Federal Register Vol. 82, No.11,

On March 18, 2016, the Competitive Service Act of 2015 (the “Act”) was enacted as Public Law 114-137. The Act allows an “appointing authority” to share a competitive certificate issued under delegated examining procedures with one or more “appointing authorities” to make an appointment to a position that is in the same occupational series, grade level (or equivalent), and duty location during the 240-day period beginning on the date of issuance of the certificate of eligibles.

Under current rules, an appointing authority may share a certificate within the bureaus and components of his or her department or agency. The current practice allows an appointing authority to expedite hiring when multiple vacancies for the same position exist throughout his or her organization. For example, suppose that the Department of Treasury headquarters human resources (HQ HR) office recruits for a Financial Management Specialist, GS-501-12, and hires two highly qualified individuals from the certificate of eligibles. Treasury's HQ HR office may currently share the certificate with its components, like the Bureau of the Fiscal Service and the Internal Revenue Service, that have identified Financial Management Specialist vacancies that need to be filled. This current practice allows these different components with the Department to leverage the recruitment efforts already undertaken by the Department.

While the Act does not define “appointing authority” for the purpose of shared certificates, its clear purpose is to expand current practice to allow an appointing authority to share his or her certificates with an appointing authority in other departments or agencies, not just within the same agency (e.g., the Department of Treasury will now be able to share certificates with the Department of Energy). Consistent with this purpose, in this interim rule, OPM refers to the “original hiring agency” and the “receiving agency” with respect to shared certificates, rather than using the more generic term “appointing authority.”

Congress's purpose in enacting the Act was to help facilitate faster hiring through the sharing of talent across the Government by permitting agencies to share resumes and select from among candidates who have competed for similar positions at another hiring agency, were assessed, and were referred by that agency. The new process will benefit agencies who may make selections from among the top rated applicants readily available, as well as applicants who through one job application may now be considered for more public service opportunities in their desired Federal occupation.

The law specifies that an appointing official can select an applicant for appointment from the certificate of another agency provided that certain conditions are met.

• The hiring agency seeking to share the certificate may share the certificate with one or more hiring agencies only if the announcement of the original position stated that the resulting certificate may be used by one or more Federal agencies, and applicants “opt-in,” electing to have their applications shared with agencies other than the agency posting the job announcement.

• An agency seeking to use another agency's certificate must provide advance notice of the available position to its own employees, give them up to 10 days to apply, and review their qualifications before it can make a selection from the certificate from the original hiring agency.

It is plain from the Act that only the original hiring agency may “share” a certificate with any other agency. But Congress did not define precisely what it means to “share” the certificate. One possible approach is that when the original hiring agency “shares” the certificate with other agencies they must simultaneously work the certificate in a coordinated fashion, accounting for declinations, failures to respond, selections, and so on as if they were integrated arms of the same employer. (This is how the process might work when a department shares a certificate among a number of its different components.) Another possible approach is that each of the other agencies may work the certificate independently, as if the certificates had been referred from the top of a register or inventory. Neither of these approaches is compelled by the text of the statute and as such OPM has determined that the most reasonable approach, and the one that best effectuates Congress's apparent purpose, is the latter of the two. A shared certificate of eligibles may be used by a receiving agency independently of other receiving agencies. Each receiving agency is responsible for establishing a unique instance of a case file to document that agency's use of the certificate. This will be helpful in the event a receiving agency must later reconstruct its hiring actions. Allowing multiple agencies to use certificates independently of one another also supports the timeliest and practical implementation of these provisions and minimizes the risk of error associated with multiple agencies simultaneously working the same certificate.

However, because of the added complexity of any “sharing” of certificates, the ability to track the distribution of certificates to receiving agencies must be a feature of these provisions. Thus, whenever the original agency shares a certificate, it must maintain a record of any agencies with whom the certificate was shared. This is important in the event any errors occur which require reconstruction of all hiring actions which flow from a certificate generated by the original agency. In this scenario, if an error occurs at the original agency, the original agency is responsible solely for notifying each succeeding receiving agency that received a shared certificate of the error. Any corrective actions or reconstructions subsequent to the original agency's would be the responsibility of each receiving agency that made a selection.

The original hiring agency (i.e., the agency sharing the certificate) must issue a certificate in accordance with competitive examining procedures for a position it is seeking to fill. This includes public notice, rating and ranking, the application of veterans' preference, etc. The 240-day window (during which other Federal agencies may use the certificate of eligibles to select an individual) begins on the date the certificate is issued by the original hiring agency. OPM notes that the Competitive Service Act includes this 240-day window in 5 U.S.C. 3318, related to rule-of-three hiring, but does not expressly repeat this requirement in 5 U.S.C. 3319, related to hiring through category rating. However, the legislative history expresses congressional intent to apply the 240-day limitation to both hiring methods. See H.R. Rep. No. 114-367 (Dec. 3, 2015); S. Rep. No. 114-143 (Sept. 15, 2015). Moreover, there is no logical reason to have different expiration periods for shared certificates depending on whether the original hiring agency chooses to hire by the rule-of-three method or the category rating method, and having two different expiration periods for shared certificates could lead to confusion. For this reason we are applying the same 240-day expiration period to shared certificates under both hiring methods.

The original hiring agency can (1) make a selection and then share the certificate with one or more receiving agencies or (2) share the certificate with one or more receiving agencies after reviewing, and deciding not to hire from, its certificate of eligible applicants. OPM notes in this regard that when an agency announces a position, examines and rates applicants, and issues a certificate of eligibles, it must do so for its own hiring needs in the first instance. An agency may not generate a certificate solely for the purpose of sharing it with another agency. That would be misleading to applicants and contrary to competitive principles.

If the original hiring agency makes a selection and shares the certificate, any pass-overs of preference eligibles or objections to other eligible candidates must be resolved by that agency before the certificate may be shared with another agency. The 240-day window cannot be extended while the pass-over of a preference eligible or objection request is being resolved; the law does not permit extensions of shared certificates.

Once the above processes have been completed, the original hiring agency may share the certificate of eligibles with one or more Federal agencies. In order to share a certificate, the Delegated Examining Unit (DEU) of the original agency may transmit the certificate to a DEU of a receiving agency. The DEU of the original agency must audit the original agency's own use of the certificate in accordance with the procedures of the Delegated Examining Operations Handbook (DEOH) before the certificate is shared.

When sharing a certificate of eligibles, the original agency must include all documentation pertaining to the creation of that certificate (e.g., the job analysis, a copy of job opportunity announcement, the rating schedule, job applications, etc.) and must safeguard (i.e., redact) any personally identifiable information not required by the receiving agency to use the certificate for its intended purpose. The original agency shares the certificate of eligibles in its original form, with the names of those applicants who have been selected and those who have chosen not to “opt-in” redacted, in order to retain the original ordering of the certificate subject to these appropriate deletions.

The original agency may share a certificate in one or both of two ways: (1) Simultaneous sharing with multiple agencies; and (2) serial sharing, i.e., sharing with one agency at a time.

Simultaneous Sharing. The original agency may share the certificate with one or more agencies at the same time. Each receiving agency works the certificate independently. All selections from shared certificates must be made within 240 days of the date of the issuance of the certificate by the original agency. Each receiving agency creates its own case file for audit and reconstruction purposes, documenting its compliance with the DEOH and all applicable regulations.

Serial Sharing. Another option is for the original agency to share a certificate with just one agency at a time. Under this option, the original agency shares the certificate with the first receiving agency. The first receiving agency works the certificate and makes selections within 240 days of the date of issuance of the certificate by the original agency. After sharing the certificate with the first receiving agency, the original agency may share the certificate with a second receiving agency. The second receiving agency works the certificate and makes selections within 240 days of the date of issuance of the certificate by the original agency. Each receiving agency must create its own case file for audit and reconstruction purposes, documenting its compliance with the DEOH and all applicable regulations. This process may continue to additional receiving agencies as long as this procedure is followed and all selections are made within 240 days of the date of issuance of the certificate by the original agency.

As noted above, the processes are not exclusive, i.e., an agency may start with simultaneous sharing and subsequently permit additional sharing through a serial sharing scenario.

In the event that the original agency determines that an error was made on the original certificate, the original agency must notify all receiving agencies of the details of the error; receiving agencies are responsible for taking appropriate action to address any erroneous actions that may have occurred due to the error by the original agency.

Before using a shared certificate, a receiving agency must consider its own employees for the position under the agency's merit promotion procedures. This includes considering individuals covered under the agency's Career Transition Assistance Program (CTAP) and the agency's reemployment priority list (RPL), where applicable, as well as other individuals for which consideration is required as part of the internal selection process. See 5 CFR part 330, subparts B and F.

The Competitive Service Act provides for notice to a receiving agency's own employees, an internal application period of no more than 10 days, and consideration of the internal applicants before a selection can be made from this shared certificate. The law does not permit an extension of this internal application period beyond 10 days.

The law also specifies that the internal application process is subject to applicable collective bargaining obligations (to the extent consistent with law). However, the Competitive Service Act does not affect the provision of the Federal Service Labor-Management Relations Statute under which management has the right to fill a position either from among properly ranked and certified candidates for promotion or from any other appropriate source, such as a competitive certificate. See 5 U.S.C. 7106(a)(2)(C); 5 CFR 330.102, 335.103(b)(4).

If a receiving agency makes a selection from among its own employees (i.e., under merit promotion procedures) the process ends with respect to that agency. But if the agency wishes to make a selection from the shared certificate (after first considering its own employees), it must first provide selection priority, where applicable, to individuals eligible under the Interagency Career Transition Assistance Program (ICTAP) who applied to the original job announcement. See 5 CFR part 330, subpart G. The agency is not required to re-advertise the position for ICTAP eligibles because the original agency has already afforded an opportunity for ICTAP eligibles to apply and be considered. This allows the agency to use a ready-made certificate of eligibles while still adhering to the provisions of part 330, subpart G.

If there are no ICTAP eligibles, a receiving agency can make a selection from the shared certificate in accordance with veterans' preference rules and the provisions governing selections under competitive examining procedures. A receiving agency may not reassess the applicants for purposes of rating/ranking. A receiving agency may seek to pass over a preference eligible, and would follow the usual rules for doing so when filling positions under competitive examining procedures.

OPM is proposing to limit use of shared certificates to delegated examining for permanent and term appointments. We are excluding temporary appointments, i.e., those not to exceed one year, from these provisions because of the requirement that a receiving agency must first consider individuals from within its own workforce prior to making a selection from a shared certificate. We believe it would be inefficient to undergo this process for appointments of a very short duration.

Positions may be full-time or other than full-time (i.e., part-time, seasonal, on-call, and intermittent). As noted above, the original hiring agency must complete all of its actions on the certificate before it may be shared. As also was previously observed, the original hiring agency does not have to make a selection in order for the certificate to be shared. The original agency may share the certificate with one or more agencies.

A receiving hiring agency may select an individual from a shared certificate only for a position of the same occupational series, grade level, and duty location as the position advertised by the original hiring agency. The Act states that the shared certificate may also be used to select for a “similar grade level” to that for which the original hiring agency issued its certificate. OPM interprets the term “similar grade level” in this context to mean a corresponding rate or level of pay under an alternative pay system for a position excluded from the General Schedule. We do not interpret the term “similar grade level” to mean a higher or lower General Schedule grade than that for which the original hiring agency issued its certificate. It would not be efficient for an agency to use a certificate for higher-graded positions to select for lower-graded positions, and it would violate competitive principles to use a certificate for lower-graded positions to select for higher-graded positions (as different applicants would have competed if they had been aware that the vacancy could be filled at a higher level than advertised). For the same reasons OPM is not permitting the use of shared certificates to fill vacancies for positions with higher full performance levels.

A receiving agency must verify through its job analysis that the minimum qualification requirements (including use of any selective placement factors) and competencies—or knowledge, skills, and abilities (KSAs)—assessed for the original position are appropriate for the position to be filled. This verification is necessary to establish the job-relatedness and relevance of the assessment method used, consistent with 5 CFR part 300, subpart A.

A receiving agency may make its selection from a shared certificate within the 240-day period beginning on the date the original hiring agency issued the certificate of eligibles (not on the date on which the original hiring agency provided the certificate to the receiving agency).

The original hiring agency must provide public notice via a job opportunity announcement posted on www.USAJOBS.gov for the position being filled, in accordance with public notice requirements for filling jobs under the competitive examining process. The original announcement must indicate that the resulting list of eligible candidates may be shared with one or more other hiring agencies. Therefore, we are amending 5 CFR part 330 to require that if an agency is sharing a certificate of eligibles under part 332, the original hiring agency must provide notice in the job opportunity announcement that the resulting list of eligible candidates may be used by one or more other hiring agencies. The original hiring agency must provide an opportunity for applicants to “opt-in” to have their applications and other personal information shared with one or more other hiring agencies under these provisions. This allows the applicant to furnish advance written consent for disclosure of the information under the Privacy Act. See 5 U.S.C. 552a(b).

The original hiring agency may not share a certificate containing the name and personal information of an applicant unless that applicant has chosen to “opt-in” for these purposes. If an applicant chooses not to “opt-in,” his/her application materials will not be shared and the applicant will receive no further consideration when a certificate of eligibles is shared with one or more hiring agencies. His or her name will be redacted on the shared certificate.

Before making a selection from a shared certificate, a receiving agency must notify its employees of the opportunity to apply and be considered before a selection can be made from the shared certificate and of a period of up to 10 days to apply consistent with the provisions of part 335. If the agency has RPL eligibles or CTAP eligibles, the notice must provide information about their priority.

Before using a shared certificate, a receiving agency must notify the list of candidates of its receipt of their names and application materials and its intention of considering them for a position. A receiving agency must also inform these individuals of its obligation to consider applicants from within its own workforce who apply during the required internal application period and any other individuals the agency is required to consider (e.g., individuals eligible for consideration under the CTAP or from the RPL). The notification must include the agency, position title, series, grade level (or equivalent), and duty location.

Before using a shared certificate, a receiving agency must consider its own employees for the position that the original hiring agency advertised. The receiving agency must consider individuals covered under the agency's RPL or CTAP where applicable. At this point, a receiving agency either makes a selection from among its own employees under merit promotion procedures, or it may consider applicants from the certificate of eligibles shared by the original hiring agency.

If, after considering its own employees, a receiving agency wishes to make a selection from the shared certificate, it must first provide selection priority to any external applicants who applied to the original job announcement who are ICTAP eligible. If there are no ICTAP eligibles who met the well-qualified definition, a receiving agency can make a selection from the shared certificate in accordance with veterans' preference rules and the provisions governing selections under competitive examining procedures. Upon completion of the process, a receiving agency must audit the certificate.

Objections to a non-preference eligible applicant and requests to pass over an individual entitled to veterans' preference must be adjudicated on a case-by-case basis. Each case must be reviewed on its own merits. Therefore, adjudications by the original hiring agency (or the Office of Personnel Management in the case of a 30 percent or more disabled veteran) sustaining objections or granting requests to pass over do not extend to the receiving agency if a certificate is shared. A receiving agency may object to an applicant or request to pass over an individual entitled to veterans' preference on a shared certificate in accordance with the procedures outlined in the DEOH and the provisions of part 332.

Likewise, if using numerical rating, the consideration of an applicant by the original hiring agency does not count as a consideration of the applicant by a receiving agency for purposes of the three-consideration rule, 5 CFR 332.405. The three-consideration rule does not apply when using category rating.

When sharing a certificate of eligibles, the original hiring agency must share all documentation pertaining to the creation of that certificate, including but not limited to the job analysis, testing and examination materials, the job opportunity announcement, and applications, as relevant. The original agency must safeguard any personally identifiable information not needed for effective use of the certificate by the receiving agency.

The original hiring agency and any receiving agency using a shared certificate must each maintain case file documentation for that agency's selection or selections sufficient for each agency that used the certificate to make a selection to reconstruct its own hiring actions later, if necessary. Each time a certificate is shared, each receiving agency is responsible for creating a new instance of a case file to document its use.

In the event that the original agency determines that an error was made on the original certificate, the original agency must notify all receiving agencies of the details of the error. The original hiring agency must make available, to any receiving agency that needs it, all relevant case file documents concerning the selection or selections made by the original agency, as necessary, to make full reconstruction possible. Each receiving agency would be responsible for taking appropriate action to address any erroneous actions that it took due to the error by the original agency.

Each agency is responsible for the proper selection, audit, recordkeeping, etc., of delegated examining activities. All actions taken on competitive certificates must be documented in accordance with the DEOH and all applicable regulations.

OPM welcomes recommendations on rule changes to improve the administration of the Competitive Service Act of 2015 and on implementation guidance.

OPM is also amending § 337.304 to reflect the Act's renumbering of 5 U.S.C. 3319.

Section 2(d) of Public Law 114-137, the Competitive Service Act of 2015, directs the rulemaking procedure to be followed for this rule. It states that “the Director of the Office of Personnel Management shall issue an interim final rule with comment to carry out the amendments made by this section.” Therefore the general notice of proposed rulemaking typically required for rulemaking under 5 U.S.C. 553(b) is statutorily waived for this rule.

This rule has been reviewed by the Office of Management and Budget in accordance with Executive Order 12866.

I certify that this regulation would not have a significant economic impact on a substantial number of small entities because it affects only Federal employees.

This regulation will not have substantial direct effects on the States, on the relationship between the National Government and the States, or on distribution of power and responsibilities among the various levels of government. Therefore, in accordance with Executive Order 13132, it is determined that this rule does not have sufficient federalism implications to warrant preparation of a Federalism Assessment.

This regulation meets the applicable standard set forth in section 3(a) and (b)(2) of Executive Order 12988.

This rule will not result in the expenditure by State, local or tribal governments of more than $100 million annually. Thus, no written assessment of unfunded mandates is required.

This action pertains to agency management, personnel and organization and does not substantially affect the rights or obligations of non-agency parties and, accordingly, is not a “rule” as that term is used by the Congressional Review Act (Subtitle E of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA)). Therefore, the reporting requirement of 5 U.S.C. 801 does not apply.

This final regulatory action will not impose any additional reporting or recordkeeping requirements under the Paperwork Reduction Act.

Accordingly, OPM is amending parts 330, 332, and 337 of title 5, Code of Federal Regulations, as follows:

On December 27, 2007, OPM issued a proposed rule at 72 FR 73282 to revise regulations on medical qualification determinations. The public comment period on the proposed rule ended February 25, 2008. OPM received written comments from four agencies, a union, and an individual pertinent to the proposed rule. A discussion of the comments is provided under the respective subpart below.

The final rule also replaces the verb “shall” with “must” for added clarity and readability. Any provisions in this part using the verb “must” have the same meaning and effect as previous provisions in this part using “shall.” The final rule also adds four authority citations to clarify the scope of applicability: (1) 5 U.S.C. 3312 Preference eligibles; physical qualifications; waiver; (2) 5 U.S.C. 3318 Competitive service; selection from certificates; (3) 5 U.S.C. 3320 Excepted service; government of the District of Columbia; selection; and (4) 5 U.S.C. 3504 Preference eligibles; retention; physical qualifications; waiver.

The summary covers the basis for OPM issuance of the final rule and outlines the revisions that have been made to its regulations for medical qualification determinations.

Subpart A covers general information. The proposed subpart A added wording to clarify applicability of this regulation to excepted service positions; updated references to the Rehabilitation Act of 1973, as amended (Rehabilitation Act), and to portions of the Americans with Disabilities Act (ADA) of 1990, as amended by the ADA Amendments Act of 2008 (ADAAA), that are applicable to the Federal Government through the Rehabilitation Act; added examples to the definition in § 339.104 of “medical evaluation program”; added the definition of “medical restriction,” and separated and moved definitions of “subtle incapacitation” and “sudden incapacitation.”

In response to the comments on the proposed rule, which are discussed below, we have revised subpart A to—

(1) Retain an example regarding removal of a preference eligible in § 339.101.

(2) Replace the word “suitable” with “appropriate” in § 339.102(c) to more accurately reflect the proper administrative action that an agency may render when an individual fails to meet an established condition of employment and to avoid confusion with suitability determinations.

(3) Add language to § 339.102(c) that failure of an applicant to be examined, after a tentative job offer is extended, may result in an applicant not being considered further for the position.

(4) Add language to § 339.102(c) that failure of an applicant, who received a tentative offer of employment, to provide medical documentation requested by the agency medical review officer or related hiring agency medical or human resources personnel, following a pre-placement medical examination, may result in an applicant not being considered further for the position.

(5) Add the term “applicant” where appropriate in subpart A.

(6) Revise § 339.103 to remove the phrase “to the extent consistent with” from the section in the proposed rule on compliance with disability laws and regulations. The new language clarifies that the statutory provisions of the Rehabilitation Act and the ADA apply to actions under this section.

(7) Correct the reference to the definition of “qualified individual with a disability” in § 339.103.

(8) Clarify the definitions of “medical documentation” and “medical restriction” in § 339.104.

(9) Add the definition of “medical surveillance” in § 339.104.

(10) Clarify the definition of “physical requirement” in § 339.104.

One agency stated that § 339.101 of the current regulation provides an example, “removal of a preference eligible employee in the excepted service under part 752,” of a situation when medical issues arise in connection with an OPM regulation that governs a particular personnel decision. The agency stated the example did not appear in the proposed rule and recommended that it be retained because the example provides clarity. OPM agrees this example assists the reader in understanding the intent of the regulation and is retaining that example in the final § 339.101.

One agency proposed adding the term “physical fitness standards or testing” to § 339.102(c). The agency rationale was that this change clarifies the applicability of this provision. OPM has decided not to accept this comment. As discussed below, OPM has decided to remove the terms “physical fitness standards” and “physical fitness testing” from the final rule at this time.

One agency proposed amending the language in proposed § 339.102(c) to delete the word “suitable” and replace it with the word “indicated.” The word “suitable” was contained in the portion of the proposed rule that read failure to meet properly established medical standards or physical requirement under this part means that the applicant or employee is not qualified for the position unless a waiver or reasonable accommodation is “suitable.” The rationale of the commenter was that the word “indicated” more accurately reflected the appropriate administrative action that an agency may render when an individual fails to meet an established condition of employment. OPM agrees with the agency that the word “suitable” could lead to confusion, especially in relation to the suitability function administered by OPM pursuant to part 731 of this title. Instead of the word “indicated,” however, OPM has revised the section with the word “appropriate.” The use of the word “appropriate” makes it clear that a waiver or a reasonable accommodation under § 339.102(c) must meet certain conditions. OPM also revised the sentence to “reasonable accommodation or a waiver is appropriate” to track the order of the citations.

OPM included an additional clarification to § 339.102(c) by adding the phrase “which may include psychological” after “medical” to the sentence noting, when there are established medical standards and/or physical requirements for the position, the failure of an applicant to be examined may result in an applicant no longer being considered for the position. OPM receives frequent inquiries from agencies relative to proper handling of such instances. This clarification will enable Federal agencies to obtain applicants' cooperation with examination requirements in appropriate circumstances. This additional language also informs the reader of the possible scope of an agency-offered examination as well as the consequences of refusal to report. The provision now clearly states that such failure may be a basis for the agency to determine the applicant is not qualified when there are established medical (which may include psychological) standards and/or, physical requirements for the position.

OPM included an additional clarification to § 339.102(c) that failure of an applicant to provide medical documentation requested by the hiring agency medical or human resources personnel as part of a pre-placement medical examination also may result in an applicant not being considered further for the position. OPM receives inquiries from agencies relative to proper handling of such instances, and this clarification will enable Federal agencies to obtain applicant cooperation with appropriate examination requirements and prevent delays in filling critical vacancies. In addition, after a tentative job offer, agencies may request relevant documentation to determine whether there is a medical condition that will affect safe and efficient performance of the essential duties of the position. The clarifying language in this provision informs the reader of the consequences of failure to submit requested medical documentation.

One agency requested that the definition of “qualified individual with a disability” in proposed § 339.103 be corrected, noting that the section misquoted 29 CFR 1630.2(r), which relates to the definition of direct threat. OPM agrees that the proposed rule inadvertently referenced 29 CFR 1630.2(r). OPM also notes that citing to specific regulations of other agencies within this part poses a risk of future ambiguity because the text of the cited regulations are subject to change, as has occurred with the existing provisions. The final rule has been revised to reference the definition of “qualified individual with a disability” contained within the Rehabilitation Act, as amended, and the ADA, as amended as well as their implementing regulations for the Federal sector. In interpreting the meaning of these statutes, agencies can and should refer to current regulations and guidance promulgated pursuant to these Acts, see, e.g., 29 CFR part 1630, as well as case law construing these Acts, in consultation with agency counsel.

One agency recommended the term “applicants” be added along with “employees” to § 339.103. The agency noted that 29 CFR 1630.13 included references to both applicants and employees. As revised, § 339.103 no longer makes reference to either employees or applicants. OPM still agrees, however, that including applicants in the final rule was appropriate and has revised the entire rule accordingly.

One agency recommended revising the language in proposed § 339.103 to remove the phrase “to the extent consistent with” from the section in the proposed rule on compliance with disability laws and regulations. The section stated “the Equal Employment Opportunity Commission (EEOC) has issued regulations covering the equal employment provisions of the ADA in 29 CFR part 1630, which must be followed to the extent consistent with the Rehabilitation Act.” The agency stated that under the Rehabilitation Act, agencies must follow the standards applied under title 1 of the ADA and the EEOC regulations reflect the ADA's nondiscrimination standards. OPM agrees that further clarification is needed and has amended the section to refer directly to compliance with the Rehabilitation Act, the ADA, as it applies to the Federal government, and their implementing regulations for the Federal sector. This language clarifies that the statutory, non-discrimination provisions under the Rehabilitation Act and the ADA apply to actions under this section.

One agency proposed adding three citations to the language on compliance with disability laws and regulations in § 339.103. The agency concurred with the inclusion of specific sections of the EEOC's ADA regulations within this OPM regulation and suggested three additional citations relevant to medical qualification determinations. Two other citations, 29 CFR 1614.203(a) and 29 CFR 1614.203(b), were enforcement regulations and outside of the scope of this regulation. OPM has declined to accept this change. Upon further consideration, OPM has decided to remove all references to specific regulations of other agencies, because, as occurred with the current regulations, the outside citations changed, making the cross- references in the OPM regulations difficult to interpret. To avoid perpetuating this sort of ambiguity, OPM has decided to refer directly to compliance with the non-discrimination provisions of the Rehabilitation Act, the ADA, including the ADA Amendments Act of 2008, and their implementing regulations for the Federal sector.

An individual proposed adding clarifying language to the definition of “qualified individual with a disability” in § 339.103. The rationale of the commenter was that there may be job demands (e.g., overtime work) and conditions of employment (e.g., requirement of frequent travel) that are not, of themselves, essential functions of the job. OPM did not accept this comment but has revised the definition. As noted above, the meaning of “qualified individual with a disability” comes from the Rehabilitation Act, the ADA, and their implementing regulations for the Federal sector.

One agency proposed that proposed § 339.103 be revised to include a specific reference to the definition of “direct threat” contained in the EEOC's regulations, 29 CFR 1630.2(r). The agency did not provide a supporting rationale for this revision. OPM did not adopt this suggestion because the proposed rule only inadvertently referenced 29 CFR 1630.2(r). As noted above, the final rule references the definition of “qualified individual with a disability” contained in the Rehabilitation Act, the ADA, and their implementing regulations for the Federal sector.

One agency requested that OPM insert the words “as defined below” after “other appropriate practitioner” under the definition of the term “medical documentation” to alert the reader that there is a definition of the term “practitioner” in § 339.104. OPM agrees with the commenter but changed “other appropriate practitioner” to “licensed health practitioner” for clarity and inserted the words “as these terms are defined below” in the final rule to direct the reader to the applicable definitions.

One agency requested that the words “which have been obtained” be removed from the sentence under the definition of “medical documentation” in proposed § 339.104(2). The agency rationale was that the information may not have been initially provided by the applicant or employee, but the information may still be needed by the agency. Further, if the applicant or employee does not provide the information, the agency can request the applicant to obtain it, at his/her expense, in order to be considered for the position. The agency indicated that if the definition is not changed, and the agency requests the information because it may not have been obtained, the agency will have to pay the associated costs for attaining the information. OPM agrees that this is a legitimate concern and has accepted the proposed change and deleted the term “which have been obtained” from item (2) in the definition of “medical documentation” to remove any suggestion that the agency would be expected to incur any costs associated with obtaining medical information the agency deems necessary when the agency needs to request an applicant or employee to submit additional information in order for the agency to render an informed employment decision. By changing “and” to “and/or” in the appropriate places, OPM also clarified that any, but not necessarily all, of the clinical findings listed in item (2) may need to be provided.

One agency requested that the word “and” be changed to the word “or” between (6) and (7) in the list of items contained in the definition of “medical documentation” in proposed § 339.104 where it stated “an acceptable diagnosis must include the following information, or parts of this information identified by the agency as necessary and relevant to its employment decision.” The agency rationale was that the type and amount of medical information needed in each case may differ and the regulation does not require submission of documentation meeting all of the seven listed categories in this part. OPM has revised the section to insert the words “and, either of the following:” after the text for (5) and insert the word “or” between (6) and (7) to avoid any suggestion that all seven categories of information must be submitted. OPM made a similar change to item (2), by changing “and” to “and/or” to clarify and to be consistent with the opening statement of this item “including any of the following.”

Further, the same agency stated that the section conflicted with the Rehabilitation Act limitation on medical examinations because it effectively instructs agencies to obtain substantially more medical information than may be necessary to make an employment decision. OPM agrees that clarification was needed to eliminate any suggestion that documentation meeting all seven categories must be submitted. OPM has revised the section to insert the words “and, either of the following:” after the text for (5) and insert the word “or” between (6) and (7).

One agency proposed amending the language in the definition of “medical documentation” in § 339.104 to state “such medical documentation must include as much of the following types of information as is necessary and relevant to making the job-related decision for which the information is being requested.” The agency rationale was that section 102(d)(4) of the ADA provides that an employer shall not require a medical examination or make inquiry of an employee unless such examination or inquiry is job-related and consistent with business necessity. The agency further stated any requirement for information outside of this express statutory limitation violates the Rehabilitation Act. OPM has clarified this section by revising the opening sentence to state medical documentation must contain “necessary and relevant information to enable the agency to make an employment decision.” OPM is retaining the remainder of the language in this sentence to maintain consistency with generally accepted medical practice and principle as to what constitutes an acceptable medical diagnosis. By limiting the scope of the requested information, however, to what is “necessary and relevant” the sentence also is consistent with the intent of the ADA and Rehabilitation Act with regard to the scope of an employer's medical inquiry.

An individual proposed modifying the definition of “medical documentation” in § 339.104 to include new language that medical documentation should include copies of actual medical office or hospital records, in addition to a written statement from a physician. The rationale provided by the commenter was that a statement by a physician, written or oral, must be supported by clinical findings obtained through a medical history, physical examination, and appropriate tests and diagnostic procedures. OPM agrees with the commenter that medical documentation includes copies of related medical office or hospital records and has amended the section to include these additional materials. Therefore, OPM further clarified the definition by stating the medical documentation must be “dated” and contain “necessary and relevant” medical information to enable the agency to make an informed employment decision.

A union proposed clarification of the definition of “medical documentation” in § 339.104. The union stated the definition leaves agencies and supervisor's wide berth to determine what constitutes necessary or appropriate medical documentation, particularly in regards to absences. The union further stated that medical documentation for sick leave, whether extended or not, is often left to the discretion of individual supervisors. The union requested that OPM delineate the baseline for appropriate medical documentation and identify practices that should be avoided. OPM did not accept this suggestion of delineating acceptable and unacceptable forms of documentation because medical documentation needed by an agency can vary according to the situation. The modification made to the “medical documentation” definition, as noted directly above, however, now clarifies that a dated written statement from a licensed physician or practitioner should contain necessary and relevant information to enable it to make an employment decision. This revised language provides agencies with needed discretion in obtaining necessary and relevant information while preventing overly broad requests for medical records, consistent with the Rehabilitation Act and the ADA.

OPM also will seek to issue guidance from time to time as to best practices with regard to working with healthcare providers to obtain appropriate information and materials responsive to the agency's request for information necessary and relevant to making its employment decision.

One agency proposed adding examples to the definition of “medical evaluation program” in § 339.104, such as age adjusted periodic medical examinations or anthrax testing for certain employees. OPM did not adopt this suggestion because “medical evaluation program” covers a broad category of medical examination and clinical and diagnostic testing procedures.

An individual proposed a definition for the term “medical record” and requested the inclusion of this new definition in § 339.104, indicating that a physician's written statement should be supplemented with the medical history, physical examination and related testing and diagnostic procedures. The individual stated this will aid the reviewer in assessing the validity of the diagnosis and management plan for the medical or physical condition. OPM has not incorporated this proposed definition in the final rule. As noted above, the definition for medical documentation states that an agency may request necessary and relevant information to enable it to make an employment decision. OPM believes this revised definition is appropriate to allow an agency to obtain what is needed for its decision-making process while preventing overly broad requests for medical records, consistent with the Rehabilitation Act and the ADA.

One agency noted that the definition of “medical restriction” in § 339.104 as written in the proposed rule was too narrow because it only addressed physical requirements. The agency requested that the words “physical requirements” be replaced with the words “type or duration of work or activity” in order to cover both physical and medical requirements. OPM agrees with the agency proposal and has replaced the phrase “physical requirements” with the words “type or duration of work or activity” to clarify that the definition applies broadly to a variety of activities for which the individual is limited or prevented from performing due to medical conditions and/or physical limitations.

One agency requested revising the definition of “medical restriction” in § 339.104 to eliminate the phrase “operative event” or expound upon the meaning or intent for clarification purposes. OPM agrees with the proposed agency clarification and removed the term “operative event.” OPM revised the language to state that a medical restriction is a “medical determination” that an applicant or employee is limited or prevented from performing a certain type or duration of work or activity, or motion, because of a particular medical condition or physical limitation.

An individual requested modifying the definition of “medical restriction” in § 339.104 to include language that a restriction is medically warranted if the physician can support a conclusion that there is risk-avoiding or therapeutic value associated with the restriction. The rationale of the individual was that unless there is a risk-avoiding or therapeutic value inherent in a physician's recommendation that a patient not engage in a particular kind of activity, the physician cannot justify the recommendation as medically warranted. OPM did not adopt this specific language. The modification made to the definition of “medical restriction,” as noted above, clearly defines the term without the potential confusion to a reader who may not have the medical knowledge or expertise to accurately interpret and apply the language proposed by the commenter.

An individual recommended replacing the term “medical standard” with “medical qualification standard” in § 339.104 as well as the remainder of the regulations. The commenter described a “medical qualification standard” as a written description of the clinical findings associated with a health status or level of fitness below which the individual would be at an unacceptable level of potential risk for injury, harm or performance failure. OPM has not adopted the term “medical qualification standard” because its intent is covered by the existing definition. OPM has, however, revised the definition of “medical standard” for clarity. As noted in the final rule, the term “medical standard” represents the minimum medical requirements necessary for an applicant or employee to perform essential job duties as a condition of employment. By referencing the phrase “condition of employment” rather than the descriptive phrase in the proposed rule, the definition makes it clear this is an agency-established qualification standard that must be met prior to appointment and/or maintained during employment for successful performance. In addition, just inserting the term “qualifications” in the title could lead to confusion with the more general employment qualifications for Federal positions.

One agency requested adding a new definition of “medical surveillance” to § 339.104 to clarify to the reader the distinction between medical surveillance, medical evaluation program, and medical examination and to ensure uniform application. OPM agrees that a clear understanding of the different terms is important and has incorporated a definition for “medical surveillance” into § 339.104. “Medical surveillance” is the collection and analysis of health data and trends, such as injuries or illnesses, to improve and protect the health and safety of employees. A “medical evaluation program,” however, refers to an overall program of recurring medical examinations or testing, established by written agency policy, to monitor employees whose work may subject them to significant health or safety risks due to occupational or environmental exposures.

An individual commented that the definitions of “physical requirement” and “physical fitness standard” in § 339.104 were virtually identical and suggested eliminating one of the definitions to avoid redundancy. OPM did not accept the comment but, as noted earlier, has decided to withdraw references to “physical fitness standard” and “physical fitness testing” from the regulations at this time. OPM has taken the matter of appropriate definitions of the terms “physical fitness standard” and “physical fitness testing” under further consideration. OPM did revise the definition of “physical requirement” in the final rule to provide better harmony with the underlying statute. See 5 U.S.C. 3312.

One agency recommended inclusion of a stand-alone definition for the term “static or well stabilized” along with the stand-alone definitions of “subtle incapacitation” and “sudden incapacitation.” In the alternative, the commenter recommended retaining all three terms only as part of the definition of the term “medical documentation” in § 339.104. The commenter believed that for consistency, these terms should appear in the same manner. OPM is not including a stand-alone definition for the term “static or well stabilized” and is retaining, with some modification, the stand-alone definitions for the terms “subtle incapacitation” and “sudden incapacitation.” As stated in § 339.104, the term “static or well stabilized” is offered only for the purpose of clarification within the definition of “medical documentation.” In this context, the term is intended to mean a medical condition that is not likely to change as a consequence of the natural progression of the condition, specifically as a result of the normal aging process, or in response to the work environment or the work itself. In contrast, the terms “subtle incapacitation” and “sudden incapacitation” remain as stand-alone definitions because they are not limited only to clarification of the definition of “medical documentation.” These terms relate to the gradual or abrupt impairment of physical or mental function and are not only medical in nature, but also relate directly to safety, performance, and/or conduct issues that may undermine the agency's commitment to maintaining a safe working environment for all employees and others. OPM revised these terms further in the final rule to make the additional related issues clear.

Subpart B governs medical standards, physical requirements, and medical evaluation programs. We proposed changing the title of subpart B to clarify application of this part to medical evaluation programs. The proposed subpart B added language to clarify application of part 339 to arbitrary disqualification; added “medical surveillance” to policies agencies may establish to safeguard employee health; provided an example of an immunization program; and changed “incumbents” to “employees” to clarify § 339.205. As explained above, OPM has withdrawn the physical fitness standards and physical fitness testing from the final regulation for further consideration. Consequently, these references have been removed from the title and other parts of this section, including § 339.203.

In response to the comments on the proposed rule which are discussed below, we have revised subpart B to—

(1) Correct an erroneous reference to subpart C of part 731 of this chapter in § 339.201.

(2) Add a requirement to § 339.202 that OPM approve medical standards established by agencies prior to implementation.

(3) Provide language to § 339.202 regarding performance and behavioral and personality characteristics.

(4) Add a requirement to § 339.202 that there must be a study validating medical standards to the specific occupation.

(5) Include language in § 339.204 on established timeframes for submission of medical documentation by an applicant or employee.

(6) Re-title § 339.204 as “Waiver of standards and requirements and medical review boards.”

(7) Change the term “vaccine” to “vaccination” and clarify the language relative to vaccinations in § 339.205.

(8) Change the term “candidate” to “applicant or employee” in § 339.206.

(9) Revise the reference to “substantial harm” in § 339.206 to provide that applicants and employees may be disqualified for positions based on medical history when the condition (or recurrence) would pose a significant risk of substantial harm.

(10) Change “reasonable probability of substantial harm” in § 339.206 to the ADA and Rehabilitation Act standard of “significant risk of substantial harm.”

One agency stated there was a need to reference subpart B, rather than subpart C, of 5 CFR part 731 in § 339.201. The agency rationale was that subpart C relates to suitability action procedures, rather than the criteria authority used in making suitability determinations, which are covered in subpart B. After carefully considering the comment, OPM has decided to completely remove the reference to 5 CFR part 731 from 5 CFR 339.201. OPM has previously explained in four separate Federal Register notices that a sustained objection to an applicant, or a sustained request to pass over an applicant, is not a suitability determination. See 74 FR 30459 (June 26, 2009); 73 FR 51245 (Sept. 2, 2008); 73 FR 20149 (Apr. 15, 2008); 72 FR 2203 (Jan. 18, 2007). Regardless of whether a medical disqualification of an applicant is made under 5 U.S.C. 3312 or 3318, it is not a determination under 5 CFR part 731 that the applicant is unsuitable for employment in the competitive service. In fact, there is no suitability factor in 5 CFR part 731, subpart B, addressing medical disqualification. Further, as noted in 5 CFR part 339's authority citation, the part is issued only under rule II of E.O. 10577, as amended. It is not issued under rule V thereof, which authorizes OPM to order the removal of incumbent employees on grounds of fitness, pursuant to the President's standard-setting authority in 5 U.S.C. 3301, 3302, and 7301, and consistent with OPM's administrative authority in 5 U.S.C. 1103(a)(5)(A) and 1302(a). Accordingly, OPM also is amending § 339.201 to delete the text concerning directed removals of appointees based on physical or mental unfitness. OPM is retaining the reference to exclusion of applicants from examinations, which falls under OPM's authority in 5 U.S.C. 1302(a). OPM also is adding text to clarify that the procedures applicable to a medical disqualification under 5 U.S.C. 3312 or 3318 are in 5 CFR 339.306.

An individual proposed adding language to § 339.202 relative to performance and human reliability demands. The rationale of the commenter was that the need for standards is to minimize the risk of human failure, rather than to predict successful performance. OPM agrees with the commenter's rationale but has amended the language to more plainly note the direct relationship between performance and the requirements needed to perform the duties of the position.

One agency proposed revising § 339.202 to add language regarding the requirement for OPM approval of medical standards established by agencies prior to implementation. The agency rationale was that although the current language states an agency may establish medical standards in certain circumstances, definitive language on OPM approval would provide clarity and eliminate agency questions. OPM agrees and amended the section to state that agencies are required to obtain OPM approval of all medical standards within the competitive service prior to implementation.

One agency proposed revising § 339.202 to add the requirement that there must be a study validating medical standards to that specific occupation. The agency rationale is that this section should clearly state that a medical standard for an occupation should be supported by a job analysis. OPM agrees generally with the comment and revised this section to clarify that there must be a study(ies) or evaluation(s) establishing the medical standard is job-related to one or more occupations (recognizing some medical requirements may be similar across occupations). A validation study generally is not required where there is no evidence of adverse action; therefore OPM did not wish to impose a higher legal standard here. See Uniform Guidelines on Employee Selection Procedures, 29 CFR part 1607. The “job-related” standard is consistent with the non-discrimination provisions under Part 300 of this title and Title VII. OPM made a similar change to the definition of physical requirement, as discussed below.

One agency stated that the language in parenthesis in § 339.202, “(i.e., where the agency has 50 percent or more of the position(s) in a particular occupation)”, is confusing and restrictive. OPM disagrees and has not amended this language. The regulation states that an agency may establish medical standards for positions that predominate in that agency and the parenthetical gives an example of what may constitute a predominance of a particular occupation.

One agency proposed revising § 339.203 to clarify the difference between “physical requirements” and “physical fitness standards.” The agency rationale was to eliminate potential confusion concerning requirements when applying § 339.204, (re-titled “Waiver of Standards and Requirements and Medical Review Boards” to § 339.203. OPM agrees with the need to avoid confusion between these terms. Consequently, as noted above, OPM has withdrawn references to “physical fitness standards or testing” from the final rule for further consideration. This provision is revised and re-titled to “Physical requirements.”

A union proposed that in relation to the physical requirements and physical fitness standards or testing in § 339.203, OPM accept the role to carry out oversight and external validation for the positions to which agencies choose to apply a physical requirements standard. As a rationale, the union cited its experience with inconsistent use of the authority granted to agencies to establish physical requirements for individual positions without OPM approval. In addition, the union proposed that OPM further expand on procedures for the validation process. The union rationale was to provide consistency throughout the government of individuals who perform essentially the same functions, but work for different agencies. OPM has not accepted these comments. As noted, OPM has withdrawn the language related to “physical fitness standards or testing” at this time. In addition, as noted in the rule, approval by OPM remains available to agencies, but is not mandatory. Further, challenges to such policies or directives can be addressed through administrative processes or grievances or through the courts.

OPM revised this section in the final rule for the reasons noted in section 202, supra, to clarify that there must be a study(ies) or evaluation(s) that establishes the physical requirement(s) is job-related to one or more occupations (recognizing some physical requirements may be similar across occupations).

One agency proposed adding to § 339.204, the waiver provision, examples of “sufficient evidence” and “additional information” that an applicant or employee may submit or any agency may obtain with regard to waiving a medical standard or physical requirement, to ensure uniform application and to provide clarity. OPM has not accepted this comment because the regulatory language is clear and the standards are best elucidated by case law.

One agency proposed including language in § 339.204 to state the established timeframe an applicant or employee has to provide sufficient medical evidence or that an agency has to obtain additional information prior to rendering a final decision. The agency was concerned the existing language implied that documentation could be supplied at any time, which could tax the agency administrative workload and affect and/or indefinitely extend the timeframe for rendering an employment decision. OPM agrees with the agency concerns and has clarified the language to state that an agency may establish timeframes, in writing, for submission of initial or additional information for consideration, with allowance for reasonable extensions.

A union proposed mandating review panels at agencies. The union rationale was that these review panels will assist agencies in determining appropriate accommodation of a disability or review of medical ineligibility determinations. OPM agrees that medical review boards can assist agencies in making determinations under this section and included language permitting agencies to establish medical review boards. Consequently, OPM has re-titled § 339.204 as “Waiver of standards and requirements and medical review boards.” At this time, however, OPM believes agencies should be given discretion in determining whether and how best to use medical review boards, so the creation of such boards is not mandatory. OPM plans to confer periodically with agencies regarding their use of medical review boards. OPM also will seek to issue guidance from time to time as to best practices with regard to the composition and use of medical review boards.

An individual proposed replacing the term “vaccine” with “vaccination” and clarifying that the need for a medical evaluation program “must be clearly supported by the nature of the exposures incurred in the course of the work” in § 339.205. The commenter stated only that the need for these inclusions were “self-evident.” OPM agrees the term “vaccine” should be replaced with the term “vaccination” and amended the term to reflect the act of receiving a vaccine. OPM did not include the additional language above. The existing language conveys the same meaning and the commenter provided no supporting or convincing rationale for further change.

A union commented that although § 339.205 of the proposed rule would mandate that employees be vaccinated under certain circumstances limited to work, and although this requirement may be imposed only upon written notification, only limited guidance is provided in the regulation concerning the circumstance under which such vaccinations may be compelled. In addition, the union stated that agencies should be allowed to retroactively impose an immunization requirement on an employee only if the employee was notified of the requirement prior to acceptance of the position through the vacancy announcement or position description. OPM recognizes the need for some clarification and has amended the language to clarify that any vaccinations required by this section must be FDA-approved. OPM does not otherwise accept this comment. As noted in the rule, agencies that choose to implement one or more of the programs noted in § 339.205 must have written policies or directives. Challenges to such policies or directives can be addressed through administrative processes or grievances or through the courts.

One agency recommended that the proposed language in § 339.205 be expanded to read “this may include, but is not limited to the requirement to undergo vaccination with FDA approved vaccines (e.g., for national security reasons or in order to safely carry out an agency program.” The rationale of the agency was that the modification eliminated the possibility that an applicant or employee could challenge an agency requirement to undergo a vaccination under the contention that the FDA may have licensed the vaccination, but had not “mandated” its use.” OPM agrees with the rationale of the commenter and has amended § 339.205 to state vaccinations may include FDA-approved vaccines.

One agency requested clarification of what is meant by “mandatory vaccines” in § 339.205. Further, the agency states an example would be helpful (e.g., in the event of a pandemic flu when the position does not permit the accomplishment of work at home or in isolation). OPM has not accepted this comment. OPM has included situational examples but has not included specific vaccination examples to allow flexibility to address changes in environmental, situational, and other circumstances wherein agencies determine and document the need for certain vaccinations.

An individual proposed replacing the reference to reasonable probability of substantial harm in § 339.206 with a provision that applicants and employees may be disqualified for positions only if the condition(s) at issue is disqualifying “and a recurrence would pose an unacceptable risk of injury or harm to the individual or others, or would present an unacceptable risk of human failure.” The rationale provided was that the decision in this type of situation must be based on minimum/maximum criteria, not probability criteria. The commenter also noted that if a recurrence is possible and the consequences of a recurrence are unacceptable, it does not matter how small the probability. OPM recognizes the concern of the individual and based in part on this comment and another comment described below has amended the section to read that a history of a medical condition may result in medical disqualification only if the condition is itself disqualifying, “recurrence of the condition is a reasonable medical probability, and the duties of the position are such that a recurrence of the condition would pose a significant risk to the health and safety of the applicant or employee or others that cannot be eliminated or reduced by reasonable accommodation or any other agency efforts to mitigate risk.” This revised language is clearer and consistent with the ADA, as amended, and applied through the Rehabilitation Act.

One agency recommended referring to “significant risk” of substantial harm in § 339.206 instead of “reasonable probability of substantial harm” because the latter is less exacting than the ADA and Rehabilitation Act standard of “significant risk” of substantial harm. OPM disagrees with the commenter's view as to which term is “less exacting.” OPM does agree, however, that, in order to avoid any ambiguity, § 339.206 should be consistent with the statutory language. Therefore, as discussed above, this provision has been revised.

One agency recommended changing the term “candidate” to “applicant or employee” for clarity and consistency. OPM agrees that using the phrase “applicant or employee” is clearer and should be used consistently throughout this regulation. OPM has amended § 339.206 accordingly.

One agency recommended adding an example of a disqualifying condition to § 339.206 for clarification purposes. OPM has not accepted this comment. Medical disqualifications must be made on a case-by-case, fact-based, individualized assessment prior to reaching a conclusion as to the applicant's or employee's qualifications for a particular position.

One agency recommended inclusion of a reference in § 339.206 to recent behavioral or mental health history as a subset for disqualification. The agency requested consideration of language that an individual's previous “mental health treatment shall not be a basis for a psychiatric examination or psychological assessment unless the individual has been hospitalized within the past seven years for a mental health related condition.” The agency rationale was that this seems to be an area of potential employee medical disqualifiers that does not neatly fit into a category (i.e. medical standard) that applies to positions with and without medical standards and physical requirements, and where an employee may pose substantial harm to himself and others. OPM is not adopting this approach to amending § 339.206. With respect to mental health histories, mental health conditions are evaluated to determine whether they are temporary, transient, transitional or self-limiting, as opposed to mental health difficulties that are chronic and on-going with no perceivable end in sight. While behavioral traits, personality characteristics, temperaments, attitudes and biases, may be linked to mental health problems, they in and of themselves would not normally rise to a level supporting a clinical diagnosis of a mental condition. See, e.g. Diagnostic and Statistical Manual of Mental Disorders(DSM) published by the American Psychiatric Association. Moreover, medical disqualifications based on mental health must be made on a case-by-case, fact-based, individualized assessment prior to reaching a conclusion as to the applicant's or employee's qualifications for a particular position.

Subpart C governs medical examinations. The proposed subpart C incorporated minor corrections in references, spelling and punctuation; added wording to clarify examinations the agency may require and provide examples of “benefits” in § 339.304; and added wording to clarify applicability of this regulation to excepted service positions when requesting a medical disqualification or a passover of a preference eligible in § 339.306.

In response to the comments on the proposed rule which are discussed below, we have revised subpart C to—

(1) Add language to § 339.301(b) regarding return to work from medically based absence in addition to reemployment from medically based absence.

(2) Revise the language in § 339.301(b)(1) to be consistent with the ADA prohibition against employers making disability inquiries or conducting medical examinations of job applicants' prior to an offer of employment.

(3) Clarify § 339.301(b)(3) to state an agency may require an individual to report for a medical examination “whenever the agency has a reasonable belief, based on objective evidence, that there is a question about an employee's continued capacity to meet the medical standards or physical requirements of a position.”

(4) Add language to § 339.301(c) relative to the Federal Employees' Compensation Act.

(5) Include language in § 339.301(e) addressing vulnerability of business operation and information systems to potential threats.

(6) Add clarifying language to § 339.301(e) relative to the licensing of physicians conducting psychiatric examinations.

(7) Add language to § 339.303(a) that an agency may establish timeframes, in writing, for submission of medical documentation, with allowances for reasonable extensions dependent on the nature of the condition and the availability of qualified physicians.

(8) Add the term “applicant” to § 339.303(a).

(9) Revise § 339.303(a) and (b) to add the requirement that an applicant or employee must furnish and authorize the release of medical documentation generated as a result of a medical examination and relevant medical documentation from his or her private physician, to authorized agency representatives.

(10) Revise § 339.303(a)(2) in relation to above to further state an employee may be subject to adverse action if he or she fails or refuses to authorize release of the above referenced medical documentation.

(11) Revise the language in § 339.303(b) to address situations where medical documentation from the applicant or employee's private physician or practitioner is contradictory to, and cannot be resolved by, documentation from the examining physician or the agency medical review officer.

(12) In § 339.304, clarify when an agency is financially responsible, versus when an applicant or employee is financially responsible, for the cost of medical examinations, testing and related documentation.

(13) Removed references to “physical fitness standards or testing” from throughout this section in light of OPM's decision, as discussed earlier, to withdraw these terms for further consideration.

An individual proposed adding “appropriate for the purpose of obtaining and recording baseline medical information” following the term “pre-employment medical examination” in § 339.301(a). OPM did not include this language because the section is intended only to define when a routine pre-employment examination is appropriate, which is following a tentative offer of employment and only for a position with specific medical standards, physical requirements, or covered by a medical evaluation program.

An individual proposed adding language in § 339.301(b) concerning the return to work from medically based absence. The rationale provided by the individual was that if there is reason to suspect that a medical condition has caused or contributed to the failure of an employee to perform the essential functions of the position in an acceptable manner or meet the conditions of employment, including a demand for human reliability, then a complete medical evaluation may be appropriate. OPM agrees with the concerns noted by the commenter and has amended the section to include language to make clear that this provision includes employees returning to work from medically based absences.

One agency proposed revising the language in § 339.301(b)(1) to be consistent with the ADA prohibition against employers making disability inquiries or conducting medical examinations of job applicants' prior to an offer of employment. OPM agrees that revising the language would eliminate any confusion as to when disability inquiries can be made. Consequently, OPM has accepted the proposed language and amended the section to read “subsequent to a tentative offer of employment or reemployment,” rather than the previous language of “prior to appointment or selection,” to be more consistent with the Rehabilitation Act and ADA prohibition of disability inquiries or medical examinations prior to a tentative job offer.

One agency proposed revising § 339.301(b)(2) to state that regularly recurring examinations are to be limited to persons in positions affecting public safety. The agency rationale was that the language in the proposed regulation was overbroad in allowing an employer to conduct medical examinations of current employees “on a regularly recurring, periodic basis after appointment.” The agency stated that the standard that the examination be job related and consistent with business necessity applies to all employer efforts to obtain medical information from employees. Further, the agency noted that there is EEOC guidance stating that any such regularly occurring examinations should be limited to persons in positions affecting public safety. OPM did not accept this comment. As noted in the provision, this section applies to positions that have “medical standards and/or physical requirements” and must be applied in a manner consistent with disability laws. Thus, OPM intends this provision to apply to all positions that may require medical examinations due to the nature of the work and/or the vulnerability of business operation and information systems to potential threats. This includes, but is not limited to, public safety positions.

One agency proposed revising § 339.301(b)(3), which, in the proposed rule, stated that an agency may require an individual to report for a medical examination “whenever there is a direct question about an employee's continued capacity to meet the physical or medical or physical fitness requirements of a position.” The agency proposed clarifying language to define the above medical and physical components. Another agency proposed revising § 339.301(b)(3) to replace “direct question” with “reasonable belief based on objective evidence.” The agency's rationale was that the section intended to specify the circumstances under which an agency may require an employee to undergo a medical or psychiatric examination. The agency noted that the basic rule establishing when an employee examination may be required is that the requirement must be job related and consistent with business necessity. The agency proposed revising the language to read “whenever the agency has a reasonable belief based on objective evidence, that there is a question about an employee's capacity to meet the physical or medical or physical fitness requirements of a position.” OPM agrees with both comments that further clarification was appropriate and amended the section. The relevant clause now reads “whenever the agency has a reasonable belief, based on objective evidence, that there is a question about an employee's continued capacity to meet the medical standards and/or physical requirements.” An example of where this section could be triggered includes a situation where medical opinions submitted by an applicant or employee are at variance with one another or there is insufficient medical documentation.

An individual proposed clarifying the language in § 339.301(c) to state that an agency may require an employee who has applied for or is receiving continuation of pay or compensation as a result of an injury or disease “covered under the provisions of the Federal Employee's Compensation Act (FECA)” to report for an examination to determine medical limitations that may affect placement decisions. OPM agrees and has amended the section by inserting the specific reference to FECA in order to provide more definitive guidance. An examination under FECA is ordered for compensation purposes. An examination under 5 CFR 339 is ordered to determine medical limitation that may affect job placement decisions.

One agency proposed expanding § 339.301(d) to include the term “physical fitness standards or testing” to the existing terms “medical standards” or “physical requirements” for clarification purposes. OPM declines to adopt this comment. As noted previously, OPM has withdrawn these terms from the final rule for further consideration.

One agency proposed revising § 339.301(e)(1) to address when an agency may require an employee to undergo a medical or psychiatric examination. The agency states that the basic rule is that an examination requirement for employees must be job related and consistent with business necessity. The agency recommended revising the section to read “an agency may order a psychiatric examination (including a psychological assessment) only when it has a reasonable belief, based on objective evidence, that the employee appears unable to meet the physical or mental or physical fitness requirements of a position.” OPM did not accept inclusion of the proposed additional language. The existing provision limits a psychiatric examination or psychological assessment to circumstances where there is no physical-based reason for the employment-related difficulty or where such examination/assessment is an articulated condition of employment.

One agency proposed adding language relative to potential threats to Federal Government equipment and systems. The rationale provided by the agency was in relation to situations where an individual may not be a threat to individuals, but because of the nature of the position, could be a threat to agency equipment and systems. OPM agrees that threats to infrastructure by individuals is within the scope of these regulations, and has amended § 339.301(e) to include a reference to vulnerability of business operation and information systems to potential threats to enhance understanding of the need to safeguard agency information and security systems.

An individual proposed that § 339.301(e)(1)(i) be revised to state that an agency may order a psychiatric examination including a psychological assessment only when “the physician who has performed a current general medical examination that the agency has the authority to order under this section identifies a basis upon which a psychiatric examination is medically warranted.” The individual also requested clarifying § 339.301(e)(2) relative to the licensing of physicians conducting psychiatric examinations to state that a psychiatric examination or psychological assessment must be conducted in accordance with accepted professional standards “by a licensed physician certified in psychiatry by the American Board of Psychiatry and Neurology.” The rationale of the commenter was that, if a medical qualification standard for a position includes criteria for mental status and function, and there is a reason to suspect that a medical condition has caused or contributed to failure of the employee to perform the essential functions of the position, including a demand for human reliability, then a complete medical evaluation may be appropriate. The commenter further explained that such an evaluation would begin with a complete medical examination by, most likely, a specialist in internal medicine who would determine what additional specialty evaluations are medically warranted, including a psychiatric examination. OPM declines to adopt the comment related to § 339.301(e)(1)(i). OPM believes the existing language in this section clearly states when an agency may order a psychiatric examination or psychological assessment. OPM did modify the language in § 339.301(e)(2), and included references to clarify the licensing of physicians relative to psychiatric examinations. The language now states that the examination must be conducted by a licensed physician “certified in psychiatry by the American Board of Psychiatry and Neurology or the American Osteopathic Board of Psychiatry and Neurology,” “or by a licensed psychologist or clinical neuropsychologist.”

One agency proposed amending § 339.301(e) to provide that an individual's previous mental health treatment will not be a basis for a psychiatric examination or psychological assessment unless the individual has been hospitalized for a mental health related condition within the past seven years. The agency stated that there “seems to be one area of potential employee medical disqualifiers that doesn't neatly `fit' into a category . . . that applies to positions with and without medical standards and physical requirements, and where an employee may pose `substantial harm' to themselves and others . . . .” OPM is not adopting this approach to amending § 339.301(e). With respect to mental health histories, mental health conditions are evaluated to determine whether they are temporary, transient, transitional or self-limiting, as opposed to mental health difficulties that are chronic and on-going with no perceivable end in sight. While behavioral traits, personality characteristics, temperaments, attitudes and biases, may be linked to mental health problems, they in and of themselves would not normally rise to a level supporting a clinical diagnosis of a mental health condition. See, e.g. Diagnostic and Statistical Manual of Mental Disorders (DSM-5; American Psychiatric Association, 2013).

An individual recommended deleting the authority to offer examinations covered in § 339.302 and retain only the section on authority to order an examination. The commenter believed there are no circumstances under which an employer needs medical information to manage an employee's duty or employment status unless there are already medical qualification standards in place for the position. OPM has not accepted this comment. This regulation clearly distinguishes situations wherein an agency can order or offer an examination.

One agency stated that, in § 339.303(a) of the proposed rule, a refusal or failure to report for a medical examination ordered by the agency could result in the agency determining that the employee is not qualified for the position. The agency proposed adding the term “applicant” along with “employee” to § 339.303(a) as this section also applies to applicants. OPM agrees and has amended this section on medical examination procedures to make clear the application of this rule to both applicants and employees.

One agency recommended language be added to § 339.303 that states that employees must be given a reasonable amount of time to provide medical documentation, based upon the nature of the condition and the accessibility of qualified individuals. The agency rationale is that this change would afford a level of protection to the employee and takes into consideration accessibility and availability of appropriate healthcare providers. OPM agrees with the needed clarification and has amended § 339.303(a) to state that “an agency may establish timeframes, in writing, for submission of medical documentation, with allowances for reasonable extensions.”

One agency proposed adding language to § 339.303 requiring an applicant or employee to provide medical documentation generated as a result of a medical examination. The agency questioned whether an agency could find that an applicant or employee is not qualified for the position if the individual reported for the examination, but refused to authorize release of any resulting medical documentation to the agency. The agency also recommended adding the requirement that an individual must furnish and authorize release of relevant medical documentation from his or her private physician to authorized agency representatives. OPM agrees there is a need for clarification and has amended § 339.303 to state that refusal or failure by an applicant or employee to authorize release of any results from an agency ordered or offered medical examination, or the results of any previous medical treatments or evaluations relative to the identified issue, to authorized agency representatives, including the agency physician or independent medical specialists, may be a basis for disqualification for the position by the hiring agency. In addition, the employee may be subject to adverse action. Relevant medical documentation is needed in order for agency representatives, such as the agency physician or medical review officer, to render an informed medical and/or management decision relative to the health and safety of the applicant, employee, coworkers, and the public they serve.

One agency requested clarifying § 339.303(b) to address situations where medical documentation from the applicant or employee's private physician or practitioner is contradictory to, and cannot be resolved by, the examining physician or the agency medical review officer. OPM agrees and has amended the section to state that in situations where medical documentation of the private physician or practitioner is contradictory and cannot be resolved by the examining physician or the agency medical review officer, the agency may, at its option, pursue a third opinion from an appropriate specialist (e.g. independent medical specialist). This enables the hiring agency to make an informed management decision relative to the medical eligibility determination of an applicant or employee.

Two agencies proposed revising § 339.304 to clarify circumstances where an agency is financially responsible, versus when the applicant or employee is financially responsible, for the cost of medical examinations, testing and related documentation, noting that this issue has caused confusion in the past. OPM agrees that this can be a confusing issue for managers, applicants and employees. OPM has amended the section to clearly state when an agency is responsible, and when an applicant or employee is responsible, for payment of medical examinations, related testing, and documentation.

An individual proposed revising § 339.305 relative to workers compensation issues. Specifically, the individual stated the section was confusing. The individual also stated he did not understand the purpose of the communication and information interchange with the Office of Workers Compensation (OWCP) and requested to discuss the objectives further. OPM has not accepted this comment or request. This section provides that agencies must forward to OWCP copies of medical documentation and examinations of employees who are receiving or have applied for injury compensation benefits, including continuation of pay. The results of these employee evaluations are significant to the agency and to OWCP in that this information and any related periodic updates are critical to determining medical limitations that may affect job placement decisions.

The final part 339 is published in its entirety for the convenience of the reader.

This rule has been reviewed by the Office of Management and Budget in accordance with E.O. 12866.

I certify that these regulations would not have a significant economic impact on a substantial number of small entities because it affects only Federal agencies and employees.

This regulation will not have substantial direct effects on the States, on the relationship between the National Government and the States, or on distribution of power and responsibilities among the various levels of government. Therefore, in accordance with Executive Order 13132, it is determined that this rule does not have sufficient federalism implications to warrant preparation of a Federalism Assessment.

This rule will not result in the expenditure by State, local or tribal governments of more than $100 million annually. Thus, no written assessment of unfunded mandates is required.

These proposed regulations impose no new reporting or recordkeeping requirements subject to the Paperwork Reduction Act of 1995.

Background and Description of the Joint Final Rule

The Agencies' CRA regulations establish CRA performance standards for small and intermediate small banks and savings associations. The CRA regulations define small and intermediate small banks and savings associations by reference to asset-size criteria expressed in dollar amounts, and they further require the Agencies to publish annual adjustments to these dollar figures based on the year-to-year change in the average of the CPI-W, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million. 12 CFR 25.12(u)(2), 195.12(u)(2), 228.12(u)(2), and 345.12(u)(2). This adjustment formula was first adopted for CRA purposes by the OCC, the Board, and the FDIC on August 2, 2005, effective September 1, 2005. 70 FR 44256 (Aug. 2, 2005). The Agencies noted that the CPI-W is also used in connection with other federal laws, such as the Home Mortgage Disclosure Act. See 12 U.S.C. 2808; 12 CFR 1003.2. On March 22, 2007, and effective July 1, 2007, the former Office of Thrift Supervision, the agency then responsible for regulating savings associations, adopted an annual adjustment formula consistent with that of the other federal banking agencies in its CRA rule previously set forth at 12 CFR 563e. 72 FR 13429 (Mar. 22, 2007).

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),1 effective July 21, 2011, CRA rulemaking authority for federal and state savings associations was transferred from the OTS to the OCC, and the OCC subsequently republished, at 12 CFR 195, the CRA regulations applicable to those institutions.2 In addition, the Dodd-Frank Act transferred responsibility for supervision of savings and loan holding companies and their non-depository subsidiaries from the OTS to the Board, and the Board subsequently amended its CRA regulation to reflect this transfer of supervisory authority.3

The threshold for small banks and small savings associations was revised most recently in December 2015 and became effective January 1, 2016. 80 FR 81162 (Dec. 29, 2015). The current CRA regulations provide that banks and savings associations that, as of December 31 of either of the prior two calendar years, had assets of less than $1.216 billion are small banks or small savings associations. Small banks and small savings associations with assets of at least $304 million as of December 31 of both of the prior two calendar years and less than $1.216 billion as of December 31 of either of the prior two calendar years are intermediate small banks or intermediate small savings associations. 12 CFR 25.12(u)(1), 195.12(u)(1), 228.12(u)(1), and 345.12(u)(1). This joint final rule revises these thresholds.

During the 12-month period ending November 2016, the CPI-W increased by 0.84 percent. As a result, the Agencies are revising 12 CFR 25.12(u)(1), 195.12(u)(1), 228.12(u)(1), and 345.12(u)(1) to make this annual adjustment. Beginning January 18, 2017, banks and savings associations that, as of December 31 of either of the prior two calendar years, had assets of less than $1.226 billion are small banks or small savings associations. Small banks and small savings associations with assets of at least $307 million as of December 31 of both of the prior two calendar years and less than $1.226 billion as of December 31 of either of the prior two calendar years are intermediate small banks or intermediate small savings associations. The Agencies also publish current and historical asset-size thresholds on the Web site of the Federal Financial Institutions Examination Council at http://www.ffiec.gov/cra/.

The FDIC is also amending its CRA Notice requirements located at Appendix B to Part 345. The current appendix states that Regional Managers are the proper agency officials responsible for both making available, upon request, lists of the banks scheduled for CRA examination in any particular quarter and receiving any public comment regarding the CRA performance of any of those banks. Since that language was published, a technical change was made to the responsible official's title from Regional Manager to Regional Director. In addition, since the original notice requirements were written, there has been the creation of a Web page to receive public comments electronically. The amendments made in this notice reflect those two changes. The associated changes to the CRA notice requirements will compel covered institutions to print and post the revised CRA notices in their main and branch offices.

Under 5 U.S.C. 553(b)(B) of the Administrative Procedure Act (APA), an agency may, for good cause, find (and incorporate the finding and a brief statement of reasons therefore in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.

The amendments to the regulations to adjust the asset-size thresholds for small and intermediate small banks and savings associations result from the application of a formula established by a provision in the respective CRA regulations that the Agencies previously published for comment. See 70 FR 12148 (Mar. 11, 2005), 70 FR 44256 (Aug. 2, 2005), 71 FR 67826 (Nov. 24, 2006), and 72 FR 13429 (Mar. 22, 2007). As a result, §§ 25.12(u)(1), 195.12(u)(1), 228.12(u)(1), and 345.12(u)(1) of the Agencies' respective CRA regulations are amended by adjusting the asset-size thresholds as provided for in §§ 25.12(u)(2), 195.12(u)(2), 228.12(u)(2), and 345.12(u)(2).

Accordingly, the Agencies' rules provide no discretion as to the computation or timing of the revisions to the asset-size criteria. Furthermore, revising the FDIC's CRA Notice requirements to reflect the two referenced changes to the manner in which the agency will receive public comments considered in the CRA examination process is a technical and non-substantive revision. For these reasons, the Agencies have determined that publishing a notice of proposed rulemaking and providing opportunity for public comment are unnecessary.

The effective date of this joint final rule is January 18, 2017. Under 5 U.S.C. 553(d)(3) of the APA, the required publication or service of a substantive rule shall be made not less than 30 days before its effective date, except, among other things, as provided by the agency for good cause found and published with the rule. Because this rule adjusts asset-size thresholds consistent with the procedural requirements of the CRA rules, the Agencies conclude that it is not substantive within the meaning of the APA's delayed effective date provision. Moreover, the Agencies find that there is good cause for dispensing with the delayed effective date requirement, even if it applied, because their current rules already provide notice that the small and intermediate small asset-size thresholds will be adjusted as of December 31 based on 12-month data as of the end of November each year.

The Regulatory Flexibility Act (RFA) does not apply to a rulemaking when a general notice of proposed rulemaking is not required. 5 U.S.C. 603 and 604. As noted previously, the Agencies have determined that it is unnecessary to publish a general notice of proposed rulemaking for this joint final rule. Accordingly, the RFA's requirements relating to an initial and final regulatory flexibility analysis do not apply.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) states that no agency may conduct or sponsor, nor is the respondent required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The Agencies have determined that this final rule does not create any new, or revise any existing, collections of information pursuant to the Paperwork Reduction Act. Consequently, no information collection request will be submitted to the OMB for review.

Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded Mandates Act), 2 U.S.C. 1532, requires the OCC to prepare a budgetary impact statement before promulgating any final rule for which a general notice of proposed rulemaking was published. As discussed above, the OCC has determined that the publication of a general notice of proposed rulemaking is unnecessary. Accordingly, this joint final rule is not subject to section 202 of the Unfunded Mandates Act.

For the reasons discussed in the preamble, the Office of Comptroller of the Currency amends 12 CFR parts 25 and 195, the Board of Governors of the Federal Reserve System amends part 228 of chapter II, and Board of Directors of the Federal Deposit Insurance Corporation amends part 345 of chapter III of title 12 of the Code of Federal Regulations as follows:

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to all Airbus Defense and Space S.A. Model C-212 airplanes. The NPRM published in the Federal Register on October 11, 2016 (81 FR 70062). The NPRM was prompted by multiple reports of damaged and cracked rudder torque tube shafts. The NPRM proposed to require repetitive general visual and high frequency eddy current (HFEC) inspections of the inner rudder torque tube shaft for cracks, deformation, and damage; repetitive detailed inspections, and HFEC inspections, if necessary, of the inner and outer rudder torque tube shaft for cracks, deformation, and damage; and corrective actions if necessary. We are issuing this AD to detect and correct damaged and cracked rudder torque tube shafts, which could lead to structural failure of the affected rudder torque tube shaft and possible reduced control of the airplane.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2016-0052, dated March 14, 2016 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus Defense and Space S.A. Model C-212 airplanes. The MCAI states:

Required actions include repetitive general visual and HFEC inspections of the inner rudder torque tube shaft for cracks, deformation, and damage; repetitive detailed inspections, and HFEC inspections, if necessary, of the inner and outer rudder torque tube shaft for cracks, deformation, and damage; a general visual inspection to verify rudder alignment if necessary; and corrective actions if necessary. Repetitive inspections are done depending on conditions (wind conditions, gust lock engagement, and rudder deviation) identified in Airbus Defense & Space Alert Operators Transmission AOT-C212-27-0001, Revision 0, dated July 15, 2015 (“AOT-C212-27-0001, Rev. 0”). Damage may include bulging, dents, peeled paint, or visible corrosion. Corrective actions include replacement of the rudder torque tube shaft with a new rudder torque tube shaft, and repair. The optional terminating action includes replacement of the rudder torque tube shaft with an improved rudder torque tube shaft. 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-2016-9187.

We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM or on the determination of the cost to the public.

Paragraph (g)(2) of the proposed AD specifies to do inspections “after the conditions” identified in paragraph 3.1.1.1 of AOT-C212-27-0001, Rev. 0. We have revised paragraph (g)(2) of the AD to clarify the inspections are done after any weather event that includes the conditions identified in paragraph 3.1.1.1 of AOT-C212-27-0001, Rev. 0.

We reviewed the relevant data and determined that air safety and the public interest require adopting this AD with the change 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 reviewed the following Airbus Defense and Space service information.

• EADS CASA Service Bulletin SB-212-27-0058, dated April 25, 2014. This service information describes procedures for replacement of the rudder torque tube shaft with an improved rudder torque tube shaft.

• AOT-C212-27-0001, Rev. 0. This service information describes procedures for general visual and HFEC inspections of the inner rudder torque tube shaft for cracks, deformation, and damage; detailed inspections, and HFEC inspections, if necessary, of the inner and outer rudder torque tube shaft for cracks, deformation, and damage; a general visual inspection to verify rudder alignment; and corrective actions, if necessary.

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.

We estimate that this AD affects 49 airplanes of U.S. registry.

We estimate the following costs to comply with this AD:

We have received no definitive data that will enable us to provide cost estimates for the on-condition actions and parts cost specified in this AD.

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.

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.

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

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to certain Diamond Aircraft Industries GmbH Model DA 42 airplanes. The NPRM was published in the Federal Register on October 25, 2016 (81 FR 73360). The NPRM proposed to correct an unsafe condition for the specified products and was based on mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country. The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued AD No. 2016-0156R1, dated November 23, 2016 (referred to after this as “the MCAI”). The revised MCAI states:

We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM or on the determination of the cost to the public.

We reviewed the relevant data and determined that air safety and the public interest require adopting this AD as proposed except for the changes discussed above. We have determined that these 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 reviewed Diamond Aircraft Industries GmbH Mandatory Service Bulletin MSB 42-120, dated June 24, 2016, Mandatory Service Bulletin MSB 42-120/1, dated November 10, 2016, and Work Instruction WI-MSB 42-120, dated June 24, 2016. In combination, this service information describes procedures for replacing the exhaust pipes with exhaust pipes having a new design. 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 of this AD.

We estimate that this AD will affect 130 products of U.S. registry. We also estimate that it will take the following to comply with the requirements of this AD:

It will take about 1 work-hour per product to comply with the installation of additional exhaust clamps required by this AD. The average labor rate is $85 per work-hour. Required parts will cost about $125 per product.

Based on these figures, we estimate the cost of this AD on U.S. operators for the installation of additional exhaust clamps to be $27,300, or $210 per product.

It will take about 4 work-hours per product to comply with the exhaust pipe replacement required by this AD. The average labor rate is $85 per work-hour. Required parts will cost about $1,990 per product.

Based on these figures, we estimate the cost of this AD on U.S. operators for the exhaust pipe replacement requirement to be $302,900, or $2,330 per product.

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.

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, 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.

You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-9317; 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 the NPRM, the regulatory evaluation, any comments received, and other information. The street address for the Docket Office (telephone (800) 647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

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

We issued a supplemental notice of proposed rulemaking (SNPRM) to amend 14 CFR part 39 by adding an AD that would apply to all Airbus Model A318 and A319 series airplanes, Model A320-211, -212, -214, -231, -232, and -233 airplanes, and Model A321 series airplanes. The SNPRM published in the Federal Register on June 28, 2016 (81 FR 41886) (“the SNPRM”). We preceded the SNPRM with a notice of proposed rulemaking (NPRM) that published in the Federal Register on April 24, 2015 (80 FR 22939) (“the NPRM”). The NPRM proposed to require an inspection to identify the part number and serial number of the MLG sliding tubes installed on the airplane; an inspection of the axle on certain MLG sliding tubes for damage; and replacement of the sliding tube if necessary. The NPRM was prompted by a report of a rupture of a MLG sliding tube axle. The SNPRM proposed to remove certain service information that does not adequately address the identified unsafe condition and revise the compliance method. We are issuing this AD to detect and correct cracks in the axle and (partial) detachment of the axle and wheel from the sliding tube, which could result in failure of an MLG.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive 2014-0058, dated March 11, 2014 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus Model A318 and A319 series airplanes, Model A320-211, -212, -214, -231, -232, and -233 airplanes, and Model A321 series airplanes. The MCAI states:

The SDI includes a detailed visual inspection of the chromium plate for damage, and a Barkhausen noise inspection of the sliding tube axles for damage.

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-2015-0831.

We gave the public the opportunity to participate in developing this AD. We received no comments on the SNPRM or on the determination of the cost to the public.

We reviewed the relevant data 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 SNPRM for correcting the unsafe condition; and

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

Airbus has issued Service Bulletin A320-32-1416, including Appendix 01, dated March 10, 2014. This service information describes procedures for inspecting MLG axles and brake flanges by doing a detailed visual inspection of the chromium plates for damage, a Barkhausen noise inspection of the sliding tube axles for damage, and replacement of affected parts if necessary. 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.

We estimate that this AD affects 3 airplanes of U.S. registry.

We also estimate that it would take about 18 work-hours per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour. Based on these figures, we estimate the cost of this AD on U.S. operators to be $4,590, or $1,530 per product.

In addition, we estimate that any necessary on-condition actions will take about 3 work-hours, for a cost of $255 per product. We have received no definitive data that would enable us to provide part cost estimates for the on-condition actions specified in this AD. We have no way of determining the number of aircraft that might need these actions.

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.

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.

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

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to certain Fokker Services B.V. Model F28 Mark 0100 airplanes. The NPRM published in the Federal Register on September 8, 2016 (81 FR 62029) (“the NPRM”). The NPRM was prompted by an analysis which determined that, for certain areas of the fuselage, the current threshold of an Airworthiness Limitations Section inspection is insufficient to detect early crack development. The NPRM proposed to require one time high and low frequency eddy current inspections of the affected fuselage skin for cracks, and repair if necessary. We are issuing this AD to detect and correct cracks in the fuselage skin; such cracking could result in reduced structural integrity of the fuselage.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive Airworthiness Directive 2016-0029R1, dated November 17, 2016 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Fokker Services B.V. Model F28 Mark 0100 airplanes. The MCAI states:

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-2016-9058.

We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM or on the determination of the cost to the public.

Since the NPRM was issued, EASA revised 2016-0029, dated March 8, 2016. EASA AD 2016-0029R1, dated November 17, 2016, clarifies that the inspection threshold of both ALS inspection tasks have been re-assessed. The revised MCAI did not result in a change to the NPRM. We have revised this AD to refer to EASA AD 2016-0029R1, dated November 17, 2016.

We reviewed the relevant data and determined that air safety and the public interest require adopting this AD with the change 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 reviewed Fokker Service Bulletin SBF100-53-130, dated December 1, 2015. This service information describes one time high and low frequency eddy current inspections for cracks of the fuselage skin. 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.

We estimate that this AD affects 8 airplanes of U.S. registry.

We estimate the following costs to comply with this AD:

We have received no definitive data that will enable us to provide cost estimates for the on-condition actions specified in this AD.

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.

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.

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

This final rule implements the 2015 Act,1 which amended the Inflation Adjustment Act.2 The Inflation Adjustment Act previously had been amended by the DCIA 3 to require that each federal agency adopt regulations at least once every four years that adjust for inflation the civil monetary penalties (“CMPs”) that could be imposed under the statutes administered by the agency. Pursuant to the requirements of the DCIA, the Commission previously adopted regulations in 1996, 2001, 2005, 2009, and 2013 to adjust the maximum amount of the CMPs that could be imposed under the statutes the Commission administers.4

Preamble Table of Contents I. Background II. Adjustment for 2017 III. Discussion of Public Comments IV. Paperwork Reduction Act V. Administrative Procedure Act VI. Executive Order 12866: Regulatory Planning and Review, and Executive Order 13563: Improving Regulation and Regulatory Review VII. Regulatory Flexibility Act and Small Business Regulatory Enforcement Fairness Act VIII. Other Regulatory Considerations A. The Unfunded Mandates Reform Act of 1995 B. Executive Order 13132: Federalism C. Executive Order 13175: Indian Tribal Governments D. The Treasury and General Government Appropriations Act of 1999: Assessment of Federal Regulations and Policies on Families E. Executive Order 13045: Protection of Children From Environmental Health Risks and Safety Risks F. Environmental Impact Assessment G. Executive Order 13211: Energy Supply H. Executive Order 12630: Constitutionally Protected Property Rights I. Executive Order 12988: Civil Justice Reform Analysis I. Background

On November 2, 2015, Congress enacted the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, Public Law 114-74, 701 (Inflation Adjustment Act), which further amended the Federal Civil Penalties Inflation Adjustment Act of 1990 as previously amended by the 1996 Debt Collection Improvement Act (collectively, the “Prior Inflation Adjustment Act”), to improve the effectiveness of civil monetary penalties and to maintain their deterrent effect. The Inflation Adjustment Act required agencies to: (1) Adjust the level of civil monetary penalties with an initial “catch-up” adjustment through an interim final rule (IFR); and (2) make subsequent annual adjustments for inflation. The Department is required to publish an annual inflation adjustment no later than January 15, 2017, and by January 15 of each subsequent year.

On July 1, 2016, the Department published an IFR that established the initial catch-up adjustment for civil penalties that the Department administers and requested comments. See 81 FR 43430 (DOL IFR). Nine comments were received on the Employment and Training Administration, Wage and Hour Division, Occupational Safety and Health Administration, and Employee Benefit Security Administration sections of the IFR, and are discussed below.

This rule implements the annual inflation adjustment that the Department is required by the Inflation Adjustment Act to publish by January 15, 2017 for civil monetary penalties assessed or enforced in the Department's regulations.1 The Inflation Adjustment Act provides that the increased penalty levels apply to any penalties assessed after the effective date of the increase. Pursuant to the Inflation Adjustment Act, this final rule is published notwithstanding Section 553 of the APA.

The Department has undertaken a thorough review of civil penalties administered by its various components pursuant to the Inflation Adjustment Act and in accordance with guidance issued by the Office of Management and Budget.2 The Department first identified the most recent penalty amount, which was the amount established by the catch-up adjustment as set forth in the IFR published on July 1, 2016.

The Department is required to calculate the annual adjustment based on the Consumer Price Index for all Urban Consumers (CPI-U). Annual inflation adjustments are based on the percent change between the October CPI-U preceding the date of the adjustment, and the prior year's October CPI-U; in this case, the percent change between the October 2016 CPI-U and the October 2015 CPI-U. The cost-of-living adjustment multiplier for 2017, based on the Consumer Price Index (CPI-U) for the month of October 2016, not seasonally adjusted, is 1.01636.3 In order to complete the 2017 annual adjustment, the Department multiplied the most recent penalty amount for each applicable penalty by the multiplier, 1.01636, and rounded to the nearest dollar.

As provided by the Inflation Adjustment Act, the increased penalty levels apply to any penalties assessed after the effective date of this rule.4 Accordingly, for penalties assessed after January 13, 2017, whose associated violations occurred after November 2, 2015, the higher penalty amounts outlined in this rule will apply. The table below demonstrates the penalty amounts that apply:

Nine organizations filed responsive comments with the Department within the public comment period for the IFR. The Department received comments from the Center for Progressive Reform (CPR); Farmworker Justice; Contractors Risk Management, Inc.; the North Carolina Department of Labor; the National Association of Heath Underwriters (NAHU); the Kentucky Labor Cabinet; the National Guestworker Alliance (NGA); the New Mexico Environment Department; and the Occupational Safety and Health State Plan Association (OSHSPA).

Comments were received on the Employment and Training Administration, Wage and Hour Division, Occupational Safety and Health Administration, and Employee Benefit Security Administration sections of the IFR. No comments were received related to the Office of Workers' Compensation Programs, Office of the Secretary, and Mine Safety and Health Administration sections.

The following discussion addresses the comments and the Department's responses. The Department has reviewed and considered these comments, but found none of them required a change in the penalty levels or regulatory text.

In the IFR, the Department increased the civil monetary penalties enforced by Department's Wage and Hour Division (WHD) under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), the Immigration and Nationality Act (INA) (specifically, the H-2A, D-1, and H-1B visa programs), the Fair Labor Standards Act (FLSA) (including the child labor provisions), the Employee Polygraph Protection Act, and the Family and Medical Leave Act.5 The civil monetary penalties authorized by the INA's D-1 and H-1B visa programs are reflected in the Employment and Training Administration's regulations, title 20 of the Code of Federal Regulations (CFR), but are enforced by WHD. The Department increased these civil monetary penalties pursuant to the “catch-up” adjustment formula as specified in the Inflation Adjustment Act. The Department explained each increase in the preamble to the IFR.

The Department received two comments addressing the increase of civil monetary penalties under programs administered by the WHD. Farmworker Justice, a national advocacy organization representing migrant and seasonal farmworkers, submitted a comment addressing civil monetary penalties under MSPA, H-2A, and FLSA.6 Farmworker Justice commented that while they were pleased that the civil monetary penalties under these programs had increased, the penalties remain “woefully inadequate to deter agricultural employers from violating labor laws and should be significantly increased.” Farmworker Justice recommended that all civil monetary penalties for these programs “be raised significantly in order to have an impact on the pervasive labor law violations in agriculture.” The National Guestworker Alliance (NGA), a membership organization representing contingent workers across labor sectors, submitted a comment addressing civil monetary penalties under the H-1B visa program.7 With respect to civil monetary penalties under the H-1B visa program, the NGA commented that while it supports the increases included in the IFR, “it believes that DOL should have increased the penalt[ies]” to the “150 [percent] maximum allowed under the [Inflation Adjustment Act] to help ensure employer compliance with the regulation.”

The Department agrees that civil monetary penalties serve an important role in deterring violations of the programs administered by the Department. Indeed, the Inflation Adjustment Act is intended to improve the effectiveness of civil monetary penalties and to maintain their deterrent effect. See DOL IFR, 81 FR at 43431. However, the Department increased civil monetary penalties under the H-1B, H-2A, FLSA, and MSPA programs in the IFR pursuant to the Inflation Adjustment Act's mandatory “catch-up” adjustment formula, which is specified in the statute and is based on inflation. For this “catch-up” adjustment, the Inflation Adjustment Act required agencies to identify, for each penalty, the year and corresponding amount(s) for which the penalty amount, the maximum penalty level, or range of minimum and maximum penalties was established (i.e., originally enacted by Congress or by regulation) or last adjusted other than pursuant to the Prior Inflation Adjustment Act. That amount became the basis of the “catch-up” adjustment, subject to a cap on any penalty increase of 150 percent of the current penalty amount as of November 2015—allowing for a total new penalty of no more than 250 percent of the November 2015 penalty amount. See Inflation Adjustment Act, Sec. 701. This cap is triggered only where the relevant calculation results in a higher penalty amount; the Inflation Adjustment Act does not permit agencies to increase civil monetary penalties up to this cap where the specified calculation results in an increase lower than 150 percent of the November 2015 penalty amount. Id.

As explained in the preamble to the IFR, applying the “catch-up” formula required by the Inflation Adjustment Act, the civil monetary penalties under the FLSA, H-1B, H-2A, and MSPA were increased to the maximum amounts permissible under the Inflation Adjustment Act, none of which reached or exceeded the 150 percent cap. Accordingly, the Department may not further increase civil monetary penalties under these programs pursuant to the Inflation Adjustment Act, other than by making the subsequent annual adjustments for inflation.

In the IFR, the Department increased the civil monetary penalties administered by the Occupational Safety and Health Administration (OSHA) to enforce provisions of the Occupational Safety & Health Act of 1970 (OSH Act), as amended, including conforming edits to the agency's State Plan regulations. The Department increased these civil monetary penalties pursuant to the “catch-up” adjustment formula as specified in the Inflation Adjustment Act. The Department explained each increase in the preamble to the IFR. The Department received four comments related to State Plans, and four comments related to the civil penalty adjustments.

Section 18(c)(2) of the OSH Act provides that a State may assume responsibility for development and enforcement of its own occupational safety and health standards by submitting a State Plan. There were four State Plan related comments submitted in response to the DOL IFR. One was from the Occupational Safety and Health State Plan Association (OSHSPA) and three from individual State Plans (North Carolina, Kentucky and New Mexico). Responses to these four comments are discussed below.

Section 18(c)(2) of the OSH Act requires that a State Plan “provides for the development and enforcement of safety and health standards relating to one or more safety or health issues, which standards (and the enforcement of which standards) are or will be at least as effective in providing safe and healthful employment and places of employment as the standards promulgated under section 6 which relate to the same issues. . . .” Prior to the July 1, 2016 publication of the IFR, the State Plan Indices of Effectiveness for initial approval stated that State Plans must “[p]rovide[ ] effective sanctions against employers who violate State standards and orders, such as those prescribed in the Act.” See 29 CFR 1902.4(c)(2)(xi) (2015). In the factors for determination of final approval status, the regulations require that, “[t]he State proposes penalties in a manner at least as effective as under the Federal program, including the proposing of penalties for first instance violations and the consideration of factors comparable to those required to be considered under the Federal program.” See 29 CFR 1902.37(b)(12).

Thus, OSHA-approved State Plans must have maximum and minimum 8 penalty levels that are at least as effective as federal OSHA's per Section 18 (c)(2) of the OSH Act; See 29 CFR 1902.4(c)(2)(xi); 1902.37(b)(12). It is OSHA's long-standing position that “at least as effective,” in this context, means that State Plans must have maximum and minimum penalty levels that are at least as high as OSHA's maximum and minimum penalty levels. Therefore, all State Plans must increase their maximum and minimum penalty levels to be at least as high as OSHA's initial catch-up maximum and minimum penalty levels in 29 CFR 1903.15(d), and must thereafter increase these maximums and minimums based on inflation.

With the publication of the IFR, the location of OSHA's maximum and minimum penalties was moved from Section 17 of the OSH Act to 29 CFR 1903.15(d). To make it clear where the OSHA penalty levels are located, OSHA amended 29 CFR 1902.4(c)(2)(xi) to now read that State Plans must “[p]rovide[] effective sanctions against employers who violated State standards and orders, such as those prescribed in the Act and 29 CFR 1903.15(d)”(emphasis added). This change was simply to add a reference to the new location of OSHA penalty levels, in 29 CFR 1903.15(d).

OSHSPA submitted a letter requesting that OSHA make clear that the amendment to 29 CFR 1902.4(c)(2)(xi) is not intended to require State Plans to have an identical penalty structure for assessed penalties. As explained above, State Plans have long been required to have effective sanctions as prescribed in the OSH Act. The penalty levels in the OSH Act (Section 17) have historically been OSHA's maximum and minimum penalties, while OSHA's structure or practice for assessing penalties has been developed through policy and is currently contained in OSHA's Field Operations Manual. OSHA confirms that the amendment to § 1902.4(c)(2)(xi) refers only to the location of the new maximum and minimum penalty levels in 29 CFR 1903.15(d). The change to § 1902.4(c)(2)(xi) does not expand OSHA's scope of authority or control over State Plans' penalties, nor does it alter OSHA's obligation to analyze both State Plan maximum penalties and State Plan penalty assessment structures under the “at least as effective” lens.

The North Carolina Department of Labor submitted a comment that took issue with OSHA's amendment of 29 CFR 1902.4(c)(2)(xi), and was joined by Kentucky Labor Cabinet and the New Mexico Environment Department. The North Carolina State Plan contended that OSHA's amendment to 29 CFR 1902.4(c)(2)(xi) was in excess of the authority granted by the Bipartisan Budget Act of 2015's amendment to the Inflation Adjustment Act; not in conformance with the APA, 5 U.S.C. 553; and arbitrary, capricious, and an abuse of discretion.

The Inflation Adjustment Act directed OSHA to increase maximum and minimum penalties through an IFR issuing without prior notice and comment rather than a change to the OSH Act. OSHA has the inherent authority to make technical amendments to its regulations to conform to Congress's direction to increase its penalty levels. With the change to the location of penalty levels to 29 CFR 1903.15(d), OSHA needed to update the reference in 29 CFR 1902.4(c)(2)(xi) to point to both the Act and the new regulation. This change was merely the addition of a reference, or pointer, to increase clarity and transparency in the State Plan Indices of effectiveness.

The North Carolina, Kentucky and New Mexico State Plans argue that the change to 29 CFR 1902.4(c)(2)(xi) violated the APA because it was not issued through notice-and-comment rulemaking, and the good cause exception to notice-and-comment rulemaking is not applicable.

As noted by the North Carolina State Plan, the APA exception from notice and comment applies to regulations that make minor technical amendments and non-substantive corrections. See p. 3. That comports with the APA language that notice and comment is not required where they are “impractical, unnecessary, or contrary to the public interest.” 5 U.S.C. 553(b)(3)(B). The amendment to 29 CFR 1902.4(c)(2)(xi) fits within that exception because it is a minor, technical amendment that updated the reference to the location of OSHA maximum and minimum penalty levels. It is the “at least as effective” standard in OSH Act § 18 that requires State Plans to increase their maximum and minimum penalty levels, and the amendment to 29 CFR 1902.4(c)(2)(xi) only made clear to State Plans and all other stakeholders that the maximum and minimum penalty levels that State Plans are required to be at least as effective as, are now listed under 29 CFR 1903.15(d), and are no longer in OSH Act § 17. There is no need for notice and comment on that type of “pointer” reference. See, e.g., Corrections and Technical Amendments to 16 OSHA Standards, 76 FR 80735 (Dec. 27, 2011) (updating cross-reference from “Section 101(14)” of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) to “Section 103(14)” after Congress amended CERCLA). Nonetheless, DOL did accept comments on the IFR, and several State Plans took advantage of that opportunity to file comments,

Further, the State Plan comments argue that the change to 29 CFR 1902.4(c)(2)(xi) was arbitrary, capricious, and an abuse of discretion under the APA because it is not based on reasoned analysis. The North Carolina State Plan comment argues that OSHA should present current data to support the requirement that State Plans increase penalties to the level assessed by OSHA effective August 1, 2016 in order to be deemed “at least as effective.” Further, the North Carolina State Plan comment emphasizes that the “at least as effective” standard does not require State Plans to have programs identical to OSHA's. New Mexico joined in arguing that assessed penalty levels and injury rates are not correlated and thus penalty levels should not be part of the “at least as effective” analysis.

In the Inflation Adjustment Act, Congress found that “(1) the power of Federal agencies to impose civil monetary penalties for violations of Federal law and regulations plays an important role in deterring violations and furthering the policy goals embodied in such laws and regulations; (2) the impact of many civil monetary penalties has been and is diminished due to the effect of inflation.” See 28 U.S.C. 2461 note, § 2(a). This finding is as applicable to State Plan penalties as it is to federal penalties.

The regulations that OSHA adopted (29 CFR 1903.15(d)) address only the maximum and minimum penalty levels—they do not address penalties finally assessed or the methodology involved in calculating assessed penalties. The latter are matters to be determined under the “at least as effective” standard, on a case-by-case basis with each State Plan.

OSHA has an obligation to ensure that State Plans continue to maintain maximum and minimum penalty levels that are at least as effective as OSHA's. OSHA agrees that the “at least as effective” standard does not require State Plans to be identical to OSHA. However, as acknowledged by the OSHSPA comment, historically, State Plans have matched OSHA's maximum and minimum penalties identically. In 1990, when Congress last increased OSHA's maximum and minimum penalty levels, all State Plans adopted identical penalty levels, resulting in the $7,000/$70,000 penalty levels in effect for 25 years for both OSHA and the State Plans. OSHA recognizes that the August 1, 2016 increase in OSHA's maximum and minimum penalty levels is complicated by the requirement that the penalties levels increase annually, based on the cost-of-living adjustment, but that does not mean that State Plans do not have to increase their maximum and minimum penalty levels. OSHA will assist the State Plans to make these necessary changes occur. OSHA's position has been and continues to be that State Plans must have maximum and minimum penalties that are at least as effective as OSHA's.

The IFR updated § 1903.15 to read in part, “After, or concurrent with, the issuance of a citation, and within a reasonable time after the termination of the inspection, the Area Director shall notify the employer by certified mail or by personal service by the Compliance Safety and Health Officer of the proposed penalty in accordance with paragraph (d) of this section, or that no penalty is being proposed.” In its comments, Contractors Risk Management asked whether this means that the employer will be notified if there are no penalties proposed or no citations issued. At the closing of the inspection process, OSHA conducts a closing conference with the employer and the employee representatives to discuss the findings of the inspection. The compliance officer discusses possible courses of action an employer may take following an inspection, which could include an informal conference with OSHA or contesting citations and proposed penalties where citations and penalties are proposed. The compliance officer also discusses consultation services and employee rights. This closing conference is held regardless of whether citations and penalties are proposed.

The IFR added § 1903.15(d) to provide the adjusted civil penalties for penalties proposed on or after August 1, 2016. Contractors Risk Management expressed concern about a case being opened before August 1, but higher penalty levied because the time OSHA takes to complete the case goes beyond August 1. The Inflation Adjustment Act mandates that the catch-up adjustment apply to any civil monetary penalty assessed after August 1, 2016, “including those whose associated violation predated such increase” See Public Law 114-74 at § 701. OSHA attempted to complete open cases prior to the August 1 conversion date. However, in some cases, citations for inspections opened prior to August 1st were not issued until after August 1, and enhanced penalties were proposed under the new rules. OSHA made every effort to inform employers, through outreach, use of our Web site, and notices to affected employers, of the changes to our penalties and the potential impact on the inspection.

The NGA commented that it supports the increases in penalties for employer violations of the OSH Act, but believes that the Department should have increased the penalties to the 150% maximum allowed under Inflation Adjustment Act to help ensure employer compliance with the law. Farmworker Justice similarly commented that civil monetary penalties under the OSH Act should be increased. The Department agrees that civil monetary penalties serve an important role in deterring violations of the programs administered by the Department. However, the Department increased civil monetary penalties under the OSH Act in the IFR pursuant to the Inflation Adjustment Act's mandatory “catch-up” adjustment formula, which is specified in the statute and is based on inflation. For this “catch-up” adjustment, the Inflation Adjustment Act required agencies to identify, for each penalty, the year and corresponding amount(s) for which the penalty amount, the maximum penalty level, or range of minimum and maximum penalties was established (i.e., originally enacted by Congress or by regulation) or last adjusted other than pursuant to the Prior Inflation Adjustment Act. That amount became the basis of the “catch-up” adjustment, subject to a cap on any penalty increase of 150 percent of the current penalty amount as of November 2015—allowing for a total new penalty of no more than 250 percent of the November 2015 penalty amount. See Inflation Adjustment, Sec. 701. This cap is triggered only where the relevant calculation results in a higher penalty amount; the Inflation Adjustment Act does not permit agencies to increase civil monetary penalties up to this cap where the specified calculation results in an increase lower than 150 percent of the November 2015 penalty amount. Id. By applying the “catch-up” formula required by the Inflation Adjustment Act, the civil monetary penalties under the OSH Act were increased to the maximum amounts permissible under the Inflation Adjustment Act, none of which reached or exceeded the 150 percent cap.

The Center for Progressive Reform commented that it applauds the agency for adjusting the penalties to the maximum amount permitted by the Inflation Adjustment Act, but it encourages OSHA to revise its informal settlement policies. In response to the penalty adjustments mandated by Congress, OSHA revised Chapter 6 of its Field Operations Manual. In revising the guidance, OSHA wanted to be consistent with current procedures and ensure that penalties were impactful. However, we were also mindful of the impact that these changes may have had on small businesses. To offset any undue impact, OSHA created an additional size category for businesses with 1-10 employees, and now offers a reduction of 70 percent for those smallest businesses. The informal settlement policy remains the same, but OSHA is closely monitoring the influence that the new penalties have on our contest rates, etc. to see where adjustments, if needed, may be appropriate.

In the IFR, the Department increased the civil monetary penalties administered by the Employee Benefits Security Administration to enforce provisions of the Employee Retirement Income Security Act of 1974, as amended, (ERISA). The Department increased these civil monetary penalties as required by the “catch-up” adjustment formula specified in the Inflation Adjustment Act. Minor modifications were made to 29 CFR 2575.3 to clarify that future inflation adjustments to ERISA civil monetary penalties would be made by notice in the Federal Register without amending the code of federal regulations each year to reflect an increase in the penalty amount.

The Department received one comment letter regarding the adjustment of the ERISA civil monetary penalties under the IFR. The commenter, the National Association of Health Underwriters (NAHU), stated that “the formula used to increase penalties was fairly applied in the IFR.” NAHU, however, questioned the “decision to impose increased penalties on employers at this time” due to the increased cost of compliance and reporting responsibilities placed on group health plans by the Patient Protection and Affordable Care Act (ACA). NAHU expressed concern “that increasing the potential penalties could have a detrimental impact on an employer's potential willingness to offer group benefits, particularly for smaller employers that have not previously offered coverage.” Most ERISA civil monetary penalties affecting group health plans are expressed in terms of “up to” or “not more than” a maximum penalty. The Department did not automatically impose the maximum penalty in the past and has no plans at this time to change its enforcement policy to maximize penalty collections following the catch-up adjustment. It is the view of the Department that neither the catch-up adjustment nor any subsequent adjustment will have the detrimental impact on group health plans suggested by NAHU. Accordingly, the unverifiable social cost of the catch-up adjustment postulated by NAHU's comment does not outweigh the benefits of increasing the ERISA civil monetary penalties by the otherwise required amount.

Section 4(a) of the Inflation Adjustment Act states that “[n]ot later than July 1, 2016, and not later than January 15 of every year thereafter,” the head of each agency shall adjust civil monetary penalties in accordance with section 4(b). Section 4(b)(1) states that “for purposes of the first adjustment” (i.e., the catch-up adjustment) the “head of each agency shall adjust the civil monetary penalties by IFR” that “shall take effect no later than August 1, 2016.” Since the operative word of the statute is “shall,” the Department did not have the discretion to delay adjustment of the ERISA civil monetary penalties beyond August 1, 2016, except as otherwise provided by section 4(c) of the Inflation Adjustment Act.

Under section 4(c), an agency could not delay or otherwise reduce the catch-up adjustment unless: (1) After publishing a notice of proposed rulemaking in the Federal Register, the agency determines that the increase in the penalty or penalty range would have a negative economic impact, or that the social costs of increasing the penalty would outweigh the benefits, and (2) OMB concurred with that determination. OMB advised that an agency seeking OMB's concurrence to a reduction of the required catch-up adjustment must submit the associated notice of proposed rulemaking to the Office of Information and Regulatory Affairs (OIRA) of OMB for review by May 2, 2016.9 OMB also advised that its concurrence to a reduction of the catch-up adjustment would be “rare.” 10 The Department decided not to pursue a reduction in the increase of any of the ERISA penalties, because, in the Department's view, there was no negative economic impact or a verifiable social cost resulting from the catch-up adjustment. Since the Department did not submit the requisite notice of proposed rulemaking to OIRA by May 2, 2016, the Department arguably does not have the authority to reduce a required catch-up adjustment to an ERISA penalty under section 4(c). Even if the Department currently has the authority to reduce a catch-up adjustment under section 4(c), the one comment received by the Department regarding ERISA penalties did not provide sufficient evidence of negative economic impact or social cost for the Department to seek a reduction of the increased ERISA penalties resulting from the catch-up adjustment.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) requires that the Department consider the impact of paperwork and other information collection burdens imposed on the public. The Department has determined that this final rule does not require any collection of information.

The Inflation Adjustment Act provides that agencies shall annually adjust civil monetary penalties for inflation notwithstanding Section 553 of the APA. Additionally, the Inflation Adjustment Act provides a nondiscretionary cost-of-living formula for annual adjustment of the civil monetary penalties. For these reasons, the requirements in sections 553(b), (c), and (d) of the APA, relating to notice and comment and requiring that a rule be effective 30 days after publication in the Federal Register, are inapplicable.

Executive Order 12866 requires that regulatory agencies assess both the costs and benefits of significant regulatory actions. Under the Executive Order, a “significant regulatory action” is one meeting any of a number of specified conditions, including the following: Having an annual effect on the economy of $100 million or more; creating a serious inconsistency or interfering with an action of another agency; materially altering the budgetary impact of entitlements or the rights of entitlement recipients, or raising novel legal or policy issues.

The Department has determined that this final rule is not a “significant” regulatory action and a cost-benefit and economic analysis is not required. This regulation merely adjusts civil monetary penalties in accordance with inflation as required by the Inflation Adjustment Act, and has no impact on disclosure or compliance costs. The benefit provided by the inflationary adjustment to the maximum civil monetary penalties is that of maintaining the incentive for the regulated community to comply with the laws enforced by the Department, and not allowing the incentive to be diminished by inflation.

Executive Order 13563 directs 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, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility to minimize burden.

This final rule is exempt from the requirements of the APA because the Inflation Adjustment Act directed the Department to issue the annual adjustments without regard to Section 553 of the APA. In that context, Congress has already determined that any possible increase in costs is justified by the overall benefits of such adjustments. This final rule makes only the statutory changes outlined herein; thus there are no alternatives or further analysis required by E.O. 13563.

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), imposes certain requirements on Federal agency rules that are subject to the notice and comment requirements of the APA, 5 U.S.C. 553(b). This final rule is exempt from the requirements of the APA because the Inflation Adjustment Act directed the Department to issue the annual adjustments without regard to Section 553 of the APA. Therefore, the requirements of the RFA applicable to notices of proposed rulemaking, 5 U.S.C. 603, do not apply to this rule. Accordingly, the Department is not required to either certify that the final rule would not have a significant economic impact on a substantial number of small entities or conduct a regulatory flexibility analysis.

Because the rule simply adjusts for inflation, it does not include any Federal mandate that may result in increased expenditures by State, local, or tribal governments; nor does it increase private sector expenditures by more than $100 million annually; nor does it significantly or uniquely affect small governments. Accordingly, the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1501 et seq.) requires no further agency action or analysis.

Section 18 of the OSH Act (29 U.S.C. 667) requires OSHA-approved State Plans to have standards and an enforcement program that are at least as effective as federal OSHA's standards and enforcement program. OSHA-approved State Plans must have maximum and minimum penalty levels that are at least as effective as federal OSHA's per Section 18 (c)(2) of the OSH Act; 29 CFR 1902.4(c)(2)(xi); 1902.37(b)(12). State Plans are required to increase their penalties in alignment with OSHA's penalty increases to maintain at least as effective penalty levels.

State Plans are not required to impose monetary penalties on state and local government employers. See § 1956.11(c)(2)(x). Five (5) states and one territory have State Plans that cover only state and local government employees: Connecticut, Illinois, New Jersey, New York, Maine, and the Virgin Islands. Therefore, the requirements to increase the penalty levels do not apply to these State Plans. Twenty-one (21) states and one U.S. territory have State Plans that cover both private sector employees and state and local government employees: Alaska, Arizona, California, Hawaii, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Nevada, New Mexico, North Carolina, Oregon, Puerto Rico, South Carolina, Tennessee, Utah, Vermont, Virginia, Washington, and Wyoming. These states must increase their penalties for private-sector employers.

Other than as listed above, this final rule does not have federalism implications because it does 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. Accordingly, Executive Order 13132, Federalism, requires no further agency action or analysis.

This final rule does not have “tribal implications” because it does not 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. Accordingly, Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, requires no further agency action or analysis.

This final rule will have no effect on family well-being or stability, marital commitment, parental rights or authority, or income or poverty of families and children. Accordingly, section 654 of the Treasury and General Government Appropriations Act of 1999 (5 U.S.C. 601 note) requires no further agency action, analysis, or assessment.

This final rule will have no adverse impact on children. Accordingly, Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks, as amended by Executive Orders 13229 and 13296, requires no further agency action or analysis.

A review of this final rule in accordance with the requirements of the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et seq.; the regulations of the Council on Environmental Quality, 40 CFR 1500 et seq.; and the Departmental NEPA procedures, 29 CFR part 11, indicates that the final rule will not have a significant impact on the quality of the human environment. As a result, there is no corresponding environmental assessment or an environmental impact statement.

This final rule has been reviewed for its impact on the supply, distribution, and use of energy because it applies, in part, to the coal mining and uranium industries. MSHA has concluded that the adjustment of civil monetary penalties to keep pace with inflation and thus maintain the incentive for operators to maintain safe and healthful workplaces is not a significant energy action because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy.

This final rule has not been identified to have other impacts on energy supply. Accordingly, Executive Order 13211 requires no further Agency action or analysis.

This final rule will not implement a policy with takings implications. Accordingly, Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights, requires no further agency action or analysis.

This final rule was drafted and reviewed in accordance with Executive Order 12988, Civil Justice Reform. This final rule was written to provide a clear legal standard for affected conduct and was carefully reviewed to eliminate drafting errors and ambiguities, so as to minimize litigation and undue burden on the Federal court system. The Department has determined that this IFR meets the applicable standards provided in section 3 of Executive Order 12988.

For the reasons set out in the preamble, 20 CFR chapters V and VI, 29 CFR chapters V, XVII, and XXV, and 30 CFR chapter I are amended as follows.

Background

This document contains amendments to 26 CFR part 1. On June 8, 2016, the Department of the Treasury (Treasury Department) and the IRS published temporary regulations (TD 9770) under section 337(d) (temporary regulations) in the Federal Register (81 FR 36793) concerning certain transfers of property to regulated investment companies (RICs) and real estate investment trusts (REITs). A notice of proposed rulemaking cross-referencing the temporary regulations (REG-126452-15) (proposed regulations) was published in the Federal Register (81 FR 36816) on the same day. A correction to the temporary regulations was published in the Federal Register (81 FR 41800) on June 28, 2016. The Treasury Department and the IRS received one written comment in response to the proposed regulations. The comment requested a public hearing, and a hearing was held on November 9, 2016. After consideration of the written comment and the comments made at the public hearing, the proposed regulations are adopted in part and as amended by this Treasury decision, and the corresponding temporary regulations are removed in part. The revisions adopted by this Treasury decision are discussed below.

The comment requested that the temporary regulations and the proposed regulations with respect to the recognition period be immediately withdrawn and the recognition period with respect to REITs be defined with reference to the recognition period of section 1374(d)(7), which is currently a five-year period as a result of section 127(a) of the Protecting Americans Against Tax Hikes Act of 2015 (PATH Act), enacted as Division Q of the Consolidated Appropriations Act, 2016, Public Law 114-113, 129 Stat. 2422. The comment asserted that the change to the length of the recognition period in the temporary regulations and the proposed regulations was inconsistent with Congress's intent in the PATH Act and with prior administrative guidance. On October 18, 2016, the Chairmen and Ranking Members of the Ways and Means Committee of the U.S. House of Representatives and the Finance Committee of the U.S. Senate addressed a letter to the Secretary of the Treasury stating that the recognition period in the temporary regulations and the proposed regulations was inconsistent with congressional intent and the longstanding practice of treating REITs and RICs as having the same built-in gain recognition period as S corporations, currently five years. The Chairmen and Ranking Members also asked that the temporary regulations and the proposed regulations be modified to provide that REITs, RICs and S corporations are all subject to the same five-year built-in gain recognition period in order to be consistent with congressional intent and longstanding practice.

The Treasury Department and the IRS decline to withdraw the temporary regulations and the proposed regulations relating to the recognition period but agree with the comment relating to the length of the recognition period. Accordingly, these final regulations provide that the term recognition period means the recognition period described in section 1374(d)(7), beginning, in the case of a conversion transaction that is a qualification of a C corporation as a RIC or a REIT, on the first day of the RIC's or the REIT's first taxable year, and, in the case of other conversion transactions, on the day the RIC or the REIT acquires the property. The final regulations will apply prospectively from February 17, 2017, but taxpayers may choose to apply the definition of recognition period in the final regulations, instead of the 10-year recognition period in the temporary regulations, for conversion transactions occurring on or after August 8, 2016, and on or before February 17, 2017.

The Treasury Department and the IRS continue to study the other issues addressed in the temporary regulations and the proposed regulations, including other issues raised by the comment, and welcome further comment on those issues.

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented by Executive Order 13653. Therefore, a regulatory assessment is not required. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this regulation will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that this regulation will primarily affect large corporations with a substantial number of shareholders. Accordingly, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received.

The principal author of these regulations is Austin M. Diamond-Jones, Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development.

Accordingly, 26 CFR part 1 is amended as follows:

This document contains regulations under section 7874 of the Internal Revenue Code (Code). On September 17, 2009, the Department of the Treasury (Treasury Department) and the IRS issued Notice 2009-78 (2009-40 IRB 452), which announced that regulations would be issued under section 7874 identifying certain stock of a foreign corporation that would not be taken into account for purposes of determining the ownership percentage described in section 7874(a)(2)(B)(ii) (the 2009 notice). On January 17, 2014, temporary regulations (TD 9654) were published in the Federal Register (79 FR 3094) that implemented and obsoleted the 2009 notice and provided guidance with respect to subsequent transfers of stock of a foreign corporation described in section 7874(a)(2)(B)(ii) (the 2014 temporary regulations). A notice of proposed rulemaking (REG-121534-12) cross-referencing the 2014 temporary regulations was published in the same issue of the Federal Register (79 FR 3145) (the 2014 proposed regulations). On November 19, 2015, the Treasury Department and the IRS issued Notice 2015-79 (2015-49 IRB 775), which announced, in part, that regulations would be issued to clarify certain aspects of the 2014 temporary regulations (the 2015 notice). On April 8, 2016, the Treasury Department and the IRS published temporary regulations (TD 9761) in the Federal Register (81 FR 20858) that, in part, implemented the clarifications announced in the 2015 notice and provided common definitions for purposes of certain regulations under sections 367(b), 956, 7701(l), and 7874 (the 2016 temporary regulations). A notice of proposed rulemaking (REG-135734-14) cross-referencing the 2016 temporary regulations was published in the same issue of the Federal Register (81 FR 20588) (the 2016 proposed regulations). The 2014 temporary regulations as modified by the 2016 temporary regulations are referred to in this preamble as the “temporary regulations.” No public hearing was requested or held on the 2014 proposed regulations or the 2016 proposed regulations; however, comments were received. All comments are available at www.regulations.gov or upon request. After consideration of the comments, the 2014 proposed regulations, as modified by the 2016 proposed regulations and as updated to reflect the common definitions in those regulations, are adopted as amended by this Treasury decision, and the corresponding temporary regulations are removed.

A foreign corporation (foreign acquiring corporation) generally is treated as a surrogate foreign corporation under section 7874(a)(2)(B) if, pursuant to a plan (or a series of related transactions), three conditions are satisfied. First, the foreign acquiring corporation completes, after March 4, 2003, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation (domestic entity acquisition). Second, after the domestic entity acquisition, at least 60 percent of the stock (by vote or value) of the foreign acquiring corporation is held by former shareholders of the domestic corporation (former domestic entity shareholders) by reason of holding stock in the domestic corporation (such percentage, the ownership percentage, and the fraction used to calculate the ownership percentage, the ownership fraction). And third, after the domestic entity acquisition, the expanded affiliated group (as defined in section 7874(c)(1)) that includes the foreign acquiring corporation (EAG) does not have substantial business activities in the foreign country in which, or under the law of which, the foreign acquiring corporation is created or organized when compared to the total business activities of the EAG. Similar provisions apply if a foreign acquiring corporation acquires substantially all of the properties constituting a trade or business of a domestic partnership. The domestic corporation or the domestic partnership described in this paragraph is referred to at times in this preamble as the “domestic entity.” For other definitions used throughout this preamble but not defined in this preamble, see § 1.7874-12T (providing common definitions for purposes of certain regulations under sections 367(b), 956, 7701(l), and 7874).

The temporary regulations provide a rule (the disqualified stock rule) that, subject to a de minimis exception, excludes disqualified stock from the denominator of the ownership fraction. In general, disqualified stock is stock of the foreign acquiring corporation that, in a transaction related to the domestic entity acquisition, is transferred in one of two types of exchanges. See Parts II.A and B of this Summary of Comments and Explanation of Revisions for the discussion of these exchanges. However, stock is disqualified stock only to the extent that the transfer of the stock in the exchange increases the fair market value of the assets of the foreign acquiring corporation or decreases the amount of its liabilities (the net asset requirement). The disqualified stock rule thus generally prevents stock of the foreign acquiring corporation that is transferred in certain transactions that increase the net assets of the foreign acquiring corporation from inappropriately increasing the denominator of the ownership fraction and thereby diluting the ownership percentage.

Under the temporary regulations, stock may be disqualified stock regardless of whether it is, has been, or will be publicly traded. In addition, stock may be disqualified stock regardless of whether it is transferred by reason of an issuance, sale, distribution, exchange, or any other type of disposition, or whether it is transferred by the foreign acquiring corporation or another person.

One comment suggested that disqualified stock should generally include only stock transferred by reason of an issuance by the foreign acquiring corporation. According to the comment, this would generally simplify the disqualified stock rule by obviating the need for the net asset requirement, though it noted that special rules regarding hook stock would likely be needed. The final regulations do not adopt this comment. The Treasury Department and the IRS have determined that transfers other than solely by reason of an issuance can inappropriately dilute the ownership percentage. For example, see § 1.7874-4(j) Example 6 (iii) (issuance of stock by the foreign acquiring corporation in exchange for qualified property followed by a transfer of that stock by the transferee in satisfaction of an obligation of the transferee) and § 1.7874-4(j) Example 10 (issuance of stock followed by use of the stock to satisfy an obligation). The Treasury Department and the IRS have concluded that addressing these transactions and other transactions (such as transactions involving hook stock) via special rules would largely negate the simplicity benefits of the approach recommended by the comment.

Disqualified stock includes stock of the foreign acquiring corporation that, in a transaction related to the domestic entity acquisition, is transferred to a person other than the domestic entity in exchange for “nonqualified property.” Nonqualified property means (i) cash or cash equivalents, (ii) marketable securities, (iii) certain obligations (as discussed in Part II.A.3 of this Summary of Comments and Explanation of Revisions), and (iv) any other property acquired with a principal purpose of avoiding the purposes of section 7874, regardless of whether the transaction involves an indirect transfer of property described in clause (i), (ii), or (iii). This preamble refers at times to the property described in clauses (i), (ii), and (iii) of the preceding sentence collectively as “specified nonqualified property” and to the property described in clause (iv) as “avoidance property.” For this purpose, marketable securities has the meaning set forth in section 453(f)(2), except that the term does not include stock of a corporation or an interest in a partnership that becomes a member of the EAG in a transaction (or series of transactions) related to the domestic entity acquisition.

Under the temporary regulations, the extent to which stock of a foreign acquiring corporation is considered transferred in exchange for nonqualified property can differ depending on the structure of a transaction. For example, if, in a transaction related to a domestic entity acquisition, the foreign acquiring corporation acquires all the stock of another foreign corporation (foreign target corporation) in exchange for stock of the foreign acquiring corporation, then such stock of the foreign acquiring corporation would normally not be considered transferred in exchange for nonqualified property, regardless of the extent to which the properties of the foreign target corporation constitute nonqualified property, unless the stock of the foreign target corporation constitutes avoidance property. However, if the transaction were instead structured so that the foreign acquiring corporation acquires all of the properties of the foreign target corporation in exchange for stock of the foreign acquiring corporation, then such stock of the foreign acquiring corporation would be considered transferred in exchange for nonqualified property, to the extent that the properties of the foreign target corporation constitute nonqualified property. The preamble to the 2014 temporary regulations acknowledged this disparity and the decision not to harmonize the treatment of stock and asset acquisitions by, for example, applying a look-through approach to stock acquisitions. See Part C of the Explanation of Provisions section of the preamble to the 2014 temporary regulations. Nevertheless, comments requested more consistent treatment between stock and asset acquisitions, noting in particular that, when the foreign target corporation is publicly-traded, corporate and other legal considerations may dictate the structure of the transaction.

One comment suggested that this result could be achieved when a foreign acquiring corporation acquires substantially all of the properties of a foreign target corporation by viewing the two corporations as a single combined unit for purposes of the disqualified stock rule. Under this view, properties historically held by the foreign target corporation (including nonqualified property) would not represent an infusion of value into the combined group. The comment thus asserted that, regardless of the structure of the transaction, the disqualified stock rule generally should not apply to stock attributable to such properties. The comment noted, though, that if asset acquisitions were to be treated similar to stock acquisitions, there might be a heightened need for rules, in addition to the anti-abuse rule of section 7874(c)(4), to address certain related transactions in which stock of the foreign target corporation is transferred in exchange for nonqualified property.

After considering the comments, the Treasury Department and the IRS decline to adopt a rule treating certain asset acquisitions as stock acquisitions or to otherwise coordinate their treatment. The Treasury Department and the IRS have determined that stock of a foreign acquiring corporation attributable to any nonqualified property—whether acquired in a transaction related to the domestic entity acquisition or historically held—generally presents opportunities to inappropriately dilute the ownership percentage. For example, see, the passive assets rule of § 1.7874-7T. Thus, the Treasury Department and the IRS have concluded that a look-through approach, pursuant to which stock acquisitions would be treated similar to asset acquisitions, would be the preferable approach for harmonizing the treatment, in contrast to the comments' recommendation to treat certain assets acquisitions similar to stock acquisitions. The final regulations, however, do not implement a look-through approach out of concerns of undue complexity and administrative burden.

Another comment recommended that, if the final regulations retain different treatment for stock and asset acquisitions, working capital of a foreign target corporation should be excluded from the definition of nonqualified property. After considering this comment, the Treasury Department and the IRS have determined that providing special rules that exclude working capital from the definition of nonqualified property would result in undue complexity and administrative burden. Notably, such special rules would have limited applicability when the foreign target corporation is a parent corporation of an affiliated group—which is often the case—because, in such a structure, working capital generally would be held by subsidiaries. Accordingly, the final regulations do not adopt the comment.

Under the temporary regulations, nonqualified property includes an obligation owed by (i) a member of the EAG; (ii) a former domestic entity shareholder or former domestic entity partner; or (iii) a person that owns, before or after the domestic entity acquisition, stock of (or a partnership interest in) a person described in clause (i) or (ii) or that is related (within the meaning of section 267 or 707(b)) to such a person. Comments requested several modifications to this rule.

First, a comment recommended that, if the final regulations retain different treatment for stock and asset acquisitions, they exclude certain obligations owed by a member of the EAG from the definition of nonqualified property. In particular, the comment suggested excluding intercompany obligations held by the foreign target corporation (that is, obligations owed by an affiliate of the foreign target corporation to the foreign target corporation), at least to the extent that the obligations arose in the ordinary course of the foreign target group's cash management program. The comment noted that, in these cases, had the foreign target corporation instead funded its affiliate through equity (rather than debt), stock of the foreign acquiring corporation transferred in exchange for the equity generally would not be disqualified stock. The comment questioned this disparate treatment.

After considering the comment, the Treasury Department and the IRS have determined that transfers of stock of a foreign acquiring corporation in exchange for intercompany obligations generally do not present opportunities to inappropriately reduce the ownership fraction. Accordingly, the final regulations exclude from the definition of nonqualified property an obligation owed by a member of the EAG if the holder of the obligation immediately before the domestic entity acquisition and any related transaction (or its successor), is a member of the EAG after the domestic entity acquisition and all related transactions. § 1.7874-4(i)(2)(iii)(A).

Another comment recommended that nonqualified property generally not include an obligation owed by a person that is only a de minimis former domestic entity shareholder or former domestic entity partner. The comment made a similar recommendation for an obligation owed by a person that, before and after the domestic entity acquisition, owns no more than a de minimis interest in any member of the EAG. The Treasury Department and the IRS agree with this comment, and the final regulations are modified accordingly. See § 1.7874-4(i)(2)(iii)(B) and (C) (providing a de minimis rule for a less than five percent ownership interest). Nevertheless, the anti-abuse rule in section 7874(c)(4) may still apply to disregard transfers of stock in exchange for such obligations.

The temporary regulations define an obligation by reference to § 1.752-1(a)(4)(ii), which includes “any fixed or contingent obligation to make payment. . . . Obligations include, but are not limited to, debt obligations, environmental obligations, tort obligations, contract obligations, pension obligations, obligations under a short sale, and obligations under derivative financial instruments such as options, forward contracts, futures contracts, and swaps.”

The Treasury Department and the IRS are concerned that the reference in the temporary regulations to § 1.752-1(a)(4)(ii) may cause confusion when applied outside of a partnership setting. The final regulations thus remove the reference to § 1.752-1(a)(4)(ii) and provide that an obligation for purposes of the disqualified stock rule includes any fixed or contingent obligation to make payment or provide value (such as through providing goods or services). § 1.7874-4(i)(3). No inference is intended regarding the treatment, under § 1.752-1(a)(4)(ii) or the temporary regulations, of a contractual agreement by a person to provide goods or services.

Avoidance property means any property (other than specified nonqualified property) acquired with a principal purpose of avoiding the purposes of section 7874. The 2015 notice and the 2016 temporary regulations clarified that this definition applies regardless of whether the transaction involves an indirect transfer of specified nonqualified property. One comment was received regarding this clarification.

The comment agreed with the clarification but asserted that avoidance property should not include property that meets two conditions. First, the property (or, in cases in which the property is stock or a partnership interest, the property indirectly transferred) either (i) constitutes a trade or business within the meaning of § 1.367(a)-2(d)(2), or (ii) is related to an existing business of the foreign acquiring corporation. And, second, the property is transferred without an intention to dispose of it at a later time. After considering the comment, the Treasury Department and the IRS have determined that whether property constitutes avoidance property should in all cases depend on the principal purpose for the acquisition of the property, which cannot be determined based on an exclusive set of objective factors, such as the nature of the property or holding period. In certain circumstances, property that meets the conditions described by the comment could be acquired with a principal purpose of avoiding the purposes of section 7874. Thus, the Treasury Department and the IRS have concluded that it would be inappropriate to exclude such property from the definition of avoidance property. Consequently, the final regulations do not adopt the comment.

Disqualified stock also generally includes stock of the foreign acquiring corporation that is transferred by a person (the transferor) to another person (the transferee) in exchange for property (the exchanged property) if, pursuant to the same plan (or series of related transactions), the transferee subsequently transfers the stock in exchange for the satisfaction or assumption of one or more obligations associated with the exchanged property (the associated obligation rule). The purpose of the rule is to ensure that the same amount of stock of the foreign acquiring corporation is included in the denominator of the ownership fraction in economically similar situations.

For example, consider a situation in which a foreign acquiring corporation (FA) intends to acquire the property of a domestic entity (DT), which holds property with a fair market value of $100x and has a $25x obligation that is associated with the property. The parties could structure the domestic entity acquisition using the following steps: (i) DT transfers all of its property to FA in exchange for $75x of FA stock and FA's assumption of the $25x associated obligation, (ii) DT distributes the $75x of FA stock to its shareholders, and (iii) in a related transaction, FA issues $25x of its stock to the public for cash and uses that cash to satisfy the associated obligation. Alternatively, FA could not assume the associated obligation and could thus acquire all of DT's properties in exchange for $100x of FA stock, followed by DT using $25x of FA stock to satisfy the $25x associated obligation and distributing the remaining $75x of FA stock to its shareholders in liquidation. Under the first alternative, the $25x of FA stock issued to the public in exchange for cash (which is nonqualified property) would be excluded from the denominator of the ownership fraction. Under the second alternative, however, no FA stock would be excluded absent the associated obligation rule. Allowing a different result under the second alternative would be inappropriate because the first and second alternatives are economically similar. That is, under both alternatives, FA's value reflects the gross value of the acquired property (under the first alternative, because the amount of the associated obligation is satisfied with the cash and, under the second alternative, because FA did not assume the associated obligation), and DT's obligations have been reduced by the amount of the associated obligation. The associated obligation rule thus ensures that, as under the first alternative, $25x of FA stock is excluded from the denominator of the ownership fraction under the second alternative. The rule serves the same purpose when the transferee is a person other than the domestic entity.

Several comments were received regarding the purpose and effect of the associated obligation rule. First, a comment noted that the rule serves an important purpose and suggested that the final regulations retain the rule. Another comment questioned the practical significance of the rule under the temporary regulations and suggested that the final regulations remove it. In particular, the comment asserted that creditors typically require obligations to be satisfied in cash, rather than stock. Moreover, the comment stated that, under the temporary regulations, the rule might not apply if, instead of using stock of the foreign acquiring corporation to satisfy an associated obligation, the transferee sold the stock for cash and then used the cash to satisfy the obligation. One comment acknowledged, however, that a plan (or series of related transactions) to satisfy obligations of the transferee using the proceeds of the sale of stock of the foreign acquiring corporation could be subject to the anti-abuse rule under section 7874(c)(4).

After considering the comments, the Treasury Department and the IRS have determined that the associated obligation rule promotes an important policy and thus the final regulations retain the rule. The Treasury Department and the IRS also have determined that when a foreign acquiring corporation issues its stock in lieu of assuming an obligation associated with the exchanged property, the rule should not be limited to situations in which, pursuant to the same plan (or series of related transactions), the transferee uses the stock to directly satisfy the associated obligation. Rather, the Treasury Department and the IRS have concluded that the rule should generally apply if, pursuant to the same plan (or series of related transactions), the transferee uses the stock to directly or indirectly satisfy any obligation of the transferee (regardless of whether it is an associated obligation). For example, the rule should apply if the transferee sells the stock and then uses the proceeds to satisfy an amount of an obligation of the transferee equal to the amount of the associated obligation. In these cases, the transferee and the foreign acquiring corporation are in an economic position similar to the one in which they would have been had the foreign acquiring corporation assumed the associated obligation, issued stock in exchange for cash, and then used that cash to satisfy the obligation. The final regulations accordingly modify the associated obligation rule. See § 1.7874-4(c)(1)(ii)(A). In addition, the final regulations generally limit the amount of disqualified stock arising under the associated obligation rule to the proportionate share of obligations associated with the exchanged property that, pursuant to the same plan (or series of related transactions), is not assumed by the foreign acquiring corporation. See § 1.7874-4(c)(1)(ii)(B).

A comment requested a modification of the associated obligation rule so that it applies only if the transferor acquires substantially all of the property of the transferee. The comment asserted that, when the transferor acquires only a portion (rather than substantially all) of the transferee's property, it may be difficult or burdensome to determine which obligations are associated with the exchanged property.

The associated obligation rule addresses a concern that, absent the rule, a different amount of stock of a foreign acquiring corporation might be included in the denominator of the ownership fraction in economically similar scenarios. The Treasury Department and the IRS have determined that this concern may exist regardless of the portion of the transferee's property that is acquired. In addition, determinations concerning the association between obligations and property may be required under the Code for purposes other than applying the associated obligation rule. For example, see section 358(h)(2). Accordingly, the final regulations decline to adopt the comment.

One comment suggested broadening the associated obligation rule to address certain cases in which the domestic entity is the transferee and the foreign acquiring corporation issues its stock in lieu of assuming any obligation of the transferee (regardless of whether it is associated with the exchanged property). For example, consider a situation in which a domestic entity (DT) has two lines of business: (i) Business A, which comprises property that, in the aggregate, has a fair market value of $90x and no obligations associated with it, and (ii) Business B, which comprises property that, in the aggregate, has a fair market value of $20x and $10x of obligations associated with it. If a foreign acquiring corporation (FA) acquires only the Business A property in exchange for $90x of FA stock, DT might use $10x of FA stock to satisfy the Business B associated obligations and distribute the remaining $80x of FA stock and the $20x of Business B property to its shareholders in liquidation. In such a case, the $10x of FA stock would not be disqualified stock under the associated obligation rule because the transferee did not retain any obligations associated with the exchanged property (the Business A property); thus, absent special rules, the stock might inappropriately dilute the ownership percentage. The comment noted that the associated obligation rule could be modified to address such cases.

The Treasury Department and the IRS acknowledge the concern raised by the comment but decline to broaden the associated obligation rule to address it at this time. However, the Treasury Department and the IRS will monitor transactions in which the foreign acquiring corporation transfers its stock in lieu of assuming an obligation of the domestic entity and continue to study whether future guidance should broaden the rule. In addition, section 7874(c)(4) (which would disregard the transfer of the $10x of FA stock in satisfaction of the obligation if the transfer is part of a plan a principal purpose of which is to avoid the purposes of section 7874) and § 1.7874-10T (which could cause DT's distribution of the $20x of Business B assets to give rise to a non-ordinary course distribution, which, in turn, would cause the former domestic entity shareholders of DT to be deemed to receive additional FA stock for purpose of computing the ownership fraction) may apply to address the concern raised by the comment.

The disqualified stock rule contains a de minimis exception, which generally applies when two requirements are satisfied. First, the ownership percentage—determined without regard to the application of the disqualified stock rule, the passive assets rule of § 1.7874-7T (the passive assets rule), and the non-ordinary course distribution rule of § 1.7874-10T (the non-ordinary course distribution rule)—must be less than five (by vote and value). Second, after the domestic entity acquisition and all related transactions, former domestic entity shareholders or former domestic entity partners, in the aggregate, must own (applying the attribution rules of section 318(a) with the modifications described in section 304(c)(3)(B)) less than five percent (by vote and value) of the stock of (or a partnership interest in) any member of the EAG. When the de minimis exception applies, the disqualified stock rule does not apply and, as a result, no stock of the foreign acquiring corporation is excluded from the denominator of the ownership fraction pursuant to the rule.

The passive assets rule and the non-ordinary course distribution rule contain similar de minimis exceptions (the three exceptions collectively, the de minimis exceptions). See §§ 1.7874-7T(c) and 1.7874-10T(d). Together, the de minimis exceptions generally prevent one or more of the disqualified stock rule, the passive assets rule, and the non-ordinary course rule from causing section 7874 to apply to a domestic entity acquisition that, given minimal actual ownership continuity, largely resembles a cash purchase by the foreign acquiring corporation of the stock of (or interests in) the domestic entity.

Comments requested expanding the de minimis exceptions in several respects. First, comments requested increasing the ownership thresholds in the de minimis exceptions. One comment recommended a 20-percent threshold, noting that such a threshold would be generally consistent with the threshold in the internal group restructuring exception under § 1.7874-1(c)(2) (permitting up to 20 percent ownership by non-EAG members). The internal group restructuring exception, however, addresses different policies than the de minimis exceptions. In particular, the internal group restructuring exception addresses transactions in which there is no, or only a small, shift in ownership of a domestic entity to persons outside of a corporate group, whereas the de minimis exceptions address transactions in which there is almost a complete shift in ultimate ownership of a domestic entity. Moreover, the Treasury Department and the IRS have concluded that a five-percent threshold appropriately differentiates between domestic entity acquisitions that largely resemble a cash purchase and those that do not. Accordingly, the final regulations do not adopt the comment.

Other comments requested removing the second requirement of the de minimis exceptions or, alternatively, modifying the requirement so that it looks only to stock held by reason of holding stock (or interests) of the domestic entity. The comments noted that, particularly in cases involving a publicly-traded domestic entity or a complex ownership structure, it could be difficult or burdensome to identify each former domestic entity shareholder or former domestic entity partner (including a de minimis former domestic entity shareholder or former domestic entity partner), as applicable, and then determine (taking into account the applicable attribution rules) the former domestic entity shareholders' or former domestic entity partners' collective ownership of the foreign acquiring corporation and each member of the EAG. Accordingly, the comment asserted that, at least in certain cases, uncertainty surrounding whether the second requirement is satisfied could result in taxpayers having to apply—and thus conduct the potentially complicated analyses required by—the disqualified stock rule, passive assets rule, and non-ordinary course distribution rule, notwithstanding that the domestic entity acquisition may largely resemble a purchase.

After considering the comment, the final regulations modify each of the de minimis exceptions to provide that the second requirement is satisfied if, after the domestic entity acquisition and all related transactions, each former domestic entity shareholder or former domestic entity partner, as applicable, owns (applying the attribution rules of section 318(a) with the modifications described in section 304(c)(3)(B)) less than five percent (by vote and value) of the stock of (or a partnership interest in) each member of the EAG. § 1.7874-4(d)(1)(ii); § 1.7874-7T(c)(2); § 1.7874-10T(d)(2). The Treasury Department and the IRS have determined that limiting the second requirement to consider only the ownership of former domestic entity shareholders or former domestic entity partners (with applicable attribution rules), individually, rather than the ownership of all former domestic entity shareholders or former domestic entity partners, collectively, strikes the appropriate balance between preventing the de minimis exceptions from applying in inappropriate circumstances and addressing the practical difficulties noted in the comment.

The preamble to the 2014 temporary regulations noted that the de minimis exception with respect to the disqualified stock rule may facilitate certain transactions that have the effect of converting a publicly traded domestic corporation into a publicly traded foreign corporation over time. For example, a buyer may contribute cash to a newly formed foreign acquiring corporation that uses such cash, along with the proceeds from borrowings and a small amount of its stock (often issued to the management of the domestic corporation), to acquire all of the stock of a publicly traded domestic corporation in a domestic entity acquisition. After a period of time, the buyer may sell its stock of the foreign acquiring corporation pursuant to a public offering, which may have been contemplated at the time of the domestic entity acquisition. The preamble to the 2014 regulations explained that the Treasury Department and the IRS would study these transactions and requested comments on the application of section 7874 to such transactions.

A comment asserted that, given the number of non-tax contingencies between the domestic entity acquisition and the public offering, it would be inappropriate to apply the step-transaction doctrine or related principles to the transactions. Comments also suggested that these transactions do not violate the policies of section 7874 because the domestic entity acquisition is essentially a purchase by the foreign acquiring corporation of the stock of the publicly traded domestic corporation. Accordingly, comments recommended against new rules to address the transactions.

After further study and consideration of the comments, the Treasury Department and the IRS decline at this time to provide special rules to address these transactions. However, section 7874(c)(4), § 1.7874-4(d)(2) (providing that the de minimis exception does not apply to disqualified stock that is transferred with a principal purpose of avoiding the purposes of section 7874), and judicial doctrines each may apply to address the concerns raised by these transactions.

A comment requested that the Treasury Department and the IRS clarify that stock of a foreign acquiring corporation included in the numerator of the ownership fraction is also included in the denominator of the fraction, regardless of whether the stock is disqualified stock. The preamble to the temporary regulations indicated that stock described in section 7874(a)(2)(B)(ii) (by reason of stock) is never treated as disqualified stock and thus cannot be excluded from the denominator of the ownership fraction under the disqualified stock rule. See Part A of the Explanation of Provisions section of the preamble to the 2014 temporary regulations. Nevertheless, in response to the comment and for the avoidance of doubt, the final regulations clarify that by reason of stock may never be treated as disqualified stock. See § 1.7874-4(c)(1). Accordingly, the final regulations clarify that stock of the foreign acquiring corporation included in the numerator of the ownership fraction is in all cases also included in the denominator of the fraction.

Comments requested clarification about whether an acquisition of a partnership interest is treated similarly to an acquisition of stock for purposes of the disqualified stock rule. That is, the comment asked whether stock of a foreign acquiring corporation transferred in exchange for a partnership interest is treated as stock transferred in exchange for a proportionate share of partnership assets represented by the partnership interest (a look-through approach). The Treasury Department and the IRS confirm that a partnership interest does not constitute nonqualified property unless it is a marketable security (for example, an interest in a publicly traded partnership described in § 1.7704-1(a)(1)(i)) or is avoidance property. The definition of marketable securities in the temporary regulations excludes an interest in a partnership that becomes a member of the EAG in a transaction (or series of transactions) related to the domestic entity acquisition, an exclusion that would be unnecessary if partnership interests were subject to a look-through approach. Nevertheless, in response to the comment and for the avoidance of doubt, the definition of nonqualified property is clarified to provide that an interest in a partnership is nonqualified property only to the extent it is a marketable security or avoidance property.

The temporary regulations provide a rule (the subsequent transfer rule) pursuant to which stock of a foreign corporation that is described in section 7874(a)(2)(B)(ii) (that is, by reason of stock) does not cease to be so described as a result of any subsequent transfer of the stock by the former domestic entity shareholder or former domestic entity partner that received such stock, even if the subsequent transfer is related to the domestic entity acquisition. A comment requested adding a de minimis exception to the subsequent transfer rule, similar to the three de minimis exceptions discussed in Part III of this Summary of Comments and Explanation of Revisions. For example, the comment suggested that if, pursuant to a subsequent transfer (or series of transfers) related to the domestic entity acquisition, the former domestic entity shareholders or former domestic entity partners, in the aggregate, dispose of all but a de minimis amount of stock of the foreign acquiring corporation, then the subsequent transfer rule should not apply. In such a case, the requested de minimis exception would provide that the stock received by the former domestic entity shareholders or former domestic entity partners would not be considered by reason of stock and thus would not be included in the numerator of the ownership fraction (though it generally would be included in the denominator of the ownership fraction).

The final regulations do not adopt the comment. The de minimis exceptions, as discussed in Part III of this Summary of Comments and Explanation of Revisions, provide relief for transactions that are in substance cash purchases by the foreign acquiring corporation of the stock of (or interests in) the domestic entity. In contrast, the subsequent transfer rule applies to ensure the application of section 7874 to transactions where a foreign corporation acquires substantially all the property (directly or indirectly) of a domestic entity in exchange for stock. The ultimate use of the stock received by the former domestic entity shareholders or former domestic entity partners is irrelevant to the three-factor test established by the statute. Accordingly, the final regulations do not adopt a de minimis exception for purposes of the subsequent transfer rule.

The final regulations generally apply to domestic entity acquisitions completed on or after September 17, 2009, to the extent described in the 2009 notice. The final regulations generally apply with respect to the remainder of the proposed rules in the 2014 proposed regulations to domestic entity acquisitions completed on or after January 16, 2014. However, see § 1.7874-4(k) for certain rules that apply only to domestic entity acquisitions completed on or after the publication of the 2015 notice or these final regulations, as applicable. Similar to the 2014 temporary regulations, these regulations provide that taxpayers may elect to apply all the rules contained in these final regulations to domestic entity acquisitions completed on or after September 17, 2009, and before January 13, 2017 (transition period), if the taxpayer applies all of the rules consistently to all domestic entity acquisitions completed during the transition period.

No inference is intended as to the treatment of transactions under the law before the various applicability dates of these regulations. For example, these transactions could be subject to challenge under applicable provisions, including under section 7874(c)(4) or judicial doctrines such as the substance-over-form doctrine.

Certain IRS regulations, including these, 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. The Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply because the regulations do not impose a collection of information on small entities. Pursuant to section 7805(f) of the Code, the notices of proposed rulemaking that preceded this regulation were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. No comments were received.

The principal author of these regulations is Joshua G. Rabon of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development.

Accordingly, 26 CFR part 1 is amended as follows:

Organization of this Document. The following outline is provided to aid in locating information in this preamble.

Regulated Entities. Categories and entities potentially regulated by this action are shown in Table 1 of this preamble.

Table 1 of this preamble is not intended to be exhaustive, but rather to provide a guide for readers regarding entities likely to be affected by the final action for the source category listed. To determine whether your facility is affected, you should examine the applicability criteria in 40 CFR part 63, subpart XXX (National Emission Standards for Hazardous Air Pollutants: Ferroalloys Production). If you have any questions regarding the applicability of this final action to a particular entity, consult either the air permitting authority for the entity or your EPA Regional representative as listed in 40 CFR 63.13 (General Provisions).

The docket number for this final action regarding the Ferroalloys Production NESHAP (40 CFR part 63, subpart XXX) is Docket ID No. EPA-HQ-OAR-2010-0895.

In addition to being available in the docket, an electronic copy of this document will also be available on the World Wide Web (WWW). Following signature, a copy of this document will be posted at https://www.epa.gov/stationary-sources-air-pollution/ferromanganese-and-silicomanganese-production-national-emission.

Under Clean Air Act (CAA) section 307(b)(1), judicial review of this final action is available only by filing a petition for review in the United States Court of Appeals for the District of Columbia Circuit by March 20, 2017. Under CAA section 307(b)(2), the requirements established by this final rule may not be challenged separately in any civil or criminal proceedings brought by the EPA to enforce the requirements.

Section 307(d)(7)(B) of the CAA further provides that “[o]nly an objection to a rule or procedure which was raised with reasonable specificity during the period for public comment (including any public hearing) may be raised during judicial review.” This section also provides a mechanism for the EPA to reconsider the rule “[i]f the person raising an objection can demonstrate to the Administrator that it was impracticable to raise such objection within [the period for public comment] or if the grounds for such objection arose after the period for public comment (but within the time specified for judicial review) and if such objection is of central relevance to the outcome of the rule.” Any person seeking to make such a demonstration should submit a Petition for Reconsideration to the Office of the Administrator, U.S. EPA, Room 3000, EPA WJC Building, 1200 Pennsylvania Ave. NW., Washington, DC 20460, with a copy to both the person(s) listed in the preceding FOR FURTHER INFORMATION CONTACT section, and the Associate General Counsel for the Air and Radiation Law Office, Office of General Counsel (Mail Code 2344A), U.S. EPA, 1200 Pennsylvania Ave. NW., Washington, DC 20460.

The EPA published a final residual risk and technology review (RTR) rule for the Ferroalloys Production source category in the Federal Register on June 30, 2015 (80 FR 37366), which included, among other things, the following:

• Revisions to the emission limits for particulate matter (PM) from stacks for the electric arc furnaces, metal oxygen refining (MOR) processes, and crushing and screening operations to minimize PM emissions from these units;

• Emission limits for four previously unregulated hazardous air pollutants (HAP): Formaldehyde, hydrogen chloride, mercury, and PAH;

• Requirements to capture process fugitive emissions using effective, enhanced local capture, and duct the captured emissions to control devices;

• An average opacity limit of 8 percent during a full furnace cycle and a maximum opacity limit of 20 percent for any two consecutive 6-minute periods to ensure effective capture and control of process fugitive emissions;

• A requirement to conduct opacity observations using the DCOT at least once per week for a full furnace cycle for each operating furnace and each MOR operation for at least 26 weeks. After 26 weeks, if all tests are compliant, facilities can decrease to monthly opacity observations;

• A requirement to use BLDS to monitor PM emissions from all furnace baghouses; and

• A requirement to conduct periodic performance testing to demonstrate compliance with the stack emission limits for the various HAP, including a requirement to conduct PAH performance testing every 3 months for furnaces producing FeMn with the opportunity to reduce to annual testing after the first year.

Following promulgation of the final rule, the EPA received two petitions for reconsideration of several provisions of the NESHAP pursuant to CAA section 307(d)(7)(B). The EPA received a petition dated August 25, 2015, from Eramet Marietta Inc. (Eramet) and a petition dated August 28, 2015, from Felman Production LLC (Felman). In the petition submitted by Eramet, the company requested the EPA reconsider the following issues: (1) The requirement to conduct PAH performance testing every 3 months for furnaces producing FeMn; (2) the requirement to demonstrate compliance weekly with shop building opacity limits using the American Society for Testing and Materials (ASTM) DCOT test method; and (3) the PAH emission limits for existing furnaces producing FeMn and SiMn. In addition, Eramet requested a stay of 90 days from the effective date of the final amendments pending completion of the reconsideration proceeding. In the petition submitted by Felman, the company stated that it supported and adopted the petition submitted by Eramet and requested reconsideration of the requirement to use BLDS to monitor emissions from positive pressure baghouses. Copies of the petitions are provided in the docket (see EPA Docket ID No. EPA-HQ-OAR-2010-0895).

On November 5, 2015, the EPA sent letters to the petitioners granting reconsideration of two issues: The PAH testing compliance frequency issue raised by Eramet and the use of BLDS on positive pressure baghouses raised by Felman. In those letters, the EPA said it was still reviewing the other issues and intended to take final action on those when it took final action on BLDS and PAH testing frequency. The agency also stated in the letters that a proposed Federal Register notice would be issued initiating the reconsideration process for the issues that the EPA is granting reconsideration. The EPA published the proposed notice of reconsideration in the Federal Register on July 12, 2016 (81 FR 45089).

In addition to the two requirements mentioned above (i.e., PAH testing frequency for furnaces producing FeMn and the use of BLDS to monitor PM emissions from positive pressure baghouses), the EPA also granted reconsideration of a third issue in the reconsideration proposal notice (81 FR 45089): the requirement to use DCOT in accordance with ASTM D7520-13 to demonstrate compliance with shop building opacity standards. However, for each of these three requirements, after further analyses, evaluation, and consideration, we explained in the reconsideration proposal notice that we continued to believe these requirements were appropriate. Therefore, we did not propose any changes to these requirements. Instead, we provided further discussion and explanation as to why we believed it was appropriate to maintain these requirements in the rule, provided additional technical information to the record, and requested comment on the three requirements for which the EPA granted reconsideration.

After reviewing and considering all the public comments received in response to the reconsideration proposal, the EPA has decided to amend the baghouse monitoring requirements to allow existing facilities with positive pressure baghouses to perform visible emissions monitoring twice daily using Method 22 as an alternative to using BLDS. In addition, although EPA is maintaining the requirement to use DCOT to demonstrate compliance with the opacity standards, this final action amends the references to the ASTM DCOT test method in the opacity monitoring requirements to the recently updated version of the method (ASTM D7520-16). The EPA is also maintaining the quarterly PAH emission testing requirement for furnaces producing FeMn with an opportunity for facilities to request decreased compliance test frequency from their permitting authority after the first year. Each of these issues is discussed in more detail in this section of the preamble.

In their petition for reconsideration, one petitioner (Felman) objected to the EPA's requirement to use BLDS for positive pressure baghouses. The petitioner pointed out that the EPA's own guidance 1 indicates that BLDS are not appropriate for use on a positive pressure baghouse, given the different configurations of these types of units. The petitioner commented that although the EPA stated that it had knowledge of BLDS in operation on positive pressure baghouses, the EPA did not provide any specific examples. In addition, the petitioner claimed the EPA had not evaluated the costs associated with the application of BLDS on positive pressure baghouses but instead simply estimated the cost to be comparable with BLDS for negative pressure baghouses.

In their comments on the reconsideration proposal (81 FR 45089), the petitioner stated that the EPA's supporting documents did not provide any examples of BLDS in operation on positive pressure baghouses comparable to those used at the petitioner's facility, which are low airflow and use natural-draft openings instead of stacks. The petitioner provided cost quotes from vendors of $1.1 million to install the BLDS and make the necessary structural improvements (including a catwalk system) to support the operation of the BLDS.

In light of the petitioner's assertions, we re-evaluated the BLDS requirement for positive pressure baghouses. While we maintain that BLDS can be installed and operated on positive pressure baghouses, we agree that, due to their particular circumstances, it would be difficult to retrofit this facility based on the specific design of their positive pressure baghouses. Furthermore, we agree that installing BLDS and the associated infrastructure would not be cost effective. In our analysis for the proposal, we estimated the capital cost of installing BLDS on the three positive pressure baghouses to be $269,100, with annualized costs of $219,000. However, we did not include any additional costs for structural improvements to support BLDS on these baghouses. The petitioner provided a cost estimate of $870,000 for structural improvements to install BLDS on their three baghouses. Given this additional information, we now estimate the capital costs would be about $1.1 million, and annualized costs would be $330,000. Because of the structural modifications needed to install BLDS, the higher annualized costs and the potential technical issues on this particular control configuration at Felman, it would be unreasonable to require BLDS as the sole method for monitoring positive pressure baghouses in this rule. Nevertheless, we believe the baghouses need to be monitored on a regular basis to ensure they are operating as intended and that there are no tears or holes in the bags. Therefore, we have revised the rule to allow for an alternative monitoring method to the BLDS requirement for positive pressure baghouses used to control emissions from an electric arc furnace. We are allowing twice daily visual monitoring of the outlet of each furnace baghouse using Method 22 for evidence of any visible emissions indicating abnormal operations as an alternative to BLDS. We believe this revision will reduce the cost burden associated with monitoring the positive pressure baghouses used to control emissions from the furnaces and avoid possible technical issues, but still provide assurance that the baghouses are functioning correctly and controlling metal HAP emissions from the furnaces. More details are available in the Summary of Public Comments and Responses on Reconsideration of the Ferroalloys Production NESHAP Final Rule in the docket for this rulemaking.

In the June 30, 2015, final rule (80 FR 37366), we finalized opacity standards for process fugitive emissions from the furnace buildings and required the use of DCOT and the ASTM D7520-13 test method to demonstrate compliance with the opacity standards. In their petitions for reconsideration, Eramet and Felman objected to the use of DCOT in lieu of EPA Method 9 and stated that the EPA did not propose DCOT as the only method for demonstrating compliance with the opacity standards. The petitioners argued that DCOT was an unproven substitute for EPA Method 9 to measure opacity from emission sources and that variability in plume location and orientation at the ferroalloy production buildings would make DCOT infeasible at their facilities. The petitioners also noted that the ASTM test method only applies to stack openings of 7 feet in diameter or less and that DCOT is only provided by one vendor.

In their comments on the reconsideration proposal (81 FR 45089), several commenters objected to the use of DCOT as the sole method for opacity compliance and stated that the EPA should allow the option of using EPA Method 9. The commenters argue that DCOT is limited to stationary point sources and not fugitive emissions, and they pointed out that the supporting data for DCOT are all from studies performed on stationary point sources and not long, open vent sources such as those at the Eramet facility. A few commenters had concerns with the timeliness of the opacity determinations and the accuracy of the results. The commenters were also concerned that there is currently only one vendor of DCOT and that the EPA should not choose vendors for an entire industry.

On the other hand, a few commenters were supportive of the use of the DCOT. In the opinion of one commenter, DCOT is comparable to Method 9 observations, on all shapes, sizes, types of sources, and that DCOT is configurable with all types of cameras to tailor the implementation at the shop/building level to support cost-effective and efficient observations.

Another commenter explained that strong monitoring, testing and compliance measures are an essential part of the emission standards, and that the use of these measures also increases the incentive for sources to comply with the standards. The commenter states that EPA's requirement for DCOT is consistent with and an important way to implement EPA's “next generation compliance.” The commenter notes that the EPA's next generation compliance policy includes, among other things, the following: (1) Use and promotion of advanced emissions/pollutant detection technology so that regulated entities, the government, and the public can more easily see pollutant discharges, environmental conditions, and noncompliance; (2) expanded transparency by making information more accessible to the public; and (3) development and use of innovative enforcement approaches (e.g., data analytics and targeting) to achieve more widespread compliance.

Other comments and responses on DCOT can be found in the Summary of Public Comments and Responses on Reconsideration of the Ferroalloys Production NESHAP Final Rule in the docket for this rulemaking.

Based on the information provided by the petitioners and the commenters, we re-evaluated the DCOT opacity monitoring requirement and determined that DCOT is still an appropriate method for determining opacity from the shop buildings for this source category.

As explained in the initial proposal (76 FR 72508), supplemental proposal (79 FR 60238), and in the 2015 final rule (80 FR 37366), process fugitive emissions from the shop buildings are a significant source of risk from the production of ferroalloys. In each of these three actions, we concluded risks were unacceptable, largely driven by process fugitive emissions of air toxics metals.

To reduce risks to acceptable levels and protect the public with an ample margin of safety, in the initial proposal, we proposed facilities would need to install and operate full building enclosures to capture and control fugitive emissions. In response to the initial proposal, industry commented that full building enclosure requirement would be very costly and difficult to implement, and suggested an alternative approach using localized capture equipment to reduce fugitive emissions from the shop buildings. Modeling of the localized capture approach indicated that similar reductions in risk could be achieved, making this option more feasible and at significantly lower cost than full building enclosure. Based on these modeling results and consideration of costs and feasibility, we proposed the localized capture approach to significantly reduce fugitive emissions from the shop buildings in the supplemental proposal (79 FR 60238), and finalized this approach in the 2015 final rule (80 FR 37366). Specifically, the final rule requires facilities to install, maintain and operate a system designed to effectively capture and control process fugitive emissions. Furthermore, for this rule, opacity standards are the main compliance approach to ensure the process fugitive emissions are effectively captured and controlled on a continuous basis, and that the public is protected with ample margin of safety. Since process fugitive emissions were the main contributor to the unacceptable risks at baseline, and since opacity is the main tool to ensure these process fugitive emissions are effectively captured and controlled and that the public is protected with an ample margin of safety, we finalized requirements for the use of DCOT to demonstrate compliance with the opacity standard in the June 30, 2015, final rule (80 FR 37366).

The DCOT provides a photographic record of each of the opacity readings. In addition, the photographs are evaluated by a third party and the opacity is determined by the degree the plume reduces the transmitted light and obscures the background. While we believe, based on validation studies, that EPA Method 9 and DCOT provide comparable opacity results, the DCOT provides better documentation, including a permanent re-analyzable photographic record of the opacity determinations, which we believe will be beneficial to both the industry and the public. There is an advantage of having better documentation in this specific case where fugitive emissions are driving the risk from the Ferroalloys Production source category. In addition, we disagree with the commenters assertion that this methodology will not work with this source category. Fugitive emissions from this source category are emitted through roof vents at the top of the furnace buildings. Currently, the facilities in this source category use EPA Method 9 to measure opacity from the roof vents. The EPA Method 9 opacity method has procedures and requirements for determining opacity from roof vents and rectangular outlets, which are the same procedures and requirements used in the DCOT test method (ASTM D7520-16). Because the same procedures and requirements are used to measure opacity from roof vents from both these methods, we believe that opacity can be measured from this source category using the DCOT test method. Therefore, we are maintaining the requirement in the final rule that facilities in this source category must use the ASTM DCOT methodology to demonstrate compliance with the opacity standards and we are denying the petitioners' request to allow EPA Method 9 as an alternative method for determining compliance. However, we are revising the final rule language to replace the ASTM D7520-13 Standard Test Method for Determining the Opacity of a Plume in the Outdoor Ambient Atmosphere with the latest revision of the method, ASTM D7520-16. The ASTM D7520-13 method was revised by removing the stack diameter scope limitation along with editorial corrections in April 2016. We believe that this change will address the commenter's concerns specifically with the 7 foot stack diameter scope limitation in the ASTM D7520-13 method because the updated ASTM D7520-16 method has removed that limitation. However, fugitive emissions from this source category are not emitted from stacks with a diameter greater than 7 feet, but from roof vents. Therefore, we do not believe that the 7-foot diameter limitation prevented us from requiring the use of the ASTM method for measuring opacity using DCOT. As stated earlier in this section, the ASTM D7520-16 method provides the same approach for determining opacity from nontraditional point sources such as roof vents as would EPA Method 9.

In the reconsideration proposal (81 FR 45089), the EPA also reconsidered the requirement for furnaces producing FeMn to conduct PAH performance testing every 3 months with an option following the first year, to do annual performance testing. The petitioner stated that the PAH testing frequency for furnaces producing FeMn in the supplemental proposal (79 FR 60238) was every 5 years and that the quarterly testing requirement was added in the final rule. The petitioner also noted that the change in PAH testing frequency represents an increase in compliance costs of $75,000 in the first year of implementation and an increase of $475,000 in compliance costs over the first 5 years (assuming the facility is not granted reduced frequency of testing after the first year), in comparison to the supplemental proposal PAH testing requirement. The petitioner also argued that if the EPA believes that the PAH emissions dataset is inadequate to establish a representative and reliable MACT floor, the proper solution is to collect additional data pursuant to CAA section 114(a), rather than collecting data through compliance tests. We granted reconsideration on this issue to provide an opportunity for public comment on the PAH testing frequency for furnaces producing FeMn. A summary of the comments received on this issue and the responses are provided in the Summary of Public Comments and Responses on Reconsideration of the Ferroalloys Production NESHAP Final Rule available in the docket for this rulemaking.

As we stated in the reconsideration proposal (81 FR 45089), we received additional PAH test data just 3 weeks prior to the signature of the supplemental proposal (which we were not able to include in our analyses in time for signature of the supplemental proposal) and yet more data during the comment period for the supplemental proposal. This new data showed PAH emissions from furnaces producing FeMn were over 12 times higher in concentration than previous test reports submitted by the petitioner. As we explained in the reconsideration proposal, this data thus demonstrates that PAH emissions from furnaces producing FeMn are highly variable. Moreover, PAH emissions are a major source of cancer risks from these furnaces. In the risk assessment performed for the supplemental proposal (79 FR 60238), we estimated the maximum lifetime individual cancer risk posed by actual emissions from the ferroalloys production facilities was 20-in-1 million, with PAH contributing 49 percent of the cancer risk.

Testing frequency is part of verification that the limit is met. Stack testing is an important tool used to determine a facility's compliance with both initial and on-going compliance with the CAA requirements. A highly variable set of measurements on which the limit is based leads to us to want more certainty about the source's compliance with the limit, and such certainty can be provided by more frequent testing. Because of the variability of the PAH emissions during FeMn production, we believe that the quarterly testing is appropriate for ensuring compliance with the emission limit and protecting human health.

Furthermore, as we explained in the final rule and the reconsideration proposal, we believe the quarterly testing, along with the collection of process information that a facility may choose to collect voluntarily, could provide data that would help facilities learn what factors or conditions are contributing to the quantity and variation of PAH emissions. For example, we believe the collection and analyses of information about the amounts and types of input materials, types of electrodes used, electrode consumption rates, furnace temperature, and other furnace, process, or product information may help facilities understand what factors are associated with the higher PAH emissions and could provide insight regarding how to limit these emissions. Furthermore, as we described in the preamble of the final rule (80 FR 37383), if a facility decides to apply for a decreased frequency of performance testing from their permit authority, the type of information described above could be helpful input for such an application. For these reasons, the quarterly performance testing with an opportunity after the first year for facilities to request from their permitting authority a decreased frequency to annual performance testing is appropriate for ensuring compliance with the PAH emission limit and protecting human health. The option for decreased performance testing also provides an incentive for the facilities to achieve compliance with the PAH standards. Therefore, we are not making any changes to the PAH testing frequency for furnaces producing FeMn.

In the final rule, the EPA set PAH limits of 0.130 milligrams per dry standard cubic meter (mg/dscm) for furnaces producing SiMn and 12 mg/dscm for furnaces producing FeMn. Both petitioners requested reconsideration of these emission limits and asserted that they did not have an opportunity to comment on the limits. The petitioners were concerned that achieving these PAH emission limits may require additional controls. The petitioners also argued with how the PAH emission limits were calculated. The petitioners claimed that the EPA used a normal data distribution to determine the upper prediction limit (UPL), but the data sets have lognormal distributions. The petitioners further claim that had the EPA used a lognormal distribution, it would have resulted in higher emission limits. In addition, one petitioner argued that EPA should not have excluded a 3-hour single test run.

As stated in the preamble for the final rule (80 FR 37366), the PAH emission limits were re-evaluated in the final rule to include PAH test data that were received just prior to publication of the supplemental proposal and during the comment period for the supplemental proposal. The expanded PAH test data set was analyzed using the same statistical procedures from the EPA's UPL memorandum used to calculate the PAH emissions limits in the supplemental proposal. Using the statistical procedures from this memorandum (which describes the EPA's established procedures for calculating MACT floor limits), the PAH data sets were determined to have a normal distribution. Therefore, the UPL equation for calculating the 99-percent UPL was used to determine the PAH emission limit. The EPA had already provided adequate notice of the analyses and application of the UPL in the memorandum in the supplemental proposal (79 FR 60238). With regard to the 3-hour single test run the petitioner referred to in their reconsideration petition, we determined there were quality assurance and control issues with the laboratory analysis, and therefore did not include these data in the UPL analysis. The results of every valid 3-run test provided by the industry were below the final PAH limits for both FeMn and SiMn production. Therefore, we believe both facilities should be able to comply with these limits without the need for additional add-on controls. Furthermore, EPA calculated the limits using well established EPA policy and procedures. At the time the EPA published the supplemental proposal (79 FR 60238, October 6, 2014), the EPA made the existing PAH emissions data and the methodologies used to calculate the limits available for public comment. The limits in the final rule were a logical outgrowth of the limits in the supplemental proposal as EPA made no changes to the methodology used to calculate the limits and simply recalculated the limits after the addition of the newly available data with the previously received data. Therefore, we have decided to deny reconsideration of the PAH emission limits for both FeMn and SiMn production furnaces. More details are available in the Summary of Public Comments and Responses on Reconsideration of the Ferroalloys Production NESHAP Final Rule in the docket for this rulemaking.

We project that this rule will result in no significant changes in costs, emission reductions or benefits. Even though there are changes to the costs, these changes are small relative to the overall costs and benefits of the 2015 final rule. However, the costs for monitoring baghouses will be lower than the costs in the final rule due to the additional option provided in this action to use visible emissions monitoring to monitor positive pressure baghouses as an alternative to installing and operating a BLDS.

Even though we have allowed for an alternative monitoring method to the BLDS requirement for positive pressure baghouses, we believe that this change will result in no additional emissions from the baghouses used to control emissions from the furnace. Accordingly, we believe that the final rule will not result in significant changes in emissions of any of the regulated pollutants.

The changes to the final rule are anticipated to have minimal effect on the supply, distribution or use of energy. As previously stated, we are allowing for an alternative monitoring method to the BLDS requirement for positive pressure baghouses controlling emissions from the furnace. By allowing this alternative, we anticipate slightly lower energy usage by the one facility that uses this type of baghouse.

We believe there will be no significant change in compliance costs as a result of the changes to the final rule. However, as mentioned above, we anticipate that one facility will have moderately lower compliance costs due to allowing an alternative monitoring method for positive pressure baghouses. We anticipate that the alternative monitoring method will have an annual cost of $38,000, whereas the annual operating cost for a BLDS was estimated to be $219,000. Overall, we anticipate the Ferroalloys Production source category will not incur significant compliance costs or savings as a result of the changes to the final rule.

We believe that there will be a slight economic benefit to one of the facilities due to allowing an alternative monitoring method for positive pressure baghouses. In the reconsideration proposal, we estimated the capital cost for the installation of BLDS for each facility would be $269,100 and annualized costs would be $219,000. For this final action, based on information received from the company, we now estimate capital costs for the BLDS for Felman would be $1.1 million with annualized costs of $330,000. We believe allowing an alternative monitoring method for positive pressure baghouses in this final action will reduce the cost of complying with the final rule for this facility. However, we believe this final action will not have any impacts on the price of electricity, employment or labor markets or the U.S. economy.

We do not anticipate any emission changes, and therefore there are no direct monetized benefits or disbenefits associated with the changes to this final rule.

Additional information about these statutes and Executive Orders can be found at http://www2.epa.gov/laws-regulations/laws-and-executive-orders.

This action is not a significant regulatory action and was, therefore, not submitted to the Office of Management and Budget (OMB) for review.

This action does not impose any new information collection burden under the PRA. OMB has previously approved the information collection activities contained in the existing regulations and has assigned OMB control number 2060-0676. This action adds an alternative monitoring requirement and a revised test method, but does not make revisions to the reporting requirements in the final rule. Therefore, this action does not change the information collection requirements previously finalized and, as a result, does not impose any additional burden on industry.

I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA. This final action will not impose any requirements on small entities. The agency has determined that neither of the companies affected by this action is considered to be a small entity.

This action does not contain an unfunded mandate of $100 million or more as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. The action imposes no enforceable duty on any state, local, or tribal governments or the private sector.

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.

This action does not have tribal implications as specified in Executive Order 13175. There are no ferroalloys production facilities that are owned or operated by tribal governments. Thus, Executive Order 13175 does not apply to this action.

This action is not subject to Executive Order 13045 because it is not economically significant as defined in Executive Order 12866, and because the EPA does not believe the environmental health or safety risks addressed by this action present a disproportionate risk to children. The health risk assessments completed for the final rule are presented in the Residual Risk Assessment for the Ferroalloys Source Category in Support of the 2015 Final Rule document, which is available in the docket for this action (EPA-HQ-OAR-2010-0895-0281), and are discussed in Section V.G of the preamble for the final rule (80 FR 37366).

This action is not subject to Executive Order 13211, because it is not a significant regulatory action under Executive Order 12866.

This action involves technical standards. The EPA decided to use ASTM D7520-16, “Standard Test Method for Determining the Opacity of a Plume in the Outdoor Ambient Atmosphere,” for measuring opacity from the shop buildings. The ASTM D7520-16 is a method to assess opacity whereby a Digital Still Camera is used to capture a set of digital images of a plume against a contrasting background. Each image is analyzed with software that determines plume opacity by comparing a user defined portion of the plume image where opacity is being measured in comparison to the background providing the contrasting values. The Analysis Software is used to average the opacities from the series of digital images taken of the plume over a fixed period of time. The software is also used to archive the image set utilized for each opacity determination including the portion of each image selected by the operator. Each DCOT vendor shall provide training for operators of their DCOT system. The training shall include the content of the “Principles of Visual Emissions Measurements and Procedures to Evaluate those Emissions Using the Digital Camera Optical Technique (DCOT)” and a description of how to operate that specific DCOT system that passed smoke school. This standard is an acceptable alternative to EPA Method 9 and is available from the American Society for Testing and Materials, 100 Barr Harbor Drive, Post Office Box C700, West Conshohocken, PA 19428-2959. See http://www.astm.org/.

The EPA believes that this action does not have disproportionately high and adverse human health or environmental effects on minority populations, low-income populations and/or indigenous peoples, as specified in Executive Order 12898 (59 FR 7629, February 16, 1994). This action does not affect the level of protection provided to human health or the environment because it only provides an alternative monitoring provision and revised test method that will not affect the emission standards that were finalized on June 30, 2015.

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).

For the reasons stated in the preamble, the Environmental Protection Agency is amending title 40, chapter I, part 63 of the Code of Federal Regulations (CFR) as follows:

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).

You may access a frequently updated electronic version of EPA's tolerance regulations at 40 CFR part 180 through the Government Printing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2015-0829 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before March 20, 2017. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2015-0829, 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 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.

In the Federal Register of May 19, 2016 (81 FR 31581) (FRL-9946-02), EPA issued a document pursuant to FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), announcing the filing of a pesticide petition (PP 5E8422) by Interregional Research Project Number 4 (IR-4), Rutgers University, 500 College Rd. East, Suite 201 W, Princeton, NJ 08540. The petition requested that 40 CFR 180.599 be amended by establishing tolerances for residues of the insecticide acequinocyl in or on avocado at 0.4 parts per million (ppm); bean, dry, seed at 0.03 ppm; vegetable, cucurbit, group 9 at 0.2 ppm; tea, plucked leaves at 40 ppm; cherry subgroup 12-12A at 1.0 ppm; fruit, citrus, group 10-10 at 0.20 ppm; fruit, pome, group 11-10 at 0.40 ppm; nut, tree, group 14-12 at 0.02 ppm; and vegetable, fruiting, group 8-10 at 0.70 ppm. The petition also requested that upon establishment of the above tolerances, to remove the existing tolerances for cucumber at 0.15 ppm; melon, subgroup 9A at 0.15 ppm; cherry, sweet at 0.50 ppm; cherry, tart at 1.0 ppm; fruit, citrus, group 10 at 0.20 ppm; fruit, pome, group 11 at 0.40 ppm; nut, tree, group 14 at 0.02 ppm; pistachio at 0.02 ppm; vegetable, fruiting, group 8 at 0.70 ppm; and okra at 0.70 ppm. That document referenced a summary of the petition prepared by Arysta LifeScience, the registrant, which is available in the docket, http://www.regulations.gov. Comments were received on the notice of filing. EPA's response to these comments is discussed in Unit IV.C.

Based upon review of the data supporting the petition, EPA has modified the levels at which some of the tolerances are being established. The reason for these changes is explained in Unit IV.D.

Section 408(b)(2)(A)(i) of FFDCA allows EPA to establish a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the tolerance is “safe.” Section 408(b)(2)(A)(ii) of FFDCA defines “safe” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Section 408(b)(2)(C) of FFDCA requires EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue. . . .”

Consistent with FFDCA section 408(b)(2)(D), and the factors specified in FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action. EPA has sufficient data to assess the hazards of and to make a determination on aggregate exposure for acequinocyl including exposure resulting from the tolerances established by this action. EPA's assessment of exposures and risks associated with acequinocyl follows.

EPA has evaluated the available toxicity data and considered its validity, completeness, and reliability as well as the relationship of the results of the studies to human risk. EPA has also considered available information concerning the variability of the sensitivities of major identifiable subgroups of consumers, including infants and children.

The target organs of acequinocyl are the liver (hepatocyte vacuolization, brown pigmented cells and perivascular inflammatory cells in liver) and hematopoietic system (hemorrhage, increased clotting factor times and increased platelet counts). There was no evidence of neurotoxicity and immunotoxicity and there was no evidence of carcinogenic potential in either the rat or mouse, or in the genotoxicity and mutagenicity studies.

In rats and rabbits, there was no evidence of increased quantitative or qualitative fetal susceptibility. In both species there were clinical signs and gross necropsy findings seen in maternal animals at similar or lower doses than those producing resorptions. In rabbits, there were increased incidences of late resorptions at the highest dose tested. In the rat two-generation reproductive toxicity study, there was evidence of apparent increased quantitative postnatal susceptibility. Offspring effects at the mid- and high-doses consisted of swollen body parts, protruding eyes, clinical signs, delays in pupil development, and increased mortality occurring mainly after weaning. No parental effects were observed up to the highest dose tested; however, hematological parameters, such as changes in partial and activated partial thromboplastin times, were not measured in parental animals and changes in these parameters would have been expected at the same doses as offspring effects based on rat studies in the acequinocyl toxicological database. There were no effects on reproductive parameters.

Specific information on the studies received and the nature of the adverse effects caused by acequinocyl as well as the no-observed-adverse-effect-level (NOAEL) and the lowest-observed-adverse-effect-level (LOAEL) from the toxicity studies can be found at http://www.regulations.gov in the document titled “Acequinocyl. Human Health Risk Assessment To Support the Petition for Tolerance for Residues in/on Dry Beans, Cucurbit Vegetables, Group 9, Avocado and Tea (Without U.S. Registration) and Crop Group Conversions for Citrus Fruit Group 10-10, Tree Nut Group 14-12, and Fruiting Vegetable Group 8-10” at page 30 in docket ID number EPA-HQ-OPP-2015-0829.

Once a pesticide's toxicological profile is determined, EPA identifies toxicological points of departure (POD) and levels of concern to use in evaluating the risk posed by human exposure to the pesticide. For hazards that have a threshold below which there is no appreciable risk, the toxicological POD is used as the basis for derivation of reference values for risk assessment. PODs are developed based on a careful analysis of the doses in each toxicological study to determine the dose at which no adverse effects are observed (the NOAEL) and the lowest dose at which adverse effects of concern are identified (the LOAEL). Uncertainty/safety factors are used in conjunction with the POD to calculate a safe exposure level—generally referred to as a population-adjusted dose (PAD) or a reference dose (RfD)—and a safe margin of exposure (MOE). For non-threshold risks, the Agency assumes that any amount of exposure will lead to some degree of risk. Thus, the Agency estimates risk in terms of the probability of an occurrence of the adverse effect expected in a lifetime. For more information on the general principles EPA uses in risk characterization and a complete description of the risk assessment process, see http://www2.epa.gov/pesticide-science-and-assessing-pesticide-risks/assessing-human-health-risk-pesticides.

Since the last assessment for acequinocyl (Federal Register of April 13, 2016, (81 FR 21752) (FRL-9944-34)), the endpoints for acequinocyl were revisited and updated based upon the available data. An acute dietary endpoint for the general population has been selected to be consistent with current Agency practices. A summary of the updated toxicological endpoints for acequinocyl used for human risk assessment is shown in Table 1 of this unit.

1. Dietary exposure from food and feed uses. In evaluating dietary exposure to acequinocyl, EPA considered exposure under the petitioned-for tolerances as well as all existing acequinocyl tolerances in 40 CFR 180.599. EPA assessed dietary exposures from acequinocyl in food as follows:

i. Acute exposure. Quantitative acute dietary exposure and risk assessments are performed for a food-use pesticide, if a toxicological study has indicated the possibility of an effect of concern occurring as a result of a 1-day or single exposure.

Such effects were identified for acequinocyl. In estimating acute dietary exposure, EPA used food consumption information from the United States Department of Agriculture (USDA) 2003-2008 National Health and Nutrition Examination Survey, What We Eat in America, (NHANES/WWEIA). As to residue levels in food, EPA assumed tolerance level residues and 100 percent crop treated (PCT) for all proposed and registered uses.

ii. Chronic exposure. In conducting the chronic dietary exposure assessment EPA used the food consumption data from the USDA 2003-2008 NHANES/WWEIA. As to residue levels in food, EPA assumed tolerance level residues and 100 PCT for all proposed and registered uses.

iii. Cancer. Based on the data summarized in Unit III.A., EPA has concluded that acequinocyl does not pose a cancer risk to humans. Therefore, a dietary exposure assessment for the purpose of assessing cancer risk is unnecessary.

iv. Anticipated residue and PCT information. EPA did not use anticipated residue or PCT information in the dietary assessment for acequinocyl. Tolerance level residues and 100 PCT were assumed for all food commodities.

2. Dietary exposure from drinking water. The Agency used screening level water exposure models in the dietary exposure analysis and risk assessment for acequinocyl in drinking water. These simulation models take into account data on the physical, chemical, and fate/transport characteristics of acequinocyl. Further information regarding EPA drinking water models used in pesticide exposure assessment can be found at http://www2.epa.gov/pesticide-science-and-assessing-pesticide-risks/about-water-exposure-models-used-pesticide.

Based on the Pesticide Root Zone Model/Exposure Analysis Modeling System (PRZM/EXAMS), Provisional Cranberry Model, and Screening Concentration in Ground Water (SCI-GROW) Model, the estimated drinking water concentrations (EDWCs) of acequinocyl for acute exposures are estimated to be 6.69 parts per billion (ppb) for surface water and 3.6 × 10−3 ppb for ground water, and for chronic exposures are estimated to be 6.69 ppb for surface water and ≥3.6 × 10−3 ppb for ground water.

Modeled estimates of drinking water concentrations were directly entered into the dietary exposure model. For acute dietary risk assessment, the water concentration value of 6.69 ppb was used to assess the contribution to drinking water. For chronic dietary risk assessment, the water concentration of value 6.69 ppb was used to assess the contribution to drinking water.

3. From non-dietary exposure. The term “residential exposure” is used in this document to refer to non-occupational, non-dietary exposure (e.g., for lawn and garden pest control, indoor pest control, termiticides, and flea and tick control on pets).

Acequinocyl is currently registered for the following uses that could result in residential exposures: use on ornamentals for landscapes, gardens, and trees. EPA assessed residential exposure using the following assumptions: There is a potential for residential exposure associated with handler (i.e., mixing, loading and applying); however, all registered acequinocyl product labels with residential use sites (e.g., ornamentals for landscapes, gardens, and trees) require that handlers wear specific clothing (e.g., long-sleeve shirt/long pants) and/or use personal protective equipment (PPE). Therefore, the Agency has made the assumption that these products are not for homeowner use, and has not conducted a quantitative residential handler assessment.

Only short-term post-application dermal exposure is anticipated for the registered residential uses. The quantitative exposure/risk assessment for residential post-application exposures assessed dermal exposures to adults for activities associated with gardening, dermal exposures to children (6 to <11 years old) for activities associated with playing in and around gardens and gardening, dermal exposures to adults associated with handling trees and retail plants, and dermal exposures to children (6 to <11 years old) for activities associated with playing in and around trees and retail plants.

Further information regarding EPA standard assumptions and generic inputs for residential exposures may be found at http://www2.epa.gov/pesticide-science-and-assessing-pesticide-risks/standard-operating-procedures-residential-pesticide.

4. Cumulative effects from substances with a common mechanism of toxicity. Section 408(b)(2)(D)(v) of FFDCA requires that, when considering whether to establish, modify, or revoke a tolerance, the Agency consider “available information” concerning the cumulative effects of a particular pesticide's residues and “other substances that have a common mechanism of toxicity.”

EPA has not found acequinocyl to share a common mechanism of toxicity with any other substances, and acequinocyl does not appear to produce a toxic metabolite produced by other substances. For the purposes of this tolerance action, therefore, EPA has assumed that acequinocyl does not have a common mechanism of toxicity with other substances. For information regarding EPA's efforts to determine which chemicals have a common mechanism of toxicity and to evaluate the cumulative effects of such chemicals, see EPA's Web site at http://www2.epa.gov/pesticide-science-and-assessing-pesticide-risks/cumulative-assessment-risk-pesticides.

1. In general. Section 408(b)(2)(C) of FFDCA provides that EPA shall apply an additional tenfold (10X) margin of safety for infants and children in the case of threshold effects to account for prenatal and postnatal toxicity and the completeness of the database on toxicity and exposure unless EPA determines based on reliable data that a different margin of safety will be safe for infants and children. This additional margin of safety is commonly referred to as the FQPA Safety Factor (SF). In applying this provision, EPA either retains the default value of 10X, or uses a different additional safety factor when reliable data available to EPA support the choice of a different factor.

2. Prenatal and postnatal sensitivity. There is no evidence of an increased quantitative or qualitative fetal susceptibility in rats or rabbits. In isolation, there was evidence of increased quantitative offspring susceptibility in the two-generation reproductive study; however, but the concern is low since: (1) The effects in pups are well characterized with a clear NOAEL; and (2) the effects are protected for by the selected endpoints. Therefore, there are no residual uncertainties for pre-/post-natal toxicity. Additionally, taking into consideration the full database, there would be no susceptibility to offspring since assessment of parental animals in the two-generation reproductive toxicity study were limited. If additional evaluations had been performed, including all hematological measurements, then it would be expected that effects on the hematopoietic system observed in the other oral rat studies would have been seen at the same doses eliciting offspring effects. Therefore, using a weight-of-evidence approach that puts the offspring findings in the two-generation reproductive toxicity study in context with the full toxicological database, there is no concern for susceptibility to offspring since parental toxicity would be anticipated at the same dose as offspring effects.

3. Conclusion. EPA has determined that reliable data show the safety of infants and children would be adequately protected if the FQPA SF were reduced to 1x. That decision is based on the following findings:

i. The toxicity database for acequinocyl is complete.

ii. There is no indication that acequinocyl is a neurotoxic chemical and there is no need for a developmental neurotoxicity study or additional UFs to account for neurotoxicity.

iii. There is no evidence of an increased quantitative or qualitative fetal susceptibility in rats or rabbits, but in isolation there was evidence of increased quantitative offspring susceptibility in the two-generation reproductive study. However, the concern is low for the reasons outlined above in section III.D.2.

iv. There are no residual uncertainties identified in the exposure databases. The dietary food exposure assessments were performed based on 100 PCT and tolerance-level residues. EPA made conservative (protective) assumptions in the ground and surface water modeling used to assess exposure to acequinocyl in drinking water. EPA used similarly conservative assumptions to assess post-application exposure of children. These assessments will not underestimate the exposure and risks posed by acequinocyl.

EPA determines whether acute and chronic dietary pesticide exposures are safe by comparing aggregate exposure estimates to the acute PAD (aPAD) and chronic PAD (cPAD). For linear cancer risks, EPA calculates the lifetime probability of acquiring cancer given the estimated aggregate exposure. Short-, intermediate-, and chronic-term risks are evaluated by comparing the estimated aggregate food, water, and residential exposure to the appropriate PODs to ensure that an adequate MOE exists.

1. Acute risk. Using the exposure assumptions discussed in this unit for acute exposure, the acute dietary exposure from food and water to acequinocyl will occupy 71% of the aPAD for children 1-2 years old, the population group receiving the greatest exposure.

2. Chronic risk. Using the exposure assumptions described in this unit for chronic exposure, EPA has concluded that chronic exposure to acequinocyl from food and water will utilize 70% of the cPAD for children 1-2 years old, the population group receiving the greatest exposure. Based on the explanation in Unit III.C.3., regarding residential use patterns, chronic residential exposure to residues of acequinocyl is not expected.

3. Short-term risk. Short-term aggregate exposure takes into account short-term residential exposure plus chronic exposure to food and water (considered to be a background exposure level). Acequinocyl is currently registered for uses that could result in short-term residential exposure, and the Agency has determined that it is appropriate to aggregate chronic exposure through food and water with short-term residential exposures to acequinocyl.

Using the exposure assumptions described in this unit for short-term exposures, EPA has concluded the combined short-term food, water, and residential exposures result in aggregate MOEs of 1200 for adults and 890 for children 6-12 years old. Because EPA's level of concern for acequinocyl is a MOE of 100 or below, these MOEs are not of concern.

4. Intermediate-term risk. Intermediate-term aggregate exposure takes into account intermediate-term residential exposure plus chronic exposure to food and water (considered to be a background exposure level).

An intermediate-term adverse effect was identified; however, acequinocyl is not registered for any use patterns that would result in intermediate-term residential exposure. Intermediate-term risk is assessed based on intermediate-term residential exposure plus chronic dietary exposure. Because there is no intermediate-term residential exposure and chronic dietary exposure has already been assessed under the appropriately protective cPAD (which is at least as protective as the POD used to assess intermediate-term risk), no further assessment of intermediate-term risk is necessary, and EPA relies on the chronic dietary risk assessment for evaluating intermediate-term risk for acequinocyl.

5. Aggregate cancer risk for U.S. population. Based on the lack of evidence of carcinogenicity in two adequate rodent carcinogenicity studies, acequinocyl is not expected to pose a cancer risk to humans.

6. Determination of safety. Based on these risk assessments, EPA concludes that there is a reasonable certainty that no harm will result to the general population, or to infants and children from aggregate exposure to acequinocyl residues.

Adequate enforcement methodology (two high-performance liquid chromatography methods with tandem mass-spectroscopy detection (HPLC/MS/MS) for determining residues in/on fruit and nut commodities (Morse Methods Meth-133 and Meth-135) is available to enforce the tolerance expression.

The method may be requested from: Chief, Analytical Chemistry Branch, Environmental Science Center, 701 Mapes Rd., Ft. Meade, MD 20755-5350; telephone number: (410) 305-2905; email address: [email protected].

In making its tolerance decisions, EPA seeks to harmonize U.S. tolerances with international standards whenever possible, consistent with U.S. food safety standards and agricultural practices. EPA considers the international maximum residue limits (MRLs) established by the Codex Alimentarius Commission (Codex), as required by FFDCA section 408(b)(4). The Codex Alimentarius is a joint United Nations Food and Agriculture Organization/World Health Organization food standards program, and it is recognized as an international food safety standards-setting organization in trade agreements to which the United States is a party. EPA may establish a tolerance that is different from a Codex MRL; however, FFDCA section 408(b)(4) requires that EPA explain the reasons for departing from the Codex level.

The Codex has not established any MRLs for acequinocyl.

A comment was submitted by the Center for Biological Diversity and was primarily concerned about EPA's consideration of the impacts of acequinocyl on the environment, pollinators, and endangered species. This comment is not relevant to the Agency's evaluation of safety of the acequinocyl tolerances under section 408 of the FFDCA, which requires the Agency to evaluate the potential harms to human health, not effects on the environment.

Two other comments were submitted in response to the Notice of Filing that stated, in part, that this chemical “should not be used at all in America or anywhere in the world” and that “no residue should be permitted on any food or other plant.” The Agency understands the commenter's concerns and recognizes that some individuals believe that pesticides should be banned on agricultural crops. However, the existing legal framework provided by section 408 of the FFDCA states that tolerances may be set when persons seeking such tolerances or exemptions have demonstrated that the pesticide meets the safety standard imposed by that statute. The citizens' comments appear to be directed at the underlying statute and not EPA's implementation of it; the citizens have made no contention that EPA has acted in violation of the statutory framework.

The petitioned-for tolerance of 0.4 for residues on avocado is being increased to 0.50 ppm as EPA corrected some residue levels in the field trials for degradation during storage and declared two of the trials to be replicates. The data that EPA used in Organization for Economic Co-operation and Development (OECD) Maximum Residue Limits (MRL) Tolerance Worksheet for avocado was thus slightly different from the petitioner's data. The tolerance level of 0.15 ppm for residues in dry beans is based upon the OECD MRL tolerance worksheet. The difference is based on EPA using slightly different residue levels that were corrected for degradation during storage. The tolerance level of 0.30 ppm for residues in/on cucurbit vegetables is based upon the OECD MRL tolerance worksheet. The difference is based on EPA using slightly different residue levels that were corrected for degradation during storage. The data that EPA used in MRL tolerance spreadsheet for summer squash was slightly different from the petitioner's data. Concerning the crop group conversions, the tolerance level for residues in/on citrus fruit was modified to be harmonized with the Canadian MRL.

Therefore, tolerances are established for residues of acequinocyl, including its metabolites and degradates, in or on avocado at 0.50 ppm; bean, dry, seed at 0.15 ppm; cherry, subgroup 12-12A at 1.0 ppm; fruit, citrus, group 10-10 at 0.35 ppm; fruit, pome, group 11-10 at 0.40 ppm; nut, tree, group 14-12 at 0.02 ppm; tea, plucked leaves at 40 ppm; vegetable, cucurbit, group 9 at 0.30 ppm; and vegetable, fruiting, group 8-10 at 0.70 ppm. In addition, the existing tolerances on cherry, sweet; cherry, tart; cucumber; fruit, citrus, group 10; fruit, pome, group 11; melon, subgroup 9A; nut, tree, group 14; okra; pistachio; and vegetable, fruiting, group 8 are removed as unnecessary since they are now covered by the new tolerances.

This action establishes tolerances under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this action has been exempted from review under Executive Order 12866, this action is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This action does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.), nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the tolerance in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), do not apply.

This action directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this action. In addition, this action does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act (UMRA) (2 U.S.C. 1501 et seq.).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

I. Background

In the June 1, 2015 Federal Register (80 FR 31098), we published the “Medicaid and Children's Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, Medicaid and CHIP Comprehensive Quality Strategies, and Revisions Related to Third Party Liability” proposed rule (“June 1, 2015 proposed rule”). As part of the actuarial soundness proposals, we proposed to define actuarially sound capitation rates as those sufficient to provide for all reasonable, appropriate, and attainable costs that are required under the terms of the contract, including furnishing of covered services and operation of the managed care plan for the duration of the contract. Among the proposals was a general rule that the state may not direct the managed care organization's (MCO's), prepaid inpatient health plan's (PIHP's), or prepaid ambulatory health plan's (PAHP's) expenditures under the contract.

In the May 6, 2016 Federal Register (81 FR 27498), we published the “Medicaid and Children's Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, and Revisions Related to Third Party Liability” final rule (“May 6, 2016 final rule”), which finalized the June 1, 2015 proposed rule. In the final rule, we finalized, with some revisions, the proposal which limited state direction of payments, including pass-through payments as defined below.

In the November 22, 2016 Federal Register (81 FR 83777), we published the “Medicaid Program; The Use of New or Increased Pass-Through Payments in Medicaid Managed Care Delivery Systems” proposed rule (“November 22, 2016 proposed rule”). This rule finalizes the November 22, 2016 proposed rule as discussed below. This final rule is consistent with the intent of the May 6, 2016 final rule to provide transition periods for states that already use pass-through payments—these transition periods allow states to implement changes to existing pass-through payments over a period of time to minimize disruption and to ensure continued financial support for safety-net providers. As we discussed in the November 22, 2016 proposed rule, this final rule is also consistent with the CMCS Informational Bulletin (CIB) concerning “The Use of New or Increased Pass-Through Payments in Medicaid Managed Care Delivery Systems,” which was published on July 29, 2016.

We finalized a policy to limit state direction of payments, including pass-through payments, at § 438.6(c) and (d) in the May 6, 2016 final rule (81 FR 27587 through 27592). Specifically, under the final rule (81 FR 27588), we defined pass-through payments at § 438.6(a) as any amount required by the state (and considered in calculating the actuarially sound capitation rate) to be added to the contracted payment rates paid by the MCO, PIHP, or PAHP to hospitals, physicians, or nursing facilities that is not for the following purposes: A specific service or benefit provided to a specific enrollee covered under the contract; a provider payment methodology permitted under § 438.6(c)(1)(i) through (iii) for services and enrollees covered under the contract; a subcapitated payment arrangement for a specific set of services and enrollees covered under the contract; graduate medical education (GME) payments; or federally-qualified health center (FQHC) or rural health clinic (RHC) wrap around payments. We noted that section 1903(m)(2)(A) of the Social Security Act (the Act) requires that capitation payments to managed care plans be actuarially sound; we interpret this requirement to mean that payments under the managed care contract must align with the provision of services to beneficiaries covered under the contract. We provided that these pass-through payments are not consistent with our regulatory standards for actuarially sound rates because they do not tie provider payments with the provision of services. The final rule contains a detailed description of the policy rationale (81 FR 27587 through 27592).

In an effort to provide a smooth transition for network providers, to support access for the beneficiaries they serve, and to provide states and managed care plans with adequate time to design and implement payment systems that link provider reimbursement with services covered under the contract or associated quality outcomes, we finalized transition periods related to pass-through payments for the specified provider types to which states make most pass-through payments under Medicaid managed care programs: Hospitals, physicians, and nursing homes (81 FR 27590 through 27592). As finalized, § 438.6(d)(2) and (3) provide a 10-year transition period for hospitals, subject to limitations on the amount of pass-through payments. For MCO, PIHP, or PAHP contracts beginning on or after July 1, 2027, states will not be permitted to require pass-through payments for hospitals. The final rule also provides a 5-year transition period for pass-through payments to physicians and nursing facilities. For MCO, PIHP, or PAHP contracts beginning on or after July 1, 2022, states will not be permitted to require pass-through payments for physicians or nursing facilities. These transition periods provide states, network providers, and managed care plans significant time and flexibility to integrate current pass-through payment arrangements into allowable payment structures under actuarially sound capitation rates, including enhanced fee schedules or the other approaches consistent with § 438.6(c).

As finalized in the May 6, 2016 final rule, § 438.6(d) limits the amount of pass-through payments to hospitals as a percentage of the “base amount,” which is defined in paragraph (a) and calculated under rules in paragraph (d)(2). Section 438.6(d)(3) specifies a schedule for the phased reduction of the base amount, limiting the amount of pass-through payments to hospitals. For contracts beginning on or after July 1, 2017, the state may require pass-through payments to hospitals under the contract up to 100 percent of the base amount, as defined in the final rule. For subsequent contract years (contracts beginning on or after July 1, 2018 through contracts beginning on or after July 1, 2026), the portion of the base amount available for pass-through payments decreases by 10 percentage points per year. For contracts beginning on or after July 1, 2027, no pass-through payments to hospitals are permitted. The May 6, 2016 final rule noted that nothing would prohibit a state from eliminating pass-through payments to hospitals before contracts beginning on or after July 1, 2027. However, the final rule provided for a phased reduction in the percentage of the base amount that can be used for pass-through payments, because a phased transition would support the development of permissible and accountable payment approaches while mitigating any disruption to states and providers.

We believe that states will be able to more easily transition existing pass-through payments to physicians and nursing facilities to payment structures linked to services covered under the contract compared to the transition necessary for similar payments to hospitals. Consequently, the May 6, 2016 final rule, in § 438.6(d)(5), provided a shorter time period for eliminating pass-through payments to physicians and nursing facilities and did not prescribe a limit or phased reduction in these payments; states have the option to eliminate these payments immediately or phase down these payments over the 5 year transition period if they prefer. As noted in the May 6, 2016 final rule, the distinction between hospitals and nursing facilities and physicians was also based on the comments from stakeholders during the public comment period (81 FR 27590).

Since publication of the May 6, 2016 final rule, we have received inquiries about states' ability to integrate new or increased pass-through payments into Medicaid managed care contracts. As explained in the CMCS Informational Bulletin (CIB) published on July 29, 2016,1 adding new or increased pass-through payments for hospitals, physicians, or nursing facilities complicates the required transition of these pass-through payments to permissible provider payment models.

The transition periods under the May 6, 2016 final rule provide states, network providers, and managed care plans significant time and flexibility to move existing pass-through payment arrangements (that is, those in effect when the final rule was published) into different, permissible payment structures under actuarially sound capitation rates, including enhanced fee schedules or the other approaches consistent with § 438.6(c). We did not intend for states, after the May 6, 2016 final rule was published, to begin additional or new pass-through payments, or to increase existing pass-through payments; such actions are contrary to and undermine the policy goal of eliminating pass-through payments. We proposed in the November 22, 2016 proposed rule and finalize here that we will not permit a pass-through payment amount to exceed the lesser of the amounts calculated under paragraph (d)(3) of this final rule. For states to add new or to increase existing pass-through payments is inconsistent with longstanding CMS policy, the proposal made in the June 1, 2015 proposed rule, and the May 6, 2016 final rule, which reflects the general policy goal to effectively and efficiently transition away from pass-through payments.

Under the May 6, 2016 final rule, we provided a delayed compliance deadline for § 438.6(c) and (d); we will enforce compliance with § 438.6(c) and (d) no later than the rating period for Medicaid managed care contracts beginning on or after July 1, 2017. Our exercise of enforcement discretion in this respect was not intended to create new opportunities for states to add or increase existing pass-through payments before July 1, 2017. This delay was intended to address concerns articulated by commenters, among them states and providers, that an abrupt end to directed pass-through payments could cause damaging disruption to safety-net providers. As discussed in the May 6, 2016 final rule and this final rule, pass-through payments are inconsistent with our interpretation and implementation of the statutory requirement for actuarially sound capitation rates because pass-through payments do not tie provider payments to the provision of services under the contract (81 FR 27588). A distinguishing characteristic of a pass-through payment is that a managed care plan is contractually required by the state to pay providers an amount that is disconnected from the amount, quality, or outcomes of services delivered to enrollees under the contract during the rating period of the contract. When managed care plans only serve as a conduit for passing payments to providers independent of delivered services, such payments reduce managed care plans' ability to control expenditures, effectively use value-based purchasing strategies, implement provider-based quality initiatives, and generally use the full capitation payment to manage the care of enrollees. The May 6, 2016 final rule made clear our position on these payments and our intent that they be eliminated from Medicaid managed care delivery systems, except for the directed payment models permitted by § 438.6(c), or the payments excluded from the definition of a pass-through payment in § 438.6(a), such as FQHC wrap payments.

The transition periods provided under § 438.6(d) are for states to identify existing pass-through payments and begin either tying such payments directly to services and utilization covered under the contract or eliminating them completely in favor of other support mechanisms for providers that comply with the requirements in § 438.6(c). The transition periods for current pass-through payments minimize disruption to local health care systems and interruption of beneficiary access by permitting a gradual step down from current levels of pass-through payments: (1) At the schedule and subject to the limit announced in the May 6, 2016 final rule for hospitals under § 438.6(d)(3); and (2) at a schedule adopted by the state for physicians and nursing facilities under § 438.6(d)(5). By providing states, network providers, and managed care plans significant time and flexibility to integrate current pass-through payment arrangements into different payment structures (including enhanced fee schedules or the other approaches consistent with § 438.6(c)) and into actuarially sound capitation rates, we intended to address comments that the June 1, 2015 proposed rule would be unnecessarily disruptive and endanger safety-net provider systems that states have developed for Medicaid.

Questions from states following the May 6, 2016 final rule indicated that the transition period and delayed enforcement date have caused some confusion regarding our intent for increased and new pass-through payments for contracts prior to July 1, 2017, because the final rule did not explicitly prohibit such additions or increases. While we assumed such a prohibition was implicit in the May 6, 2016 final rule, as our discussion of § 438.6(d) made clear that pass-through payments were to be discontinued, we believe that this additional rulemaking is necessary to clarify this issue in light of the recent questions. Under this final rule, we are linking pass-through payments permitted during the transition period to the aggregate amounts of pass-through payments that were in place at the time the May 6, 2016 final rule became effective on July 5, 2016, which is consistent with the intent under the May 6, 2016 final rule to phase out pass-through payments under Medicaid managed care contracts.

We received 46 timely comments from the public, including comments from hospitals, hospital associations, state Medicaid agencies, Medicaid managed care plans, and other healthcare providers and associations. The following sections, arranged by subject area, are a summary of the comments we received. In response to the November 22, 2016 proposed rule, some commenters chose to raise issues that were beyond the scope of our proposals. In this final rule, we are not summarizing or responding to those comments.

We proposed to revise § 438.6(d) to better effectuate the intent of the May 6, 2016 final rule. In the November 22, 2016 proposed rule, we first proposed to limit the availability of the transition periods in § 438.6(d)(3) and (5) (that is, the ability to continue pass-through payments for hospitals, physicians, or nursing facilities) to states that can demonstrate that they had such pass-through payments in either: (A) Managed care contract(s) and rate certification(s) for the rating period that includes July 5, 2016, and that were submitted for our review and approval on or before July 5, 2016; or (B) if the managed care contract(s) and rate certification(s) for the rating period that includes July 5, 2016 had not been submitted to us on or before July 5, 2016, the managed care contract(s) and rate certification(s) for a rating period before July 5, 2016 that had been most recently submitted to us for review and approval as of July 5, 2016.

Second, we proposed to prohibit retroactive adjustments or amendments to managed care contract(s) and rate certification(s) to add new pass-through payments or increase existing pass-through payments defined in § 438.6(a). In the proposed rule, we noted that we would not permit a pass-through payment amount to exceed the lesser of the amounts calculated under paragraph (d)(3).

Third, we proposed to establish a new maximum amount of permitted pass-through payments for each year of the transition period. For hospitals, a state would be limited (in the total amount of permissible pass-through payments) during each year of the transition period to the lesser of either: (A) The percentage of the base amount applicable to that contract year; or (B) the pass-through payment amount identified in proposed paragraph (d)(1)(i). Thus, the amount of pass-through payments identified by the state in order to satisfy proposed paragraph (d)(1)(i) would be compared to the amount representing the applicable percentage of the base amount that is calculated for each year of the transition period. For pass-through payments to physicians and nursing facilities, we also proposed to limit the amount of pass-through payments during the transition period to the amount of pass-through payments to physicians and nursing facilities under the contract and rate certification identified in proposed paragraph (d)(1)(i).

In making these comparisons to the pass-through payments under the managed care contract(s) in effect for the rating period covering July 5, 2016 as identified in proposed paragraph (d)(1)(i)(A), or the rating period before July 5, 2016 as identified in proposed paragraph (d)(1)(i)(B), we noted that we would look at total pass-through payment amounts for the specified provider types. Past aggregate amounts of hospital pass-through payments will be used in determining the maximum amount for hospital pass-through payments during the transition period; past aggregate amounts of physician pass-through payments will be used in determining the maximum amount for physician pass-through payments during the transition period; and past aggregate amounts of nursing facility pass-through payments will be used in determining the maximum amount for nursing facility pass-through payments during the transition period.

Under the November 22, 2016 proposed rule, the aggregate amounts of pass-through payments in each provider category would be used to set applicable limits for the provider type during the transition period, without regard to the specific provider(s) that received a pass-through payment. For example, if the pass-through payments in the contract identified under paragraph (d)(1)(i) were to 5 specific hospitals, the aggregate amount of pass-through payments to those hospitals would be relevant in establishing the limit during the transition period, but different hospitals could be the recipients of pass-through payments during the transition. We requested comment on our proposed approach as a whole, as well as our specific proposals to amend the existing regulation text and revise paragraph (d)(1) (adding new (d)(1)(i) and (ii)), revise paragraph (d)(3) (adding new (d)(3)(i) and (ii)), and revise paragraph (d)(5).

Comment: Some commenters stated concerns with the overall proposal and stated that the current proposal would limit state flexibility for pass-through payments beyond what was finalized in the May 6, 2016 final rule; these commenters recommended that we not finalize the November 22, 2016 proposed rule and recommended that we ensure that states continue to have the flexibility permitted in the May 6, 2016 final rule for pass-through payments in Medicaid managed care programs.

Response: We do not agree with commenters that states should have more flexibility in this area than this final rule provides. We believe that this final rule flows from the intent of the May 6, 2016 final rule to phase out pass-through payments under Medicaid managed care contracts and ensure that the transition periods be used by states that had pass-through payments in their MCO, PIHP, or PAHP contracts when we finalized the May 6, 2016 final rule. While we recognize that the regulation text finalized in the May 6, 2016 final rule was not explicit on this point and have taken steps to amend this final rule here to rectify that, this final rule is consistent with the policy and goals of the May 6, 2016 final rule in adopting transition periods. This final regulation maintains the significant time and flexibility provided to states, network providers, and managed care plans during the transition periods to move existing pass-through payment arrangements (those in effect when the May 6, 2016 final rule was published) into different, permissible payment structures under actuarially sound capitation rates, including enhanced fee schedules or the other approaches consistent with § 438.6(c) that tie managed care payments to services and utilization (and outcomes) covered under the contract.

Comment: Some commenters recommended that we not finalize this rule and that we not further restrict or limit pass-through payments beyond what was included in the May 6, 2016 final rule to support safety-net providers that provide care to Medicaid managed care enrollees. These commenters stated that states and providers have already begun to plan for the transition periods beginning in July 2017 and that additional constraints will add significant burden on safety-net providers.

Response: We do not agree that the proposed provisions, finalized here, restrict or limit states from continuing to use pass-through payments to support safety-net providers that provide care to Medicaid managed care enrollees during the transition periods adopted in the May 6, 2016 final rule. The May 6, 2016 final rule provided transition periods designed and finalized to enable affected providers, states, and managed care plans—meaning those that already had pass-through payments in place—to transition away from existing pass-through payments and limit disruption to safety-net providers. We believe such payments can be transitioned into permissible and accountable payment models that are tied to covered services, value-based payment structures, or delivery system reform initiatives without undermining access for Medicaid managed care enrollees. This rule flows from and reinforces the intent of the May 6, 2016 final rule by ensuring that the transition periods are used by states that had pass-through payments in their MCO, PIHP, or PAHP contracts when we finalized the May 6, 2016 final rule. These are the states for which we were concerned, based on the comments to the June 1, 2015 proposed rule, that an abrupt end to pass-through payments could be disruptive to their health care delivery system and safety-net providers. While we recognize that the regulation text finalized in the May 6, 2016 final rule was not explicit on this point and have taken steps to amend this final rule here to rectify that, this final rule is consistent with the policy and goals of the May 6, 2016 final rule in adopting transition periods.

If states do not currently have pass-through payments in their managed care contracts, we believe that the transition periods are unnecessary to avoid disruption. States that do not have pass-through payments in their managed care contracts that wish to pursue delivery system and provider payment initiatives are already in a strong position to design and implement allowable payment structures under actuarially sound capitation rates, including enhanced fee schedules or the other approaches consistent with § 438.6(c) that tie managed care payments to services and utilization covered under the contract.

We understand that states and providers have already begun to plan for the transition periods beginning in July 2017, but we do not believe that this rule will create substantially more constraints or add significant burden on safety-net providers. Under the May 6, 2016 final rule, we did not intend to permit or encourage states to add new pass-through payments or to ramp-up pass-through payments in ways that are not consistent with the elimination of pass-through payments during the transition periods. Adding new or increased pass-through payments would substantially complicate the required transition away from pass-through payments, potentially creating more disruption for safety-net providers by increasing dependence on these payments and then compressing the actual amount of time available to eliminate them.

Comment: Some commenters recommended that the proposed rule not be finalized until the new administration has the opportunity to review and ensure that the policy in the November 22, 2016 proposed rule is consistent with the new administration's Medicaid policy and goals. These commenters stated that such an approach is congruent with the general practice and policy that significant new rules should not be issued shortly before a change in the administration.