Internal Revenue Bulletin: 2004-2

January 12, 2004


Highlights of This Issue

These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2004-2 Rev. Rul. 2004-2

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for January 2004.

T.D. 9099 T.D. 9099

Final regulations under section 417(a)(3) of the Code consolidate the content requirements applicable to explanations of qualified joint and survivor annuities and qualified preretirement survivor annuities payable under certain retirement plans, and specify requirements for disclosing the relative value of optional forms of benefit that are payable from certain retirement plans in lieu of a qualified joint and survivor annuity.

Notice 2004-2 Notice 2004-2

This notice provides basic information, in question and answer format, on Health Savings Accounts (HSAs).

EMPLOYMENT TAX

Notice 2004-4 Notice 2004-4

This notice provides tables that show the amount of an individual's income that is exempt from a notice of levy used to collect delinquent tax in 2004.

ADMINISTRATIVE

Notice 2004-1 Notice 2004-1

This notice clarifies that the new application process for an IRS Individual Taxpayer Identification Number (ITIN), which generally requires that the application be accompanied by the applicant's completed tax return, constitutes compliance with regulations section 301.6109-1(d)(3)(ii). This notice also requests taxpayers to submit comments on the revised ITIN application process.

Rev. Proc. 2004-9 Rev. Proc. 2004-9

Insurance companies; loss reserves; discounting unpaid losses. The loss payment patterns and discount factors are set forth for the 2003 accident year. These factors will be used to compute discounted unpaid losses under section 846 of the Code.

Rev. Proc. 2004-10 Rev. Proc. 2004-10

Insurance companies; discounting estimated salvage recoverable. The salvage discount factors are set forth for the 2003 accident year. These factors will be used to compute discounted estimated salvage recoverable under section 832 of the Code.

Announcement 2004-3 Announcement 2004-3

This document details changes made by Chief Counsel which impact distribution codes for Form 1099-R. These changes could impact the filing of 1099-R and Form 5498 for tax year 2003.

Preface

The IRS Mission

Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are consolidated semiannually into Cumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury's Office of the Assistant Secretary (Enforcement).

Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period.*

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

T.D. 9099

Disclosure of Relative Values of Optional Forms of Benefit

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

This document contains final regulations that consolidate the content requirements applicable to explanations of qualified joint and survivor annuities and qualified preretirement survivor annuities payable under certain retirement plans, and specify requirements for disclosing the relative value of optional forms of benefit that are payable from certain retirement plans in lieu of a qualified joint and survivor annuity. These regulations affect plan sponsors and administrators, and participants in and beneficiaries of, certain retirement plans.

DATES:

Effective Date: These final regulations are effective on December 17, 2003.

Applicability Date: These final regulations are applicable to QJSA explanations with respect to distributions with annuity starting dates on or after October 1, 2004, and to QPSA explanations provided on or after July 1, 2004.

FOR FURTHER INFORMATION CONTACT:

John T. Ricotta at (202) 622-6060 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information (requirement to disclose information) contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-0928. Responses to this collection of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

The estimated annual burden per respondent varies from .01 to .99 hours, depending on individual circumstances, with an estimated average of .5 hours.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:SP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains amendments to 26 CFR part 1 under section 417(a)(3) of the Internal Revenue Code of 1986 (Code).

A qualified retirement plan to which section 401(a)(11) applies must pay a vested participant's retirement benefit under the plan in the form of a qualified joint and survivor annuity (QJSA), except as provided in section 417. Section 401(a)(11) applies to defined benefit plans, money purchase pension plans, and certain other defined contribution plans. A QJSA is defined in section 417(b) as an annuity for the life of the participant with a survivor annuity for the life of the spouse (if the participant is married) that is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity that is payable during the joint lives of the participant and the spouse. Under section 417(b)(2), a QJSA for a married participant generally must be the actuarial equivalent of the single life annuity benefit payable for the life of the participant. However, a plan is permitted to subsidize the QJSA for a married participant. If the plan fully subsidizes the QJSA for a married particip ant so that failure to waive the QJSA would not result in reduced payments over the life of the participant compared to the single life annuity benefit, then the plan need not provide an election to waive the QJSA. See section 417(a)(5).

For a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan at the same time. See §1.401(a)-20, Q&A-16. Further, the anti-forfeiture rules of section 411(a) prohibit a participant's benefit under a defined benefit plan from being satisfied through payment of a form of benefit that is actuarially less valuable than the value of the participant's accrued benefit expressed in the form of an annual benefit commencing at normal retirement age. These determinations must be made using reasonable actuarial assumptions. However, see §1.417(e)-1(d) for actuarial assumptions required for use in certain present value calculations.

If a plan provides a subsidy for one optional form of benefit (i.e., the payments under an optional form of benefit have an actuarial present value that is greater than the actuarial present value of the accrued benefit), there is no requirement to extend a similar subsidy (or any subsidy) to every other optional form of benefit. Thus, for example, a participant might be entitled to receive a single-sum distribution upon early retirement that does not reflect any early retirement subsidy in lieu of a QJSA that reflects a substantial early retirement subsidy. As a further example, a participant might be entitled to receive a single-sum distribution at normal retirement age in lieu of a QJSA that is subsidized as described in section 417(a)(5).

Section 417(a) provides rules under which a participant (with spousal consent) may waive payment of the participant's benefit in the form of a QJSA. Section 417(a)(3) provides that a plan must provide to each participant, within a reasonable period before the annuity starting date (and consistent with such regulations as the Secretary may prescribe), a written explanation of the terms and conditions of the QJSA, the participant's right to make, and the effect of, an election to waive the QJSA form of benefit, the rights of the participant's spouse, and the right to revoke (and the effect of the revocation of) an election to waive the QJSA form of benefit.

Section 205 of the Employee Retirement Income Security Act of 1974 (ERISA), Public Law 93-406 (88 Stat. 829) as subsequently amended, provides rules that are parallel to the rules of sections 401(a)(11) and 417 of the Internal Revenue Code. In particular, section 205(c)(3) of ERISA provides a rule parallel to the rule of section 417(a)(3) of the Code.

Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretative jurisdiction over the ERISA provisions that are parallel to the Code provisions addressed in these regulations. Therefore, these regulations apply for purposes of section 205(c)(3) of ERISA, as well as for section 417(a)(3) of the Code.

Regulations governing the requirements for waiver of a QJSA were published in the Federal Register on August 19, 1988 (T.D. 8219, 1988-2 CB. 48 [53 FR 31837]). Section 1.401(a)-20, Q&A-36, provides rules for the explanation that must be provided under section 417(a)(3) as a prerequisite to waiver of a QJSA. Section 1.401(a)-20, Q&A-36, requires that such a written explanation contain a general description of the eligibility conditions and other material features of the optional forms of benefit and sufficient additional information to explain the relative values of the optional forms of benefit available under the plan (e.g., the extent to which optional forms are subsidized relative to the normal form of benefit or the interest rates used to calculate the optional forms). In addition, §1.401(a)-20, Q&A-36, provides that the written explanation must comply with the requirements set forth in §1.401(a)-11(c)(3). Section 1.401( a)-11(c)(3) was issued prior to the enactment of section 417, and provides rules relating to written explanations that were required prior to a participant's election of a preretirement survivor annuity or election to waive a joint and survivor annuity. Section 1.401(a)-11(c)(3)(i)(C) provides that such a written explanation must contain a general explanation of the relative financial effect of these elections on a participant's annuity.

In addition, under section 411 and §1.411(a)-11(c), so long as a benefit is immediately distributable (within the meaning of §1.411(a)-11(c)(4)), a participant must be informed of his or her right to defer that distribution. This requirement is independent of the section 417 requirements addressed in these regulations.

Concerns have been expressed that, in certain cases, the information provided to participants under section 417(a)(3) regarding the available distribution forms does not adequately enable them to compare those distribution forms without professional advice. In particular, participants who are eligible for both subsidized annuity distributions and unsubsidized single-sum distributions may be receiving notices that do not adequately explain the value of the subsidy that is foregone if the single-sum distribution is elected. In such a case, merely disclosing the amount of the single-sum distribution and the amount of annuity payments, or merely stating that the single sum distribution does not include the subsidy that is included in the annuity payments, may not adequately enable those participants to make an informed comparison of the relative values of those distribution forms, even if the interest rate used to derive the single sum is disclosed. Furthermore, questions have been raised as to how the r elative values of optional forms of benefit are required to be expressed under current regulations.

Accordingly, proposed regulations (REG-124667-02, 2002-2 C.B. 791 [67 FR 62417]) were published in the Federal Register on October 7, 2002, that would consolidate the content requirements applicable to explanations of qualified joint and survivor annuities and qualified preretirement survivor annuities payable under certain retirement plans, and provide disclosure requirements that would enable participants to compare the relative values of the available distribution forms using more readily understandable information.

After consideration of the comments received concerning the proposed regulations, these final regulations adopt provisions of the proposed regulations with certain modifications, the most significant of which are highlighted below.

Explanation of Provisions

These regulations provide guidance regarding the required description of the relative values of optional forms of benefit compared to the value of the QJSA and the content of the required disclosure of relative values. Commentators generally approved of the increased disclosure that would result from the approach in the proposed regulations, and these final regulations are substantially similar to the proposed regulations.

As under the proposed regulations, the description of the relative value of an optional form of benefit compared to the value of the QJSA must be expressed in a manner that provides a meaningful comparison of the relative economic values of the two forms of benefit without the participant having to make calculations using interest or mortality assumptions. In order to provide this comparison, the benefit under one or both optional forms of benefit must be converted, taking into account the time value of money and life expectancies, so that both are expressed in the same form. While one commentator requested that the regulations only permit comparisons to be made on the basis of present value, the regulations do not take this approach. Instead, the final regulations retain the examples of techniques that may be used for this comparison that were included in the proposed regulation: expressing the actuarial present value of the optional form of benefit as a percentage or factor of the actuarial presen t value of the QJSA; stating the amount of an annuity payable at the same time and under the same conditions as the QJSA that is the actuarial equivalent of the optional form of benefit; or stating the actuarial present value of both the QJSA and the optional form of benefit. However, a specific example has been added illustrating the use of the actuarial present value to express relative value.

The comparisons required under the proposed regulations depended on which form of benefit constitutes the QJSA for the participant. One commentator noted that this would result in a different comparison for married and unmarried participants, creating an unnecessary burden for plan sponsors in situations where the benefit options are identical for married and unmarried participants. Furthermore, if the plan sponsor did not know whether a participant is married, the plan would need to provide comparisons that covered both possibilities. In response to the comment, the final regulations permit a plan to use a uniform basis of comparison of relative value (i.e., either the QJSA for married participants or the QJSA for unmarried participants) for both married and unmarried participants, if the benefit options are the same for married and unmarried participants. Thus, in a plan in which the applicable QJSA form for unmarried participants is a straight life annuity and the applicable QJSA form for married participants is a 50% joint and contingent annuity (and each of these forms of distribution are available to all participants on the same terms), the plan may choose to compare the relative value of the plan's optional forms of benefit to the value of the straight life annuity with respect to the required disclosure for all participants or the plan may choose to compare the relative value of the plan's optional forms of benefit to the value of the 50% joint and contingent annuity with respect to the required disclosure for all participants.

Since disclosing the relative value of every optional form of benefit regardless of the degree of subsidy may be too burdensome, and may provide participants with information that appears more precise than is warranted based on the inexact nature of the actuarial assumptions used, the final regulations follow the proposed regulation in providing for certain simplifications in the disclosure. Under one simplification, two or more optional forms of benefit that have approximately the same value could be grouped for purposes of disclosing relative value. Under the proposed regulations, two or more optional forms of benefit were treated as having approximately the same value if those optional forms of benefit varied in relative value in comparison to the value of the QJSA by 5 percentage points or less when the relative value comparison is made by expressing the actuarial present value of each of those optional forms of benefit as a percentage of the actuarial present value of the QJSA.

Several commentators recommended changes in this 5 percentage point band. One commentator suggested that a band of 7.5 percentage points be used to simplify compliance and ease the administrative burden to plans. The commentator said that a band of 7.5 percentage points would allow a plan to treat unsubsidized optional forms of benefit for virtually all retiring participants as having approximately equal value. By contrast, another commentator favored a maximum band of 3 percentage points in order for participants to receive adequate disclosure about significant differences in value. The commentator said that a 5 percentage point difference in value was significant enough to be brought to the participant's attention.

These final regulations generally retain the 5 percentage point banding rule of the proposed regulations. This rule aims to minimize the compliance burdens for plans to the extent consistent with providing participants with information on differences in value that are material in light of the inexact nature of the actuarial assumptions used.

The proposed regulations also would have allowed a plan to treat all of its forms of benefit as approximately equal in value if the actuarial present value of all of those forms is not less than 95% of the actuarial present value of the QJSA. The final regulations permit a plan that is comparing the relative value of each optional form to the value of the QJSA for a married participant to treat each presently available optional form of benefit that has an actuarial present value of at least 95% of the actuarial present value of the QJSA as having approximately the same value as the QJSA. In addition, in the case of a plan that is comparing the relative value of each optional form to the value of the single life annuity, if all of the optional forms of benefit presently available have actuarial present values that are at least 95%, but not greater than 102.5%, of the actuarial present value of the presently available single life annuity, the plan is permitted to treat all the presently available forms of distribution as approximately equal in value.

Some commentators recommended that participants have the right to know what actuarial assumptions were used in the plan's estimates of relative value. The final regulations require that this information be made available upon request if it is not provided in the notice.

Several commentators raised questions concerning whether the methods used in disclosing relative value of a plan's optional forms of benefit in accordance with these regulations affect the application of the requirement at §1.401(a)-20, Q&A-16, that the QJSA for married participants be at least as valuable as any other optional form of benefit under the plan. While this issue is not addressed in these final regulations, there is no requirement, or implication, that the same actuarial assumptions used by a plan for purposes of disclosing relative value in accordance with these regulations must be applied for purposes of the requirement in §1.401(a)-20, Q&A-16, that the QJSA for married participants be at least as valuable as any other optional form of benefit under the plan.

One commentator requested that these regulations address the use of electronic media to deliver the QJSA explanation or the QPSA explanation. The IRS and the Treasury Department are considering the extent to which the QJSA explanation and the QPSA explanation, as well as other notices under the various Internal Revenue Code requirements relating to qualified retirement plans, can be provided electronically, taking into account the effect of the Electronic Signatures in Global and National Commerce Act (ESIGN), Public Law 106-229, 114 Stat. 464 (2000). The IRS and the Treasury Department have invited comments on these issues, and anticipate issuing further guidance regarding electronic notices.

Commentators raised a number of other issues, including issues that relate to basic QJSA rules that are not addressed in these regulations and a request for the final regulations to include model language that can be included in a QJSA notice. These regulations do not include model language for several reasons, including the wide variety of distribution alternatives found in plans (including the variety of actuarial assumptions used to calculate optional forms of benefit), the variations in the average participant in the plan for purposes of understandability, as well as inclusion in the regulations of several detailed examples showing how the information can be provided in order to disclose relative value.

Effective Date

These final regulations are applicable to QJSA explanations with respect to distributions with to annuity starting dates on or after October 1, 2004, and to QPSA explanations provided on or after July 1, 2004. In the case of a retroactive annuity starting date under section 417(a)(7), when required under §1.417(e)-1(b)(3)(vi), the date of commencement of payments based on the retroactive annuity starting date is substituted for the annuity starting date for purposes of this effective date.

Special Analysis

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that qualified retirement plans of small businesses typically commence distribution of benefits to few, if any, plan participants in any given year and, similarly, only offer elections to waive a QPSA to few, if any, participants in any given year. Thus, the collection of information in these regulations will only have a minimal economic impact on most small entities. Therefore, an analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to s ection 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 — INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1986

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

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

Par. 2. Paragraph (c)(3) of §1.401(a)-11 is revised to read as follows:

§1.401(a)-11 Qualified joint and survivor annuities.

* * * * *

(c) * * *

(3) Information to be provided by plan. For rules regarding the information required to be provided with respect to the election to waive a QJSA or a QPSA, see §1.417(a)(3)-1.

* * * * *

Par. 3. A-36 of §1.401(a)-20 is revised to read as follows:

§1.401(a)-20 Requirements of qualified joint and survivor annuity and qualified preretirement survivor annuity.

* * * * *

A-36. For rules regarding the explanation of QPSAs and QJSAs required under section 417(a)(3), see §1.417(a)(3)-1.

* * * * *

Par. 4. Section 1.417(a)(3)-1 is added to read as follows:

§1.417(a)(3)-1 Required explanation of qualified joint and survivor annuity and qualified preretirement survivor annuity.

(a) Written explanation requirement—(1) General rule. A plan meets the survivor annuity requirements of section 401(a)(11) only if the plan meets the requirements of section 417(a)(3) and this section regarding the written explanation required to be provided a participant with respect to a QJSA or a QPSA. A written explanation required to be provided to a participant with respect to either a QJSA or a QPSA under section 417(a)(3) and this section is referred to in this section as a section 417(a)(3) explanation. See §1.401(a)-20, Q&A-37, for exceptions to the written explanation requirement in the case of a fully subsidized QPSA or QJSA, and §1.401(a)-20, Q&A-38, for the definition of a fully subsidized QPSA or QJSA.

(2) Time for providing section 417(a)(3) explanation—(i) QJSA explanation. See §1.417(e)-1(b)(3)(ii) for rules governing the timing of the QJSA explanation.

(ii) QPSA explanation. See §1.401(a)-20, Q&A-35, for rules governing the timing of the QPSA explanation.

(3) Required method for providing section 417(a)(3) explanation. A section 417(a)(3) explanation must be a written explanation. First class mail to the last known address of the participant is an acceptable delivery method for a section 417(a)(3) explanation. Likewise, hand delivery is acceptable. However, the posting of the explanation is not considered provision of the section 417(a)(3) explanation.

(4) Understandability. A section 417(a)(3) explanation must be written in a manner calculated to be understood by the average participant.

(b) Required content of section 417(a)(3) explanation—(1) Content of QPSA explanation. The QPSA explanation must contain a general description of the QPSA, the circumstances under which it will be paid if elected, the availability of the election of the QPSA, and, except as provided in paragraph (d)(3) of this section, a description of the financial effect of the election of the QPSA on the participant's benefits (i.e., an estimate of the reduction to the participant's estimated normal retirement benefit that would result from an election of the QPSA).

(2) Content of QJSA explanation. The QJSA explanation must satisfy either paragraph (c) or paragraph (d) of this section. Under paragraph (c) of this section, the QJSA explanation must contain certain specific information relating to the benefits available under the plan to the particular participant. Alternatively, under paragraph (d) of this section, the QJSA explanation can contain generally applicable information in lieu of specific participant information, provided that the participant has the right to request additional information regarding the participant's benefits under the plan.

(c) Participant-specific information required to be provided—(1) In general. A QJSA explanation satisfies this paragraph (c) if it provides the following information with respect to each of the optional forms of benefit presently available to the participant (i.e., optional forms of benefit with an annuity starting date for which the QJSA explanation applies)—

(i) A description of the optional form of benefit;

(ii) A description of the eligibility conditions for the optional form of benefit;

(iii) A description of the financial effect of electing the optional form of benefit (i.e., the amount payable under the form of benefit to the participant during the participant's lifetime and the amount payable after the death of the participant);

(iv) In the case of a defined benefit plan, a description of the relative value of the optional form of benefit compared to the value of the QJSA, in the manner described in paragraph (c)(2) of this section; and

(v) A description of any other material features of the optional form of benefit.

(2) Requirement for numerical comparison of relative values—(i) In general. The description of the relative value of an optional form of benefit compared to the value of the QJSA under paragraph (c)(1)(iv) of this section must be expressed to the participant in a manner that provides a meaningful comparison of the relative economic values of the two forms of benefit without the participant having to make calculations using interest or mortality assumptions. Thus, in performing the calculations necessary to make this comparison, the benefits under one or both optional forms of benefit must be converted, taking into account the time value of money and life expectancies, so that the values of both optional forms of benefit are expressed in the same form. For example, such a comparison may be expressed to the participant using any of the following techniques—

(A) Expressing the actuarial present value of the optional form of benefit as a percentage or factor of the actuarial present value of the QJSA;

(B) Stating the amount of the annuity that is the actuarial equivalent of the optional form of benefit and that is payable at the same time and under the same conditions as the QJSA; or

(C) Stating the actuarial present value of both the optional form of benefit and the QJSA.

(ii) Use of one form for both married and unmarried individuals—(A) In general. Under the rules of this paragraph (c)(2)(ii), in lieu of providing different QJSA explanations for married and unmarried individuals, the plan may provide a QJSA explanation to an individual that does not vary based on the participant's marital status. Except as specifically provided in paragraph (c)(3)(iii) of this section, any reference in this section to comparing the relative value of an optional form of benefit to the value of the QJSA may be satisfied using the substitution permitted under paragraph (c)(2)(ii)(B) or (C) of this section.

(B) Substitution of single life annuity for married individual. For a married participant, in lieu of comparing the value of each optional form of benefit presently available to the participant to the value of the QJSA, the plan can compare the value of each optional form of benefit (including the QJSA) to the value of a QJSA for an unmarried participant (i.e., a single life annuity), but only if that same single life annuity is available to that married participant.

(C) Substitution of joint and survivor annuity for unmarried individual. For an unmarried participant, in lieu of comparing the value of each optional form of benefit presently available to the participant to the value of the QJSA for that individual (which is a single life annuity), the plan can compare the value of each optional form of benefit (including the single life annuity) to the value of the joint and survivor annuity that is the QJSA for a married participant, but only if that same joint and survivor annuity is available to that unmarried participant.

(iii) Simplified presentations permitted—(A) Grouping of certain optional forms. Two or more optional forms of benefit that have approximately the same value may be grouped for purposes of a required numerical comparison described in this paragraph (c)(2). For this purpose, two or more optional forms of benefit have approximately the same value if none of those optional forms of benefit vary in relative value in comparison to the value of the QJSA by more than 5 percentage points when the relative value comparison is made by expressing the actuarial present value of each of those optional forms of benefit as a percentage of the actuarial present value of the QJSA. For such a group of optional forms of benefit, the requirement relating to disclosing the relative value of each optional form of benefit compared to the value of the QJSA can be satisfied by disclosing the relative value of any one of the optional forms in the group compared to the value of t he QJSA, and disclosing that the other optional forms of benefit in the group are of approximately the same value. If a single-sum distribution is included in such a group of optional forms of benefit, the single-sum distribution must be the distribution form that is used for purposes of this comparison.

(B) Representative relative value for grouped optional forms. If, in accordance with paragraph (c)(2)(iii)(A) of this section, two or more optional forms of benefits are grouped, the relative values for all of the optional forms of benefit in the group can be stated using a representative relative value as the approximate relative value for the entire group. For this purpose, a representative relative value is any relative value that is not less than the relative value of the member of the group of optional forms of benefit with the lowest relative value and is not greater than the relative value of the member of that group with the highest relative value when measured on a consistent basis. For example, if three grouped optional forms have relative values of 87.5%, 89%, and 91% of the value of the QJSA, all three optional forms can be treated as having a relative value of approximately 90% of the value of the QJSA. As required under paragraph (c)(2)(iii)(A) of this section, if a single-sum distribution is included in the group of optional forms of benefit, the 90% relative factor of the value of the QJSA must be disclosed as the approximate relative value of the single sum, and the other forms can be described as having the same approximate value as the single sum.

(C) Special rules. If the plan is comparing the value of each optional form to the value of the QJSA for a married participant, this paragraph (c)(2)(iii)(C) provides a grouping rule that is in addition to the grouping rules of paragraph (c)(2)(iii)(A) of this section. Under this special rule, the relative value of all optional forms of benefit that have an actuarial present value that is at least 95% of the actuarial present value of the QJSA for a married participant is permitted to be described by stating that those optional forms of benefit are approximately equal in value to the QJSA, or that all of those forms of benefit and the QJSA are approximately equal in value. In addition, if a plan is comparing the value of optional forms of benefit to the value of the single life annuity and all optional forms of benefit have actuarial present values that are at least 95%, but not greater than 102.5%, of the actuarial present value of the single life annuity, the plan is permitted t o describe the relative value of all optional forms of benefit by stating that all the optional forms of benefit are approximately equal in value, or that all of those forms of benefit and the single life annuity are approximately equal in value.

(iv) Actuarial assumptions used to determine relative values. For the purpose of providing a numerical comparison of the value of an optional form of benefit to the value of the immediately commencing QJSA under this paragraph (c)(2), the following rules apply—

(A) If an optional form of benefit is subject to the requirements of section 417(e)(3) and §1.417(e)-1(d), any comparison of the value of the optional form of benefit to the value of the QJSA must be made using the applicable mortality table and the applicable interest rate as defined in §1.417(e)-1(d)(2) and (3) (or, at the option of the plan, another reasonable interest rate and reasonable mortality table used under the plan to calculate the amount payable under the optional form of benefit); and

(B) All other optional forms of benefit payable to the participant must be compared with the QJSA using a single set of interest and mortality assumptions that are reasonable and that are applied uniformly with respect to all such optional forms payable to the participant (regardless of whether those assumptions are actually used under the plan for purposes of determining benefit payments).

(v) Required disclosure of assumptions—(A) Explanation of concept of relative value. The notice must provide an explanation of the concept of relative value, communicating that the relative value comparison is intended to allow the participant to compare the total value of distributions paid in different forms, that the relative value comparison is made by converting the value of the optional forms of benefit presently available to a common form (such as the QJSA or a single-sum distribution), and that this conversion uses interest and life expectancy assumptions. The explanation of relative value must include a general statement that all comparisons provided are based on average life expectancies, and that the relative value of payments ultimately made under an annuity optional form of benefit will depend on actual longevity.

(B) Disclosure of assumptions. A required numerical comparison of the value of the optional form of benefit to the value of the QJSA under this paragraph (c)(2) is required to include a disclosure of the interest rate that is used to develop the comparison. If all optional forms of benefit are permitted to be grouped under paragraph (c)(2)(iii)(A) of this section, then the requirement of this paragraph (c)(2)(v)(B) does not apply for any optional form of benefit not subject to the requirements of section 417(e)(3) and §1.417(e)-1(d)(3).

(C) Offer to provide actuarial assumptions. If the plan does not disclose the actuarial assumptions used to calculate the numerical comparison required under paragraph (c)(2) of this section, then, the notice must be accompanied by a statement that includes an offer to provide, upon the participant's request, the actuarial assumptions used to calculate the relative value of optional forms of benefit under the plan.

(3) Permitted estimates of financial effect and relative value—(i) General rule. For purposes of providing a description of the financial effect of the distribution forms available to a participant as required under paragraph (c)(1)(iii) of this section, and for purposes of providing a description of the relative value of an optional form of benefit compared to the value of the QJSA for a participant as required under paragraph (c)(1)(iv) of this section, the plan is permitted to provide reasonable estimates (e.g., estimates based on data as of an earlier date than the annuity starting date, a reasonable assumption for the age of the participant's spouse, or, in the case of a defined contribution plan, reasonable estimates of amounts that would be payable under a purchased annuity contract), including reasonable estimates of the applicable interest rate under section 417(e)(3).

(ii) Right to more precise calculation. If a QJSA notice uses a reasonable estimate under paragraph (c)(3)(i) of this section, the QJSA explanation must identify the estimate and explain that the plan will, upon the request of the participant, provide a more precise calculation and the plan must provide the participant with a more precise calculation if so requested. Thus, for example, if a plan provides an estimate of the amount of the QJSA that is based on a reasonable assumption concerning the age of the participant's spouse, the participant can request a calculation that takes into account the actual age of the spouse, as provided by the participant.

(iii) Revision of prior information. If a more precise calculation described in paragraph (c)(3)(ii) of this section materially changes the relative value of an optional form compared to the value of the QJSA, the revised relative value of that optional form must be disclosed, regardless of whether the financial effect of selecting the optional form is affected by the more precise calculation. For example, if a participant provides a plan with the age of the participant's spouse and that information materially changes the relative value of an optional form of benefit (such as a single sum) compared to the value of the QJSA, then the revised relative value of the optional form of benefit and the value of the QJSA must be disclosed, regardless of whether the amount of the payment under that optional form of benefit is affected by the more precise calculation.

(4) Special rules for disclosure of financial effect for defined contribution plans. For a written explanation provided by a defined contribution plan, a description of financial effect required by paragraph (c)(1)(iii) of this section with respect to an annuity form of benefit must include a statement that the annuity will be provided by purchasing an annuity contract from an insurance company with the participant's account balance under the plan. If the description of the financial effect of the optional form of benefit is provided using estimates rather than by assuring that an insurer is able to provide the amount disclosed to the participant, the written explanation must also disclose this fact.

(d) Substitution of generally applicable information for participant information in the section 417(a)(3) explanation—(1) Forms of benefit available. In lieu of providing the information required under paragraphs (c)(1)(i) through (v) of this section for each optional form of benefit presently available to the participant as described in paragraph (c) of this section, the QJSA explanation may contain the information required under paragraphs (c)(1)(i) through (v) of this section for the QJSA and each other optional form of benefit generally available under the plan, along with a reference to where a participant may readily obtain the information required under paragraphs (c)(1)(i) through (v) of this section for any other optional forms of benefit that are presently available to the participant.

(2) Financial effect and comparison of relative values—(i) General rule. In lieu of providing a statement of the financial effect of electing an optional form of benefit as required under paragraph (c)(1)(iii) of this section, or a comparison of relative values as required under paragraph (c)(1)(iv) of this section, based on the actual age and benefit of the participant, the QJSA explanation is permitted to include a chart (or other comparable device) showing the financial effect and relative value of optional forms of benefit in a series of examples specifying the amount of the optional form of benefit payable to a hypothetical participant at a representative range of ages and the comparison of relative values at those same representative ages. Each example in this chart must show the financial effect of electing the optional form of benefit pursuant to the rules of paragraph (c)(1)(iii) of this section, and a comparison of the relative value of the opt ional form of benefit to the value of the QJSA pursuant to the rules of paragraph (c)(2) of this section, using reasonable assumptions for the age of the hypothetical participant's spouse and any other variables that affect the financial effect, or relative value, of the optional form of benefit. The requirement to show the financial effect of electing an optional form can be satisfied through the use of other methods (e.g., expressing the amount of the optional form as a percentage or a factor of the amount payable under the normal form of benefit), provided that the method provides sufficient information so that a participant can determine the amount of benefits payable in the optional form. The chart (or other comparable device) must be accompanied by the disclosures described in paragraph (c)(2)(v) of this section explaining the concept of relative value and disclosing certain interest assumptions. In addition, the chart (or other comparable device) must be accompanied by a general statement describing the effect of significant variations between the assumed ages or other variables on the financial effect of electing the optional form of benefit and the comparison of the relative value of the optional form of benefit to the value of the QJSA.

(ii) Actual benefit must be disclosed. The generalized notice described in this paragraph (d)(2) will satisfy the requirements of paragraph (b)(2) of this section only if the notice includes either the amount payable to the participant under the normal form of benefit or the amount payable to the participant under the normal form of benefit adjusted for immediate commencement. For this purpose, the normal form of benefit is the form under which payments due to the participant under the plan are expressed under the plan, prior to adjustments for form of benefit. For example, assuming that a plan's benefit accrual formula is expressed as a straight life annuity, the generalized notice must provide the amount of either the straight life annuity commencing at normal retirement age or the straight life annuity commencing immediately.

(iii) Ability to request additional information. The generalized notice described in this paragraph (d)(2) must be accompanied by a statement that includes an offer to provide, upon the participant's request, a statement of financial effect and a comparison of relative values that is specific to the participant for any presently available optional form of benefit, and a description of how a participant may obtain this additional information.

(3) Financial effect of QPSA election. In lieu of providing a specific description of the financial effect of the QPSA election, the QPSA explanation may provide a general description of the financial effect of the election. Thus, for example, the description can be in the form of a chart showing the reduction to a hypothetical participant's normal retirement benefit at a representative range of participant ages as a result of the QPSA election (using a reasonable assumption for the age of the hypothetical participant's spouse relative to the age of the hypothetical participant). In addition, this chart must be accompanied by a statement that includes an offer to provide, upon the participant's request, an estimate of the reduction to the participant's estimated normal retirement benefit, and a description of how a participant may obtain this additional information.

(4) Additional information required to be furnished at the participant's request— The generalized notice described in paragraph (d)(2) of this section must be accompanied by a statement that includes an offer to provide, upon the participant's request, information described in this paragraph (d)(4)(i) and (ii), and a description of how a participant may obtain this additional information.

(i) Explanation of QJSA. If, as permitted under paragraphs (d)(1) and (2) of this section, the content of a QJSA explanation does not include all the items described in paragraph (c) of this section, then, upon a participant's request for any of the information required under paragraphs (c)(1)(i) through (v) of this section for one or more presently available optional forms (including a request for all optional forms presently available to the participant), the plan must furnish the information required under paragraphs (c)(1)(i) through (v) of this section with respect to those optional forms. Thus, with respect to those optional forms of benefit, the participant must receive a QJSA explanation specific to the participant that is based on the participant's actual age and benefit. In addition, the plan must comply with paragraph (c)(3)(iii) of this section. Further, if as permitted under paragraph (c)(2)(v)(B) of this section, the plan does not disclose the actuarial assumptions used to calculate the numerical comparison required under paragraph (c)(2) of this section, then, upon request, the plan must provide the actuarial assumptions used to calculate the relative value of optional forms of benefit under the plan.

(ii) Explanation of QPSA. If, as permitted under paragraph (d)(3) of this section, the content of a QPSA explanation does not include all the items described in paragraph (b)(1) of this section, then, upon a participant's request, the plan must furnish an estimate of the reduction to the participant's estimated normal retirement benefit that would result from a QPSA election.

(e) Examples. The following examples illustrate the application of this section. Solely for purposes of these examples, the applicable interest rate that applies to any distribution that is subject to the rules of section 417(e)(3) is assumed to be 5%, and the applicable mortality table under section 417(e)(3) and §1.417(e)-1(d)(2) is assumed to be the table that applies as of January 1, 2003. In addition, solely for purposes of these examples, assume that a plan which determines actuarial equivalence using 6% interest and the applicable mortality table under section 417(e)(3) and §1.417(e)-1(d)(2) that applies as of January 1, 1995, is using reasonable actuarial assumptions. The examples are as follows:

Example 1. (i) Participant M participates in Plan A, a qualified defined benefit plan. Under Plan A, the QJSA is a joint and 100% survivor annuity, which is actuarially equivalent to the single life annuity determined using 6% interest and the section 417(e)(3) applicable mortality table that applies as of January 1, 1995. On October 1, 2004, M will terminate employment at age 55. When M terminates employment, M will be eligible to elect an unreduced early retirement benefit, payable as either a single life annuity or the QJSA. M will also be eligible to elect a single-sum distribution equal to the actuarial present value of the single life annuity payable at normal retirement age (age 65), determined using the applicable mortality table and the applicable interest rate under section 417(e)(3).

(ii) Consistent with paragraph (c) of this section, Participant M is provided with a QJSA explanation that describes the single life annuity, the QJSA, and single-sum distribution options under the plan, and any eligibility conditions associated with these options. Participant M is married when the explanation is provided. The explanation indicates that, if Participant M commenced benefits at age 55 and had a spouse age 55, the monthly benefit under an immediately commencing single life annuity is $3,000, the monthly benefit under the QJSA is estimated to be 89.96% of the monthly benefit under the immediately commencing single life annuity or $2,699, and the single sum is estimated to be 74.7645 times the monthly benefit under the immediately commencing single life annuity or $224,293.

(iii) The QJSA explanation indicates that the single life annuity and the QJSA are of approximately the same value, but that the single-sum option is equivalent in value to a monthly benefit under the QJSA of $1,215. (This amount is 45% of the value of the QJSA at age 55 ($1,215 divided by 89.96% of $3,000 equals 45%).) The explanation states that the relative value comparison converts the value of the single life annuity and the single-sum options to the value of each if paid in the form of the QJSA and that this conversion uses interest and life expectancy assumptions. The explanation specifies that the calculations relating to the single-sum distribution were prepared using 5.5% interest and average life expectancy, that the other calculations were prepared using a 6% interest rate and that the relative value of actual annuity payments for an individual can vary depending on how long the individual and spouse live. The explanation notes that the calculation of the QJSA assumed that the spouse was age 55, that the amount of the QJSA will depend on the actual age of the spouse (for example, annuity payments will be significantly lower if the spouse is significantly younger than the participant), and that the amount of the single-sum payment will depend on the interest rates that apply when the participant actually takes a distribution. The explanation also includes an offer to provide a more precise calculation to the participant taking into account the spouse's actual age.

(iv) In accordance with paragraph (c)(3)(ii) of this section, Participant M requests a more precise calculation of the financial effect of choosing a QJSA taking into account that Participant M's spouse is 50 years of age. Using the actual age of Participant M's spouse, Plan A determines that the monthly payments under the QJSA are 87.62% of the monthly payments under the single life annuity, or $2,628.60 per month, and provides this information to M. Plan A is not required to provide an updated calculation of the relative value of the single sum because the value of single sum continues to be 45% of the value of the QJSA.

Example 2. (i) The facts are the same as in Example 1, except that the comparison of the relative values of optional forms of benefit to the value of the QJSA is not expressed as a percentage of the actuarial present value of the QJSA, but instead is expressed by disclosing the actuarial present values of the optional forms and the QJSA. In addition, the Plan uses the applicable interest rate and the applicable mortality table under section 417(e)(3) for all comparison purposes.

(ii) Accordingly, the QJSA explanation indicates that the QJSA has an actuarial present value of $498,089, while the single-sum payment has an actuarial present value of $224,293 (i.e., the amount of the single sum is $224,293) and that the single life annuity is approximately equal in value to the QJSA. The explanation states that the relative value comparison converts the value of single life annuity and the QJSA into an amount payable in the form of the single-sum option (even though a single-sum distribution in that amount is not available under the plan) and that this conversion uses interest and life expectancy assumptions. The explanation specifies that the calculations were prepared using 5.5% interest and average life expectancy, and that the relative value of actual annuity payments for an individual can vary depending on how long the individual and spouse live. The explanation notes that the calculation of the QJSA assumed that the spouse was age 55, that the amount of the QJSA will depend on the actual age of the spouse (for example, annuity payments will be significantly lower if the spouse is significantly younger than the participant), and that the amount of the single-sum payment will depend on the interest rates that apply when the participant actually takes a distribution. The explanation also includes an offer to provide a more precise calculation to the participant taking into account the spouse's actual age.

Example 3. (i) The facts are the same as in Example 1, except that, in lieu of providing information specific to Participant M in the QJSA notice as set forth in paragraph (c) of this section, Plan A satisfies the QJSA explanation requirement in accordance with paragraph (d)(2) of this section by providing M with a statement that M's monthly benefit under an immediately commencing single life annuity (which is the normal form of benefit under Plan A, adjusted for immediate commencement) is $3,000, along with the following chart. The chart shows the financial effect of electing each optional form of benefit for a hypothetical participant with a $1,000 benefit and a spouse who is the same age as the participant. Instead of showing the relative value of these optional forms of benefit compared to the value of the QJSA, the chart shows the relative value of these optional forms of benefit compared to the value of the single life annuity. Separate charts are pro vided for ages 55, 60, and 65 as follows:

Age 55 Commencement

Optional Form Amount of distribution per $1,000 of immediate single life annuity Relative Value
Life Annuity $1,000 per month n/a
QJSA (Joint and 100% survivor annuity) $900 per month ($900 per month for survivor annuity) approximately the same value as the Life Annuity
Lump sum $ 74,764 approximately 45% of the value of the Life Annuity

Age 60 Commencement

Optional Form Amount of distribution per $1,000 of immediate single life annuity Relative Value
Life Annuity $1,000 per month n/a
QJSA (Joint and 100% survivor annuity) $878 per month ($878 per month for survivor annuity) approximately the same value as the Life Annuity
Lump sum $99,792 approximately 66% of the value of the Life Annuity

Age 65 Commencement

Optional Form Amount of distribution per $1,000 of immediate single life annuity Relative Value
Life Annuity $1,000 per month n/a
QJSA (Joint and 100% survivor annuity) $852 per month ($852 per month for survivor annuity) approximately the same value as the Life Annuity
Lump sum $135,759 approximately the same value as the Life Annuity

(ii) In accordance with paragraph (d)(4)(i) of this section, when Participant M requests specific information regarding the amounts payable under the QJSA, the joint and 100% survivor annuity, and the single-sum distribution and provides the age of M's spouse, Plan A determines that M's QJSA is $2,628.60 per month and the single-sum distribution is $224,293. The actuarial present value of the QJSA (determined using the 5.5% interest and the section 417(e)(3) applicable mortality table) is $498,896 and the actuarial present value of the single life annuity is $497,876. Accordingly, the specific information discloses that the single-sum distribution has a value that is 45% of the value of the single life annuity available to M on October 1, 2004. In accordance with paragraph (c)(2)(iii)(C) of this section, the QJSA notice provides that the QJSA is of approximately the same value as the single life annuity.

Example 4. (i) The facts are the same as in Example 1, except that under Plan A, the single-sum distribution is determined as the actuarial present value of the immediately commencing single life annuity. In addition, Plan A provides a joint and 75% survivor annuity that is reduced from the single life annuity and that is the QJSA under Plan A. For purposes of determining the amount of the QJSA, if the participant is married the reduction is only half of the reduction that would normally apply under the actuarial assumptions specified in Plan A for determining actuarial equivalence of optional forms.

(ii) In lieu of providing information specific to Participant M in the QJSA notice as set forth in paragraph (c) of this section, Plan A satisfies the QJSA explanation requirement in accordance with paragraph (d)(2) of this section by providing M with a statement that M's monthly benefit under an immediately commencing single life annuity (which is the normal form of benefit under Plan A, adjusted for immediate commencement) is $3,000, along with the following chart showing the financial effect and the relative value of the optional forms of benefit compared to the QJSA for a hypothetical participant with a $1,000 benefit and a spouse who is three years younger than the participant. For each optional form generally available under the plan, the chart shows the financial effect and the relative value, using the grouping rules of paragraph (c)(2)(ii) of this section. Separate charts are provided for ages 55, 60, and 65, as follows:

Age 55 Commencement

Optional Form Amount of distribution per $1,000 of immediate single life annuity Relative Value
Life Annuity $1,000 per month approximately the same value as the QJSA
QJSA (joint and 75% survivor annuity for a participant who is married) $956 per month ($717 per month for survivor annuity) n/a
Joint and 100% survivor annuity $886 per month ($886 per month for survivor annuity) approximately the same value as the QJSA
Lump sum $165,959 approximately the same value as the QJSA

Age 60 Commencement

Optional Form Amount of distribution per $1,000 of immediate single life annuity Relative Value
Life Annuity $1,000 per month approximately 94% of the value of the QJSA
QJSA (joint and 75% survivor annuity for a participant who is married) $945 per month ($709 per month for survivor annuity) n/a
Joint and 100% survivor annuity $859 per month ($859 per month for survivor annuity) approximately 94% of the value of the QJSA
Lump sum $151,691 approximately the same value as the QJSA

Age 65 Commencement

Optional Form Amount of distribution per $1,000 of immediate single life annuity Relative Value
Life Annuity $1,000 per month approximately 93% of the value of the QJSA
QJSA (joint and 75% survivor annuity for a participant who is married) $932 per month ($699 per month for survivor annuity) n/a
Joint and 100% survivor annuity $828 per month ($828 per month for survivor annuity) approximately 93% of the value of the QJSA
Lump sum $135,759 approximately 93% of the value of the QJSA

(iii) The chart disclosing the financial effect and relative value of the optional forms specifies that the calculations were prepared assuming that the spouse is three years younger than the participant, that the calculations relating to the single-sum distribution were prepared using 5.5% interest and average life expectancy, that the other calculations were prepared using a 6% interest rate, and that the relative value of actual payments for an individual can vary depending on how long the individual and spouse live. The explanation states that the relative value comparison converts the single life annuity, the joint and 100% survivor annuity, and the single-sum options to value of each if paid in the form of the QJSA and that this conversion uses interest and life expectancy assumptions. The explanation notes that the calculation of the QJSA depends on the actual age of the spouse (for example, annuity payments will be significantly lower if the spouse is significantly younger than the participant), and that the amount of the single-sum payment will depend on the interest rates that apply when the participant actually takes a distribution. The explanation also includes an offer to provide a calculation specific to the participant upon request, and an offer to provide mortality tables used in preparing calculations upon request.

(iv) In accordance with paragraph (d)(4)(i) of this section, Participant M requests specific information regarding the amounts payable under the QJSA, the joint and 100% survivor annuity, and the single sum.

(v) Based on the information about the age of Participant M’s spouse, Plan A determines that M’s QJSA is $2,856.30 per month, the joint and 100% survivor annuity is $2,628.60 per month, and the single sum is $497,876. The actuarial present value of the QJSA (determined using the 5.5% interest and the section 417(e)(3) applicable mortality table, the actuarial assumptions required under section 417) is $525,091. Accordingly, the value of the single-sum distribution available to M on October 1, 2004, is 94.8% of the actuarial present value of the QJSA. In addition, the actuarial present value of the life annuity and the 100% joint and survivor annuity are 95.0% of the actuarial present value of the QJSA.

(vi) Plan A provides M with a QJSA explanation that incorporates these more precise calculations of the financial effect and relative value of the optional forms for which M requested information.

(f) Effective date. This section applies to QJSA explanations with respect to distributions with annuity starting dates on or after October 1, 2004, and to QPSA explanations provided on or after July 1, 2004. In the case of a retroactive annuity starting date under section 417(a)(7), when required under §1.417(e)-1(b)(3)(vi), the date of commencement of the actual payments based on the retroactive annuity starting date is substituted for the annuity starting date for this purpose.

§1.417(e)-1 [Amended]

Par. 5. In §1.417(e)-1, paragraph (b)(2) is amended by removing the language “§1.401(a)-20 Q&A-36” and adding “§1.417(a)(3)-1” in its place.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 6. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7808.

Par. 7. In §602.101, paragraph (b) is amended by adding an entry for “1.417(a)(3)-1” in numerical order to the table to read in part as follows:

§602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section whereidentified and described Current OMB control No.
* * * * *
1.417(a)(3)-1 1545-0928
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

Approved December 3, 2003.

Gregory Jenner,
Deputy Assistant Secretary (Tax Policy).

Note

(Filed by the Office of the Federal Register on December 16, 2003, 8:45 a.m., and published in the issue of the Federal Register for December 17, 2003, 68 F.R. 70141)

Drafting Information

The principal authors of these regulations are Linda S. F. Marshall and John T. Ricotta of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in their development.

* * * * *

Rev. Rul. 2004-2

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for January 2004.

This revenue ruling provides various prescribed rates for federal income tax purposes for January 2004 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Table 5 contains the federal rate for determining the present value of annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the deemed rate of return for transf ers made during calendar year 2004 to pooled income funds described in § 642(c)(5) that have been in existence for less than 3 taxable years immediately preceding the taxable year in which the transfer was made.

REV. RUL. 2004-2 TABLE 1
Applicable Federal Rates (AFR) for January 2004
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-Term
AFR 1.71% 1.70% 1.70% 1.69%
110% AFR 1.88% 1.87% 1.87% 1.86%
120% AFR 2.05% 2.04% 2.03% 2.03%
130% AFR 2.22% 2.21% 2.20% 2.20%
Mid-Term
AFR 3.52% 3.49% 3.47% 3.46%
110% AFR 3.88% 3.84% 3.82% 3.81%
120% AFR 4.23% 4.19% 4.17% 4.15%
130% AFR 4.59% 4.54% 4.51% 4.50%
150% AFR 5.31% 5.24% 5.21% 5.18%
175% AFR 6.20% 6.11% 6.06% 6.03%
Long-Term
AFR 5.01% 4.95% 4.92% 4.90%
110% AFR 5.52% 5.45% 5.41% 5.39%
120% AFR 6.03% 5.94% 5.90% 5.87%
130% AFR 6.54% 6.44% 6.39% 6.36%
REV. RUL. 2004-2 TABLE 2
Adjusted AFR for January 2004
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-term adjusted AFR 1.44% 1.43% 1.43% 1.43%
Mid-term adjusted AFR 2.67% 2.65% 2.64% 2.64%
Long-term adjusted AFR 4.40% 4.35% 4.33% 4.31%
REV. RUL. 2004-2 TABLE 3
Rates Under Section 382 for January 2004
Adjusted federal long-term rate for the current month 4.40%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.58%
REV. RUL. 2004-2 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for January 2004
Appropriate percentage for the 70% present value low-income housing credit 7.99%
Appropriate percentage for the 30% present value low-income housing credit 3.42%
REV. RUL. 2004-2 TABLE 5
Rate Under Section 7520 for January 2004
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 4.2%
REV. RUL. 2004-2 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 2004
Deemed rate of return for transfers during 2004 to pooled income funds that have been in existence for less than 3 taxable years 4.8%

Part III. Administrative, Procedural, and Miscellaneous

Notice 2004-1

Interpretation of Section 301.6109-1(d)(3)(ii) of the Procedure and Administration Regulations

SECTION 1. PURPOSE

This notice addresses the requirements of section 301.6109-1(d)(3)(ii) of the regulations on Procedure and Administration, relating to applications for Individual Taxpayer Identification Numbers (ITINs). The Service has changed its ITIN application process. This notice confirms that taxpayers who comply with the new ITIN application process will be deemed to have satisfied the requirements in section 301.6109-1(d)(3)(ii) relating to the time for applying for an ITIN. This notice also solicits public comments regarding the changes to the ITIN application process.

SECTION 2. BACKGROUND

Section 6109(a)(1) generally provides that a person must furnish a taxpayer identifying number (TIN) on any return, statement, or other document required to be made under the Internal Revenue Code (Code). For taxpayers eligible to obtain a social security number (SSN), the SSN is the taxpayer's TIN. See section 6109(d); section 301.6109-1(d)(4). Taxpayers who are required under the Code to furnish a TIN, but who are not eligible for a SSN, must obtain an ITIN from the Service. See Section 301.6109-1(d)(3)(ii). A taxpayer must apply for an ITIN on Form W-7, Application for the IRS Individual Taxpayer Identification Number.

ITINs were not intended to be used as proof of identity for nontax purposes (e.g., to obtain a driver's license, to claim legal residency, to seek employment in the United States, or to apply for welfare and health benefits) and may not be reliable proof of an individual's identity for those purposes. To help eliminate the nontax use of ITINs, the Service now is requiring taxpayers to attach the original, completed tax return for which the ITIN is needed, such as a Form 1040, to the Form W-7.

SECTION 3. FORM W-7 AND ACCOMPANYING INSTRUCTIONS

The Service has revised Form W-7 and the accompanying instructions. In general, a taxpayer who must obtain an ITIN from the Service is required to attach the taxpayer's original, completed tax return for which the ITIN is needed, such as a Form 1040, to the Form W-7. There are, however, certain exceptions to the requirement that a completed return be filed with the Form W-7. These exceptions are described in detail in the instructions to the revised Form W-7. One of the exceptions applies to holders of financial accounts generating income subject to information reporting or withholding requirements. In these cases, an applicant for an ITIN must provide the IRS with evidence that the applicant had opened the account with the financial institution and that the applicant had an ownership interest in the account. The Treasury Department and the IRS will consider changes to the requirements of this exception if necessary to ensure the timely issuance of ITINs to holders of these types of financial acco unts. In addition, financial institutions may participate in the IRS' acceptance agent program.

SECTION 4. CLARIFICATION OF REGULATORY REQUIREMENTS

Section 301.6109-1(d)(3)(ii) provides that any taxpayer who is required to furnish an ITIN must apply for an ITIN on Form W-7. The regulation further states that the application must be made far enough in advance of the taxpayer's first required use of the ITIN to permit the issuance of the ITIN in time for the taxpayer to comply with the required use (e.g., the timely filing of a tax return). This requirement was intended to prevent delays related to Code filing requirements.

Under the Service's new ITIN application process, applicants, in general, are required to submit the Form W-7 with (and not in advance of) the original, completed tax return for which the ITIN is needed. Accordingly, taxpayers who comply with the Service's new ITIN application process will be deemed to have satisfied the requirements of section 301.6109-1(d)(3)(ii) with respect to the time for applying for an ITIN.

The original, completed tax return and the Form W-7 must be filed with the IRS office specified in the instructions to the Form W-7 regardless of where the taxpayer might otherwise be required to file the tax return. The tax return will be processed in the same manner as if it were filed at the address specified in the tax return instructions. No separate filing of the tax return (e.g., a copy) with any other IRS office is requested or required. Taxpayers are responsible for filing the original, completed tax return, with the Form W-7, by the due date applicable to the tax return for which the ITIN is needed (generally, April 15 of the year following the calendar year covered by the tax return).

If a taxpayer requires an ITIN for an amended or delinquent return, then the Form W-7 must be submitted together with the return to the IRS office specified in the instructions accompanying the Form W-7.

SECTION 5. EFFECTIVE DATE

This notice is effective December 17, 2003.

SECTION 6. COMMENTS

The Service is committed to maintaining a dialogue with stakeholders on the ITIN application process, including Form W-7. Comments in response to this notice will be considered carefully by the Service in future revisions to the ITIN application process and Form W-7.

The Service welcomes all comments and suggestions and is particularly interested in comments on the following matters:

1. How can Form W-7 and the instructions be simplified or clarified?

2. The instructions to Form W-7 provide four exceptions to the requirement that a completed tax return be attached to Form W-7. Should these exceptions be modified? Are additional exceptions needed?

3. ITIN applicants may submit a Form W-7 to an acceptance agent. The acceptance agent reviews the applicant's documentation and forwards the completed Form W-7 to the Service. What steps, if any, should the Service consider to improve the acceptance agent program?

Comments must be submitted by June 15, 2004. Comments may be submitted electronically to notice.comments@irscounsel.treas.gov. Alternatively, comments may be sent to CC:PA:LPD:PR (Notice 2004-1), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (Notice 2004-1), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC 20224.

SECTION 7. CONTACT INFORMATION

The principal author of this notice is Michael A. Skeen of the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this notice, contact Michael A. Skeen at (202) 622-4910 (not a toll-free call).

Notice 2004-2

Health Savings Accounts (HSAs)

PURPOSE

This notice provides guidance on Health Savings Accounts.

BACKGROUND

Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, added section 223 to the Internal Revenue Code to permit eligible individuals to establish Health Savings Accounts (HSAs) for taxable years beginning after December 31, 2003. HSAs are established to receive tax-favored contributions by or on behalf of eligible individuals and amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay or reimburse qualified medical expenses.

A number of the rules that apply to HSAs are similar to rules that apply to Individual Retirement Accounts (IRAs) under sections 219, 408 and 408A, and to Archer Medical Savings Accounts (Archer MSAs) under section 220. For example, like an Archer MSA, an HSA is established for the benefit of an individual, is owned by that individual, and is portable. Thus, if the individual is an employee who later changes employers or leaves the work force, the HSA does not stay behind with the former employer, but stays with the individual.

This notice provides certain basic information about HSAs in question and answer format, without attempting to enumerate all of the specific rules that apply under section 223.

The notice is divided into five parts. Part I of the notice explains what HSAs are and who can have them. Part II describes how HSAs can be established. Parts III and IV cover contributions to HSAs and distributions from HSAs. Part V discusses other matters relating to HSAs.

QUESTIONS AND ANSWERS

Set forth below are questions and answers concerning HSAs.

I. What Are HSAs and Who Can Have Them?

Q-1. What is an HSA?

A-1. An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan.

Q-2. Who is eligible to establish an HSA?

A-2. An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not entitled to benefits under Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person's tax return.

Q-3. What is a “high-deductible health plan” (HDHP)?

A-3. Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP has an annual deductible of at least $1,000 and annual out-of-pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, an HDHP has an annual deductible of at least $2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible. Amounts are indexed for inflation. A plan does not fail to qualify as an HDHP merely because it does not have a deductible (or has a small deductible) for preventive care (e.g., first dollar coverage for preventive care). However, except for preventive care, a plan may not provide benefits for any year until the deductible for that year is met. See A-4 and A-6 for special rules regarding network plans and plans providing certain types of coverage.

Example (1): A Plan provides coverage for A and his family. The Plan provides for the payment of covered medical expenses of any member of A's family if the member has incurred covered medical expenses during the year in excess of $1,000 even if the family has not incurred covered medical expenses in excess of $2,000. If A incurred covered medical expenses of $1,500 in a year, the Plan would pay $500. Thus, benefits are potentially available under the Plan even if the family's covered medical expenses do not exceed $2,000. Because the Plan provides family coverage with an annual deductible of less than $2,000, the Plan is not an HDHP.

Example (2): Same facts as in example (1), except that the Plan has a $5,000 family deductible and provides payment for covered medical expenses if any member of A's family has incurred covered medical expenses during the year in excess of $2,000. The Plan satisfies the requirements for an HDHP with respect to the deductibles. See A-12 for HSA contribution limits.

Q-4. What are the special rules for determining whether a health plan that is a network plan meets the requirements of an HDHP?

A-4. A network plan is a plan that generally provides more favorable benefits for services provided by its network of providers than for services provided outside of the network. In the case of a plan using a network of providers, the plan does not fail to be an HDHP (if it would otherwise meet the requirements of an HDHP) solely because the out-of-pocket expense limits for services provided outside of the network exceeds the maximum annual out-of-pocket expense limits allowed for an HDHP. In addition, the plan's annual deductible for out-of-network services is not taken into account in determining the annual contribution limit. Rather, the annual contribution limit is determined by reference to the deductible for services within the network.

Q-5. What kind of other health coverage makes an individual ineligible for an HSA?

A-5. Generally, an individual is ineligible for an HSA if the individual, while covered under an HDHP, is also covered under a health plan (whether as an individual, spouse, or dependent) that is not an HDHP. See also A-6.

Q-6. What other kinds of health coverage may an individual maintain without losing eligibility for an HSA?

A-6. An individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage for any benefit provided by “permitted insurance.” Permitted insurance is insurance under which substantially all of the coverage provided relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property (e.g., automobile insurance), insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization.

In addition to permitted insurance, an individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. If a plan that is intended to be an HDHP is one in which substantially all of the coverage of the plan is through permitted insurance or other coverage as described in this answer, it is not an HDHP.

Q-7. Can a self-insured medical reimbursement plan sponsored by an employer be an HDHP?

A-7. Yes.

II. How Can An HSA Be Established?

Q-8. How does an eligible individual establish an HSA?

A-8. Beginning January 1, 2004, any eligible individual (as described in A-2) can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs or Archer MSAs with qualified IRA or Archer MSA trustees or custodians. No permission or authorization from the Internal Revenue Service (IRS) is necessary to establish an HSA. An eligible individual who is an employee may establish an HSA with or without involvement of the employer.

Q-9. Who is a qualified HSA trustee or custodian?

A-9. Any insurance company or any bank (including a similar financial institution as defined in section 408(n)) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian. Other persons may request approval to be a trustee or custodian in accordance with the procedures set forth in Treas. Reg. § 1.408-2(e) (relating to IRA nonbank trustees). For additional information concerning nonbank trustees and custodians, see Announcement 2003-54, 2003-40 I.R.B. 761.

Q-10. Does the HSA have to be opened at the same institution that provides the HDHP?

A-10. No. The HSA can be established through a qualified trustee or custodian who is different from the HDHP provider. Where a trustee or custodian does not sponsor the HDHP, the trustee or custodian may require proof or certification that the account beneficiary is an eligible individual, including that the individual is covered by a health plan that meets all of the requirements of an HDHP.

III. Contributions to HSAs.

Q-11. Who may contribute to an HSA?

A-11. Any eligible individual may contribute to an HSA. For an HSA established by an employee, the employee, the employee's employer or both may contribute to the HSA of the employee in a given year. For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA. Family members may also make contributions to an HSA on behalf of another family member as long as that other family member is an eligible individual.

Q-12. How much may be contributed to an HSA in calendar year 2004?

A-12. The maximum annual contribution to an HSA is the sum of the limits determined separately for each month, based on status, eligibility and health plan coverage as of the first day of the month. For calendar year 2004, the maximum monthly contribution for eligible individuals with self-only coverage under an HDHP is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $1,000) but not more than $2,600. For eligible individuals with family coverage under an HDHP, the maximum monthly contribution is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $2,000) but not more than $5,150. In addition to the maximum contribution amount, catch-up contributions, as described in A-14, may be made by or on behalf of individuals age 55 or older and younger than 65.

All HSA contributions made by or on behalf of an eligible individual to an HSA are aggregated for purposes of applying the limit. The annual limit is decreased by the aggregate contributions to an Archer MSA. The same annual contribution limit applies whether the contributions are made by an employee, an employer, a self-employed person, or a family member. Unlike Archer MSAs, contributions may be made by or on behalf of eligible individuals even if the individuals have no compensation or if the contributions exceed their compensation. If an individual has more than one HSA, the aggregate annual contributions to all the HSAs are subject to the limit.

Q-13. How is the contribution limit computed for an individual who begins self-only coverage under an HDHP on June 1, 2004 and continues to be covered under the HDHP for the rest of the year?

A-13. The contribution limit is computed each month. If the annual deductible is $5,000 for the HDHP, then the lesser of the annual deductible and $2,600 is $2,600. The monthly contribution limit is $216.67 ($2,600 /12). The annual contribution limit is $1,516.69 (7 x $216.67).

Q-14. What are the “catch-up contributions” for individuals age 55 or older?

A-14. For individuals (and their spouses covered under the HDHP) between ages 55 and 65, the HSA contribution limit is increased by $500 in calendar year 2004. This catch-up amount will increase in $100 increments annually, until it reaches $1,000 in calendar year 2009. As with the annual contribution limit, the catch-up contribution is also computed on a monthly basis. After an individual has attained age 65 (the Medicare eligibility age), contributions, including catch-up contributions, cannot be made to an individual's HSA.

Example: An individual attains age 65 and becomes eligible for Medicare benefits in July, 2004 and had been participating in self-only coverage under an HDHP with an annual deductible of $1,000. The individual is no longer eligible to make HSA contributions (including catch-up contributions) after June, 2004. The monthly contribution limit is $125 ($1,000 /12+ $500/12 for the catch-up contribution). The individual may make contributions for January through June totaling $750 (6 x $125), but may not make any contributions for July through December, 2004.

Q-15. If one or both spouses have family coverage, how is the contribution limit computed?

A-15. In the case of individuals who are married to each other, if either spouse has family coverage, both are treated as having family coverage. If each spouse has family coverage under a separate health plan, both spouses are treated as covered under the plan with the lowest deductible. The contribution limit for the spouses is the lowest deductible amount, divided equally between the spouses unless they agree on a different division. The family coverage limit is reduced further by any contribution to an Archer MSA. However, both spouses may make the catch-up contributions for individuals age 55 or over without exceeding the family coverage limit.

Example (1): H and W are married. H is 58 and W is 53. H and W both have family coverage under separate HDHPs. H has a $3,000 deductible under his HDHP and W has a $2,000 deductible under her HDHP. H and W are treated as covered under the plan with the $2,000 deductible. H can contribute $1,500 to an HSA (1/2 the deductible of $2,000 + $500 catch up contribution) and W can contribute $1,000 to an HSA (unless they agree to a different division).

Example (2): H and W are married. H is 35 and W is 33. H and W each have a self-only HDHP. H has a $1,000 deductible under his HDHP and W has a $1,500 deductible under her HDHP. H can contribute $1,000 to an HSA and W can contribute $1,500 to an HSA.

Q-16. In what form must contributions be made to an HSA?

A-16. Contributions to an HSA must be made in cash. For example, contributions may not be made in the form of stock or other property. Payments for the HDHP and contributions to the HSA can be made through a cafeteria plan. See A-33.

Q-17. What is the tax treatment of an eligible individual's HSA contributions?

A-17. Contributions made by an eligible individual to an HSA (which are subject to the limits described in A-12) are deductible by the eligible individual in determining adjusted gross income (i.e., “above-the-line”). The contributions are deductible whether or not the eligible individual itemizes deductions. However, the individual cannot also deduct the contributions as medical expense deductions under section 213.

Q-18. What is the tax treatment of contributions made by a family member on behalf of an eligible individual?

A-18. Contributions made by a family member on behalf of an eligible individual to an HSA (which are subject to the limits described in A-12) are deductible by the eligible individual in computing adjusted gross income. The contributions are deductible whether or not the eligible individual itemizes deductions. An individual who may be claimed as a dependent on another person's tax return is not an eligible individual and may not deduct contributions to an HSA.

Q-19. What is the tax treatment of employer contributions to an employee's HSA?

A-19. In the case of an employee who is an eligible individual, employer contributions (provided they are within the limits described in A-12) to the employee's HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee's gross income. The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions to an employee's HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions under section 213.

Q-20. What is the tax treatment of an HSA?

A-20. An HSA is generally exempt from tax (like an IRA or Archer MSA), unless it has ceased to be an HSA. Earnings on amounts in an HSA are not includable in gross income while held in the HSA (i.e., inside buildup is not taxable). See A-25 regarding the taxation of distributions to the account beneficiary.

Q-21. When may HSA contributions be made? Is there a deadline for contributions to an HSA for a taxable year?

A-21. Contributions for the taxable year can be made in one or more payments, at the convenience of the individual or the employer, at any time prior to the time prescribed by law (without extensions) for filing the eligible individual's federal income tax return for that year, but not before the beginning of that year. For calendar year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made. Although the annual contribution is determined monthly, the maximum contribution may be made on the first day of the year. See A-22 regarding correcting excess contributions.

Example: B has self-only coverage under an HDHP with a deductible of $1,500 and also has an HSA. B's employer contributes $200 to B's HSA at the end of every quarter in 2004 and at the end of the first quarter in 2005 (March 31, 2005). B can exclude from income in 2004 all of the employer contributions (i.e., $1,000) because B's exclusion for all contributions does not exceed the maximum annual HSA contributions. See A-12.

Q-22. What happens when HSA contributions exceed the maximum amount that may be deducted or excluded from gross income in a taxable year?

A-22. Contributions by individuals to an HSA, or if made on behalf of an individual to an HSA, are not deductible to the extent they exceed the limits described in A-12. Contributions by an employer to an HSA for an employee are included in the gross income of the employee to the extent that they exceed the limits described in A-12 or if they are made on behalf of an employee who is not an eligible individual. In addition, an excise tax of 6% for each taxable year is imposed on the account beneficiary for excess individual and employer contributions.

However, if the excess contributions for a taxable year and the net income attributable to such excess contributions are paid to the account beneficiary before the last day prescribed by law (including extensions) for filing the account beneficiary's federal income tax return for the taxable year, then the net income attributable to the excess contributions is included in the account beneficiary's gross income for the taxable year in which the distribution is received but the excise tax is not imposed on the excess contribution and the distribution of the excess contributions is not taxed.

Q-23. Are rollover contributions to HSAs permitted?

A-23. Rollover contributions from Archer MSAs and other HSAs into an HSA are permitted. Rollover contributions need not be in cash. Rollovers are not subject to the annual contribution limits. Rollovers from an IRA, from a health reimbursement arrangement (HRA), or from a health flexible spending arrangement (FSA) to an HSA are not permitted.

IV. Distributions from HSAs.

Q-24. When is an individual permitted to receive distributions from an HSA?

A-24. An individual is permitted to receive distributions from an HSA at any time.

Q-25. How are distributions from an HSA taxed?

A-25. Distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents are excludable from gross income. In general, amounts in an HSA can be used for qualified medical expenses and will be excludable from gross income even if the individual is not currently eligible for contributions to the HSA.

However, any amount of the distribution not used exclusively to pay for qualified medical expenses of the account beneficiary, spouse or dependents is includable in gross income of the account beneficiary and is subject to an additional 10% tax on the amount includable, except in the case of distributions made after the account beneficiary's death, disability, or attaining age 65.

Q-26. What are the “qualified medical expenses” that are eligible for tax-free distributions?

A-26. The term “qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under section 213.

Q-27. Are health insurance premiums qualified medical expenses?

A-27. Generally, health insurance premiums are not qualified medical expenses except for the following: qualified long-term care insurance, COBRA health care continuation coverage, and health care coverage while an individual is receiving unemployment compensation. In addition, for individuals over age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance can be paid from an HSA. Premiums for Medigap policies are not qualified medical expenses.

Q-28. How are distributions from an HSA taxed after the account beneficiary is no longer an eligible individual?

A-28. If the account beneficiary is no longer an eligible individual (e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has an HDHP), distributions used exclusively to pay for qualified medical expenses continue to be excludable from the account beneficiary's gross income.

Q-29. Must HSA trustees or custodians determine whether HSA distributions are used exclusively for qualified medical expenses?

A-29. No. HSA trustees or custodians are not required to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.

Q.-30. Must employers who make contributions to an employee's HSA determine whether HSA distributions are used exclusively for qualified medical expenses?

A-30. No. The same rule that applies to trustees or custodians applies to employers. See A-29.

Q-31. What are the income tax consequences after the HSA account beneficiary's death?

A-31. Upon death, any balance remaining in the account beneficiary's HSA becomes the property of the individual named in the HSA instrument as the beneficiary of the account. If the account beneficiary's surviving spouse is the named beneficiary of the HSA, the HSA becomes the HSA of the surviving spouse. The surviving spouse is subject to income tax only to the extent distributions from the HSA are not used for qualified medical expenses.

If, by reason of the death of the account beneficiary, the HSA passes to a person other than the account beneficiary's surviving spouse, the HSA ceases to be an HSA as of the date of the account beneficiary's death, and the person is required to include in gross income the fair market value of the HSA assets as of the date of death. For such a person (except the decedent's estate), the includable amount is reduced by any payments from the HSA made for the decedent's qualified medical expenses, if paid within one year after death.

V. Other Matters.

Q-32. What discrimination rules apply to HSAs?

A-32. If an employer makes HSA contributions, the employer must make available comparable contributions on behalf of all “comparable participating employees” (i.e., eligible employees with comparable coverage) during the same period. Contributions are considered comparable if they are either the same amount or same percentage of the deductible under the HDHP.

The comparability rule is applied separately to part-time employees (i.e., employees who are customarily employed for fewer than 30 hours per week). The comparability rule does not apply to amounts rolled over from an employee's HSA or Archer MSA, or to contributions made through a cafeteria plan. If employer contributions do not satisfy the comparability rule during a period, the employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to HSAs for that period.

Example: Employer X offers its collectively bargained employees three health plans, including an HDHP with self-only coverage and a $2,000 deductible. For each employee electing the HDHP self-only coverage, X contributes $1,000 per year on behalf of the employee to an HSA. X makes no HSA contributions for employees who do not elect the HDHP. X's plans and HSA contributions satisfy the comparability rule.

Q-33. Can an HSA be offered under a cafeteria plan?

A-33. Yes. Both an HSA and an HDHP may be offered as options under a cafeteria plan. Thus, an employee may elect to have amounts contributed as employer contributions to an HSA and an HDHP on a salary-reduction basis.

Q-34. What reporting is required for an HSA?

A-34. Employer contributions to an HSA must be reported on the employee's Form W-2. In addition, information reporting for HSAs will be similar to information reporting for Archer MSAs. The IRS will release forms and instructions, similar to those required for Archer MSAs, on how to report HSA contributions, deductions, and distributions.

Q-35. Are HSAs subject to COBRA continuation coverage under section 4980B?

A-35. No. Like Archer MSAs, HSAs are not subject to COBRA continuation coverage.

Q-36. How do the rules under section 419 affect contributions by an employer to an HSA?

A-36. Contributions by an employer to an HSA are not subject to the rules under section 419. An HSA is a trust that is exempt from tax under section 223. Thus, an HSA is not a “fund” under section 419(e)(3) and, therefore, is not a “welfare benefit fund” under section 419(e)(1).

Q-37. May eligible individuals use debit, credit or stored-value cards to receive distributions from an HSA for qualified medical expenses?

A-37. Yes.

Q-38. Are HSAs subject to other statutory rules and provisions?

A-38. Yes. HSAs are subject to other statutory rules and provisions not addressed in this notice. No inference should be drawn regarding issues not expressly addressed in this notice that may be suggested by a particular question or answer, or by the inclusion or exclusion of certain questions.

COMMENTS REQUESTED

Comments are requested on the questions and answers set forth in this notice. In addition, comments are requested on any other issue not addressed in this notice but which should be addressed in future IRS guidance. In particular, comments are requested as to the following:

  1. The appropriate standard for preventive care in section 223(c)(2)(C).

  2. The relationship between section 223 and the rules governing health FSAs in cafeteria plans under section 125 and the proposed and final regulations under section 125 (in particular, Prop. Treas. Reg. § 1.125-2 Q&A 7).

  3. Whether transition relief should be provided in cases of inappropriate coordination of an HDHP with other coverage.

  4. The relationship between HSAs and health FSAs or HRAs.

  5. The application of the nondiscrimination rules in section 125 to HSAs offered under a cafeteria plan.

  6. The corrective procedures in instances where employer contributions exceed the statutory contribution limits.

  7. The relationship between limits on out-of-pocket expenses in section 223(c)(2)(A) and reasonable lifetime maximums on benefits in health insurance plans.

Send comments to: CC:DOM:CORP:R (Notice 2004-2), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Comments may be hand-delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORT:R (Notice 2004-2), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, D.C. Alternatively, taxpayers may submit comments electronically at:

Notice.2004.2.Comments@irscounsel.treas.gov (a Service Comments e-mail address).

DRAFTING INFORMATION

The principal authors of this notice are Elizabeth Purcell and Shoshanna Tanner of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Ms. Purcell or Ms. Tanner at (202) 622-6080 (not a toll-free call).

Notice 2004-4

Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income

Publication 1494, shown below, provides tables that show the amount of an individual's income that is exempt from a notice of levy used to collect delinquent tax in 2004.

1. Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income (Forms 668-W(c), 668-W(c)(DO) & 668-W(ICS)) 2004 (Amounts are for each pay period.)

Filing Status: Single
Pay Period Number of Exemptions Claimed on Statement
1 2 3 4 5 6 More Than 6
Daily 30.58 42.50 54.42 66.35 78.27 90.19 18.65 plus 11.92 for each exemption
Weekly 152.88 212.50 272.12 331.73 391.35 450.96 93.27 plus 59.62 for each exemption
Biweekly 305.77 425.00 544.23 663.46 782.69 901.92 186.54 plus 119.23 for each exemption
Semimonthly 331.25 460.42 589.58 718.75 847.92 977.08 202.08 plus 129.17 for each exemption
Monthly 662.50 920.83 1179.17 1437.50 1695.83 1954.17 404.17 plus 258.33 for each exemption
Filing Status: Unmarried Head of Household
Pay Period Number of Exemptions Claimed on Statement
1 2 3 4 5 6 More Than 6
Daily 39.42 51.35 63.27 75.19 87.12 99.04 27.50 plus 11.92 for each exemption
Weekly 197.12 256.73 316.35 375.96 435.58 495.19 137.50 plus 59.62 for each exemption
Biweekly 394.23 513.46 632.69 751.92 871.15 990.38 275.00 plus 119.23 for each exemption
Semimonthly 427.08 566.25 685.42 814.58 943.75 1072.92 297.92 plus 129.17 for each exemption
Monthly 854.17 1112.50 1370.83 1629.17 1887.50 2145.83 595.83 plus 258.33 for each exemption
Filing Status: Married Filing Joint Return (and Qualifying Widow(er)s)
PayPeriod Number of Exemptions Claimed on Statement
1 2 3 4 5 6 More Than 6
Daily 49.23 61.15 73.08 85.00 96.92 108.85 37.31 plus 11.92 for each exemption
Weekly 246.15 305.77 365.38 425.00 484.62 544.23 186.54 plus 59.62 for each exemption
Biweekly 492.31 611.54 730.77 850.00 969.23 1088.46 373.08 plus 119.23 for each exemption
Semimonthly 533.33 662.50 791.67 920.83 1050.00 1179.17 404.17 plus 129.17 for each exemption
Monthly 1066.67 1325.00 1583.33 1841.67 2100.00 2358.33 808.33 plus 258.33 for each exemption
Filing Status: Married Filing Separate Return
PayPeriod Number of Exemptions Claimed on Statement
1 2 3 4 5 6 More Than 6
Daily 30.58 42.50 54.42 66.35 78.27 90.19 18.65 plus 11.92 for each exemption
Weekly 152.88 212.50 272.12 331.73 391.35 450.96 93.27 plus 59.62 for each exemption
Biweekly 305.77 425.00 544.23 663.46 782.69 901.92 186.54 plus 119.23 for each exemption
Semimonthly 331.25 460.42 589.58 718.75 847.92 977.08 202.08 plus 129.17 for each exemption
Monthly 662.50 920.83 1179.17 1437.50 1695.83 1954.17 404.17 plus 258.33 for each exemption

2. Table for Figuring Additional Exempt Amount for Taxpayers at Least 65 Years Old and/or Blind

2. Table for Figuring Additional Exempt Amount for Taxpayers at Least 65 Years Old and/or Blind

Additional Exempt Amount
Filing Status * Daily Weekly Biweekly Semimonthly Monthly
Single or Head of Household 1 2 4.629.23 23.0846.15 46.1592.31 50.00100.00 100.00200.00
Any Other Filing Status 1 2 3 4 3.65 7.31 10.96 14.62 18.27 36.54 54.81 73.08 36.54 73.08 109.62 146.15 39.58 79.17 118.75 158.33 79.17 158.33 237.50 316.67

*ADDITIONAL STANDARD DEDUCTION claimed on Parts 3, 4, & 5 of levy.

Examples

These tables show the amount exempt from a levy on wages, salary, and other income. For example:

1. A single taxpayer who is paid weekly and claims three exemptions (including one for the taxpayer) has $272.12 exempt from levy.

2. If the taxpayer in number 1 is over 65 and writes 1 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy, $295.20 is exempt from this levy ($272.12 plus $23.08).

3. A taxpayer who is married, files jointly, is paid bi-weekly, and claims two exemptions (including one for the taxpayer) has $611.54 exempt from levy.

4. If the taxpayer in number 3 is over 65 and has a spouse who is blind, this taxpayer should write 2 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy. Then, $684.62 is exempt from this levy ($611.54 plus $73.08).

Rev. Proc. 2004-9

SECTION 1. PURPOSE

This revenue procedure prescribes the loss payment patterns and discount factors for the 2003 accident year. These factors will be used for computing discounted unpaid losses under § 846 of the Internal Revenue Code. See Rev. Proc. 2003-17, 2003-6 I.R.B. 427, for background concerning the loss payment patterns and application of the discount factors.

SECTION 2. SCOPE

This revenue procedure applies to any taxpayer that is required to discount its unpaid losses under § 846 for a line of business using discount factors published by the Secretary.

SECTION 3. TABLES OF DISCOUNT FACTORS

.01 The following tables present separately for each line of business the discount factors under § 846 for accident year 2003. All the discount factors presented in this section were determined using the applicable interest rate under § 846(c) for 2003, which is 5.27 percent, and by assuming all loss payments occur in the middle of the calendar year.

.02 If the groupings of individual lines of business on the annual statement change, taxpayers must discount the unpaid losses on the affected lines of business in accordance with the discounting patterns that would have applied to those unpaid losses based on their classification on the 2000 annual statement. See Rev. Proc. 2003-17, 2003-6 I.R.B. 427, section 2, for additional background on discounting under section 846 and the use of the Secretary's tables.

.03 Section V of Notice 88-100, 1988-2 C.B. 439, sets forth a composite method for computing discounted unpaid losses for accident years that are not separately reported on the annual statement. The tables separately provide discount factors for taxpayers who elect to use the composite method of section V of Notice 88-100. See Rev. Proc. 2002-74, 2002-2 C.B. I.R.B. 980.

.04 Tables

Accident and Health (Other Than Disability Income or Credit Disability Insurance)
Taxpayers that do not use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the 2003 and later taxable years.
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount all unpaid losses that are incurred in this line of business and that are outstanding at the end of the 2003 tax year.
Auto Physical Damage
Tax Year Estimated CumulativeLosses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 89.6468 89.6468 10.3532 10.0680 97.2455
2004 99.6845 10.0377 0.3155 0.2998 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2005 and later years 0.1578 0.1578 0.1538 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2005 tax year.
Commercial Auto/Truck Liability/Medical
Tax Year Estimated CumulativeLosses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 28.8244 28.8244 71.1756 64.4355 90.5304
2004 54.9871 26.1626 45.0129 40.9881 91.0586
2005 72.8039 17.8168 27.1961 24.8680 91.4393
2006 85.0572 12.2533 14.9428 13.6065 91.0568
2007 91.6276 6.5704 8.3724 7.5822 90.5618
2008 94.9514 3.3239 5.0486 4.5715 90.5501
2009 97.0453 2.0938 2.9547 2.6641 90.1639
2010 98.1574 1.1121 1.8426 1.6635 90.2768
2011 98.7370 0.5796 1.2630 1.1564 91.5620
2012 99.1070 0.3700 0.8930 0.8378 93.8128
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.3700 0.5230 0.5023 96.0372
2014 and later years 0.3700 0.1530 0.1492 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 96.3144 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Composite
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 40.9985 40.9985 59.0015 52.3463 88.7203
2004 65.8439 24.8454 34.1561 29.6133 86.6999
2005 77.5023 11.6583 22.4977 19.2123 85.3966
2006 84.6221 7.1198 15.3779 12.9198 84.0151
2007 90.2455 5.6234 9.7545 7.8309 80.2805
2008 92.2780 2.0325 7.7220 6.1583 79.7500
2009 94.3974 2.1195 5.6026 4.3083 76.8980
2010 95.2526 0.8552 4.7474 3.6579 77.0504
2011 96.2792 1.0266 3.7208 2.7973 75.1817
2012 96.4323 0.1531 3.5677 2.7877 78.1369
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.1531 3.4145 2.7774 81.3423
2014 0.1531 3.2614 2.7667 84.8321
2015 0.1531 3.1083 2.7554 88.6476
2016 0.1531 2.9551 2.7435 92.8384
2017 and later years 0.1531 2.8020 2.7310 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 87.9561 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Fidelity/Surety
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 38.3328 38.3328 61.6672 57.1422 92.6623
2004 58.8485 20.5156 41.1515 39.1043 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2005 and later years 20.5758 20.5758 20.0541 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2005 tax year.
Financial Guaranty/Mortgage Guaranty
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 4.0723 4.0723 95.9277 89.2327 93.0207
2004 40.7639 36.6916 59.2361 56.2892 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2005 and later years 29.6180 29.6180 28.8672 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2005 tax year.
International (Composite)
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 40.9985 40.9985 59.0015 52.3463 88.7203
2004 65.8439 24.8454 34.1561 29.6133 86.6999
2005 77.5023 11.6583 22.4977 19.2123 85.3966
2006 84.6221 7.1198 15.3779 12.9198 84.0151
2007 90.2455 5.6234 9.7545 7.8309 80.2805
2008 92.2780 2.0325 7.7220 6.1583 79.7500
2009 94.3974 2.1195 5.6026 4.3083 76.8980
2010 95.2526 0.8552 4.7474 3.6579 77.0504
2011 96.2792 1.0266 3.7208 2.7973 75.1817
2012 96.4323 0.1531 3.5677 2.7877 78.1369
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.1531 3.4145 2.7774 81.3423
2014 0.1531 3.2614 2.7667 84.8321
2015 0.1531 3.1083 2.7554 88.6476
2016 0.1531 2.9551 2.7435 92.8384
2017 and later 0.1531 2.8020 2.7310 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 87.9561 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Medical Malpractice —Claims-Made
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 7.3447 7.3447 92.6553 80.8929 87.3052
2004 29.0191 21.6744 70.9809 62.9178 88.6404
2005 53.3108 24.2917 46.6892 41.3100 88.4786
2006 69.1517 15.8409 30.8483 27.2341 88.2838
2007 82.0981 12.9464 17.9019 15.3861 85.9469
2008 86.3995 4.3014 13.6005 11.7837 86.6415
2009 89.7111 3.3116 10.2889 9.0069 87.5404
2010 92.4688 2.7577 7.5312 6.6522 88.3283
2011 94.5163 2.0475 5.4837 4.9020 89.3920
2012 95.7635 1.2471 4.2365 3.8807 91.6012
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 1.2471 2.9894 2.8056 93.8535
2014 1.2471 1.7422 1.6739 96.0782
2015 and later years 1.2471 0.4951 0.4825 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 94.5587 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Medical Malpractice —Occurrence
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 0.8316 0.8316 99.1684 80.5880 81.2638
2004 7.4573 6.6257 92.5427 78.0369 84.3253
2005 23.5575 16.1002 76.4425 65.6305 85.8560
2006 41.0062 17.4487 58.9938 51.1867 86.7661
2007 55.5832 14.5770 44.4168 38.9280 87.6425
2008 68.9413 13.3581 31.0587 27.2740 87.8142
2009 78.2095 9.2682 21.7905 19.2020 88.1210
2010 82.8727 4.6632 17.1273 15.4294 90.0869
2011 86.3178 3.4451 13.6822 12.7078 92.8788
2012 91.0834 4.7656 8.9166 8.4880 95.1933
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 and later years 4.7656 4.1510 4.0457 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Miscellaneous Casualty
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 79.7790 79.7790 20.2210 19.3443 95.6645
2004 94.9417 15.1627 5.0583 4.8067 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2005 and later years 2.5292 2.5292 2.4650 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2005 tax year.
Multiple Peril Lines (Homeowners/Farmowners, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery))
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 59.7445 59.7445 40.2555 36.6385 91.0149
2004 81.0347 21.2902 18.9653 16.7253 88.1893
2005 87.3325 6.2978 12.6675 11.1451 87.9825
2006 91.0659 3.7334 8.9341 7.9020 88.4479
2007 95.1781 4.1122 4.8219 4.0993 85.0140
2008 95.7605 0.5824 4.2395 3.7177 87.6937
2009 97.0539 1.2933 2.9461 2.5867 87.7996
2010 97.6441 0.5903 2.3559 2.1174 89.8774
2011 98.7037 1.0596 1.2963 1.1418 88.0851
2012 98.6217 -0.0821 1.3783 1.2862 93.3151
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.5226 0.8558 0.8178 95.5652
2014 and later years 0.5226 0.3332 0.3247 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 96.3076 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Other (Including Credit)
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 69.1729 69.1729 30.8271 29.4135 95.4143
2004 91.2168 22.0439 8.7832 8.3463 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2005 and later years 4.3916 4.3916 4.2803 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2005 tax year.
Other Liability — Claims-Made
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 14.9618 14.9618 85.0382 72.6837 85.4719
2004 36.2113 21.2494 63.7887 54.7120 85.7706
2005 54.2876 18.0763 45.7124 39.0488 85.4227
2006 64.2163 9.9288 35.7837 30.9196 86.4071
2007 73.2732 9.0569 26.7268 23.2566 87.0162
2008 80.5748 7.3016 19.4252 16.9907 87.4675
2009 87.6200 7.0452 12.3800 10.6577 86.0880
2010 89.9155 2.2955 10.0845 8.8641 87.8987
2011 93.3946 3.4791 6.6054 5.7616 87.2268
2012 94.6170 1.2223 5.3830 4.8111 89.3763
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 1.2223 4.1607 3.8106 91.5850
2014 1.2223 2.9383 2.7572 93.8366
2015 1.2223 1.7160 1.6484 96.0612
2016 and later years 1.2223 0.4936 0.4811 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 92.3191 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Other Liability — Occurrence
Tax Year Estimated Cumulative Losses Paid (%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 19.1133 19.1133 80.8867 66.7947 82.5780
2004 36.4434 17.3301 63.5566 52.5339 82.6568
2005 52.1648 15.7215 47.8352 39.1720 81.8895
2006 63.2383 11.0734 36.7617 29.8749 81.2663
2007 72.0780 8.8397 27.9220 22.3797 80.1505
2008 75.9021 3.8241 24.0979 19.6355 81.4821
2009 82.9305 7.0284 17.0695 13.4590 78.8484
2010 85.1441 2.2136 14.8559 11.8972 80.0837
2011 89.3006 4.1565 10.6994 8.2595 77.1961
2012 89.9898 0.6892 10.0102 7.9877 79.7952
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.6892 9.3210 7.7015 82.6250
2014 0.6892 8.6318 7.4002 85.7320
2015 0.6892 7.9426 7.0830 89.1783
2016 0.6892 7.2533 6.7492 93.0492
2017 and later years 0.6892 6.5641 6.3977 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 87.9049 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Private Passenger Auto Liability/Medical
Tax Year Estimated CumulativeLosses Paid(%) Estimated Losses Paid Each Year (%) Unpaid Losses at Year End (%) DiscountedUnpaid Losses at Year End (%) Discount Factors (%)
2003 43.1926 43.1926 56.8074 52.5668 92.5350
2004 72.2008 29.0082 27.7992 25.5743 91.9963
2005 84.5632 12.3625 15.4368 14.2380 92.2343
2006 91.9316 7.3684 8.0684 7.4283 92.0667
2007 95.8729 3.9413 4.1271 3.7760 91.4919
2008 97.7804 1.9075 2.2196 2.0178 90.9099
2009 98.7957 1.0153 1.2043 1.0825 89.8838
2010 99.2491 0.4535 0.7509 0.6743 89.8010
2011 99.5195 0.2703 0.4805 0.4325 89.9950
2012 99.6353 0.1159 0.3647 0.3364 92.2395
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.1159 0.2488 0.2352 94.5391
2014 0.1159 0.1330 0.1287 96.8375
2015 and later years 0.1159 0.0171 0.0167 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 95.5509 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Products Liability — Claims-Made
Tax Year EstimatedCumulativeLossesPaid(%) EstimatedLosses PaidEach Year(%) UnpaidLosses atYear End(%) DiscountedUnpaidLosses atYear End(%) DiscountFactors(%)
2003 6.5804 6.5804 93.4196 76.7759 82.1839
2004 26.7183 20.1379 73.2817 60.1603 82.0945
2005 43.1834 16.4652 56.8166 46.4373 81.7320
2006 43.9209 0.7375 56.0791 48.1279 85.8214
2007 54.3806 10.4597 45.6194 39.9324 87.5339
2008 78.3630 23.9824 21.6370 17.4307 80.5596
2009 82.8643 4.5013 17.1357 13.7309 80.1303
2010 68.2184 -14.6459 31.7816 29.4814 92.7624
2011 79.1582 10.9399 20.8418 19.8107 95.0526
2012 89.6963 10.5381 10.3037 10.0424 97.4648
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 92.4655 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Products Liability — Occurrence
Tax Year EstimatedCumulativeLossesPaid(%) EstimatedLosses PaidEach Year(%) UnpaidLosses atYear End(%) DiscountedUnpaidLosses atYear End(%) DiscountFactors(%)
2003 9.4198 9.4198 90.5802 72.9877 80.5780
2004 20.5845 11.1647 79.4155 65.3791 82.3253
2005 36.7807 16.1962 63.2193 52.2071 82.5809
2006 55.5974 18.8167 44.4026 35.6522 80.2930
2007 66.6238 11.0263 33.3762 26.2179 78.5526
2008 77.2636 10.6399 22.7364 16.6829 73.3756
2009 79.1888 1.9251 20.8112 15.5869 74.8967
2010 83.6816 4.4928 16.3184 11.7987 72.3029
2011 85.5507 1.8691 14.4493 10.5027 72.6868
2012 85.7291 0.1784 14.2709 10.8732 76.1914
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.1784 14.0925 11.2632 79.9231
2014 0.1784 13.9141 11.6737 83.8983
2015 0.1784 13.7357 12.1059 88.1343
2016 0.1784 13.5573 12.5608 92.6497
2017 and later years 0.1784 13.3789 13.0397 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 85.1270 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Reinsurance A (Nonproportional Assumed Property)
Tax Year EstimatedCumulativeLossesPaid(%) EstimatedLosses PaidEach Year(%) UnpaidLosses atYear End(%) DiscountedUnpaidLosses atYear End(%) DiscountFactors(%)
2003 25.0571 25.0571 74.9429 67.9998 90.7355
2004 52.0402 26.9831 47.9598 43.8985 91.5317
2005 82.4709 30.4307 17.5291 14.9896 85.5127
2006 85.6387 3.1678 14.3613 12.5293 87.2439
2007 92.7228 7.0840 7.2772 5.9213 81.3678
2008 91.8604 -0.8624 8.1396 7.1182 87.4513
2009 96.5016 4.6412 3.4984 2.7314 78.0753
2010 96.1872 -0.3143 3.8128 3.1979 83.8727
2011 97.6206 1.4333 2.3794 1.8958 79.6738
2012 97.8419 0.2214 2.1581 1.7686 81.9516
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 0.2214 1.9367 1.6347 84.4040
2014 0.2214 1.7154 1.4937 87.0779
2015 0.2214 1.4940 1.3453 90.0469
2016 0.2214 1.2727 1.1891 93.4342
2017 and later years 0.2214 1.0513 1.0247 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 88.6413 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Reinsurance B (Nonproportional Assumed Liability)
Tax Year EstimatedCumulativeLossesPaid(%) EstimatedLosses PaidEach Year(%) UnpaidLosses atYear End(%) DiscountedUnpaidLosses atYear End(%) DiscountFactors(%)
2003 8.9223 8.9223 91.0777 72.6945 79.8159
2004 27.3618 18.4395 72.6382 57.6064 79.3058
2005 44.5758 17.2140 55.4242 42.9804 77.5481
2006 53.8781 9.3023 46.1219 35.7012 77.4062
2007 60.8896 7.0115 39.1104 30.3888 77.7000
2008 69.7327 8.8430 30.2673 22.9172 75.7159
2009 76.6292 6.8965 23.3708 17.0490 72.9500
2010 79.4030 2.7738 20.5970 15.1015 73.3191
2011 83.8936 4.4906 16.1064 11.2899 70.0961
2012 80.1707 -3.7229 19.8293 15.7046 79.1993
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 1.1805 18.6487 15.3210 82.1560
2014 1.1805 17.4682 14.9172 85.3965
2015 1.1805 16.2877 14.4921 88.9761
2016 1.1805 15.1072 14.0446 92.9668
2017 and later years 1.1805 13.9266 13.5736 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 88.0916 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Reinsurance C (Nonproportional Assumed Financial Lines)
Tax Year EstimatedCumulativeLossesPaid(%) EstimatedLosses PaidEach Year(%) UnpaidLosses atYear End(%) DiscountedUnpaidLosses atYear End(%) DiscountFactors(%)
2003 17.1195 17.1195 82.8805 72.3532 87.2983
2004 46.6590 29.5395 53.3410 45.8584 85.9721
2005 67.7135 21.0545 32.2865 26.6730 82.6134
2006 78.1379 10.4244 21.8621 17.3830 79.5123
2007 89.7346 11.5967 10.2654 6.4008 62.3531
2008 92.1268 2.3921 7.8732 4.2837 54.4090
2009 89.7323 -2.3945 10.2677 6.9663 67.8462
2010 90.0460 0.3137 9.9540 7.0115 70.4390
2011 94.8867 4.8407 5.1133 2.4144 47.2179
2012 86.7041 -8.1827 13.2959 10.9371 82.2591
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 1.4277 11.8683 10.0487 84.6686
2014 1.4277 10.4406 9.1134 87.2886
2015 1.4277 9.0129 8.1289 90.1918
2016 1.4277 7.5852 7.0924 93.5039
2017 and later years 1.4277 6.1575 6.0014 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 85.4523 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.
Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)
Tax Year EstimatedCumulativeLossesPaid(%) EstimatedLosses PaidEach Year(%) UnpaidLosses atYear End(%) DiscountedUnpaidLosses atYear End(%) DiscountFactors(%)
2003 62.9320 62.9320 37.0680 35.3003 95.2311
2004 88.4950 25.5631 11.5050 10.9326 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2005 and later years 5.7525 5.7525 5.6067 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2005 tax year.
Workers' Compensation
Tax Year EstimatedCumulativeLossesPaid(%) EstimatedLosses PaidEach Year(%) UnpaidLosses atYear End(%) DiscountedUnpaidLosses atYear End(%) DiscountFactors(%)
2003 28.2489 28.2489 71.7511 62.2360 86.7389
2004 57.8739 29.6249 42.1261 35.1204 83.3695
2005 71.2999 13.4260 28.7001 23.1959 80.8218
2006 77.7584 6.4585 22.2416 17.7919 79.9937
2007 81.9301 4.1717 18.0699 14.4493 79.9633
2008 83.7739 1.8437 16.2261 13.3191 82.0839
2009 86.5350 2.7611 13.4650 11.1880 83.0895
2010 88.4367 1.9017 11.5633 9.8265 84.9796
2011 89.5926 1.1559 10.4074 9.1583 87.9982
2012 91.6441 2.0515 8.3559 7.5361 90.1891
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that are incurred in this line of business in the 2003 accident year and that are outstanding at the end of the tax year shown.
2013 2.0515 6.3045 5.8285 92.4498
2014 2.0515 4.2530 4.0308 94.7754
2015 2.0515 2.2016 2.1384 97.1321
2016 and later years 2.0515 0.1501 0.1463 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 92.1260 percent to discount unpaid losses that are incurred in this line of business in 2003 and prior years and that are outstanding at the end of the 2013 tax year.

DRAFTING INFORMATION

The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Hossofsky at (202) 622-8435 (not a toll-free call).

Rev. Proc. 2004-10

SECTION 1. PURPOSE

This revenue procedure prescribes the salvage discount factors for the 2003 accident year. These factors must be used to compute discounted estimated salvage recoverable under § 832 of the Internal Revenue Code.

SECTION 2. BACKGROUND

Section 832(b)(5)(A) requires that all estimated salvage recoverable (including that which cannot be treated as an asset for state accounting purposes) be taken into account in computing the deduction for losses incurred. Under § 832(b)(5)(A), paid losses are to be reduced by salvage and reinsurance recovered during the taxable year. This amount is adjusted to reflect changes in discounted unpaid losses on nonlife insurance contracts and in unpaid losses on life insurance contracts. An adjustment is then made to reflect any changes in discounted estimated salvage recoverable and in reinsurance recoverable.

Pursuant to § 832(b), the amount of estimated salvage is determined on a discounted basis in accordance with procedures established by the Secretary.

SECTION 3. SCOPE

This revenue procedure applies to any taxpayer that is required to discount estimated salvage recoverable under § 832.

SECTION 4. APPLICATION

.01 The following tables present separately for each line of business the discount factors under § 832 for the 2003 accident year. All the discount factors presented in this section were determined using the applicable interest rate under § 846(c) for 2003, which is 5.27 percent, and by assuming all estimated salvage is recovered in the middle of each calendar year. See Rev. Proc. 2003-18, 2003-6 I.R.B. 439, for background regarding the tables.

.02 These tables must be used by taxpayers irrespective of whether they elected to discount unpaid losses using their own historical experience under § 846.

.03 Section V of Notice 88-100, 1988-2 C.B. 439, provides a composite discount factor to be used in determining the discounted unpaid losses for accident years that are not separately reported on the NAIC Annual Statement. The tables separately provide discount factors for taxpayers who elect to use the composite method. Rev. Proc. 2002-74, 2002-2 C.B. 980, clarifies that for certain insurance companies subject to tax under § 831 the composite method for discounting unpaid losses set forth in Notice 88-100, section V, 1988-2 C.B. 439, is permitted but not required. This revenue procedure further provides alternative methods for computing discounted unpaid losses that are permitted for insurance companies not using the composite method, and sets forth a procedure for insurance companies to obtain automatic consent of the Commissioner to change to one of the methods described in Rev. Proc. 2002-74.

.04 Tables.

Accident and Health (Other Than Disability Income or Credit Disability Insurance)
Taxpayers that do not use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable with respect to losses incurred in this line of business in the 2003 accident year as of the end of the 2003 and later taxable years.
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount all salvage recoverable in this line of business as of the end of the 2003 taxable year.
Auto Physical Damage
Tax Year DiscountFactors(%)
2003 96.2554
2004 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2005 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2005 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Commercial Auto/Truck Liability/Medical
Tax Year DiscountFactors(%)
2003 89.8985
2004 89.5760
2005 89.3200
2006 89.8660
2007 90.4447
2008 89.8117
2009 91.1941
2010 92.3941
2011 92.7106
2012 95.0592
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Composite
Tax Year DiscountFactors(%)
2003 89.8098
2004 88.3565
2005 87.7654
2006 87.0910
2007 85.7719
2008 85.8519
2009 85.5584
2010 85.4976
2011 85.6301
2012 87.7378
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 89.9120
2014 92.1502
2015 94.4404
2016 96.7198
2017 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 91.2442 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Fidelity/Surety
Tax Year DiscountFactors(%)
2003 92.5838
2004 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2005 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2005 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Financial Guaranty/Mortgage Guaranty
Tax Year DiscountFactors(%)
2003 94.2115
2004 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2005 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2005 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
International (Composite)
Tax Year DiscountFactors(%)
2003 89.8098
2004 88.3565
2005 87.7654
2006 87.0910
2007 85.7719
2008 85.8519
2009 85.5584
2010 85.4976
2011 85.6301
2012 87.7378
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 89.9120
2014 92.1502
2015 94.4404
2016 96.7198
2017 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 91.2442 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Medical Malpractice — Claims-Made
Tax Year DiscountFactors(%)
2003 84.3980
2004 78.8909
2005 84.4191
2006 81.6093
2007 82.7520
2008 76.1578
2009 87.8015
2010 91.2457
2011 95.3664
2012 97.4648
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Medical Malpractice — Occurrence
Tax Year DiscountFactors(%)
2003 79.6421
2004 80.9952
2005 85.2445
2006 87.0038
2007 72.1989
2008 83.9897
2009 90.0478
2010 93.6582
2011 95.7277
2012 97.4648
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Miscellaneous Casualty
Tax Year DiscountFactors(%)
2003 95.6896
2004 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2005 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2005 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Multiple Peril Lines (Homeowners/Farmowners, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery))
Tax Year DiscountFactors(%)
2003 90.9145
2004 88.9102
2005 89.7851
2006 89.4452
2007 88.9585
2008 90.4184
2009 90.4744
2010 90.6908
2011 92.5143
2012 94.8490
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 97.2277
2014 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.2293 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Other (Including Credit)
Tax Year DiscountFactors(%)
2003 95.9179
2004 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2005 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2005 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Other Liability — Claims-Made
Tax Year DiscountFactors(%)
2003 89.2780
2004 78.5075
2005 62.4035
2006 86.1485
2007 81.9557
2008 81.0354
2009 88.2681
2010 92.3506
2011 88.6256
2012 90.8220
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 93.0754
2014 95.3564
2015 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 93.8216 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Other Liability — Occurrence
Tax Year DiscountFactors(%)
2003 83.2582
2004 84.8797
2005 86.1298
2006 82.2849
2007 86.2602
2008 89.0916
2009 89.5094
2010 91.8747
2011 93.3837
2012 95.6270
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Private Passenger Auto Liability/Medical
Tax Year DiscountFactors(%)
2003 93.1921
2004 92.9705
2005 92.6585
2006 91.7286
2007 91.4818
2008 90.3084
2009 90.2405
2010 90.3023
2011 91.6647
2012 93.9196
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 96.1460
2014 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 96.3834 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Products Liability — Claims-Made
Tax Year DiscountFactors(%)
2003 84.9166
2004 84.9800
2005 86.8647
2006 0.7583
2007 77.5029
2008 84.7211
2009 89.8996
2010 94.6740
2011 18.9104
2012 95.1273
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Products Liability — Occurrence
Tax Year DiscountFactors(%)
2003 78.5645
2004 81.5171
2005 82.2229
2006 85.2182
2007 82.2629
2008 86.2042
2009 89.6780
2010 90.5149
2011 84.3756
2012 86.4415
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 88.5733
2014 90.7701
2015 93.0258
2016 95.3146
2017 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 91.4228 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Reinsurance A (Nonproportional Assumed Property)
Tax Year DiscountFactors(%)
2003 84.1377
2004 80.8145
2005 85.4580
2006 89.6948
2007 90.4119
2008 92.3911
2009 94.4085
2010 95.8429
2011 96.5134
2012 97.4648
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 and later years 97.4648

Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.

Reinsurance B (Nonproportional Assumed Liability)
Tax Year DiscountFactors(%)
2003 83.6204
2004 81.0240
2005 84.6899
2006 82.2606
2007 74.4127
2008 78.4098
2009 77.6451
2010 80.1689
2011 74.4036
2012 82.8920
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 85.2223
2014 87.7390
2015 90.5105
2016 93.6633
2017 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 88.3351 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Reinsurance C (Nonproportional Assumed Financial Lines)
Tax Year DiscountFactors(%)
2003 83.2609
2004 84.0880
2005 88.0193
2006 85.0937
2007 88.7104
2008 80.8979
2009 84.4733
2010 92.2206
2011 93.7574
2012 95.9818
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)
Tax Year DiscountFactors(%)
2003 93.0692
2004 95.0251
Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2005 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 97.4648 percent to discount salvage recoverable as of the end of the 2005 taxable year with respect to losses incurred in this line of business in 2003 and prior years.
Workers’ Compensation
Tax Year DiscountFactors(%)
2003 84.2536
2004 85.6999
2005 86.2016
2006 86.1127
2007 85.3503
2008 86.2797
2009 86.0424
2010 86.2260
2011 87.1469
2012 89.2936
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2003 accident year.
2013 91.4992
2014 93.7481
2015 95.9726
2016 and later years 97.4648
Taxpayers that use the composite method of Notice 88-100 should use 92.2314 percent to discount salvage recoverable as of the end of the 2013 taxable year with respect to losses incurred in this line of business in 2003 and prior years.

DRAFTING INFORMATION

The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Hossofsky at (202) 622-8435 (not a toll-free call).

Part IV. Items of General Interest

Announcement 2004-3

Correction to Publication 1220, Specifications for Filing Forms 1098, 1099, 5498 and W-2G Electronically or Magnetically

Changes issued in December 2003 by Chief Counsel will impact the filing of Form 1099-R. These changes affect the Payee “B” Record, Distribution Code, positions 545 — 546. The descriptions for Code J, Q, and T, shown in the Publication 1220, have changed. If you have issued a Form 1099-R or (applicable substitute) for 2003 for a Roth IRA distribution, you may have to issue a corrected return based on the changes in the chart below.

Distribution Codes Explanations *Used with code (if applicable)
J — Early distribution from a Roth IRA. Use Code J for a distribution from a Roth IRA when Code Q and Code T do not apply. 5, 8, or P
Q — Qualified distribution from a Roth IRA Use Code Q for a distribution from a Roth IRA if you know that the participant meets the 5-year holding period and:
  • The participant has reached age 59, or

  • The participant died, or

  • The participant is disabled.

Note: If any other codes, such as 5, 8, or P apply, use Code J.
None
T — Roth IRA distribution, exception applies. Use Code T for a distribution from a Roth IRA if you do not know if the 5-year holding period has been met but:
  • The participant has reached age 59, or

  • The participant died, or

  • The participant is disabled.

Note: If any other codes, such as 5, 8, or P apply, use Code J.
None

Also, for Codes 5, 8, and P, delete any reference to Codes T and/or Q shown in the Form 1099-R Distribution Code Chart 2003.

The above changes will appear in the 2004 revision of Publication 1220.

Definition of Terms and Abbreviations

Definition of Terms

Amplified describes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare with modified, below).

Clarified is used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed.

Distinguished describes a situation where a ruling mentions a previously published ruling and points out an essential difference between them.

Modified is used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare with amplified and clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted.

Revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling.

Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example, modified and superseded describes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is superseded.

Supplemented is used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series.

Suspended is used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study.

Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the effect:

Abbreviations

The following abbreviations in current use and formerly used will appear in material published in the Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contributions Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign corporation.

G.C.M.—Chief Counsel's Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statement of Procedural Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D. —Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z —Corporation.

Numerical Finding List

Numerical Finding List

A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003-27 through 2003-52 is in Internal Revenue Bulletin 2003-52, dated December 29, 2003.

Bulletins 2004-1 through 2004-2

Announcements

Article Issue Link Page
2004-1 2004-1 I.R.B. 2004-1 254
2004-3 2004-2 I.R.B. 2004-2


Notices

Article Issue Link Page
2004-1 2004-2 I.R.B. 2004-2
2004-2 2004-2 I.R.B. 2004-2
2004-4 2004-2 I.R.B. 2004-2


Revenue Procedures

Article Issue Link Page
2004-1 2004-1 I.R.B. 2004-1 1
2004-2 2004-1 I.R.B. 2004-1 83
2004-3 2004-1 I.R.B. 2004-1 114
2004-4 2004-1 I.R.B. 2004-1 125
2004-5 2004-1 I.R.B. 2004-1 167
2004-6 2004-1 I.R.B. 2004-1 197
2004-7 2004-1 I.R.B. 2004-1 237
2004-8 2004-1 I.R.B. 2004-1 240
2004-9 2004-2 I.R.B. 2004-2
2004-10 2004-2 I.R.B. 2004-2


Revenue Rulings

Article Issue Link Page
2004-2 2004-2 I.R.B. 2004-2


Treasury Decisions

Article Issue Link Page
9099 2004-2 I.R.B. 2004-2


Effect of Current Actions on Previously Published Items

Findings List of Current Actions on Previously Published Items

A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003-27 through 2003-52 is in Internal Revenue Bulletin 2003-52, dated December 29, 2003.

Bulletins 2004-1 through 2004-2

Revenue Procedures

Old Article Action New Article Issue Link Page
2003-1 Superseded by Rev. Proc. 2004-1 2004-1 I.R.B. 2004-1 1
2003-2 Superseded by Rev. Proc. 2004-2 2004-1 I.R.B. 2004-1 83
2003-3 As amplified by Rev. Proc. 2003-14, and as modified by Rev. Proc. 2003-48 superseded by Rev. Proc. 2004-3 2004-1 I.R.B. 2004-1 114
2003-4 Superseded by Rev. Proc. 2004-4 2004-1 I.R.B. 2004-1 125
2003-5 Superseded by Rev. Proc. 2004-5 2004-1 I.R.B. 2004-1 167
2003-6 Superseded by Rev. Proc. 2004-6 2004-1 I.R.B. 2004-1 197
2003-7 Superseded by Rev. Proc. 2004-7 2004-1 I.R.B. 2004-1 237
2003-8 Superseded by Rev. Proc. 2004-8 2004-1 I.R.B. 2004-1 240


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