), adjusted for any increase during that year that was expected to continue indefinitely if the service provider had not separated from service; or

    (2) The maximum amount that may be taken into account under a qualified retirement plan pursuant to section 401(a)(17) for the calendar year in which the service provider has a separation from service.

    (11) * * * In addition, a plan does not provide for a deferral of compensation for purposes of this paragraph (b) to the extent it provides for a payment of reasonable attorneys' fees or other reasonable expenses incurred by the service provider to enforce any bona fide legal claim against the service recipient with respect to the service relationship between the service provider and the service recipient.

    (13) Recurring part-year compensation. A plan in which a service provider participates that provides for the payment of recurring part-year compensation (as defined in § 1.409A-2(a)(14)), whether or not at the service provider's election, does not provide for a deferral of compensation for purposes of this paragraph (b) if the plan does not defer payment of any of the recurring part-year compensation to a date beyond the last day of the 13th month following the first day of the service period for which the recurring part-year compensation is paid, and the amount of the service provider's recurring part-year compensation does not exceed the annual compensation limit under section 401(a)(17) for the calendar year in which the service period commences.

    (h) * * *

    (4) Asset purchase transactions. If as part of a sale or other disposition of assets by one service recipient (seller) to an unrelated service recipient (buyer), a service provider of the seller would otherwise experience a separation from service with the seller, the seller and the buyer may retain the discretion to specify, and may specify, whether a service provider providing services to the seller immediately before the asset purchase transaction and providing services to the buyer after and as a result of the asset purchase transaction has experienced a separation from service for purposes of this paragraph (h), provided that the asset purchase transaction results from bona fide, arm's length negotiations, all service providers providing services to the seller immediately before the asset purchase transaction and providing services to the buyer after and as a result of the asset purchase transaction are treated consistently (regardless of position at the seller) for purposes of applying the provisions of any nonqualified deferred compensation plan, and such treatment is specified in writing no later than the closing date of the asset purchase transaction. For purposes of this paragraph (h)(4), references to a sale or other disposition of assets, or an asset purchase transaction, refer only to a transfer of substantial assets, such as a plant or division or substantially all of the assets of a trade or business, and do not refer to a stock purchase treated as a deemed asset sale under section 338. For purposes of this paragraph (h)(4), whether a service recipient is related to another service recipient is determined under the rules provided in paragraph (f)(2)(ii) of this section.

    (5) Dual status. If a service provider provides services both as an employee of a service recipient and as an independent contractor of the service recipient, the service provider must separate from service both as an employee and as an independent contractor to be treated as having separated from service. Notwithstanding the foregoing, if a service provider provides services both as an employee of a service recipient and as a member of the board of directors of a corporate service recipient (or an analogous position with respect to a non-corporate service recipient), the services provided as a director are not taken into account in determining whether the service provider has a separation from service as an employee for purposes of a nonqualified deferred compensation plan in which the service provider participates as an employee that is not aggregated with any plan in which the service provider participates as a director under paragraph (c)(2)(ii) of this section. In addition, if a service provider provides services both as an employee of a service recipient and as a member of the board of directors of a corporate service recipient (or an analogous position with respect to a non-corporate service recipient), the services provided as an employee are not taken into account in determining whether the service provider has a separation from service as a director for purposes of a nonqualified deferred compensation plan in which the service provider participates as a director that is not aggregated with any plan in which the service provider participates as an employee under paragraph (c)(2)(ii) of this section.

    (q) References to a payment being made. A payment is made or an amount is paid or received when any taxable benefit is actually or constructively received, which includes a transfer of cash, a transfer of property includible in income under section 83, any other event that results in the inclusion in income under the economic benefit doctrine, a contribution to a trust described in section 402(b) at the time includible in income under section 402(b), a transfer or creation of a beneficial interest in a section 402(b) trust at the time includible in income under section 402(b), and the inclusion of an amount in income under 457(f)(1)(A). In addition, a payment is made or an amount is paid or received upon the transfer, cancellation, or reduction of an amount of deferred compensation in exchange for benefits under a welfare benefit plan, a fringe benefit excludible under section 119 or section 132, or any other benefit that is excludible from gross income. Notwithstanding the foregoing, the occurrence of any of the following events is not a payment:

    (1) a grant of an option that does not have a readily ascertainable fair market value (as defined under § 1.83-7(b));

    (2) a transfer of property (including an option that has a readily ascertainable fair market value) that is substantially nonvested (as defined under § 1.83-3(b)) with respect to which the service provider does not make a valid election under section 83(b); or

    (3) a contribution to a trust described in section 402(b) or a transfer or creation of a beneficial interest in a section 402(b) trust unless and until the amount is includible in income under section 402(b).

    (r) Application of definitions and rules. The definitions and rules set forth in paragraphs (a) through (q) of this section apply for purposes of section 409A, this section, and §§ 1.409A-2 through 1.409A-6.

    Par. 4. Section 1.409A-2 is amended by revising paragraph (b)(2)(i) to read as follows:
    § 1.409A-2 Deferral elections.

    (b) * * *

    (2) Definitions of payments for purposes of subsequent changes in the time or form of payment—(i) In general. Except as provided in paragraphs (b)(2)(ii) and (iii) of this section, the term payment refers to each separately identified amount to which a service provider is entitled to payment under a plan on a determinable date, and includes amounts applied for the benefit of the service provider. An amount is separately identified only if the amount may be objectively determined under a nondiscretionary formula. For example, an amount identified as 10 percent of the account balance as of a specified payment date would be a separately identified amount. The determination of whether a payment is or has been made for purposes of this paragraph (b) is made in accordance with the rules in § 1.409A-1(q). For additional rules relating to the application of this paragraph (b) to amounts payable at a fixed time or pursuant to a fixed schedule, see § 1.409A-3(i)(1).

    Par. 5. Section 1.409A-3 is amended by: 1. Revising paragraph (b). 2. Redesignating paragraph (d) as paragraph (d)(1) and revising the heading of paragraph (d)(1). 3. Adding paragraph (d)(2). 4. Revising paragraphs (i)(5)(iii) and (i)(5)(iv)(A). 5. Revising paragraphs (j)(1) and (j)(2). 6. Revising paragraph (j)(4)(iii)(B). 7. Revising paragraphs (j)(4)(ix)(A) and (j)(4)(ix)(C). 8. Revising paragraph (j)(4)(xiii).

    The revisions and additions read as follows:

    § 1.409A-3 Permissible payments.

    (b) Designation of payment upon a permissible payment event. Except as otherwise specified in this section, a plan provides for the payment upon an event described in paragraph (a)(1), (2), (3), (5), or (6) of this section if the plan provides the date of the event is the payment date, or specifies another payment date that is objectively determinable and nondiscretionary at the time the event occurs. A plan may also provide that a payment upon an event described in paragraph (a)(1), (2), (3), (5), or (6) of this section is to be made in accordance with a schedule that is objectively determinable and nondiscretionary based on the date the event occurs and that would qualify as a fixed schedule under paragraph (i)(1) of this section if the payment event were instead a fixed date, provided that the schedule must be fixed at the time the permissible payment event is designated. In addition, a plan may provide that a payment, including a payment that is part of a schedule, is to be made during a designated taxable year of the service provider that is objectively determinable and nondiscretionary at the time the payment event occurs such as, for example, a schedule of three substantially equal payments payable during the first three taxable years following the taxable year in which a separation from service occurs. A plan may also provide that a payment, including a payment that is part of a schedule, is to be made during a designated period objectively determinable and nondiscretionary at the time the payment event occurs, but only if the designated period both begins and ends within one taxable year of the service provider or the designated period is not more than 90 days and the service provider does not have a right to designate the taxable year of the payment (other than an election that complies with the subsequent deferral election rules of § 1.409A-2(b)). However, in the case of a payment to be made following the death of the service provider or a beneficiary who has become entitled to payment due to the service provider's death, in addition to the permitted designated periods described in the previous sentence, the designated period may begin on the date of death and end on December 31 of the first calendar year following the calendar year during which the death occurs, and the payment recipient may have the right to designate the taxable year of payment. If a plan provides for a period of more than one day following a payment event during which a payment may be made, such as permitting payment within 90 days following the date of the event, the payment date for purposes of the subsequent deferral rules under § 1.409A-2(b) is treated as the first possible date upon which a payment could be made under the terms of the plan. A plan may provide for payment upon the earliest or latest of more than one event or time, provided that each event or time is described in paragraphs (a)(1) through (6) of this section. For examples illustrating the provisions of this paragraph, see paragraph (i)(1)(vi) of this section.

    (d) When a payment is treated as made upon the designated payment date—(1) In general. * * *

    (2) Payments due following death. A payment specified to be made under the plan on any date within the period beginning on the date of the death of the service provider, or of a beneficiary who has become entitled to payment due to the service provider's death, and ending on December 31 of the first calendar year following the calendar year during which the death occurs (including a payment specified to be made upon death) is treated as made on the date specified under the plan if the payment is made on any date during this period, regardless of whether the payment recipient designates the taxable year of payment. Further, any change to the time or form of a payment that is specified to be made under the plan during this period to provide that the payment will be made on any other date during this period will not be treated as a subsequent deferral election for purposes of § 1.409A-2(b)(1) or an impermissible acceleration for purposes of § 1.409A-3(j)(1).

    (i) * * *

    (5) * * *

    (iii) Attribution of stock ownership. For purposes of paragraph (i)(5) of this section, section 318(a) applies to determine stock ownership. Stock underlying a vested option is considered owned by the person who holds the vested option (and the stock underlying a nonvested option is not considered owned by the person who holds the nonvested option). For purposes of the preceding sentence, however, if a vested option is exercisable for stock that is not substantially vested (as defined by § 1.83-3(b) and (j)), the stock underlying the option is not treated as owned by the person who holds the option.

    (iv) Special rules for certain delayed payments pursuant to a change in control event—(A) Certain transaction-based compensation. Payments of compensation related to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation's assets) that occur because a service recipient purchases its stock held by the service provider or because the service recipient or a third party purchases a stock right or a statutory stock option described in § 1.409A-(1)(b)(5)(ii) held by a service provider, or that are calculated by reference to the value of stock of the service recipient (collectively, transaction-based compensation), may be treated as paid on a designated date or pursuant to a payment schedule that complies with the requirements of section 409A if the transaction-based compensation is paid on the same schedule and under the same terms and conditions as apply to payments to shareholders generally with respect to stock of the service recipient pursuant to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or as apply to payments to the service recipient pursuant to a change in control event described in paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation's assets). In addition, to the extent that the transaction-based compensation is paid not later than five years after the change in control event, the payment of such compensation will not violate the initial or subsequent deferral election rules set out in § 1.409A-2(a) and (b) solely as a result of such transaction-based compensation being paid pursuant to such schedule and terms and conditions. The payment or agreement to pay transaction-based compensation payable with respect to a stock right described in § 1.409A-(1)(b)(5)(i)(A) or (B) or a statutory stock option described in § 1.409A-(1)(b)(5)(ii) also will not cause the stock right or statutory stock option to be treated as having provided for the deferral of compensation from the original grant date solely as a result of the transaction-based compensation being paid on the same schedule and under the same terms and conditions as apply to payments to shareholders generally with respect to stock of the service recipient pursuant to the change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or as apply to payments to the service recipient pursuant to the change in control event described in paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation's assets) and the transaction-based compensation is paid not later than five years after the change in control event. If before and in connection with a change in control event described in paragraph (i)(5)(v) or (i)(5)(vii) of this section, transaction-based compensation that would otherwise be payable as a result of such event is made subject to a condition on payment that is a substantial risk of forfeiture (as defined in § 1.409A-1(d), without regard to the provisions of that section under which additions or extensions of forfeiture conditions are disregarded) and the transaction-based compensation is payable under the same terms and conditions as apply to payments made to shareholders generally with respect to stock of the service recipient pursuant to a change in control event described in paragraph (i)(5)(v) of this section or to payments to the service recipient pursuant to a change in control event described in paragraph (i)(5)(vii) of this section, for purposes of determining whether such transaction-based compensation is a short-term deferral the requirements of § 1.409A-1(b)(4) are applied as if the legally binding right to such transaction-based compensation arose on the date that it became subject to such substantial risk of forfeiture.

    (j) Prohibition on acceleration of payments—(1) In general—Except as provided in paragraph (j)(4) of this section, a nonqualified deferred compensation plan may not permit the acceleration of the time or schedule of any payment or amount scheduled to be paid pursuant to the terms of the plan, and no such accelerated payment may be made whether or not provided for under the terms of such plan. For purposes of determining whether a payment of deferred compensation has been made, the rules of paragraph (f) of this section (on substituted payments) apply. For purposes of this paragraph (j), an impermissible acceleration does not occur if payment is made in accordance with plan provisions or an election as to the time and form of payment in effect at the time of initial deferral (or added in accordance with the rules applicable to subsequent deferral elections under § 1.409A-2(b)) pursuant to which payment is required to be made on an accelerated schedule as a result of an intervening payment event that is an event described in paragraph (a)(1), (2), (3), (5) or (6) of this section. For such purpose, the intervening payment event may apply with respect to either the service provider or, following the service provider's death, a beneficiary who becomes entitled to payment due to the service provider's death (substituting such beneficiary for the service provider in the definitions of disability in paragraph (i)(4) of this section and unforeseeable emergency in paragraph (i)(3) of this section, as applicable). For example, a plan may provide that a participant will receive six installment payments commencing at separation from service, and also provide that if the participant dies after such payments commence but before all payments have been made, all remaining amounts will be paid in a lump sum payment. Additionally, it is not an acceleration of the time or schedule of payment of a deferral of compensation if a service recipient waives or accelerates the satisfaction of a condition constituting a substantial risk of forfeiture applicable to such deferral of compensation, provided that the requirements of section 409A (including the requirement that the payment be made upon a permissible payment event) are otherwise satisfied with respect to such deferral of compensation. For example, if a nonqualified deferred compensation plan provides for a lump sum payment of the vested benefit upon separation from service, and the benefit vests under the plan only after 10 years of service, it is not a violation of the requirements of section 409A if the service recipient reduces the vesting requirement to five years of service, even if a service provider becomes vested as a result and receives a payment in connection with a separation from service before the service provider would have completed 10 years of service. However, if the plan in this example had provided for a payment on a fixed date, rather than at separation from service, the date of payment could not be accelerated due to the accelerated vesting. For the definition of a payment for purposes of this paragraph (j), see § 1.409A-2(b)(5) (coordination of the subsequent deferral election rules with the prohibition on acceleration of payments). For other permissible payments, see § 1.409A-2(b)(2)(iii) (certain immediate payments of remaining installments) and paragraph (d) of this section (certain payments made no more than 30 days before the designated payment date).

    (2) Application to multiple payment events. The addition of a permissible payment event, the deletion of a permissible payment event, or the substitution of one permissible payment event for another permissible payment event, results in an acceleration of a payment if the addition, deletion, or substitution could result in the payment being made on an earlier date than such payment would have been made absent such addition, deletion, or substitution. Notwithstanding the previous sentence, the addition of death, disability (as defined in paragraph (i)(4) of this section), or an unforeseeable emergency (as defined in paragraph (i)(3) of this section), as a potentially earlier alternative or intervening payment event to an amount previously deferred will not be treated as resulting in an acceleration of a payment, even if such addition results in the payment being paid at an earlier time than such payment would have been made absent the addition of the payment event. For such purpose, the earlier alternative or intervening payment event may apply with respect to either the service provider or, following the service provider's death, a beneficiary who becomes entitled to payment due to the service provider's death (substituting such beneficiary for the service provider in the definitions of disability in paragraph (i)(4) of this section and unforeseeable emergency in paragraph (i)(3) of this section, as applicable). However, the addition of such a payment event as a potentially later alternative payment event generally is subject to the rules governing changes in the time and form of payment (see § 1.409A-2(b)).

    (4) * * *

    (iii) * * *

    (B) Compliance with ethics laws or conflicts of interest laws. A plan may provide for acceleration of the time or schedule of a payment under the plan, or a payment may be made under a plan, to the extent reasonably necessary to avoid the violation of an applicable Federal, state, local, or bona fide foreign ethics law or conflicts of interest law (including under circumstances in which such payment is reasonably necessary to permit the service provider to participate in activities in the normal course of his or her position in which the service provider would otherwise not be able to participate under an applicable rule). A payment is reasonably necessary to avoid the violation of a Federal, state, local, or bona fide foreign ethics law or conflicts of interest law if the payment is a necessary part of a course of action that results in compliance with a Federal, state, local, or bona fide foreign ethics law or conflicts of interest law that would be violated absent such course of action, regardless of whether other actions would also result in compliance with the Federal, state, local, or bona fide foreign ethics law or conflicts of interest law.

    (ix) * * *

    (A) The service recipient's termination and liquidation of the plan within 12 months of a corporate dissolution taxed under section 331, or with the approval of a U.S. bankruptcy court, provided that the amounts deferred under the plan are included in the participants' gross incomes in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received).

    (1) The calendar year in which the plan termination and liquidation occurs;

    (2) The first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or

    (3) The first calendar year in which the payment is administratively practicable.

    (C) The service recipient's termination and liquidation of the plan, provided that—

    (1) The termination and liquidation does not occur proximate to a downturn in the financial health of the service recipient;

    (2) The service recipient terminates and liquidates all agreements, methods, programs, and other arrangements sponsored by the service recipient that would be aggregated with any terminated and liquidated agreements, methods, programs, and other arrangements under § 1.409A-1(c) as if there were one service provider that had deferrals of compensation under every such agreement, method, program, and other arrangement sponsored by the service recipient (for example, all elective account balance plans that the service recipient sponsors);

    (3) No payments in liquidation of the plan are made within 12 months of the date the service recipient takes all necessary action to irrevocably terminate and liquidate the plan other than payments that would be payable under the terms of the plan if the action to terminate and liquidate the plan had not occurred;

    (4) All payments are made within 24 months of the date the service recipient takes all necessary action to irrevocably terminate and liquidate the plan; and

    (5) The service recipient does not adopt any new agreement, method, program, or other arrangement described in paragraph (C)(2) of this subsection, at any time within three years following the date the service recipient takes all necessary action to irrevocably terminate and liquidate the plan.

    (xiii) Certain offsets—(A) De minimis offset. A plan may provide for the acceleration of the time or schedule of a payment, or a payment may be made under such plan, as satisfaction of a debt of the service provider to the service recipient, if such debt is incurred in the ordinary course of the service relationship between the service recipient and the service provider, the entire amount of reduction in any of the service recipient's taxable years does not exceed $5,000, and the reduction is made at the same time and in the same amount as the debt otherwise would have been due and collected from the service provider.

    (B) Compliance with Federal debt collection laws. A plan may provide for the acceleration of the time or schedule of a payment, or a payment may be made under such plan, as satisfaction of a debt of the service provider to the service recipient, to the extent reasonably necessary to comply with 31 U.S.C. 3711 et. seq. or similar Federal nontax law regarding debt collection relating to claims of the Federal government. A payment is reasonably necessary to comply with such a Federal debt collection law if the payment is a necessary part of a course of action that results in compliance with the Federal debt collection law that would be violated absent such course of action, regardless of whether other actions would also result in compliance with the Federal debt collection law.

    Par. 6. Section 1.409A-4 (REG-148326-05), as proposed at 73 FR 74380 (December 8, 2008), is proposed to be amended by revising paragraph (a)(1)(ii)(B) to read as follows:
    § 1.409A-4 Calculation of amount includible in income and additional income taxes.

    (B) Treatment of certain deferred amounts otherwise subject to a substantial risk of forfeiture—(1) Risk of forfeiture disregarded. For purposes of determining the amount includible in income under section 409A(a)(1) and paragraph (a)(1)(i) of this section, an amount deferred under a plan that is otherwise subject to a substantial risk of forfeiture for a taxable year is treated as not subject to a substantial risk of forfeiture for the taxable year, if during the taxable year any of the following occur:

    (i) A change (including an initial deferral election) that is not authorized under § 1.409A-1, § 1.409A-2, or § 1.409A-3 is made to a provision of the plan providing for the time or form of payment of the deferred amount, if the service recipient has not made a reasonable, good faith determination that, absent the change, the provision fails to comply with the requirements of section 409A(a).

    (ii) The service recipient has engaged in a pattern or practice of permitting substantially similar failures to comply with section 409A(a) under one or more nonqualified deferred compensation plans while amounts deferred under the plans are nonvested, and the facts and circumstances indicate that the deferred amount would be affected by the pattern or practice. Whether such a pattern or practice exists will depend on the facts and circumstances, including, but not limited to, whether the service recipient has taken commercially reasonable measures to identify and correct the substantially similar failures promptly upon discovery, whether the failures have affected nonvested deferred amounts with greater frequency than vested deferred amounts, whether the failures have occurred more frequently under newly adopted plans, and whether the failures appear intentional, are numerous, or repeat one or more similar past failures that were previously identified and corrected.

    (iii) The correction of a failure to comply with section 409A(a) affecting the deferred amount is not consistent with an applicable correction method (if one exists) set forth in applicable guidance issued by the Treasury Department and the IRS for correcting failures under section 409A(a), or the failure is not corrected in substantially the same manner as a substantially similar failure affecting a nonvested deferred amount under another plan sponsored by the service recipient. Solely with respect to the deferred amount, the requirements under applicable correction guidance with respect to eligibility, income inclusion, additional taxes, premium interest, and information reporting by the service recipient or service provider do not apply.

    Par. 7. Section 1.409A-6 is amended by revising paragraph (b) to read as follows:
    § 1.409A-6 Application of section 409A and effective dates.

    (b) Regulatory applicability date. Section 1.409A-0, § 1.409A-1, § 1.409A-2, § 1.409A-3 and this section, as amended, apply for taxable years beginning on or after publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Section 1.409A-0, § 1.409A-1, § 1.409A-2, § 1.409A-3 and this section as they appeared in the April 2009 edition of 26 CFR part 1 apply for taxable years beginning on or after January 1, 2009 and before publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

    John M. Dalrymple, Deputy Commissioner for Services and Enforcement.
    [FR Doc. 2016-14331 Filed 6-21-16; 8:45 am] BILLING CODE 4830-01-P
    DEPARTMENT OF THE TREASURY Alcohol and Tobacco Tax and Trade Bureau 27 CFR Parts 4 and 24 [Docket No. TTB-2016-0005; Notice No. 160] RIN 1513-AC27 Proposed Revisions to Wine Labeling and Recordkeeping Requirements AGENCY:

    Alcohol and Tobacco Tax and Trade Bureau, Treasury.

    ACTION:

    Notice of proposed rulemaking.

    SUMMARY:

    The Alcohol and Tobacco Tax and Trade Bureau (TTB) proposes to amend its labeling and recordkeeping regulations in 27 CFR part 24 to provide that any standard grape wine containing 7 percent or more alcohol by volume that is covered by a certificate of exemption from label approval may not be labeled with a varietal (grape type) designation, a type designation of varietal significance, a vintage date, or an appellation of origin unless the wine is labeled in compliance with the standards set forth in the appropriate sections of 27 CFR part 4 for that label information. TTB is also proposing to amend its part 4 wine labeling regulations to include a reference to the new part 24 requirement.

    DATES:

    TTB must receive written comments on or before August 22, 2016.

    ADDRESSES:

    Please send your comments on this document to one of the following addresses:

    Internet: http://www.regulations.gov (via the online comment form for this notice as posted within Docket No. TTB-2016-0005 at “Regulations.gov,” the Federal e-rulemaking portal);

    U.S. Mail: Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Box 12, Washington, DC 20005; or

    Hand delivery/courier in lieu of mail: Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Suite 400, Washington, DC 20005.

    See the Public Participation section of this notice for specific instructions and requirements for submitting comments, and for information on how to request a public hearing.

    You may view copies of this document and any comments TTB receives about this proposal at http://www.regulations.gov within Docket No. TTB-2016-0005. A link to that docket is posted on the TTB Web site at http://www.ttb.gov/wine/wine-rulemaking.shtml under Notice No. 160. You also may view copies of this proposed rule and any comments TTB receives about this proposal by appointment at the TTB Information Resource Center, 1310 G Street NW., Washington, DC 20005. Please call 202-453-2270 to make an appointment.

    FOR FURTHER INFORMATION CONTACT:

    Jennifer Berry, Alcohol and Tobacco Tax and Trade Bureau, Regulations and Rulings Division; telephone 202-453-1039, ext. 275.

    SUPPLEMENTARY INFORMATION:

    Background TTB Authority

    Chapter 51 of the Internal Revenue Code of 1986, as amended (IRC), 26 U.S.C. chapter 51, sets forth excise tax collection and related provisions pertaining to, among other things, the production of wine. Subchapter F of chapter 51 sets forth provisions specific to bonded and taxpaid wine premises. Under 26 U.S.C. 5388(a), standard wines may be removed from bonded and taxpaid wine premises subject to the provisions of subchapter F and be marked, transported, and sold under their proper designation as to kind and origin, or, if there is no such designation known to the trade or consumers, then under a truthful and adequate statement of composition. Pursuant to section 5367 of the IRC (26 U.S.C. 5367), a proprietor of a bonded wine cellar or a taxpaid wine bottling house shall keep such records and file such returns, in the form and containing such information, as the Secretary of the Treasury may by regulations provide.

    A proprietor of a bonded wine cellar (including a bonded winery) or a taxpaid wine bottling house will be referred to in this document as a “wine proprietor.”

    In addition to the IRC marking and recordkeeping requirements, wines containing at least 7 percent alcohol by volume are subject to the labeling requirements of the Federal Alcohol Administration Act (FAA Act). Section 105(e) of the FAA Act, codified at 27 U.S.C. 205(e), authorizes the Secretary of the Treasury to prescribe regulations for the labeling of wine, distilled spirits, and malt beverages. The FAA Act requires that these regulations, among other things, prohibit consumer deception and the use of misleading statements on labels, and ensure that labels provide the consumer with adequate information as to the identity and quality of the product.

    The FAA Act also generally requires a producer, blender, or wholesaler of wine, or proprietor of a bonded wine storeroom, to obtain a certificate of label approval prior to bottling wine for sale in interstate commerce. Bottlers are exempt from the labeling requirements of the FAA Act if they show to the satisfaction of the Secretary that the wine will not be sold, offered for sale, or shipped or delivered for shipment, or otherwise introduced in, interstate or foreign commerce. It should be noted that certificates of exemption from label approval are not available to importers who are removing wine in containers from customs custody for consumption. If those removals are for sale or any other commercial purpose, the importer must first obtain a certificate of label approval.

    The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers chapter 51 of the IRC and the provisions of the FAA Act pursuant to section 1111(d) of the Homeland Security Act of 2002, codified at 6 U.S.C. 531(d). The Secretary has delegated various authorities through Treasury Department Order 120-01 (dated December 10, 2013, superseding Treasury Order 120-01 (Revised), “Alcohol and Tobacco Tax and Trade Bureau,” dated January 24, 2003), to the TTB Administrator to perform the functions and duties in the administration and enforcement of these laws.

    Current Regulatory Requirements

    The TTB regulations implementing the provisions of chapter 51 of the IRC pertaining to the establishment and operation of wine premises are contained in 27 CFR part 24. The labeling requirements applicable to wine containers are found in 27 CFR 24.257. This section provides that proprietors must label each bottle or other container of wine prior to removal for consumption or sale. Certain mandatory information must appear on the label, including the name and address of the wine premises where bottled or packed; the brand name; the alcohol content; the kind of wine; and the net contents of the container.

    The labeling requirements of part 24 apply to wines that are subject to the requirement for a certificate of label approval as well as wines that are covered by a certificate of exemption from label approval. Furthermore, some wines removed from wine premises may have less than 7 percent alcohol by volume, so they do not conform to the definition of “wine” under the FAA Act. See 27 U.S.C. 211(a)(6). These wines would not need a certificate of label approval or a certificate of exemption from label approval. Accordingly, the regulations in 27 CFR 24.257(a)(4), relating to the requirement that the wine be labeled with the kind of wine, provide different rules with regard to wines subject to label approval, wines that are exempt from the label approval requirement, and wines containing less than 7 percent alcohol by volume.

    Provisions regarding the records that a proprietor must maintain to substantiate label information are contained in 27 CFR 24.314. Section 24.314 provides that a proprietor who removes bottled or packed wine with information stated on the label (such as a grape varietal designation, vintage date, or an appellation of origin) shall have complete records so that the information appearing on the label may be verified by a TTB audit. Additionally, a wine is not entitled to have information stated on the label unless the information can be readily verified by a complete and accurate record trail from the beginning source material to the removal of the wine for consumption or sale. These regulations apply to all wine labels, not just wines covered by a certificate of label approval.

    Neither the labeling nor the recordkeeping regulations in part 24 prescribe the conditions under which a wine proprietor may use grape variety names as a type designation or reference vintage dates or appellations of origin on labels of wine.

    The TTB regulations implementing the wine labeling provisions of the FAA Act are contained in 27 CFR part 4. Part 4 includes provisions that govern the use of one or more grape variety names as a type designation, the use of type designations of varietal significance, the use of vintage dates, and the use of appellations of origin on wine labels. An American appellation of origin may be the United States, a State, two or no more than three States which are all contiguous, a county, two or no more than three counties in the same State, or an American viticultural area (AVA). Under 27 CFR 4.50(b), any bottler or packer of wine shall be exempt from the requirements of part 4 if upon application the bottler or packer shows to the satisfaction of the appropriate TTB officer that the wine to be bottled or packed is not to be sold, offered for sale, or shipped or delivered for shipment, or otherwise introduced in interstate or foreign commerce. If TTB is satisfied that the wine will not be introduced into interstate commerce, it will issue a certificate of exemption from label approval to the bottler or packer.

    Concerns Regarding Label Information on Wines Covered by Certificates of Exemption From Label Approval

    Some wine industry members have contacted TTB with their concerns regarding the accuracy of label information on certain wines covered by certificates of exemption from label approval. Specifically, the wines in question are standard wines labeled with AVA names, but the wines do not appear to meet the part 4 requirements for using an AVA name. In addition, TTB also received a letter signed by members of the California, Washington, Oregon, and New York Congressional delegations expressing similar concerns and urging TTB to use its authority to enforce the standards set out in the FAA Act regulations for all wines bearing an AVA appellation, regardless of where they are sold.

    With regard to AVAs, under 27 CFR 4.25(e)(3)(iv), in order for a wine to be labeled with an AVA name: (1) The AVA name must have been approved under 27 CFR part 9; (2) not less than 85 percent of the wine must be derived from grapes grown within the boundaries of the viticultural area; and (3) the wine must have been fully finished within the State, or one of the States, within which the labeled viticultural area is located (except for cellar treatments permitted by 27 CFR 4.22(c) or blending which does not result in an alteration of class and type under 27 CFR 4.22(b)). Thus, a wine labeled with the AVA name “Napa Valley” must have been fully finished in California, in addition to complying with other requirements, in order to qualify to use the name “Napa Valley” as an appellation of origin on the label.

    Accordingly, a wine labeled with the appellation “Napa Valley” but also labeled with a statement that indicates that the wine is produced outside of California, such as “Produced and bottled by ABC Winery, Anytown, Illinois,” would not meet the provisions of § 4.25(e)(3)(iv) since the wine was not fully finished in California. As a result, it would not qualify for a certificate of label approval. However, if the wine will be sold only within the State of Illinois, and the bottler certifies that it will not introduce the bottled product into interstate commerce, then, in accordance with 27 U.S.C. 205(e), the wine is eligible for a certificate of exemption from label approval, which would exempt it from the provisions of part 4.

    The letter from the members of Congress who contacted TTB on this issue expressed concern that the use of AVA names on wines that are covered by certificates of exemption and that do not comply with the AVA provisions contained in § 4.25(e)(3)(iv) undermines the best interests of the consumer and the decades-old system of American viticultural areas, is contrary to the purposes of the FAA Act, and should not be permitted under the IRC labeling regulations in 27 CFR part 24. The industry members asked whether § 24.314, which requires proprietors to maintain complete records verifying label information (including information that substantiates appellation of origin claims such as AVAs), provides TTB with the authority to enforce the part 4 standards for AVAs on wines covered by certificates of exemption. However, it is TTB's position that there currently are no provisions in part 24, including § 24.314, that require wine proprietors to comply with part 4 standards for labeling when the wine is covered by a certificate of exemption. In reviewing this regulation, TTB also realized that the regulation does not clearly set forth the standards to which wines will be held when evaluating whether labeling claims are adequately substantiated by records.

    TTB Analysis

    TTB recognizes that wines covered by a certificate of exemption are not subject to the substantive labeling requirements of the FAA Act. On the other hand, the IRC (which covers wines sold in intrastate commerce as well as wines sold in interstate commerce) clearly provides TTB with authority to issue regulations requiring truthful and accurate information on wine containers and labels regarding the identity and origin of the wine. As previously noted, section 5388(a) of the IRC requires that wines be marked, transported and sold under their “proper designation as to kind and origin, or, if there is no such designation known to the trade or consumers, then under a truthful and adequate statement of composition.” If proprietors choose to label their wines with varietal (grape type) designations, type designations of varietal significance, vintage dates, or appellations of origin, all of which are terms of art that are subject to specific rules set forth in the FAA Act regulations, then those designations may convey to both the trade and consumers the meaning that is ascribed to them in the regulations under part 4.

    It should be noted that this issue is not unique to wine. TTB has adopted a similar policy with regard to the labeling of distilled spirits under the IRC regulations in part 19, which require distilled spirits labeled under a certificate of exemption from label approval to include certain labeling designations and statements in compliance with the requirements of the FAA Act labeling regulations in 27 CFR part 5. See 27 CFR 19.517.

    Accordingly, TTB is proposing to revise its regulations in §§ 24.257(b) and 24.314 to apply the part 4 rules for use of varietal (grape type) designations, type designations of varietal significance, vintage dates, and appellations of origin on wine labels to standard grape wine that is at least 7 percent alcohol by volume, where that wine is covered by a certificate of exemption from label approval. This amendment would ensure that the rules for the use of those designations of the origin or kind of a wine under section 5388(a) of the IRC are consistent with the existing rules for the use of those designations under the FAA Act.

    TTB is proposing to apply this requirement only to standard grape wines that contain at least 7 percent or more alcohol by volume because the labeling of wines that contain less than 7 percent alcohol by volume is not subject to the provisions of the FAA Act. While wines under 7 percent alcohol by volume are subject to the IRC labeling requirements of part 24, as well as the health warning statement requirements of part 16, those products do not fall under the definition of wine under the FAA Act. Thus, those products are subject to the food labeling requirements of the regulations issued by the U.S. Food and Drug Administration. Because the part 4 regulations limit the use of varietal (grape type) designations, type designations of varietal significance, vintage dates, and AVAs to grape wines, TTB is similarly proposing that the new provisions would apply solely to standard grape wines.

    TTB is not proposing in this document to extend this provision to include non-grape wines. However, TTB seeks comments and additional information on whether the amendments proposed in this document should be extended to non-grape wines, such as fruit wines or agricultural wines.

    Accordingly, TTB proposes to amend § 24.257 to require that a standard grape wine that contains 7 percent or more alcohol by volume and is covered by a certificate of exemption from label approval may not be labeled with a varietal (grape type) designation, a type designation of varietal significance, a vintage date, or an appellation of origin unless the wine complies with the relevant part 4 provisions for that label information. This requirement would apply only to wines covered by certificates of exemption, because wines covered by certificates of label approval are already subject to the labeling provisions of part 4. Wines that are not standard grape wine containing 7 percent or more alcohol by volume and that are covered by a certificate of exemption are exempt from all part 4 labeling provisions. TTB also proposes to make corresponding changes in the recordkeeping requirements of § 24.314.

    Finally, TTB is also proposing to revise § 4.50(b) to incorporate a reference to the labeling requirements contained in § 24.257.

    Technical Changes

    TTB also is removing the Office of Management and Budget control numbers assigned to the former Bureau of Alcohol, Tobacco and Firearms (ATF) and replacing them with the control numbers assigned currently to TTB. In § 24.257, the former control number 1512-0503, assigned to ATF, is now control number 1513-0092, assigned to TTB. In § 24.314, the former control number 1512-0298 is now control number 1513-0115. The changes to these control numbers are merely technical in nature and do not change any regulatory or recordkeeping requirement.

    Public Participation Comments Sought

    TTB requests comments from interested members of the public on the proposed change. Additionally, TTB welcomes comments on whether the new provisions should include non-grape wines. Finally, TTB solicits comments on how many labels would be affected by the proposed amendments, and how much time affected proprietors would need in order to revise their labels to comply with the proposed changes. Please provide specific information in support of your comments.

    Submitting Comments

    You may submit comments on this notice by using one of the following three methods:

    Federal e-Rulemaking Portal: You may send comments via the online comment form posted with this proposed rule within Docket No. TTB-2016-0005 on “Regulations.gov,” the Federal e-rulemaking portal, at http://www.regulations.gov. A direct link to that docket is available under Notice No. 160 on the TTB Web site at http://www.ttb.gov/wine/wine-rulemaking.shtml. Supplemental files may be attached to comments submitted via Regulations.gov. For complete instructions on how to use Regulations.gov, click on the site's “Help” tab.

    U.S. Mail: You may send comments via postal mail to the Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Box 12, Washington, DC 20005.

    Hand Delivery/Courier: You may hand-carry your comments or have them hand-carried to the Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Suite 400, Washington, DC 20005.

    Please submit your comments by the closing date shown above in this proposed rule. Your comments must reference Notice No. 160 and include your name and mailing address. Your comments also must be made in English, be legible, and be written in language acceptable for public disclosure. TTB does not acknowledge receipt of comments and considers all comments as originals.

    In your comment, please clearly state if you are commenting for yourself or on behalf of an association, business, or other entity. If you are commenting on behalf of an entity, your comment must include the entity's name as well as your name and position title. In your comment via Regulations.gov, please enter the entity's name in the “Organization” blank of the online comment form. If you comment via postal mail or hand delivery/courier, please submit your entity's comment on letterhead.

    You may also write to the Administrator before the comment closing date to ask for a public hearing. The Administrator reserves the right to determine whether to hold a public hearing.

    Confidentiality

    All submitted comments and attachments are part of the public record and subject to disclosure. Do not enclose any material in your comments that you consider to be confidential or inappropriate for public disclosure.

    Public Disclosure

    TTB will post, and you may view, copies of this proposed rule and any online or mailed comments received about this proposal within Docket No. TTB-2016-0005 on the Federal e-rulemaking portal. A direct link to that docket is available on the TTB Web site at http://www.ttb.gov/wine/wine-rulemaking.shtml under Notice No. 160. You may also reach the relevant docket through the Regulations.gov search page at http://www.regulations.gov. For information on how to use Regulations.gov, click on the site's “Help” tab.

    All posted comments will display the commenter's name, organization (if any), city, and State, and, in the case of mailed comments, all address information, including email addresses. TTB may omit voluminous attachments or material that it considers unsuitable for posting.

    You may view copies of this proposed rule and any electronic or mailed comments TTB receives about this proposal by appointment at the TTB Information Resource Center, 1310 G Street NW., Washington, DC 20005. You may also obtain copies for 20 cents per 8.5- x 11-inch page. Contact TTB's information specialist at the above address or by telephone at 202-453-2270 to schedule an appointment or to request copies of comments or other materials.

    Regulatory Flexibility Act

    TTB certifies that this proposed regulation, if adopted, will not have a significant economic impact on a substantial number of small entities. The proposed rule, if adopted, will not impose, or otherwise cause, a significant increase in reporting, recordkeeping, or other compliance burdens on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. Pursuant to 26 U.S.C. 7805(f), TTB will submit the proposed regulations to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact of the proposed regulations on small businesses.

    TTB recognizes that if the proposed rule is adopted as a final rule, some bottlers of wine may have to make revisions to labels currently covered by certificates of exemption; however, we believe that the number of affected labels will be small. TTB specifically solicits comments on the number of small producers and bottlers that may be affected by this proposed rule and the impact of this proposed rule, if adopted as a final rule, on those small businesses.

    Executive Order 12866

    It has been determined that this proposed rule is not a significant regulatory action as defined by Executive Order 12866 of September 30, 1993. Therefore, no regulatory assessment is required.

    Paperwork Reduction Act

    The two collections of information affected by this notice of proposed rulemaking have been previously reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) and assigned control numbers 1513-0092 and 1513-0115. 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 OMB.

    The proposed regulatory text in 27 CFR 24.257 contains an alteration to the information collection currently approved under OMB control number 1513-0092. If adopted, this revision would require changes in the labeling of certain wines currently covered by a certificate of exemption from label approval, where those wines are labeled with varietal (grape type) designations, type designations of varietal significance, vintage dates, or appellations of origin, in a manner that would not be allowed under the standards set forth in the regulations in 27 CFR part 4. However, since the labeling of wines, whether covered by certificates of exemption or by certificates of label approval, is a usual and customary business practice and would be done by proprietors with or without the TTB regulatory requirement, TTB does not believe that there would be any increase in the current burden hours associated with this information collection. We are, however, reporting an increase in the number of respondents to this collection, from 10,506 to 10,970, to reflect the current number of wine industry members regulated by TTB. We estimate the current burden associated with this information collection as follows:

    Estimated Number of Respondents: 10,970.

    Estimated Annual Frequency of Responses: 1 (one).

    Estimated Average Annual Total Burden Hours: 1 hour.

    The proposed regulatory text in 27 CFR 24.314 contains an alteration to the information collection currently approved under OMB control number 1513-0115. If adopted, this revision would require proprietors to keep records substantiating certain information contained on the labels of certain wines currently covered by a certificate of exemption from label approval, where those wines are labeled with varietal (grape type) designations, type designations of varietal significance, vintage dates, or appellations of origin. In particular, the records would have to substantiate that the claims would be allowed under the standards for use of such claims under the regulations in 27 CFR part 4. However, since the keeping of records substantiating the information provided on wine labels, whether covered by certificates of exemption or by certificates of label approval, is a usual and customary business practice and would be done by proprietors with or without the TTB regulatory requirement, TTB does not believe that there would be any increase in the current burden for this information collection, which is estimated as follows:

    Estimated Number of Respondents: 10,970.

    Estimated Annual Frequency of Responses: 1 (one).

    Estimated Average Annual Total Burden Hours: 1 hour.

    Revisions of these two currently approved collections have been submitted to OMB for review. Comments on the revisions to OMB control number 1513-0092 and 1513-0115 should be sent to OMB by one of these two methods:

    By U.S. Mail: Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503; or

    By E-mail: [email protected]

    A copy should also be sent to the Alcohol and Tobacco Tax and Trade Bureau by any of the methods previously described. Comments on the information collection should be submitted not later than August 22, 2016. Comments are specifically requested concerning:

    • Whether the proposed revisions of the collections of information approved under OMB control number 1513-0115 and 1513-0092 are necessary for the proper performance of the functions of the Alcohol and Tobacco Tax and Trade Bureau, including whether the information will have practical utility;

    • The accuracy of the estimated burdens associated with the proposed revisions of the collections of information;

    • How to enhance the quality, utility, and clarity of the information to be collected;

    • How to minimize the burden of complying with the proposed revision of the collection of information, including the application of automated collection techniques or other forms of information technology; and

    • Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

    Drafting Information

    Jennifer Berry of the Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, drafted this document.

    List of Subjects 27 CFR Part 4

    Administrative practice and procedure, Advertising, Customs duties and inspection, Imports, Labeling, Packaging and containers, Reporting and recordkeeping requirements, Trade practices, Wine.

    27 CFR Part 24

    Administrative practice and procedure, Claims, Electronic funds transfers, Excise taxes, Exports, Food additives, Fruit juices, Labeling, Liquors, Packaging and containers, Reporting and recordkeeping requirements, Research, Scientific equipment, Spices and flavorings, Surety bonds, Vinegar, Warehouses, Wine.

    Proposed Regulatory Amendments

    For the reasons discussed in the preamble, TTB proposes to amend 27 CFR, chapter I, parts 4 and 24 as set forth below:

    PART 4—LABELING AND ADVERTISING OF WINE 1. The authority citation for 27 CFR part 4 continues to read as follows: Authority:

    27 U.S.C. 205, unless otherwise noted.

    2. Section § 4.50 is amended by adding a sentence to the end of paragraph (b) to read as follows:
    § 4.50 Certificates of label approval.

    (b) * * * See § 24.257 of this chapter for additional labeling rules that apply to wines covered by a certificate of exemption.

    PART 24—WINE 3. The authority citation for 27 CFR part 24 continues to read as follows: Authority:

    5 U.S.C. 552(a); 26 U.S.C. 5001, 5008, 5041, 5042, 5044, 5061, 5062, 5121, 5122-5124, 5173, 5206, 5214, 5215, 5351, 5353, 5354, 5356, 5357, 5361, 5362, 5364-5373, 5381-5388, 5391, 5392, 5511, 5551, 5552, 5661, 5662, 5684, 6065, 6091, 6109, 6301, 6302, 6311, 6651, 6676, 7302, 7342, 7502, 7503, 7606, 7805, 7851; 31 U.S.C. 9301, 9303, 9304, 9306.

    4. Section § 24.257 is amended by revising paragraph (b) and by revising the OMB control number located in the second parenthetical phrase at the end of the section, to read as follows:
    § 24.257 Labeling wine containers.

    (b) Requirements applicable to information on labels—(1) Verification and recordkeeping requirements. The information shown on any label applied to bottled or packed wine is subject to the verification and recordkeeping requirements of § 24.314.

    (2) Varietal designations, type designations of varietal significance, grape vintage dates, and appellations of origin. For wines covered by a certificate of exemption from label approval, the use of any label that includes a varietal (grape type) designation, a type designation of varietal significance, a grape vintage date, or an appellation of origin for any standard grape wine containing 7 percent or more alcohol by volume is prohibited unless the wine would be entitled to use of such a labeling term under the standards set forth in the following sections of 27 CFR part 4:

    (i) Varietal (grape type) designation. The use of a varietal (grape type) designation must conform to the requirements of § 4.23 of this chapter;

    (ii) Type designation of varietal significance. The use of a type designation of varietal significance must conform to the requirements of § 4.28 of this chapter;

    (iii) Vintage date. The use of a vintage date must conform to the requirements of § 4.27 of this chapter; and

    (iv) Appellation of origin. The use of an appellation of origin must conform to the requirements of § 4.25 of this chapter.

    (Approved by the Office of Management and Budget under control number 1513-0092)
    5. Section 24.314 is amended to read as follows:
    § 24.314 Label information record.

    (a) General. A proprietor who removes bottled or packed wine with information stated on the label (e.g., varietal, vintage, appellation of origin, analytical data, date of harvest) shall have complete records, as applicable, so that the information appearing on the label may be verified by a TTB audit. A wine is not entitled to have information stated on the label unless the information can be readily verified by a complete and accurate record trail from the beginning source material to removal of the wine for consumption or sale.

    (b) Establishing that wine is entitled to labeling claims. A proprietor must keep records that will enable TTB to verify that the labeling of the wine complies with the applicable labeling requirements in this part. In addition, if wine is subject to Federal Alcohol Administration Act labeling provisions under 27 CFR part 4, the records must establish that the labeling of the wine complies with the applicable labeling provisions of 27 CFR part 4. For wines covered by a certificate of exemption, the use of any label that includes a varietal (grape type) designation, a type designation of varietal significance, a grape vintage date, or an appellation of origin for any standard grape wine containing 7 percent or more alcohol by volume is prohibited unless the proprietor has records establishing that the use of such a term complies with the standards set forth in the appropriate sections of 27 CFR part 4 for use of such a labeling term.

    (c) Record retention. All records necessary to verify wine label information are subject to the record retention requirements of § 24.300(d).

    (Sec. 201, Pub. L. 85-859, 72 Stat. 1381, as amended (26 U.S.C. 5367)) (Approved by the Office of Management and Budget under control number 1513-0115)
    Signed: April 7, 2016. John J. Manfreda, Administrator. Approved: April 22, 2016. Timothy E. Skud, Deputy Assistant Secretary (Tax, Trade, and Tariff Policy).
    [FR Doc. 2016-14696 Filed 6-21-16; 8:45 am] BILLING CODE 4810-31-P
    DEPARTMENT OF COMMERCE United States Patent and Trademark Office 37 CFR Parts 2 and 7 [Docket No. PTO-T-2016-0002] RIN 0651-AD07 Changes in Requirements for Affidavits or Declarations of Use, Continued Use, or Excusable Nonuse in Trademark Cases AGENCY:

    United States Patent and Trademark Office, Commerce.

    ACTION:

    Notice of proposed rulemaking.

    SUMMARY:

    In order to assess and promote the accuracy and integrity of the trademark register, the United States Patent and Trademark Office (USPTO or Office) proposes to amend its rules concerning the examination of affidavits or declarations of continued use or excusable nonuse filed pursuant to section 8 of the Trademark Act, or affidavits or declarations of use in commerce or excusable nonuse filed pursuant to section 71 of the Trademark Act. Specifically, the USPTO proposes to require the submission of information, exhibits, affidavits or declarations, and such additional specimens of use as may be reasonably necessary for the USPTO to ensure that the register accurately reflects marks that are in use in the United States for all the goods/services identified in the registrations, unless excusable nonuse is claimed in whole or in part. A register that does not accurately reflect marks in use in the United States for the goods/services identified in registrations imposes costs and burdens on the public. The proposed rules will allow the USPTO to require additional proof of use to verify the accuracy of claims that a trademark is in use in connection with particular goods/services identified in the registration.

    DATES:

    Comments must be received by August 22, 2016 to ensure consideration.

    ADDRESSES:

    The USPTO prefers that comments be submitted via electronic mail message to [email protected] Written comments may also be submitted by mail to the Commissioner for Trademarks, P.O. Box 1451, Alexandria, VA 22313-1451, attention Jennifer Chicoski; by hand delivery to the Trademark Assistance Center, Concourse Level, James Madison Building-East Wing, 600 Dulany Street, Alexandria, VA, 22314, attention Jennifer Chicoski; or by electronic mail message via the Federal eRulemaking Portal at http://www.regulations.gov. See the Federal eRulemaking Portal Web site for additional instructions on providing comments via the Federal eRulemaking Portal. All comments submitted directly to the USPTO or provided on the Federal eRulemaking Portal should include the docket number (PTO-T-2016-0002).

    The comments will be available for public inspection on the USPTO's Web site at http://www.uspto.gov, on the Federal eRulemaking Portal, and at the Office of the Commissioner for Trademarks, Madison East, Tenth Floor, 600 Dulany Street, Alexandria, VA 22314. Because comments will be made available for public inspection, information that is not desired to be made public, such as an address or phone number, should not be included.

    FOR FURTHER INFORMATION CONTACT:

    Jennifer Chicoski, Office of the Deputy Commissioner for Trademark Examination Policy, by email at [email protected], or by telephone at (571) 272-8943.

    SUPPLEMENTARY INFORMATION:

    Purpose: The USPTO proposes to revise the rules in parts 2 and 7 of title 37 of the Code of Federal Regulations to allow the USPTO, during the examination of affidavits or declarations of continued use or excusable nonuse filed pursuant to section 8 of the Trademark Act, 15 U.S.C. 1058, or affidavits or declarations of use in commerce or excusable nonuse filed pursuant to section 71 of the Trademark Act, 15 U.S.C. 1141k (section 8 or section 71 affidavits), to require the submission of such information, exhibits, affidavits or declarations, and such additional specimens of use as may be reasonably necessary for the USPTO to verify the accuracy of claims that a trademark is in use in connection with the goods/services listed in the registration.

    This will benefit the public by facilitating the USPTO's ability to assess and promote the integrity of the trademark register by encouraging accuracy in the identification of goods/services for which use or continued use is claimed. The accuracy of the trademark register as a reflection of marks that are actually in use in the United States for the goods/services identified in the registrations listed therein serves an important purpose for the public. The public relies on the register to determine whether a chosen mark is available for use or registration. Where a party's search of the register discloses a potentially confusingly similar mark, that party may incur a variety of resulting costs and burdens, such as those associated with investigating the actual use of the disclosed mark to assess any conflict, proceedings to cancel the registration or oppose the application of the disclosed mark, civil litigation to resolve a dispute over the mark, or changing plans to avoid use of the party's chosen mark. If a registered mark is not actually in use in the United States, or is not in use in connection with all the goods/services identified in the registration, these costs and burdens may be incurred unnecessarily. An accurate and reliable trademark register helps avoid such needless costs and burdens.

    The proposed rules also facilitate the cancellation of registrations for marks that were never in use or are no longer in use, and for which acceptable claims of excusable nonuse were not submitted, in connection with the identified goods/services. The statutory requirements in sections 8 and 71 exist to enable the USPTO to clear the register of deadwood by cancelling, in whole or in part, registrations for marks that are not in use for all or some of the goods/services identified in the registration. The proposed rules further this statutory purpose.

    Background

    Post Registration Proof-of-Use Pilot Program: A final rule was published in the Federal Register on May 22, 2012 (77 FR 30197), in which the USPTO announced a two-year pilot program to assess and promote the accuracy and integrity of the trademark register. The USPTO randomly selected 500 registrations for which section 8 and section 71 affidavits were filed to participate in the pilot program to determine the actual use of the marks in connection with the goods/services identified in the registrations. The selected registrations comprised a sample of the four statutory registration bases, that is, Trademark Act sections 1(a), 44(e), 66(a), and 1(a) and 44(e) combined (dual basis). 15 U.S.C. 1051(a), 1126(e), 1141(e). In each case, the trademark owner had submitted, as part of its section 8 or section 71 affidavit, a sworn statement that all the goods/services identified in the registration or otherwise set forth in the filing were presently in use in commerce. None of the selected registrations included claims of excusable nonuse.

    As part of the pilot program, the selected trademark owners were required to submit proof of use of their marks for two additional goods/services per class, in addition to the one specimen per class submitted with their affidavits, and to verify use of the additional goods/services during the statutory filing period. The USPTO randomly selected the two specific goods/services for which additional proof of use was required. If the owner's response to the inquiry did not fully address the requirements, or included a request to delete the identified goods/services, the USPTO required further proof of use to verify the accuracy of the goods/services identified in the registration. If the registration owner responded by providing acceptable proof of use and satisfying any other outstanding requirements as to the underlying maintenance filing, a notice of acceptance was issued. The pilot concluded with all 500 registrations receiving either a notice of acceptance of the affidavit or declaration or a notice of cancellation of the registration.

    Summary of Results: In 51% of the 500 registrations selected for the pilot, the trademark owners failed to supply additional verified proof of use on specific goods/services for which use was initially claimed. Of this 51%, in 35% of the registrations, the owner requested that some goods/services that were initially claimed to be in use be deleted, and the remaining 16% of the registrations were cancelled because the trademark owners failed to respond to the requirements for additional proof or to any other issues raised during examination of the section 8 or section 71 affidavit. Ultimately, the section 8 and section 71 affidavits were accepted for 84.4%, or 422 registrations, which included acceptances issued after goods/services queried under the pilot were deleted.

    Identifying Procedures to Assess and Promote the Accuracy and Integrity of the Trademark Register: The status reports issued throughout the course of the pilot all supported the need for ongoing efforts aimed at ensuring the accuracy and integrity of the trademark register as to the actual use of marks in connection with the goods/services identified in the registrations. To that end, the USPTO held a roundtable discussion on December 12, 2014 for various stakeholder groups, requested written comments from interested parties to further explore the topic, and discussed the topic at several other outreach sessions. During the roundtable discussion and outreach sessions, one suggestion that received widespread support was to establish a permanent program similar to the proof-of-use pilot.

    The USPTO proposes herein a permanent program where it would conduct random audits of up to 10% of the combined total of section 8 and section 71 affidavits filed each year in which the mark is registered for more than one good or service per class. As part of the review of the selected affidavits, in addition to the one specimen of use per class currently required, owners would be required to provide additional proof of use in the nature of information, exhibits, affidavits or declarations, and specimens showing use for some of the additional goods/services listed beyond that shown in the one specimen per class.

    The USPTO anticipates issuing an Office action that would specify the goods/services that will require the submission of the additional information, exhibits, affidavits or declarations, and specimens. The trademark owners would be afforded the usual response period to the Office action, that is, a response would be due within six months of the issuance date of the Office action, or before the end of the statutory filing period for the section 8 or section 71 affidavit, whichever is later. 37 CFR 2.163(b), 7.39(a). If the trademark owner responds, but is ultimately unable to provide the requested information, exhibits, affidavits or declarations, and specimens, the USPTO would deem the section 8 or section 71 affidavit unacceptable as to the goods/services to which the requirement pertained and will cancel such goods/services from the registration. If no response to the Office action is filed within six months of the issuance date of the Office action, or before the end of the statutory filing period for the section 8 or section 71 affidavit, whichever is later, the USPTO would cancel the entire registration, unless time remains in the grace period under section 8(a)(3) or section 71(a)(3) of the Act. 15 U.S.C. 1058(a)(3), 1141k(a)(3); 37 CFR 2.163(c), 7.39(b). If time remains in the grace period, the owner may file a complete new section 8 or section 71 affidavit, with a new fee and grace-period surcharge. 37 CFR 2.161(d)(2), 7.36(b)(3).

    The purpose of the program is to substantiate claims of use and discourage inaccuracies within these maintenance filings and continued registration of marks that are no longer in use for the listed goods/services. In Fiscal Year 2015, approximately 147,496 section 8 and 5,000 section 71 affidavits were filed.

    Discussion of Proposed Regulatory Changes

    The USPTO proposes to amend 37 CFR 2.161 and 7.37 to provide that the USPTO may require such information, exhibits, affidavits or declarations, and such additional specimens of use as may be reasonably necessary for the USPTO to assess and promote the accuracy and integrity of the register. The current rules mandate the submission of only one specimen per class in connection with a section 8 or section 71 affidavit unless additional information, exhibits, affidavits or declarations, or specimens are necessary for proper examination of the affidavit itself. 37 CFR 2.161(g) and (h), 7.37(g) and (h). This revision will allow the USPTO to require additional proof of use of a mark not only to facilitate proper examination of a section 8 or section 71 affidavit, but also to verify the accuracy of claims that a trademark is in use on or in connection with the goods/services identified in the registration.

    The USPTO proposes to revise § 2.161(h) to add the phrase “or for the Office to assess and promote the accuracy and integrity of the register” at the end of the paragraph.

    The USPTO proposes to revise § 7.37(h) to add the phrase “or for the Office to assess and promote the accuracy and integrity of the register” at the end of the paragraph.

    Rulemaking Requirements

    Administrative Procedure Act: The changes in this rulemaking involve rules of agency practice and procedure, and/or interpretive rules. See Perez v. Mortg. Bankers Ass'n, 135 S. Ct. 1199, 1204 (2015) (interpretive rules “advise the public of the agency's construction of the statutes and rules which it administers”) (citation and internal quotation marks omitted); Nat'l Org. of Veterans' Advocates v. Sec'y of Veterans Affairs, 260 F.3d 1365, 1375 (Fed. Cir. 2001) (rule that clarifies interpretation of a statute is interpretive); Bachow Commc'ns Inc. v. FCC, 237 F.3d 683, 690 (D.C. Cir. 2001) (rules governing an application process are procedural under the Administrative Procedure Act); Inova Alexandria Hosp. v. Shalala, 244 F.3d 342, 350 (4th Cir. 2001) (rules for handling appeals were procedural where they did not change the substantive standard for reviewing claims).

    Accordingly, prior notice and opportunity for public comment for the changes in this rulemaking are not required pursuant to 5 U.S.C. 553(b) or (c), or any other law. See Perez, 135 S. Ct. at 1206 (notice-and-comment procedures are required neither when an agency “issue[s] an initial interpretive rule” nor “when it amends or repeals that interpretive rule”); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), does not require notice and comment rulemaking for “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice,” quoting 5 U.S.C. 553(b)(A)). However, the USPTO has chosen to seek public comment before implementing the rule.

    Initial Regulatory Flexibility Analysis

    The USPTO publishes this Initial Regulatory Flexibility Analysis (IRFA) as required by the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) to examine the impact of the Office's proposed changes to the requirements for section 8 and section 71 affidavits on small entities and to seek the public's views. Under the RFA, whenever an agency is required by 5 U.S.C. 553 (or any other law) to publish a notice of proposed rulemaking (NPRM), the agency must prepare and make available for public comment an IRFA, unless the agency certifies under 5 U.S.C. 605(b) that the proposed rule, if implemented, will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 603, 605.

    Items 1-5 below discuss the five items specified in 5 U.S.C. 603(b)(1) through (5) to be addressed in an IRFA. Item 6 below discusses alternatives to this proposal that the Office considered.

    1. Description of the Reasons That Action by the Office Is Being Considered

    The USPTO proposes to require any information, exhibits, affidavits or declarations, and such additional specimens deemed reasonably necessary to assess and promote the accuracy and integrity of the trademark register in connection with the examination of a section 8 or section 71 affidavit. Post registration affidavits under section 8 or section 71, and their accompanying specimens of use, demonstrate a registration owner's continued use of its mark in commerce for the goods/services identified in the registration. The proposed revisions will facilitate the USPTO's ability to ensure that the register accurately reflects marks that are in use in commerce that may be regulated by the U.S. Congress for the goods/services identified therein.

    2. Succinct Statement of the Objectives of, and Legal Basis for, the Proposed Rules

    The objective of the proposed rulemaking is to allow the USPTO to assess and promote the integrity of the trademark register. The Trademark Act gives the Director of the USPTO discretion regarding the number of specimens to require. 15 U.S.C. 1051(a)(1), (d)(1), 1058(b)(1)(C), 1141k(b)(1)(C). The current rules mandate the submission of only one specimen per class in connection with a section 8 or section 71 affidavit unless additional information, exhibits, affidavits or declarations, or specimens are necessary for proper examination of the affidavit itself. 37 CFR 2.161(g), (h), 7.37(g), (h). However, these rules do not currently allow the Office to require additional specimens or other information or exhibits in order to verify that the mark is in use on additional goods/services listed in the registration. The proposed rules will allow the USPTO to properly examine the nature and veracity of allegations of use made in connection with the submission of a section 8 or section 71 affidavit, and thereby assess and promote the integrity of the register by verifying that the register accurately reflects the goods/services for which use is claimed for a given registered mark.

    3. Description and Estimate of the Number of Affected Small Entities

    The USPTO does not collect or maintain statistics in trademark cases on small- versus large-entity registrants, and this information would be required in order to estimate the number of small entities that would be affected by the proposed rules. However, the USPTO believes that the overall impact of the proposed rules on registrants will be relatively minimal.

    After registration, trademark owners must make periodic filings with the USPTO to maintain their registrations. A section 8 or section 71 affidavit is a sworn statement in which the registrant specifies the goods/services/collective membership organization for which the mark is in use in commerce and/or the goods/services/collective membership organization for which excusable nonuse is claimed. 15 U.S.C. 1058, 1141k. The purpose of the section 8 and section 71 affidavits is to facilitate the cancellation, by the Director of the USPTO, of registrations of marks no longer in use in connection with the goods/services/collective membership organization identified in the registrations. The proposed rules would apply to any entity filing a section 8 or section 71 affidavit, but only a subset of trademark owners would be required to provide more than one specimen or additional information, exhibits, or specimens in connection with the audit. The USPTO is unable to estimate the subset of trademark owners who are small entities that are impacted by the proposed rules. In Fiscal Year 2015, approximately 147,496 section 8 and 5,000 section 71 affidavits were filed.

    4. Description of the Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule, Including an Estimate of the Classes of Small Entities Which Will Be Subject to the Requirement and the Type of Professional Skills Necessary for Preparation of the Report or Record

    The proposed rules impose no new recordkeeping requirements on trademark registrants.

    Regarding compliance with the proposed rules, as an initial matter, the USPTO does not anticipate the proposed rules to have a disproportionate impact upon any particular class of small or large entities. Any entity that has a registered trademark in which the mark is registered for more than one good or service per class could potentially be impacted by the proposed rules.

    The USPTO anticipates that it may conduct random audits of up to 10% of the combined total of section 8 and section 71 affidavits filed each year in which the mark is registered for more than one good or service per class. In those post registration cases where an initial requirement for additional information, exhibits, affidavits or declarations, and specimens is issued in an Office action, and assuming that an attorney is representing the registrant, the USPTO estimates it will take approximately one hour to comply. To that end, the USPTO provides an online electronic form for responding to Office actions.

    Similar to the submission necessary for the statutorily required section 8 and section 71 affidavits, a response to an Office action issued in connection with these affidavits will generally necessitate gathering and submitting one or more specimens of use and an accompanying declaration. Therefore, under the proposed rules, the type of fact gathering and review of the nature and extent of the use of the mark that underlies a section 8 or section 71 affidavit will already have occurred. Compliance with the proposed requirement will only necessitate gathering and submitting the additional evidence to demonstrate and support what has previously been assessed.

    Assuming the mark is in use, as claimed, the compliance time involves the length of time to secure additional information, exhibits, affidavits or declarations, or specimens and accompanying declaration, plus any time it takes an attorney to communicate with the client in order to obtain what is required and make the necessary filing with the USPTO. In practice, approximately one-third of section 8 and section 71 affidavits are filed pro se. These trademark owners are likely to have a shorter compliance time than the USPTO has estimated, which assumes the involvement of an attorney. The proposed rules do not mandate the use of legal counsel.

    5. Description of Any Significant Alternatives to the Proposed Rule Which Accomplish the Stated Objectives of Applicable Statutes and Which Minimize Any Significant Economic Impact of the Rule on Small Entities

    The USPTO has considered whether and how it is appropriate to reduce any burden on small businesses through increased flexibility. The following alternatives were considered, but rejected, by the USPTO.

    USPTO considered an alternative where it would not require additional information, exhibits, affidavits or declarations, and specimens in connection with section 8 or section 71 affidavits, or where it would exempt small entities from such requirements. This alternative would have a lesser economic impact on small entities, but was rejected because it would not accomplish the stated objective of assessing and promoting the integrity of the trademark register by verifying that marks are in use for the goods/services identified in the registration. As noted above, the results of the post registration proof-of-use pilot supported the need for ongoing efforts aimed at assessing and promoting the accuracy and integrity of the register as to the actual use of marks in connection with the goods/services identified in the registrations. Subsequent outreach efforts revealed widespread support for continuing the pilot program on a permanent basis. Exempting small entities would prevent consideration of all section 8 and section 71 affidavits and not achieve the stated objective of assessing and promoting the accuracy and integrity of the register.

    The stated objective of the proposed rules also facilitates the cancellation of registrations for marks that are no longer in use or that were never used, and for which acceptable claims of excusable nonuse were not submitted, in connection with the identified goods/services. The statutory requirements in sections 8 and 71 exist to enable the USPTO to clear the register of deadwood by cancelling, in whole or in part, registrations for marks that are not in use for all or some of the goods/services identified in the registration. The proposed rules further this statutory purpose. Exempting small entities from possible scrutiny regarding use allegations would fail to address marks not used by them, thereby not achieving the objective.

    USPTO considered a second alternative that would extend the time period for compliance by small entities, however this was rejected because there appears to be no reason that meeting the requirements of the proposed rules would be more time consuming for small entities. The USPTO's standard six-month time period for responding to Office actions allows sufficient time regardless of small-entity status.

    Finally, USPTO considered an alternative that would streamline or simplify the compliance mechanism for small entities, but it was deemed unnecessary given the ease of responding electronically to Office actions using the Trademark Electronic Application System Response to Post Registration Office Action form. Thus, under the proposed rule, compliance will be as streamlined and simplified as possible for all affected entities. Moreover, where the objective is to verify the accuracy of a claim of use in a section 8 or section 71 affidavit, the proposed requirements for additional information, exhibits, affidavits or declarations, and specimens demonstrating the manner of use of the mark in connection with the specified goods/services are the least burdensome and most efficient means of achieving the objective of assessing and promoting and assessing the accuracy and integrity of the register by verifying allegations of use.

    Use of performance rather than design standards is not applicable to the proposed rulemaking because the USPTO is not issuing any sort of standard. The proposed rules will require registrants to furnish evidence of use, rather than comply with a performance or design standard.

    6. Identification, to the Extent Practicable, of All Relevant Federal Rules Which May Duplicate, Overlap or Conflict With the Proposed Rule

    The proposed rules do not duplicate, overlap or conflict with any other Federal rules.

    Executive Order 12866 (Regulatory Planning and Review): This rulemaking has been determined to be not significant for purposes of Executive Order 12866 (Sept. 30, 1993).

    Executive Order 13563 (Improving Regulation and Regulatory Review): The USPTO has complied with Executive Order 13563 (Jan. 18, 2011). Specifically, the USPTO has, to the extent feasible and applicable: (1) Made a reasoned determination that the benefits justify the costs of the rule changes; (2) tailored the rules to impose the least burden on society consistent with obtaining the regulatory objectives; (3) selected a regulatory approach that maximizes net benefits; (4) specified performance objectives; (5) identified and assessed available alternatives; (6) provided the public with a meaningful opportunity to participate in the regulatory process, including soliciting the views of those likely affected prior to issuing a notice of proposed rulemaking, and provided on-line access to the rulemaking docket; (7) attempted to promote coordination, simplification, and harmonization across government agencies and identified goals designed to promote innovation; (8) considered approaches that reduce burdens and maintain flexibility and freedom of choice for the public; and (9) ensured the objectivity of scientific and technological information and processes, to the extent applicable.

    Executive Order 13132 (Federalism): This rulemaking does not contain policies with federalism implications sufficient to warrant preparation of a Federalism Assessment under Executive Order 13132 (Aug. 4, 1999).

    Congressional Review Act: Under the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.), prior to issuing any final rule, the USPTO will submit a report containing the final rule and other required information to the United States Senate, the United States House of Representatives, and the Comptroller General of the Government Accountability Office. The changes in this notice are not expected to result in an annual effect on the economy of 100 million dollars or more, a major increase in costs or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets. Therefore, this notice is not expected to result in a “major rule” as defined in 5 U.S.C. 804(2).

    Unfunded Mandates Reform Act of 1995: The changes set forth in this rulemaking do not involve a Federal intergovernmental mandate that will result in the expenditure by State, local, and tribal governments, in the aggregate, of 100 million dollars (as adjusted) or more in any one year, or a Federal private sector mandate that will result in the expenditure by the private sector of 100 million dollars (as adjusted) or more in any one year, and will not significantly or uniquely affect small governments. Therefore, no actions are necessary under the provisions of the Unfunded Mandates Reform Act of 1995. See 2 U.S.C. 1501 et seq.

    Paperwork Reduction Act: This rulemaking involve information collection requirements which are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The collection of information involved in this rule has been reviewed and previously approved by OMB under control numbers control numbers 0651-0051 and 0651-0055.

    You may send comments regarding the collections of information associated with this rule, including suggestions for reducing the burden, to (1) The Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10202, 725 17th Street NW., Washington, DC 20503, Attention: Nicholas A. Fraser, the Desk Officer for the United States Patent and Trademark Office; and (2) The Commissioner for Trademarks, by mail to P.O. Box 1451, Alexandria, VA 22313-1451, attention Catherine Cain; by hand delivery to the Trademark Assistance Center, Concourse Level, James Madison Building-East Wing, 600 Dulany Street, Alexandria, VA 22314, attention Catherine Cain; or by electronic mail message via the Federal eRulemaking Portal. All comments submitted directly to the USPTO or provided on the Federal eRulemaking Portal should include the docket number (PTO-T-2016-0002).

    Notwithstanding any other provision of law, no person is required to respond to nor shall a person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a currently valid OMB control number.

    List of Subjects 37 CFR Part 2

    Administrative practice and procedure, Trademarks.

    37 CFR Part 7

    Administrative practice and procedure, International registration, Trademarks.

    For the reasons stated in the preamble and under the authority contained in 15 U.S.C. 1123 and 35 U.S.C. 2, as amended, the USPTO proposes to amend parts 2 and 7 of title 37 as follows:

    PART 2—RULES OF PRACTICE IN TRADEMARK CASES 1. The authority citation for 37 CFR part 2 continues to read as follows: Authority:

    15 U.S.C. 1113, 15 U.S.C. 1123, 35 U.S.C. 2, Section 10 of Pub. L. 112-29, unless otherwise noted.

    2. Amend § 2.161 by revising paragraph (h) to read as follows:
    § 2.161 Requirements for a complete affidavit or declaration of continued use or excusable nonuse.

    (h) The Office may require the owner to furnish such information, exhibits, affidavits or declarations, and such additional specimens as may be reasonably necessary to the proper examination of the affidavit or declaration under section 8 of the Act or for the Office to assess and promote the accuracy and integrity of the register.

    PART 7—RULES OF PRACTICE IN FILINGS PURSUANT TO THE PROTOCOL RELATING TO THE MADRID AGREEMENT CONCERNING THE INTERNATIONAL REGISTRATION OF MARKS 3. The authority citation for 37 CFR part 7 continues to read as follows: Authority:

    15 U.S.C. 1123, 35 U.S.C. 2, unless otherwise noted.

    4. Amend § 7.37 by revising paragraph (h) to read as follows:
    § 7.37 Requirements for a complete affidavit or declaration of use in commerce or excusable nonuse.

    (h) The Office may require the holder to furnish such information, exhibits, affidavits or declarations, and such additional specimens as may be reasonably necessary to the proper examination of the affidavit or declaration under section 71 of the Act or for the Office to assess and promote the accuracy and integrity of the register.

    Dated: June 16, 2016. Michelle K. Lee, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office.
    [FR Doc. 2016-14791 Filed 6-21-16; 8:45 am] BILLING CODE 3510-16-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Parts 174 and 180 [EPA-HQ-OPP-2015-0032; FRL-9947-32] Receipt of Several Pesticide Petitions Filed for Residues of Pesticide Chemicals in or on Various Commodities AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Notice of filing of petitions and request for comment.

    SUMMARY:

    This document announces the Agency's receipt of several initial filings of pesticide petitions requesting the establishment or modification of regulations for residues of pesticide chemicals in or on various commodities.

    DATES:

    Comments must be received on or before July 22, 2016.

    ADDRESSES:

    Submit your comments, identified by docket identification (ID) number and the pesticide petition number (PP) of interest as shown in the body of this document, by one of the following methods:

    Federal eRulemaking Portal: http://www.regulations.gov. Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute.

    Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

    Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html.

    Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at http://www.epa.gov/dockets.
    FOR FURTHER INFORMATION CONTACT:

    Robert McNally, Biopesticides and Pollution Prevention Division (BPPD) (7511P), main telephone number: (703) 305-7090; email address: [email protected], Susan Lewis, Registration Division (RD) (7505P), main telephone number: (703) 305-7090; email address: [email protected] The mailing address for each contact person is: Office of Pesticide Programs, Environmental Protection Agency, 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001. As part of the mailing address, include the contact person's name, division, and mail code. The division to contact is listed at the end of each pesticide petition summary.

    SUPPLEMENTARY INFORMATION:

    I. General Information A. Does this action apply to me?

    You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

    • Crop production (NAICS code 111).

    • Animal production (NAICS code 112).

    • Food manufacturing (NAICS code 311).

    • Pesticide manufacturing (NAICS code 32532).

    If you have any questions regarding the applicability of this action to a particular entity, consult the person listed under FOR FURTHER INFORMATION CONTACT for the division listed at the end of the pesticide petition summary of interest.

    B. What should I consider as I prepare my comments for EPA?

    1. Submitting CBI. Do not submit this information to EPA through regulations.gov or email. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD-ROM that you mail to EPA, mark the outside of the disk or CD-ROM as CBI and then identify electronically within the disk or CD-ROM the specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

    2. Tips for preparing your comments. When preparing and submitting your comments, see the commenting tips at http://www.epa.gov/dockets/comments.html.

    3. Environmental justice. EPA seeks to achieve environmental justice, the fair treatment and meaningful involvement of any group, including minority and/or low-income populations, in the development, implementation, and enforcement of environmental laws, regulations, and policies. To help address potential environmental justice issues, the Agency seeks information on any groups or segments of the population who, as a result of their location, cultural practices, or other factors, may have atypical or disproportionately high and adverse human health impacts or environmental effects from exposure to the pesticides discussed in this document, compared to the general population.

    II. What action is the Agency taking?

    EPA is announcing its receipt of several pesticide petitions filed under section 408 of the Federal Food, Drug, and Cosmetic Act (FFDCA), 21 U.S.C. 346a, requesting the establishment or modification of regulations in 40 CFR part 174 or part 180 for residues of pesticide chemicals in or on various food commodities. The Agency is taking public comment on the requests before responding to the petitioners. EPA is not proposing any particular action at this time. EPA has determined that the pesticide petitions described in this document contain the data or information prescribed in FFDCA section 408(d)(2), 21 U.S.C. 346a(d)(2); however, EPA has not fully evaluated the sufficiency of the submitted data at this time or whether the data support granting of the pesticide petitions. After considering the public comments, EPA intends to evaluate whether and what action may be warranted. Additional data may be needed before EPA can make a final determination on these pesticide petitions.

    Pursuant to 40 CFR 180.7(f), a summary of each of the petitions that are the subject of this document, prepared by the petitioner, is included in a docket EPA has created for each rulemaking. The docket for each of the petitions is available at http://www.regulations.gov.

    As specified in FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), EPA is publishing notice of the petitions so that the public has an opportunity to comment on these requests for the establishment or modification of regulations for residues of pesticides in or on food commodities. Further information on the petitions may be obtained through the petition summaries referenced in this unit.

    New Tolerances

    PP 5F8380. EPA-HQ-OPP-2015-0745. Bayer CropScience, 2 TW Alexander Drive, P.O. Box 12014, Research Triangle Park, NC 27709, requests to establish a tolerance in 40 CFR part 180.555 for residues of the fungicide trifloxystrobin in or on: Cotton, gin byproducts at 3 parts per million (ppm); and cotton, undelinted seed (Crop subgroup 20C) at 0.5 ppm. Either gas chromatography with nitrogen-phosphorus detection, or liquid chromatography/mass spectrometry/mass spectrometry (LC/MS/MS) are used to measure and evaluate the chemical trifloxystrobin and the free form of its acid metabolite CGA-321113 ((E,E)-methoxyimino-[2-[1-(3-trifluoromethyl-phenyl)-ethylideneaminooxymethyl]-phenyl]acetic acid). Contact: RD.

    PP 5F8417. EPA-HQ-OPP-2015-0787. K-I Chemical USA. Inc., 11 Martine Ave., Suite 970, White Plains, NY 10606, requests to establish tolerances in 40 CFR 180.659 for residues of the herbicide, pyroxasulfone (3-[(5-(difluoromethoxy)-1-methyl-3-(trifluoromethyl) pyrazole-4-ylmethylsulfonyl]-4,5-dihydro-5,5-dimethyl-1,2-oxazole) and its metabolites in or on dried shelled peas and beans (crop subgroup 6C) at 0.09 ppm, flax at 0.01 ppm, peanut at 0.2 ppm, and peanut hay at 2 ppm. The LC/MS/MS has been proposed to enforce the tolerance expression for pyroxasulfone. Contact: RD.

    PP 5F8421. EPA-HQ-OPP-2015-0825. BASF Corporation, 26 Davis Drive, P.O. Box 13528, Research Triangle Park, NC 27709, requests to establish a tolerance in 40 CFR part 180 for residues of the herbicide topramezone (3-(4,5-Dihydro-isoxazol-3-yl)-4-methanesulfonyl-2-methylphenyl]-(5-hydroxyl-1-methyl-1H-pyrazol-4-yl)methanone) in or on sugarcane, cane at 0.01 ppm. The LC/MS/MS is used to measure and evaluate the chemical topramezone (3-(4,5-Dihydro-isoxazol-3-yl)-4-methanesulfonyl-2-methylphenyl]-(5-hydroxyl-1-methyl-1H-pyrazol-4-yl)methanone). Contact: RD.

    PP 6E8464. EPA-HQ-OPP-2016-0257. Interregional Research No. 4 (IR-4), Rutgers, The State University of New Jersey, 500 College Road East, Suite 201 W, Princeton, NJ 08540, requests to establish tolerances in 40 CFR part 180.627 for residues of the fungicide fluopicolide [2,6-dichloro-N-[[3-chloro-5-(trifluoromethyl)-2-pyridinyl]methyl]benzamide], including its metabolites and degradates, in or on the raw agricultural commodities: Basil, dried leaves at 200 ppm; basil, fresh leaves at 30 ppm; bean, succulent at 0.9 ppm; citrus, dried pulp at 0.048 ppm; citrus, oil at 1.94 ppm; hop, dried cones at 15 ppm; fruit, citrus, group10-10 at 0.02 ppm; fruit, small, vine climbing, except fuzzy kiwifruit, subgroup 13-07F at 2.0 ppm; and vegetable, fruiting, group 8-10 at 1.60 ppm. The analytical method consisting of high pressure LC/MS/MS is used to measure and evaluate the chemical fluopicolide. Contact: RD.

    PP 6E8467. EPA-HQ-OPP-2016-0255. IR-4, Rutgers, The State University of New Jersey, 500 College Road East, Suite 201 W, Princeton, NJ 08540, requests to establish tolerances in 40 CFR part 180 for the residues of the insecticide spirotetramat (cis-3-(2,5-dimethlyphenyl)-8-methoxy-2-oxo-1-azaspiro[4.5]dec-3-en-4-yl-ethyl carbonate) and its metabolites cis-3-(2,5-dimethylphenyl)-4-hydroxy-8-methoxy-1-azaspiro[4.5]dec-3-en-2-one, cis-3-(2,5-dimethylphenyl)-3-hydroxy-8-methoxy-1-azaspiro[4.5]decane-2,4-dione, cis-3-(2,5-dimethylphenyl)-8-methoxy-2-oxo-1-azaspiro[4.5]dec-3-en-4-yl beta-D-glucopyranoside, and cis-3-(2,5-dimethylphenyl)-4-hydroxy-8-methoxy-1-azaspiro[4.5]decan-2-one, calculated as the stoichiometric equivalent of spirotetramat, in or on the raw agricultural commodities carrot, roots at 0.15 ppm; fruit, stone, group 12-12 at 4.5 ppm; and nut, tree, group 14-12 at 0.25 ppm. Analytical methodology to determine residues of spirotetramat in raw agricultural commodities includes high pressure LC/MS/MS using the stable isotopically labeled analytes as internal standards. The limit of quantification (LOQ) for each analyte is 0.01 ppm for all commodities. This method is used to measure and evaluate spirotetramat. Contact RD.

    PP 6E8477. EPA-HQ-OPP-2013-0235. IR-4, 500 College Road East, Suite 201 W, Princeton, NJ 08540, requests to establish a tolerance in 40 CFR part 180 for residues of the insecticide chlorantraniliprole, 3-bromo-N-[4-chloro-2-methyl-6-[(methylamino)-carbonyl]phenyl]-1-(3-chloro-2-pyridinyl)-1H-pyrazole-5-carboxamide in or on the raw agricultural commodities teff, forage at 40 ppm; teff, grain at 6.0 ppm; teff, hay at 40 ppm; teff, straw at 40 ppm; quinoa, forage at 40 ppm; quinoa, grain at 6.0 ppm; quinoa, hay at 40 ppm; and quinoa, straw at 40 ppm. Analytical methodology has been developed and validated for enforcement purposes. Contact: RD.

    Amended Tolerances

    PP 5F8380. EPA-HQ-OPP-2015-0745. Bayer CropScience, 2 TW Alexander Drive, P.O. Box 12014, Research Triangle Park, NC 27709, requests to amend the tolerance in 40 CFR 180.555 for residues of the fungicide trifloxystrobin in or on corn, field, forage at 8 ppm. Either a method based on gas chromatography with nitrogen-phosphorus detection, or LC/MS/MS are used to measure and evaluate the chemical trifloxystrobin and the free form of its acid metabolite CGA-321113 ((E,E)-methoxyimino-[2-[1-(3-trifluoromethyl-phenyl)-ethylideneaminooxymethyl]-phenyl]acetic acid). Contact: RD.

    PP 6E8464. EPA-HQ-OPP-2016-0257. IR-4, Rutgers, The State University of New Jersey, 500 College Road East, Suite 201 W, Princeton, NJ 08540, requests to amend the tolerances in 40 CFR 180.627, upon establishment of the tolerances referenced above under “New Tolerances”, to remove existing tolerances for residues of the fungicide fluopicolide [2,6-dichloro-N-[[3-chloro-5-(trifluoromethyl)-2-pyridinyl]methyl]benzamide], including its metabolites and degradates, in or on the raw agricultural commodities grape at 2.0 ppm and vegetable, fruiting, group 8 at 1.60 ppm. The analytical method consisting of LC/MS/MS is used to measure and evaluate the chemical fluopicolide. Contact: RD.

    PP 6E8467. EPA-HQ-OPP-2016-0255. IR-4, IR-4 Project Headquarters, 500 College Road East, Suite 201 W, Princeton, New Jersey, 08540, requests to amend 40 CFR part 180.641 by removing the established tolerances for the residues of the insecticide spirotetramat (cis-3-(2,5-dimethlyphenyl)-8-methoxy-2-oxo-1-azaspiro[4.5]dec-3-en-4-yl-ethyl carbonate) and its metabolites cis-3-(2,5-dimethylphenyl)-4-hydroxy-8-methoxy-1-azaspiro[4.5]dec-3-en-2-one, cis-3-(2,5-dimethylphenyl)-3-hydroxy-8-methoxy-1-azaspiro[4.5]decane-2,4-dione, cis-3-(2,5-dimethylphenyl)-8-methoxy-2-oxo-1-azaspiro[4.5]dec-3-en-4-yl beta-D-glucopyranoside, and cis-3-(2,5-dimethylphenyl)-4-hydroxy-8-methoxy-1-azaspiro[4.5]decan-2-one, calculated as the stoichiometric equivalent of spirotetramat, in or on fruit, stone, group 12 at 4.5 ppm; nut, tree, group 14 at 0.25 ppm; and pistachio at 0.25 ppm upon establishment of aforementioned “New Tolerances under PP 6E8467”. Contact RD.

    New Tolerance Exemptions

    PP 5F8410. EPA-HQ-OPP-2016-0284. AFS009 Plant Protection, Inc., 104 T.W. Alexander Dr., Building 18, Research Triangle Park, NC 27709, requests to establish an exemption from the requirement of a tolerance in 40 CFR part 180 for residues of the fungicide Pseudomonas chlororaphis subsp. aurantiaca strain AFS009 in or on all food commodities. The petitioner believes no analytical method is needed because it is expected that, when used as proposed, Pseudomonas chlororaphis subsp. aurantiaca strain AFS009 would not result in residues that are of toxicological concern. Contact: BPPD.

    PP 6G8453. EPA-HQ-OPP-2016-0279. Monsanto Company, 800 N. Lindbergh Blvd., St. Louis, MO 63167, requests to establish a temporary exemption from the requirement of a tolerance in 40 CFR part 174 for residues of the plant-incorporated protectant (PIP) Bacillus thuringiensis Cry51Aa2.834_16 (mCry51Aa2) protein in or on cotton. The petitioner believes no analytical method is needed because this petition is requesting a temporary exemption from the requirement of a tolerance without numerical limitation. Contact: BPPD.

    Authority:

    21 U.S.C. 346a.

    Dated: June 13, 2016. Daniel J. Rosenblatt, Director, Registration Division, Office of Pesticide Programs.
    [FR Doc. 2016-14816 Filed 6-21-16; 8:45 am] BILLING CODE 6560-50-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Parts 431 and 457 [CMS-6068-P] RIN 0938-AS74 Medicaid/CHIP Program; Medicaid Program and Children's Health Insurance Program (CHIP); Changes to the Medicaid Eligibility Quality Control and Payment Error Rate Measurement Programs in Response to the Affordable Care Act AGENCY:

    Centers for Medicare & Medicaid Services (CMS), HHS.

    ACTION:

    Proposed rule.

    SUMMARY:

    This proposed rule would update the Medicaid Eligibility Quality Control (MEQC) and Payment Error Rate Measurement (PERM) programs based on the changes to Medicaid and the Children's Health Insurance Program (CHIP) eligibility under the Patient Protection and Affordable Care Act. This proposed rule would also implement various other improvements to the PERM program.

    DATES:

    To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on August 22, 2016.

    ADDRESSES:

    In commenting, please refer to file code CMS-6068-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

    You may submit comments in one of four ways (please choose only one of the ways listed):

    1. Electronically. You may submit electronic comments on this regulation to http://www.regulations.gov. Follow the instructions under the “More Search Options” tab.

    2. By regular mail. You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-6068-P, P.O. Box 8016, Baltimore, MD 21244-8016.

    Please allow sufficient time for mailed comments to be received before the close of the comment period.

    3. By express or overnight mail. You may send written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-6068-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments before the close of the comment period to either of the following addresses:

    a. For delivery in Washington, DC—Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 20201.

    (Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

    b. For delivery in Baltimore, MD—Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    If you intend to deliver your comments to the Baltimore address, please call (410) 786-7195 in advance to schedule your arrival with one of our staff members.

    Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

    For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

    FOR FURTHER INFORMATION CONTACT:

    Bridgett Rider, (410) 786-2602.

    SUPPLEMENTARY INFORMATION:

    Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to view public comments.

    Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. EST. To schedule an appointment to view public comments, phone 1-800-743-3951.

    Acronyms AFR Agency Financial Report AT Account Transfer file CFR Code of Federal Regulations CHIP Children's Health Insurance Program CHIPRA Children's Health Insurance Program Reauthorization Act of 2009 CMS Centers for Medicare and Medicaid Services DAB Departmental Appeals Board DHHS Department of Health and Human Services DP Data Processing ELA Express Lane Agency ELE Express Lane Eligibility EOB Explanation of Benefits ERC Eligibility Review Contractor FFM Federally Facilitated Marketplace FFM-A Federally Facilitated Marketplace-Assessment FFM-D Federally Facilitated Marketplace-Determination FFP Federal Financial Participation FFS Fee-For-Service FFY Federal Fiscal Year FMAP Federal Medical Assistance Percentages FY Fiscal Year HHS Health and Human Services HIPP Health Insurance Premium Payments IFC Interim Final Rule with Comment period IPERA Improper Payments Elimination and Recovery Act IPERIA Improper Payments Elimination and Recovery Improvement Act IPIA Improper Payments Information Act IRFA Initial Regulatory Flexibility Analysis MAGI Modified Adjusted Gross Income MEQC Medicaid Eligibility Quality Control MSO Medicaid State Operations OMB Office of Management and Budget PCCM Primary Care Case Management PERM Payment Error Rate Measurement RC Review Contractor RFA Regulatory Flexibility Act RIA Regulatory Impact Analysis SC Statistical Contractor SHO State Health Official the Act Social Security Act UMRA Unfunded Mandates Reform Act I. Background A. Introduction

    The Medicaid Eligibility Quality Control (MEQC) program at § 431.810 through § 431.822 implements section 1903(u) of the Social Security Act (the Act) and requires states to report to the Secretary the ratio of states' erroneous excess payments for medical assistance under the state plan to total expenditures for medical assistance. Section 1903(u) of the Act sets a 3 percent threshold for eligibility-related improper payments in any fiscal year (FY) and generally requires the Secretary to withhold payments to states with respect to the amount of improper payments that exceed the threshold. The Act requires states to provide information, as specified by the Secretary, to determine whether they have exceeded this threshold.

    The Payment Error Rate Measurement (PERM) program was developed to implement the requirements of the Improper Payments Information Act (IPIA) of 2002 (Pub. L. 107-300), which requires the heads of federal agencies to review all programs and activities that they administer to determine and identify any programs that are susceptible to significant erroneous payments. If programs are found to be susceptible to significant improper payments, then the agency must estimate the annual amount of erroneous payments, report those estimates to the Congress, and submit a report on actions the agency is taking to reduce improper payments. IPIA was amended by Improper Payments Elimination and Recovery Act of 2010 (IPERA) (Pub. L. 111-204) and the Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA) (Pub. L. 112-248).

    The IPIA directed OMB to provide guidance on implementation; OMB provides such guidance for IPIA, IPERA, and IPERIA in OMB circular A-123 App. C. OMB defines “significant improper payments” as annual erroneous payments in the program exceeding (1) both $10 million and 1.5 percent of program payments, or (2) $100 million regardless of percentage (OMB M-15-02, OMB Circular A-123, App. C October 20, 2014). Erroneous payments and improper payments have the same meaning under OMB guidance. For those programs found to be susceptible to significant erroneous payments, federal agencies must provide the estimated amount of improper payments and report on what actions the agency is taking to reduce those improper payments, including setting targets for future erroneous payment levels and a timeline by which the targets will be reached. Section 2(b)(1) of IPERA clarified that, when meeting IPIA and IPERA requirements, agencies must produce a statistically valid estimate, or an estimate that is otherwise appropriate using a methodology approved by the Director of the Office of Management and Budget (OMB). IPERIA further clarified requirements for agency reporting on actions to reduce improper payments and recover improper payments.

    The Medicaid program and the Children's Health Insurance Program (CHIP) were identified as at risk for significant erroneous payments. As set forth in OMB Circular A-136, Financial Reporting Requirements, for IPIA reporting, the Department of Health and Human Services (DHHS) reports the estimated improper payment rates (and other required information) for both programs in its annual Agency Financial Report (AFR).

    The Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA) (Pub. L. 111-3) was enacted on February 4, 2009. Sections 203 and 601 of the CHIPRA relate to the PERM program. Section 203 of the CHIPRA amended sections 1902(e)(13) and 2107(e)(1) of the Act to establish a state option for an express lane eligibility (ELE) process for determining eligibility for children and an error rate measurement for the enrollment of children under the ELE option. ELE provides states with important new avenues to expeditiously facilitate children's Medicaid or CHIP enrollment through a fast and simplified eligibility determination or renewal process by which states may rely on findings made by another program designated as an express lane agency (ELA) for eligibility factors including, but not limited to, income or household size. Section 1902(e)(13)(E) of the Act, as amended by the CHIPRA, specifically addresses error rates for ELE. States are required to conduct a separate analysis of ELE error rates, applying a 3 percent error rate threshold, and are directed not to include those children who are enrolled in the State Medicaid plan or the State CHIP plan through reliance on a finding made by an ELA in any data or samples used for purposes of complying with a MEQC review or as part of the PERM measurement. Section 203(b) of the CHIPRA directed the Secretary to conduct an independent evaluation of children who enrolled in Medicaid or CHIP plans through the ELE option to determine the percentage of children who were erroneously enrolled in such plans, the effectiveness of the option, and possible legislative or administrative recommendations to more effectively enroll children through reliance on such findings.

    Section 601(a)(1) of the CHIPRA amended section 2015(c) of the Act, and provided a 90 percent federal match for CHIP spending related to PERM administration and excluded such spending from the CHIP 10 percent administrative cap. (Section 2105(c)(2) of the Act generally limits states to using no more than 10 percent of the CHIP benefit expenditures for administrative costs, outreach efforts, additional services other than the standard benefit package for low-income children, and administrative costs.)

    Section 601(b) of the CHIPRA required that the Secretary issue a new PERM rule and delay any calculations of a PERM improper payment rate for CHIP until 6 months after the new PERM final rule was effective. Section 601(c) of the CHIPRA established certain standards for such a rule, and section 601(d) of the CHIPRA provided that states that were scheduled for PERM measurement in FY 2007 could elect to accept a CHIP PERM improper payment rate determined in whole or in part on the basis of data for FY 2007, or could elect instead to consider its PERM measurement conducted for FY 2010 as the first fiscal year for which PERM applies to the state for CHIP. This same section provided that states that were scheduled for PERM measurement in FY 2008 could elect to accept a CHIP PERM improper payment rate determined in whole or in part on the basis of data for FY 2008, or could elect instead to consider its PERM measurement conducted for FY 2010 or FY 2011 as the first fiscal year for which PERM applies to the state for CHIP. The new PERM rule required by the CHIPRA was to include the following:

    • Clearly defined criteria for errors for both states and providers.

    • Clearly defined processes for appealing error determinations.

    • Clearly defined responsibilities and deadlines for states in implementing any corrective action plans (CAPs).

    • Requirements for state verification of an applicant's self-declaration or self-certification of eligibility for, and correct amount of, medical assistance under Medicaid or child health assistance under CHIP.

    • State-specific sample sizes for application of the PERM requirements.

    The Patient Protection and Affordable Care Act (Pub. L. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) (collectively referred to as the Affordable Care Act) was enacted in March 2010. The Affordable Care Act mandated changes to the Medicaid and CHIP eligibility processes and policies to simplify enrollment and increase the share of eligible persons that are enrolled and covered. Some of the key changes applicable to all states, regardless of a state decision to expand Medicaid coverage, include:

    • Use of Modified Adjusted Gross Income (MAGI) methodologies for income determinations and household compositions for most applicants.

    • Use of the single streamlined application (or approved alternative) for intake of applicant information.

    • Availability of multiple application channels for consumers to submit application information, such as mail, fax, phone, or on-line.

    • Use of a HHS-managed data services hub for access to federal verification sources.

    • Need for account transfers and data sharing between the state- or federal-Marketplace, Medicaid, and CHIP to avoid additional work or confusion by consumers.

    • Reliance on data-driven processes for 12 month renewals.

    • Use of applicant self-attestation of most eligibility elements as of January 1, 2014, with reliance on electronic third-party data sources for verification, if available.

    • Enhanced 90 percent federal financial participation (FFP) match for the design, development, installation, or enhancement of the state's eligibility system.

    In light of the implementation of the Affordable Care Act's major changes to the Medicaid and CHIP eligibility and enrollment provisions, and our continued efforts to comply with IPERIA and the CHIPRA, an interim change in methodology was implemented for conducting Medicaid and CHIP eligibility reviews under PERM. As described in the August 15, 2013 State Health Official (SHO) letter (SHO# 13-005), instead of the PERM and MEQC eligibility review requirements, we required states to participate in the Medicaid and CHIP Eligibility Review Pilots from FY 2014 to FY 2016 to support the development of a revised PERM methodology that provides informative, actionable information to states and allows CMS to monitor program administration. A subsequent SHO letter dated October 7, 2015 (SHO# 15-004) extended the Medicaid and CHIP Eligibility Review Pilots for one additional year.

    B. Regulatory History 1. Medicaid Eligibility Quality Control (MEQC) Program

    The MEQC program implements section 1903(u) of the Act, which defines erroneous excess payments as payments for ineligible persons and overpayments for eligible persons. Section 1903(u) of the Act instructs the Secretary not to make payment to a state with respect to the portion of its erroneous payments that exceed a 3 percent error rate, though the statute also permits the Secretary to waive all or part of that payment restriction if a state demonstrates that it cannot reach the 3 percent allowable error rate despite a good faith effort.

    Regulations implementing the MEQC program are at 42 CFR subpart P—Quality Control. The regulations specify the sample and review procedures for the MEQC program and standards for good faith efforts to keep improper payments below the error rate threshold. From its implementation in 1978 until 1994, states were required to follow the as-promulgated MEQC regulations in what was known as the traditional MEQC program. Every month, states reviewed a random sample of Medicaid cases and verified the categorical and financial eligibility of the case members. Sample sizes had to meet minimum standards, but otherwise were at state option.

    For cases in the sample found ineligible, the claims for services received in the review month were collected, and error rates were calculated by comparing the amount of such claims to the total claims for the universe of sampled claims. The state's calculated error rate was adjusted based on a federal validation subsample to arrive at a final state error rate. This final state error rate was calculated as a point estimate, without adjustment for the confidence interval resulting from the sampling methodology. States with error rates over 3 percent are subject under those regulations to a disallowance of FFP in all or part of the amount of FFP over the 3 percent error rate.

    States prevailed in challenges to disallowances based on the MEQC system, at HHS's Departmental Appeals Board (DAB), HHS's final level of administrative review. The DAB concluded that the MEQC sampling protocol and the resulting error rate calculation were not sufficiently accurate to provide reliable evidence to support a disallowance based on an actual error rate that exceeded the 3 percent threshold.

    Although the MEQC system remained in place, we provided states with an alternative to the MEQC program that was focused on prospective improvements in eligibility determinations rather than disallowances. These changes, outlined in Medicaid State Operations (MSO) Letter #93-58 dated July 23, 1993, provided states with the option to continue operating a traditional MEQC program or to conduct what we termed “MEQC pilots” that did not lead to the calculation of error rates. These pilots continue today. States choosing the latter pilot option have generally operated, on a year-over-year basis, year-long pilots focused on state-specific areas of interest, such as high-cost or high-risk eligibility categories and problematic eligibility determination processes. These pilots review specific program areas to determine whether problems exist and produce findings the state agency can address through corrective actions, such as policy changes or additional training. Over time, most states have elected to participate in the pilots; 39 states now operate MEQC pilots, while just 12 maintain traditional MEQC programs.

    2. Payment Error Rate Measurement (PERM) Program

    Promulgated as a result of the IPIA and OMB guidance, a proposed rule published in the August 27, 2004 Federal Register (69 FR 52620) set forth proposed provisions establishing the PERM program by which states would annually be required to estimate and report improper payments in the Medicaid program and CHIP. The state-reported, state-specific improper payment rates were to be used to compute the national improper payment estimates for these programs.

    In the October 5, 2005 Federal Register (70 FR 58260), we published a PERM interim final rule with comment period (IFC) that responded to public comments on the proposed rule and informed the public of both our national contracting strategy and plan to measure improper payments in a subset of states. That IFC described that a state's Medicaid program and CHIP would be subject to PERM measurement just once every 3 years; the 3 year period is referred to as a cycle, and the year in which a state is measured is known as its PERM year. In response to the public comments from that IFC, we published a second IFC in the August 28, 2006 Federal Register (71 FR 51050) that reiterated our national contracting strategy to estimate improper payments in both Medicaid and CHIP fee-for-service (FFS) and managed care. We set forth, and invited comments on, state requirements for estimating improper payments due to Medicaid and CHIP eligibility determination errors. We also announced that a state's Medicaid program and CHIP would be reviewed during the same cycle.

    In the August 31, 2007 Federal Register (72 FR 50490), we published a PERM final rule that finalized state requirements for: (1) Submitting claims to the federal contractors that conduct FFS and managed care reviews; (2) conducting eligibility reviews; and (3) estimating payment error rates due to errors in eligibility determinations.

    3. 2010 Final Rule: Revisions to MEQC and PERM To Meet the CHIPRA Requirements

    In the July 15, 2009 Federal Register (74 FR 34468), we published a proposed rule proposing revisions, as required by the CHIPRA, to the MEQC and PERM programs, including changes to the PERM review process. In the August 11, 2010 Federal Register (75 FR 48816), we published a final rule, which became effective on September 10, 2010, for the MEQC and PERM programs that codified several procedural aspects of the process for estimating improper payments in Medicaid and CHIP, including: Changes to state-specific sample sizes to reduce state burden, the stratification of universes to obtain required precision levels, eligibility sampling requirements, the modification of review requirements for self-declaration or self-certification of eligibility, the exclusion of children enrolled through the ELE from the PERM measurement, clearly defined “types of payment errors” to clarify that errors must affect payments for the purpose of the PERM program, a clearly defined difference resolution and appeals process, and state requirements for implementation of CAPs.

    Section 601(e) of the CHIPRA required harmonizing the MEQC and PERM programs' eligibility review requirements to improve coordination of the two programs, decrease duplicate efforts, and minimize state burden. To comply with the CHIPRA, the final rule granted states the flexibility, in their PERM year, to apply PERM data to satisfy the annual MEQC requirements, or to apply “traditional” MEQC data to satisfy the PERM eligibility component requirements.

    The final rule permitted a state to use the same data, such as the same sample, eligibility review findings, and payment review findings, for each program. However, the CHIPRA permits substituting PERM and MEQC data only where the MEQC review is conducted under section 1903(u) of the Act, so only states using the “traditional” MEQC methodology may employ this substitution option. Also, each state, with respect to each program (MEQC and PERM) is still required to develop separate error/improper payment rate calculations.

    II. Provisions of the Proposed Regulation

    We are proposing the following changes to part 431 to address the eligibility provisions of the Affordable Care Act, as well as to make improvements to the PERM eligibility reviews.

    A. MEQC Program Revision

    Section 1903(u) of the Act requires the review of Medicaid eligibility to identify erroneous payments, but it does not specify the manner by which such reviews must occur. The MEQC program was originally created to implement the requirements of section 1903(u) of the Act, but the PERM program, implemented subsequent to MEQC and under other legal authority, likewise reviews Medicaid eligibility to identify erroneous payments. As noted previously, the CHIPRA required harmonizing the MEQC and PERM programs and allowed for certain data substitution options between the two programs, to coordinate consistent state implementation to meet both sets of requirements and reduce redundancies. Because states are subject to PERM reviews only once every 3 years, we propose to meet the requirements in section 1903(u) of the Act through a combination of the PERM program and a revised MEQC program that resembles the current MEQC pilots, by which the revised MEQC program would provide measures of a state's erroneous eligibility determinations in the 2 off-years between its PERM cycle.

    As previously noted, states currently may satisfy our requirements by conducting either a traditional MEQC program or MEQC pilots, with the majority of states (39) electing the latter due to the pilots' flexibility to target specific problematic or high-interest areas. The revised MEQC program we propose here would eliminate the traditional MEQC program and, instead, formalize, and make mandatory, the pilot approach. During the 2 off-years between each state's PERM years, when a state is not reviewed under the PERM program, we propose that it conduct one MEQC pilot spanning that 2 year period. The revised regulations we propose here would conform the MEQC program to how the majority of states have applied the MEQC pilots through the administrative flexibility we granted states decades ago to meet the requirements of section 1903(u) of the Act. Assuming this rule is finalized as proposed, we believe such MEQC pilots will provide states with the necessary flexibility to target specific problem or high-interest areas as necessary. As a matter of semantics, note that in this proposed rule we continue to use the term “pilots,” which sometimes connote short-term studies or projects, because they are not fixed or defined projects, but, rather, as just described, states will have flexibility to adapt pilots to target particular areas.

    We further propose to take a similar approach here to “freezing” error rates as we took when we initially introduced MEQC pilots 2 decades ago. In 1994, when we introduced MEQC pilots we offered states the ability to “freeze” their error rates until they resumed traditional MEQC activities. In a similar vein, we now propose to freeze a state's most recent PERM eligibility improper payment rate during the 2 off-years between a state's PERM cycles, when the state will be conducting an MEQC pilot. As noted previously, section 1903(u) of the Act sets a 3 percent threshold for improper payments in any period or fiscal year and generally requires the Secretary to withhold payments to states with respect to the amount of improper payments that exceed the threshold. Therefore, we propose freezing the PERM eligibility improper payment rate as it allows each state a chance to test the efficacy of its corrective actions as related to the eligibility errors identified during its PERM year. Our proposal also allows states a chance to implement prospective improvements in eligibility determinations before having their next PERM eligibility improper payment measurement performed, where identified improper payments would be subject to potential payment reductions and disallowances under 1903(u) of the Act.

    We propose to revise § 431.800 to revise and clarify the MEQC program basis and scope.

    We propose to delete § 431.802 as federal financial participation, state plan requirements, and the requirement for the MEQC program to meet section 1903(u) of the Act would no longer be applicable to the revised MEQC program.

    We propose to revise § 431.804 by adding definitions for “corrective action,” “deficiency,” “eligibility,” “Medicaid Eligibility Quality Control (MEQC),” “MEQC Pilot,” “MEQC review period,” “negative case,” “off years,” “Payment Error Rate Measurement (PERM),” and “PERM year.”

    We propose to revise the definitions for “active case,” and “eligibility error,” and remove “administrative period,” “claims processing error,” “negative case action,” and “state agency.” We are adding, revising, or removing definitions to provide additional clarification for the proposed MEQC program revisions.

    We propose to revise § 431.806 to reflect the state requirements for the MEQC pilot program. Section 431.806 clarifies that following the end of a state's PERM year, it would have up to November 1 to submit its MEQC pilot planning document for our review and approval.

    We propose to revise § 431.810 to clarify the basic elements and requirements of the MEQC program.

    We propose to revise § 431.812 to clarify the review procedures for the MEQC program. As described earlier, the CHIPRA required harmonizing the PERM and MEQC programs and authorized us to permit states to use PERM to fulfill the requirements of section 1903(u) of the Act; the existing regulation at § 431.812(f), permitting states to substitute PERM-generated eligibility data to meet MEQC program requirements, was promulgated under the CHIPRA authority. Given that the Congress, in the CHIPRA, directed the Secretary to harmonize the PERM and MEQC programs and expressly permitted states to substitute PERM for MEQC data, we believe that the PERM program, with the proposed revisions discussed in subpart Q, meets the requirements of section 1903(u) of the Act.

    Our proposed approach would continue to harmonize the PERM and MEQC programs. It would reduce the redundancies associated with meeting the requirements of two distinct programs. As noted earlier, the CHIPRA, with certain limitations, allows for substitution of MEQC data for PERM eligibility data. Through our proposed approach, in their PERM year, states would participate in the PERM program, while during the 2 off-years between a state's PERM cycles they would conduct a MEQC pilot, markedly reducing states' burden. Moreover, we are proposing to revise the methodology for PERM eligibility reviews, as discussed below in §§ 431.960 through 431.1010. The MEQC pilots would focus on areas not addressed through PERM reviews, such as negative cases and understated/overstated liability, as well as permit states to conduct focused reviews on areas identified as error-prone through the PERM program, so the proposed new cyclical PERM/MEQC rotation would yield a complementary approach to ensuring accurate eligibility determinations.

    By conducting eligibility reviews of a sample of individuals who have received services matched with Title XIX or XXI funds, the PERM program would, under our proposal, continue to focus on identifying individuals receiving medical assistance under the Medicaid or CHIP programs who are, in fact, ineligible. Such PERM eligibility reviews conform with section 1903(u) of the Act's requirement that states measure erroneous payments due to ineligibility. Likewise, these eligibility reviews would continue under the MEQC pilots during states' off-years and include a review of Medicaid spend-down as a condition of eligibility, conforming with other state measurement requirements of section 1903(u) of the Act. We would calculate a state's eligibility improper payment rate during its PERM year, which would remain frozen at that level during its 2 off-years when it conducts its MEQC pilot. Again, freezing states' eligibility improper payment rates between PERM cycles would allow states time to work on effective and efficacious corrective actions which would improve their eligibility determinations. This approach also encourages states to pursue prospective improvements to their eligibility determination systems, policies, and procedures before their next PERM cycle, in which an eligibility improper payment rate would be calculated with the potential for payment reductions and disallowances to be invoked, in the event that a state's eligibility improper payment rate is above the 3 percent threshold.

    1. Revised MEQC Review Procedures

    For more than 2 decades, the majority of states have used the flexibility of MEQC pilots to review state-specific areas of interest, such as high-cost or high-risk eligibility categories and problematic eligibility determination processes. This flexibility has been beneficial to states because it made MEQC more useful from a corrective action standpoint.

    We propose that MEQC pilots focus on cases that may not be fully addressed through the PERM review, including, but not limited to, negative cases and payment reviews of understated and overstated liability. Still, under our proposal, states would retain much of their current flexibility. In § 431.812, we propose that states must use the MEQC pilots to perform both active and negative case reviews, but states would have flexibility surrounding their active case review pilot. In the event that a state's eligibility improper payment rate is above the 3 percent threshold for two consecutive PERM cycles, we propose this flexibility would decrease as states would be required to comply with CMS guidance to tailor the active case reviews to a more appropriate MEQC pilot which would be based upon a state's PERM eligibility findings. In order to ensure states with consecutive PERM eligibility improper payment rates over the threshold, are identifying and conducting MEQC active case reviews which are appropriate during their off-years, CMS would provide direction for conducting a MEQC pilot that would suitably address the error-prone areas identified through the state's PERM review. Both the PERM and MEQC pilot programs are operationally complementary, and should be treated in a manner that allows for states to review identified issues, develop corrective actions, and effectively implement prospective improvements to their eligibility determinations.

    Active and negative cases represent the eligibility determinations made for individuals which either approve or deny an individual's eligibility to receive benefits and/or services under Medicaid or CHIP. Individuals who are found to be eligible and authorized to receive benefits/services are termed active cases, whereas individuals who are found to be ineligible for benefits are known as negative cases. As proposed at § 431.812(b)(3) a state may focus its active case reviews on three defined areas, unless otherwise directed by us or, as proposed at § 431.812(b)(3)(i), it may perform a comprehensive review that does not limit its review of active cases. Additionally, we propose that the MEQC pilots must include negative cases because we also propose to eliminate PERM's negative case reviews; our proposal would ensure continuing oversight over negative cases to ensure the accuracy of state determinations to deny or terminate eligibility.

    Under the new MEQC pilot program, we propose that states review, a minimum total of 400 Medicaid and CHIP active cases. We propose that at least 200 of those reviews must be Medicaid cases and expect that states will include some CHIP cases, but, beyond that, we propose that states would have the flexibility to determine the precise distribution of active cases. For example, a state could sample 300 Medicaid and 100 CHIP active cases; it would describe its active sample distribution in its MEQC pilot planning document that it would submit to us for approval. Under the new MEQC pilot program, we also propose that states review, at a minimum, 200 Medicaid and 200 CHIP negative cases. Currently, under the PERM program, states are required to conduct approximately 200 negative case reviews for each the Medicaid program and CHIP (204 is the base sample size, which may be adjusted up or down from cycle to cycle depending on a state's performance). We propose a minimum total negative sample size of 400 (200 for each program) for the proposed MEQC pilots because, as mentioned above and discussed further below, we propose to eliminate PERM's negative case reviews.

    Historically, MEQC's case reviews (both active and negative) focused solely on Medicaid eligibility determinations. Here, we propose that the new MEQC pilots would now include both Medicaid and CHIP eligibility case reviews. Because we propose to eliminate PERM's negative case reviews, it is important that we concomitantly expand the MEQC pilots to include the review of no less than 200 CHIP negative cases to ensure that CHIP applicants are not inappropriately denied or terminated from a state's program. In the event that CHIP funding should end, then states would be required to review only Medicaid active and negative cases, as there would no longer be any cases associated with CHIP funding.

    We will provide states with guidelines for conducting these MEQC pilots, and we propose that states must submit MEQC pilot planning documents for CMS's approval. This approach will ensure that states are planning to conduct pilots that are suitable and in accordance with our guidance.

    This proposed rule would require states to conduct one MEQC pilot during their 2 off-years between PERM cycles. We propose that the MEQC pilot review period span 12 months, beginning on January 1, following the end of the state's PERM review period. For instance, if a state's PERM review period is July 1, 2018 to June 30, 2019, the next proposed MEQC pilot review period would be January 1-December 31, 2020. We propose at § 431.806 that a state would have up to November 1 following the end of its PERM review period to submit its MEQC pilot planning document for CMS review and approval. Following a state's MEQC pilot review period, we propose it would have up to August 1 to submit a CAP based on its MEQC pilot findings.

    Following publication of the final rule, states will not all be at the same point in the MEQC pilot program/PERM timeline. The impact of the proposed MEQC timeline for each cycle of states is clarified below to assist each cycle of states in understanding when the proposed MEQC requirements would apply.

    Cycle 1 States: First PERM review period under new rule: July 2017-June 2018; First MEQC pilot planning document due by November 1, 2018; MEQC review period would be January 1-December 31, 2019; MEQC pilot program findings and CAP reported to CMS by August 1, 2020.

    Cycle 2 States: Further CMS guidance will be provided regarding the implementation of a modified MEQC pilot program that will occur prior to the beginning of your first PERM cycle under the new rule. First PERM review period under new rule: July 2018-June 2019; Second MEQC pilot planning document due by November 1, 2019.

    Cycle 3 States: First MEQC pilot planning document due by November 1, 2017; MEQC review period would be January 1-December 31, 2018; MEQC pilot program findings and CAP reported to CMS by August 1, 2019; First PERM review period under new rule: July 2019-June 2020.

    2. MEQC Pilot Planning Document

    We propose to revise § 431.814 to clarify the revised sampling plan and procedures for the MEQC pilot program. We propose that states be required to submit, for our approval, a MEQC Pilot Planning Document that would detail how it would propose to perform its active and negative case reviews. This process is consistent with that used historically with MEQC pilots and also with the FY 2014-2017 Medicaid and CHIP Eligibility Review Pilots. Prior to the first proposed submission cycle, we would provide states with guidance containing further details informing them of what information would need to be included in the MEQC Pilot Planning Document.

    3. Timeline and Reporting for MEQC Pilot Program

    We propose to revise § 431.816 to clarify the case review completion report submission deadlines. We propose that states be required to report, through a CMS-approved Web site and in a CMS-specified format, on all sampled cases by August 1 following the end of the MEQC review period, which we believe will streamline the reporting process and ensure that all findings are contained in a central location.

    We propose to revise § 431.818 to remove the mailing requirements and the time requirement.

    4. MEQC Corrective Actions

    We propose to revise § 431.820 to clarify the corrective action requirements under the proposed MEQC pilot program. Corrective actions are critical to ensuring that states continually improve and refine their eligibility processes. Under the existing MEQC program, states must conduct corrective actions on all identified case errors, including technical deficiencies, and we propose here that states continue to be required to conduct corrective actions on all errors and deficiencies identified through the proposed MEQC pilot program.

    We propose that states report their corrective actions to CMS by August 1 following completion of the MEQC pilot review period, and that such reports also include updates on the life cycles of previous corrective actions, from implementation through evaluation of effectiveness.

    We propose to delete § 431.822, as we would no longer be performing a federal case eligibility review of the revised MEQC program.

    5. MEQC Disallowances

    Section I.B.1, above, provides a detailed regulatory history of CMS's implementation of the MEQC program, and, in conformity with CMS's policy since 1993, we propose not using the revised MEQC pilot program to reduce payments or to institute disallowances. Instead, we propose to formalize the MEQC pilot process to align all states in one cohesive pilot approach to support and encourage states during their 2 off-years between PERM cycles to address, test, and implement corrective actions that would assist in the improvement of their eligibility determinations. This approach also better harmonizes and synchronizes the MEQC pilot and PERM programs, leaving them operationally complementary. Additionally, our proposal would be advantageous to all states as they each would be exempt from potential payment reductions and disallowances while conducting their MEQC pilot, therefore placing the main focus of the pilots solely on the refinement and improvement of their eligibility determinations. Based on this approach, we propose that each state's eligibility improper payment rate would be calculated in its PERM year, and that its rate would be frozen at that level during its off-years when it would conduct an MEQC pilot and implement corrective actions.

    As previously discussed, the CHIPRA authorized certain PERM and MEQC data substitution, and we believe that the PERM eligibility improper payment rate determination methodology satisfies the requirements of section 1903(u) of the Act to be used for that provision's payment reduction (and potential disallowance) requirement. Section 1903(u)(1)(B) of the Act permits the Secretary to waive, in whole or part, section 1903(u)(1)(a)'s required payment reductions if a state is unable to reach an allowable improper payment rate for a period or a fiscal year despite the state's good faith effort. What constitutes a state's good faith effort is outlined at the proposed § 431.1010(b). As part of the proposed good faith effort, we propose that a state's participation in the proposed MEQC pilot program in conformity with §§ 431.800 through 431.820 of this proposed regulation, a