[Federal Register Volume 71, Number 125 (Thursday, June 29, 2006)]
[Rules and Regulations]
[Pages 37454-37483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5743]



[[Page 37453]]

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Part IV





Department of Health and Human Services





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Administration for Children and Families



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45 CFR Parts 261, et al.



Reauthorization of the Temporary Assistance for Needy Families Program; 
Interim Final Rule

  Federal Register / Vol. 71, No. 125 / Thursday, June 29, 2006 / Rules 
and Regulations  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Parts 261, 262, 263, 265

RIN 0970-AC27


Reauthorization of the Temporary Assistance for Needy Families 
Program

AGENCY: Administration for Children and Families (ACF), Department of 
Health and Human Services (HHS).

ACTION: Interim final rule with request for comments.

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SUMMARY: This interim final rule implements the statutory changes 
enacted in the reauthorization of the Temporary Assistance for Needy 
Families (TANF) program in the Deficit Reduction Act of 2005. This 
legislation reauthorizes the TANF program through fiscal year (FY) 2010 
with a renewed focus on work, program integrity and strengthening 
families through healthy marriage promotion and responsible fatherhood. 
The interim final rule addresses the work and program integrity changes 
of the new law.

DATES: Effective Date: June 29, 2006.
    Comment Date: Comments due on or before August 28, 2006.

ADDRESSES: You may submit your comments in writing to the Office of 
Family Assistance (OFA), Administration for Children and Families, 5th 
Floor East, 370 L'Enfant Promenade, SW., Washington, DC 20447 or hand 
deliver to OFA/ACF, 5th Floor East, 901 D St., SW., Washington, DC 
20447. You may download an electronic version of the interim final rule 
at http://www.regulations.gov and may download a copy and transmit 
written comments electronically via the Internet at: http://www.regulations.acf.hhs.gov.

FOR FURTHER INFORMATION CONTACT: Robert Shelbourne, Director, Division 
of State TANF Policy, Office of Family Assistance, ACF, at (202) 401-
5150.

SUPPLEMENTARY INFORMATION:

I. Comment Procedures

    Instructions: All comments received, including any personal 
information provided, will be posted without change to http://www.regulations.acf.hhs.gov. Also, comments will be available for 
public inspection Monday through Friday 8:30 a.m. to 5 p.m. at 901 D 
St., SW., 5th Floor, Washington, DC.
    We will not consider comments received beyond the 60-day comment 
period in modifying the interim final rule. To make sure your comments 
are fully addressed, we suggest the following:
     Be specific;
     Address only issues raised by the rulemaking discretion 
exercised in the interim final rule, not the changes to the law itself;
     Explain reasons for any objections or recommended changes;
     Propose appropriate alternatives; and
     Reference the specific section of the interim final rule 
being addressed.

II. Background

    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 (PRWORA) (Pub. L. 104-193) created the Temporary Assistance for 
Needy Families (TANF) block grant that fundamentally transformed 
welfare from a cash benefits program to a program focused on work and 
temporary assistance. Under TANF, adults receiving assistance are 
expected to engage in work activities and develop the capability to 
support themselves before their time-limited assistance runs out. 
States are required to assist recipients in making the transition to 
employment. Also, they are expected to meet work participation rates 
and other critical program requirements in order to maintain their full 
Federal funding and avoid penalties.
    The PRWORA legislation also dramatically changed intergovernmental 
relationships, giving States and Tribes broad flexibility to set 
eligibility rules and decide what types of benefits and services to 
provide clients. States and Tribes have used this flexibility to try 
new, far-reaching initiatives that effectively addressed the needs of 
families. PRWORA limited Federal regulatory authority, but added new 
responsibility for tracking State performance and imposing penalties 
when States fail to comply with program requirements.
    TANF has been a truly remarkable example of a successful Federal-
State partnership. Millions of parents have left welfare for work, 
reducing the TANF rolls by nearly 60 percent, from about 4.4 million 
families in August 1996 to just 1.9 million families in September 2005. 
But the decline in the caseload is just part of the story. During this 
period there were also great improvements in a range of outcomes for 
low-income families and children:
     The percentage of never-married mothers who work outside 
the home for wages increased nearly 30 percent, from 49.3 percent in 
1996 to 63.1 percent in 2004.
     The child poverty rate fell from 20.5 percent in 1996 to 
17.8 percent in 2004, reflecting 1.4 million fewer children living in 
poverty.
     During this same period, the poverty rate among African 
American children declined from 39.9 percent to 33.2 percent, and the 
poverty rate among Hispanic children declined from 40.3 percent to 28.9 
percent.
     Although the poverty rate has increased some since 2000 as 
a result of the most recent recession, the surge in job creation over 
the past two years portends favorably for renewed improvement in 
poverty rates.
    But, if we are to succeed in achieving the full purposes of TANF, 
there is still much to be done. Even with the dramatic results States 
have achieved, there are still far too many clients that are denied the 
opportunities of work and preparation for work. In FY 2005, only 30 
percent of those required to work were participating in work activities 
for sufficient hours to count toward the work participation rate. 
States have been less effective in placing clients with multiple 
barriers in work, including those with mental health issues, addiction, 
developmental or learning disabilities, limited English proficiency, 
and those subject to domestic violence. While the average wages of 
clients entering the workforce are above the minimum wage, they are 
still too low to ensure family well-being. More effective models of 
post-employment supports that lead to career development and wage 
progression are needed. Our clients also need programs that sustain and 
keep families together and programs that enable low-income, non-
custodial fathers to help their families financially.

Justification for Interim Final Rule

    The Administrative Procedure Act requirements for notice of 
proposed rulemaking do not apply to rules when the agency finds that 
notice is impracticable, unnecessary, or contrary to the public 
interest. We find proposed rulemaking impracticable and contrary to the 
public interest because it would fragment the implementation of the 
Deficit Reduction Act's (DRA) (Pub.L. 109-171) work requirements. The 
DRA clearly states that implementation of certain work requirement 
changes will be effective October 1, 2006. In particular, the statute 
strengthens the existing work requirements by extending work 
participation requirements to families with an adult receiving 
assistance in a separate State program and recalibrating the caseload 
reduction credit by updating the base year from FY 1995 to FY 2005. The 
law

[[Page 37455]]

also directs the Secretary of Health and Human Services to define work 
activities and determine who is a work-eligible individual, and these 
provisions are critical to the timely implementation of work 
requirements. In particular, without Federal definitions for work 
activities, States could define some activities so broadly that they 
render the new work provisions meaningless, thereby delaying 
implementation of meaningful reform. Moreover, such a practice would 
perpetuate existing disparities in State definitions and undermine the 
equitable treatment of States. In addition, States would be required to 
establish work participation verification procedures regarding 
activities that would not yet be defined in regulation. Therefore, 
States might have to revise their procedures substantially once final 
regulations were published. Thus, issuing regulations regarding all 
aspects of work requirements simultaneously is necessary to implement 
the intent of the law and promote the public interest. Under an interim 
final rule, States would know how to plan their programs and take 
necessary steps to implement the new requirements.
    Further, in the Deficit Reduction Act of 2005, Congress explicitly 
allows HHS to issue these regulations on an interim final basis. Thus, 
the policies reflected in this interim final rule are effective 
immediately. We will consider all germane comments received during the 
comment period. With one exception, States must comply with these 
requirements by October 1, 2006, or be subject to potential penalties 
during FY 2007. The exception relates to the new penalty created by the 
Deficit Reduction Act of 2005 for States that fail to establish and 
maintain procedures to verify reported work participation data. While 
States are required by the statute and this rule at Sec.  261.63 to 
submit a Work Verification Plan by September 30, 2006, we will hold 
States accountable for failure to maintain adequate internal controls 
and work verification procedures only for conduct that occurs after 
October 1, 2007.

III. The Deficit Reduction Act of 2005

    On February 8, 2006, the President signed the Deficit Reduction Act 
of 2005 (Pub. L. 109-171). It includes provisions to reauthorize TANF 
and build on this program's success. The new law addresses the needs of 
families by maintaining the program's overall funding and basic 
structure, while focusing increased efforts on building stronger 
families through work, job advancement, and research on healthy 
marriage and responsible fatherhood programs. It retains funding at 
$16.5 billion each year for block grants to States and Tribes; $319 
million a year through FY 2008 for supplemental grants to certain 
States with high population growth and historically low welfare 
payments; and $2 billion over five years for the Contingency Fund for 
needy States. It also creates a $150 million a year research, 
demonstration, and technical assistance fund for competitive grants to 
strengthen family formation, promote healthy marriages, and support 
responsible fatherhood.
    The Deficit Reduction Act of 2005 maintains State flexibility and 
many provisions of PRWORA, but includes important changes to improve 
the effectiveness of the program. The law strengthens work 
participation requirements by recalibrating the caseload reduction 
credit so that States only receive credit for additional caseload 
reductions after FY 2005. Families in separate State programs for whom 
funds are claimed to meet the ``maintenance of effort'' (MOE) 
requirements are now included in the work participation rate 
calculation and other data collection requirements. The law also 
requires the Secretary to provide additional direction and oversight on 
how to count and verify allowable work activities, to clarify who is a 
work-eligible individual and to ensure that State internal control 
procedures will result in accurate and consistent work participation 
information. The Deficit Reduction Act of 2005 also creates a new 
penalty for States that fail to establish and maintain procedures to 
verify reported work participation data. This interim final rule 
implements these statutory changes and the next phase of welfare reform 
by helping more low-income families enter the workforce and succeed at 
work.
    Under PRWORA, we interpreted the limitation on Federal authority to 
allow us to regulate in two situations: (1) Where Congress explicitly 
directed the Secretary to regulate; and (2) where Congress charged HHS 
with enforcing penalties. In the latter situation, we promulgated 
regulations to set out the criteria we would use in carrying out our 
authority to assess penalties. The Deficit Reduction Act of 2005 does 
not alter the general restriction on Federal regulatory authority at 
Section 417 of the Social Security Act, and so we are continuing this 
overall policy. However, the law did explicitly direct HHS to regulate 
on certain aspects of the work participation requirements.
    The TANF final rule (64 FR 17720, April 12, 1999) reflects PRWORA's 
strong focus on moving recipients to work and self-sufficiency, and on 
ensuring that welfare is a short-term, transitional experience, not a 
way of life. The rule encourages and supports State flexibility, 
innovation, and creativity while holding States accountable for moving 
families toward self-sufficiency. In developing this interim final 
rule, we have sought to implement the new requirements of the Deficit 
Reduction Act of 2005 in a way that does not impinge on a State's 
ability to design effective and responsive programs. Indeed, most 
States have demonstrated a tremendous commitment to the TANF work goals 
and objectives, using creativity and ingenuity to help families 
succeed.
    Nevertheless, some observers, and the Government Accountability 
Office (GAO) in particular, have noted that the flexibility provided to 
States to define work activities for themselves has led to inconsistent 
definitions across States as well as inconsistent measurement of work 
participation. In their 2005 report ``Welfare Reform: HHS Should 
Exercise Oversight to Help Ensure TANF Work Participation Is Measured 
Consistently Across States'' (GAO-05-821), GAO noted that the wide 
range of work activity definitions used across States makes it 
difficult to compare work participation across States. Similarly, some 
States have used this flexibility to authorize a wide variety of 
activities to advantage themselves compared to other States. In 
particular, some activities included by some States under some work 
activities do not appear to effectively address barriers to work or 
enhance the job readiness of clients.
    As a result of concerns about the inconsistency of work measures 
among States, the Deficit Reduction Act of 2005 requires us to issue 
this regulation to define each work activity category. As we discuss in 
detail later, under our definitions States retain the flexibility to 
engage clients in appropriate activities, tailored to their needs. But 
we restrict certain practices that some States have used under our 
prior rules, particularly those activities that do not improve job 
skills or enhance an individual's employability.
    We also provide guidance to States on our expectations for 
verifying and documenting actual hours of participation. We do this 
through preamble language with examples, as well as through general 
regulatory language that outlines internal control principles that 
derive from government auditing standards. The basic premise of this 
approach is that public officials are accountable for establishing and 
maintaining effective internal control systems to ensure that laws and 
regulations are followed; that program

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goals and objectives are met; that resources are safeguarded; and that 
reliable data are obtained, maintained, and fairly disclosed. Under 
this principle, when a State reports hours of participation for a 
family, it is reasonable to expect that there is supporting 
documentation that the reported activities are real and were actually 
performed for the hours claimed. We also recognize the need to be 
careful in establishing documentation requirements so that we do not 
return to an eligibility-focused culture, where paperwork receives more 
attention than moving individuals into self-sufficiency.
    Unsubsidized employment is the primary goal of TANF. A growing body 
of evidence suggests that more TANF recipients may be working than many 
believe, and that State-reported TANF data on reasons for case closure 
may be persistently understating the role of employment. More 
specifically, States report that less than 20 percent of case closures 
are due to employment, while nearly half of all cases are closed due to 
reasons such as ``failure to cooperate,'' ``voluntary closure,'' or 
``other'' unspecified reasons. In contrast, an HHS-funded synthesis 
report of welfare leaver studies conducted by the Urban Institute found 
that somewhat over half of families leaving welfare do so as a result 
of employment (Final Synthesis Report of Findings from ASPE ``Leavers'' 
Grants, November, 2001). Many closures that are, in fact, due to 
employment are coded by the States as ``failure to cooperate'' or as 
some other category because at the point of closure, the State agency 
often is unaware that the client became employed. This undercount in 
administrative data may occur because some recipients obtain 
employment, but do not immediately notify the TANF agency. As a result, 
individuals miss out on other employment-supporting benefits for which 
they may be eligible and States miss families that they could count 
toward the participation rates.
    Part of the success of State efforts is that many recipients want 
to work and get jobs on their own. The new requirements set forth in 
the Deficit Reduction Act of 2005 will ensure that TANF agencies know 
whether their clients are employed so that they can properly address 
the needs of families moving to self-sufficiency and count them in the 
work participation rates. The new requirements will also help ensure 
that TANF agencies know whether families that left welfare were 
employed prior to case closure so that these families can be counted 
toward the work participation rate.
    New hires information contained in the National Directory of New 
Hires (NDNH) may help solve these problems. The NDNH information can 
help identify those who are employed but whose employment is unknown to 
the TANF agency. We will continue to work with State agencies to 
provide the NDNH information and to identify effective verification and 
documentation practices. If State TANF agencies use the NDNH regularly 
and base their participation rate data on verified employment matches, 
they will improve the accuracy and consistency of information on which 
work participation rates are calculated.
    In keeping with the President's New Freedom Initiative, we 
encourage States to make every effort to engage individuals with 
disabilities in work activities. Disabled individuals on TANF caseloads 
are capable of participating in productive work activities and deserve 
an opportunity to become self-sufficient through work. Under the TANF 
statute, such families are included in the work participation rate 
calculation. It is important that every effort is made to serve the 
full range of TANF recipients that can work and benefit from work 
activities and supports. States are encouraged to explore the 
capabilities of all TANF recipients to learn what they can do rather 
than focusing on their limitations. States may explore new ways to 
implement work activities like specialized work experience sites that 
help families attain the necessary work skills to improve their ability 
to obtain employment. In fact, in the definition of ``work-eligible 
individual'' in Sec.  261.2, we encourage States to work with parents 
who receive Supplemental Security Income (SSI) and whose children are 
TANF recipients by giving them the option to include such families when 
they meet participation requirements. We are hopeful this increased 
State flexibility will give States the incentive to broaden their 
efforts in working with disabled individuals to give them every 
opportunity to enter the workforce.
    Of course, States must continue to comply with the civil rights 
laws, including those enumerated at 408(d) of the Social Security Act, 
when implementing the new work requirements. Section 408(d) expressly 
states that any program or activity receiving Federal TANF funds is 
subject to: (1) The Age Discrimination Act of 1975; (2) Section 504 of 
the Rehabilitation Act of 1973 (Section 504); (3) the Americans with 
Disabilities Act of 1990 (ADA); and (4) Title VI of the Civil Rights 
Act of 1964. These laws are also referenced in the regulations at 45 
CFR 260.35. For information about the application of civil rights laws 
in the context of TANF, visit the Office for Civil Rights (OCR) Web 
site at http://www.hhs.gov/ocr. Among other things, the Web site 
contains OCR guidance entitled Civil Rights Laws and Welfare Reform--An 
Overview and Technical Assistance for Caseworkers on Civil Rights Law 
and Welfare Reform and Prohibition Against Discrimination on the Basis 
of Disability in the Administration of TANF and other information on 
how to contact OCR headquarters and regional offices for further 
information and technical assistance. Additional information, including 
fact sheets and discrimination complaint forms, is also located on the 
OCR Web site or may be obtained by calling OCR toll free at 800-368-
1019, TDD 800-537-7697.

IV. Regulatory Provisions

    The Deficit Reduction Act of 2005 requires relatively modest 
changes to existing TANF regulations at 45 CFR Parts 261, 262, 263 and 
265. Thus, this interim final rule reflects primarily the changes to 
the original TANF rules required by the new statutory provisions. In 
the preamble, we discuss only the regulatory sections that are being 
revised or newly established. We do not make any changes to either 45 
CFR part 260, General TANF Provisions or to 45 CFR part 264, Other 
Accountability Provisions.
    Note that we use the term ``we'' throughout the regulatory text and 
preamble. The term ``we'' means the Secretary of the Department of 
Health and Human Services or any of the following individuals or 
agencies acting on his behalf: the Assistant Secretary for Children and 
Families, the Regional Administrators for Children and Families, the 
Department of Health and Human Services, and the Administration for 
Children and Families. Likewise, the term ``Act'' refers to the Social 
Security Act, as amended. We use the term ``The Deficit Reduction Act 
of 2005'' (Pub. L. 109-171) when we refer to the new law. States, the 
Territories, and the District of Columbia are all subject to the TANF 
requirements, but for the ease of the reader, hereinafter, a reference 
to States means this entire group. Tribal TANF programs are not 
affected by this rule; the Deficit Reduction Act of 2005 does not amend 
section 412 of the Social Security Act that authorizes Tribal TANF 
programs.
    For the convenience of readers, where we make major changes to a 
regulatory section or to a subpart, we republish the

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section or subpart in its entirety, rather than just the changes. This 
makes the provisions easier to understand and gives context to the 
regulatory changes.

Part 261--Ensuring That Recipients Work

Section 261.2 What definitions apply to this part?

    Under the original TANF rule, we chose not to define work 
activities to provide maximum flexibility to States so they could 
design and carry out the welfare reform programs that best met the 
individual needs to help families find work and become self-sufficient. 
We simply listed the 12 work activities in 45 CFR 261.30 in the order 
they appear in the Act. However, we indicated in the preamble of the 
final TANF rule, that we were ``concerned that different TANF 
definitions [of work activities] could affect the vulnerability of 
States to penalties for failure to meet the participation rate.'' As we 
noted, ``to the extent possible, we want to ensure an equitable and 
level playing field for the States.'' We also explained that we would 
``carefully assess the types of programs and activities States 
develop'' and ``if necessary at some time in the future, we will 
initiate further regulatory action.''
    We are now convinced that the flexibility we initially allowed 
States to define work activities results in inconsistent work 
participation measurement and that disparities in State definitions 
undermine the principle of equitable treatment. For example, several 
States count job search, job readiness activities, and vocational 
educational training as part of a work experience or community service 
program. In some instances, it appears that States integrated these 
activities into work experience or community service to avoid various 
limitations on some TANF work activities, such as the statutory six-
week limitation on counting job search and job readiness assistance. 
Some States also count participation in otherwise unallowable 
educational activities as part of an allowable TANF work activity. 
Thus, defining work activities is necessary to maintain the integrity 
of the TANF work participation requirements. Unless we define the work 
activities, States with narrow definitions would be at a disadvantage 
in meeting the participation requirements compared to States with 
broader definitions.
    Furthermore, the Deficit Reduction Act of 2005 requires the 
Secretary to promulgate regulations to ensure consistent measurement of 
work participation rates. The law specifically requires us to determine 
whether an activity of a recipient of assistance may be treated as a 
work activity. We are defining each of the allowable work activities to 
promote consistency in the measurement of work participation rates and 
thus treat States fairly.
    Section 407(d) of the Social Security Act specifies 12 separate and 
distinct activities. Thus, we have attempted to draft definitions that 
are, as far as possible, mutually exclusive from one another. Because 
the list of countable activities is provided by statute, we do not have 
the regulatory authority to add additional activities. Our definitions 
follow the order that the work activities are listed in Sec.  261.30 of 
this part and section 407(d) of the Social Security Act for ease of 
reference when referring to the nine core work activities that count 
for the first 20 hours of required work and the three activities that 
can only count as participation after the 20-hour requirement is met.
    We would like to emphasize that these definitions delineate what 
constitutes each activity for the work participation rate but they in 
no way change the requirement that individuals must participate for a 
specified number of hours to count in the participation rate. 
Generally, that requirement is for an individual to participate for an 
average of 30 hours per week in the month with the exception that a 
single custodial parent of a child under six must participate for an 
average of only 20 hours per week in a month. To count in the two-
parent rate, the parents must participate for a combined total of at 
least 35 or 55 hours, depending on whether they receive federally 
funded child care. States continue to have the flexibility to assign an 
individual to a combination of activities, for example blending school 
and work or training and work or job search and community service, to 
reach the hours needed to count a family in the work participation 
rate. Please refer to the regulations in subpart C of part 261 and the 
preamble explanation of that subpart for more a more detailed 
discussion of the hours and activities requirements.
    Below, we discuss the rationale for the definitions that are 
included in Sec.  261.2.
    Unsubsidized employment means full- or part-time employment in the 
public or private sector that is not subsidized by TANF or any other 
public program.
    The determination of whether or not employment is subsidized 
depends on whether the employer, rather than the recipient, receives a 
subsidy. If an employer receives a direct subsidy for hiring a 
recipient from TANF or other public funds, that recipient would be 
considered to be in subsidized public or private sector employment. 
This definition does not apply to recipients whose employers claim a 
tax credit for hiring economically disadvantaged workers. While such 
tax credits are designed to foster the employment of low-income 
workers, traditionally they have not been treated as ``subsidized 
employment'' in the context of welfare.
    All TANF recipients in unsubsidized employment are, by definition, 
receiving a subsidy--their TANF assistance grant. The receipt of this 
grant, however, does not constitute subsidized employment, as long as 
the employer receives no direct subsidy for employing the recipient. 
Recipients in unsubsidized employment also may receive work-related 
subsidies, such as child care, transportation, and other support 
services.
    Self-employment may count as unsubsidized employment. Self-
employment may include, but is not limited to, domestic work and the 
provision of child care. As we explain in the preamble to Sec.  261.60, 
a State may not count more hours toward the participation rate for a 
self-employed individual than the number derived by dividing the 
individual's self-employment income (gross income less business 
expenses) by the Federal minimum wage.
    We are defining both subsidized private sector employment and 
subsidized public sector employment as employment for which the 
employer receives a subsidy from TANF or other public funds to offset 
some or all of the wages and costs of employing a recipient. Subsidized 
employment differs from unsubsidized employment in that the employer 
receives a subsidy. It differs from work experience in that the 
participant is paid wages and receives the same benefits as a non-
subsidized employee who performs similar work.
    There are several ways to operate a subsidized employment program. 
One approach is to use TANF funds that would otherwise be paid as 
assistance to reimburse some or all of an employer's costs for the 
wages, benefits, and/or the additional costs of employment-related 
taxes and insurance. (Under the Aid to Families with Dependent Children 
(AFDC) program, this approach was called ``work supplementation'' or 
``grant diversion.'')
    A second model is one in which a third party acts as the employer 
of record during the trial period, like a temporary staffing agency. 
For example, a private, for-profit organization may

[[Page 37458]]

contract with a welfare agency and serve as the employer of record 
while the participant works for a private-sector company for a trial 
period. The organization receives a fee from the TANF or other public 
agency (and employers) to cover the participant's salary and support 
services, including on-site follow-up for both employers and employees. 
The total amount of the payment to the private, for-profit organization 
depends on how successful it is in placing and keeping employees in 
jobs.
    Supported work for individuals with disabilities, as defined under 
the Rehabilitation Act of 1973 (29 U.S.C. 705(35)), also could be 
counted as subsidized employment. Supported work for individuals with 
disabilities means work in an integrated setting (i.e., where people 
with and without disabilities work in the same place) for wages 
consistent with those paid to non-disabled workers with similar job 
functions. The workers with disabilities may receive individualized 
services such as, but not limited to, transportation, family support, 
or additional supervision. To the extent that supported work also 
includes intensive on-site training activities, it may be counted as 
on-the-job training, discussed below.
    Regardless of the approach, the employer is subject to the 
requirements of the Fair Labor Standards Act (FLSA) and, as a result, 
must pay the participant wages that equal or exceed the applicable 
Federal or State minimum wage. We recommend that States generally limit 
the duration of subsidized employment programs to six to twelve months; 
however, longer durations may be appropriate for supported employment 
of individuals with disabilities, as long as they are justified by an 
individualized needs assessment.
    During this trial period in which the costs of employment are being 
subsidized, the employer should provide necessary training, guidance, 
and direction to an employee. At the end of the subsidy period, the 
employer is expected to retain the participant as a regular employee 
without receiving a subsidy. States should not allow employers to 
recycle TANF recipients in subsidized employment slots, thereby 
reducing their competitive labor costs.
    We considered whether to regulate the rate of reimbursement to 
employers and the duration of a subsidized employment position. We 
decided against specifying limits because States should have the 
flexibility to design a program that meets their needs and the needs of 
the individuals they serve. However, the goal of subsidized employment 
should be to prepare participants for and move them into unsubsidized 
employment.
    Receipt of employment subsidies provided through the tax code, 
including Federal tax credits, such as the Work Opportunity Tax Credit 
(WOTC) and the Welfare-to-Work Tax Credit (WWTC), does not make 
subsidized employment of an otherwise unsubsidized job for purposes of 
this definition. These tax credits subsidize employers who hire welfare 
recipients or other hard-to-employ groups. TANF agencies, however, may 
not know whether employers use such tax credits and employers may not 
file for them until well after they have hired recipients. We consider 
participants supported by Federal tax credits only to be in 
``unsubsidized employment.''
    Subsidized private or public sector employment also does not 
include ``on-the-job training'' programs, where employers are 
subsidized to offset the costs of training. (See the discussion of on-
the-job training below.)
    Work experience (including work associated with the refurbishing of 
publicly assisted housing) if sufficient private sector employment is 
not available means a work activity, performed in return for welfare, 
that provides an individual with an opportunity to acquire the general 
skills, training, knowledge, and work habits necessary to obtain 
employment. The purpose of work experience is to improve the 
employability of those who cannot find unsubsidized employment. This 
activity must be supervised by an employer, work site sponsor, or other 
responsible party daily. Work experience programs are sometimes called 
``workfare'' because participants continue to receive their TANF grant.
    Some existing State work experience programs include activities 
that fall outside this definition. For example, several States count 
job search, job readiness activities, and vocational educational 
training as part of a work experience program. In some instances, it 
appears that States integrated these activities into work experience to 
avoid various limitations, such as the six-week limitation on counting 
job search and job readiness assistance. We will not permit these 
practices under this interim final rule.
    Work experience participants continue to receive their TANF grant 
while they are taking part in work and training activities similar to 
those of paid employees. They do not receive wages or compensation. 
Nonetheless, they may be considered employees for the purpose of the 
Fair Labor Standards Act (FLSA). According to the Department of Labor's 
May 1997 guidance, ``How Workplace Laws Apply to Welfare Recipients,'' 
``[w]elfare recipients in `workfare' arrangements, which required 
recipients to work in return for their welfare benefits, must be 
compensated at the minimum wage if they are classified as `employees' 
under the Fair Labor Standard Act's (FLSA) broad definition.'' The FLSA 
applies if there is an employment relationship between an employer and 
an employee. But the FLSA uses a broader definition than is often used 
for tax or unemployment purposes. To ``employ'' under the FLSA, means 
to ``suffer or permit to work.'' If recipients engaged in work 
experience activities are ``employees'' under the FLSA definition, they 
must be compensated at the applicable minimum wage. The FLSA's overtime 
pay (for over 40 hours in a work week), child labor, and recordkeeping 
requirements also apply.
    The TANF assistance and benefits that these work experience 
participants receive are not considered wages for Social Security 
purposes, nor are they considered taxable income for purposes of the 
Federal income tax or the Earned Income Tax Credit. However, a State 
might consider a participant in work experience to be an employee of 
the State for purposes of workers' compensation coverage.
    We considered whether to regulate the duration of a traditional 
work experience position. We decided against specifying limits. States 
should have the flexibility to design programs that meet both their 
needs and those of the individuals they serve. However, the goal of 
work experience should be to prepare participants for and move them 
into unsubsidized employment or other program activities that can help 
in this transition.
    On-the-job training (OJT) means training in the public or private 
sector that is given to a paid employee while he or she is engaged in 
productive work and that provides knowledge and skills essential to the 
full and adequate performance of the job. On-the-job training must be 
supervised by an employer, work site sponsor, or other responsible 
party daily.
    In this type of activity, States may subsidize the employer to 
offset the cost of the training provided to the participant. Upon 
satisfactory completion of the training, we expect the employer to 
retain the participant as a regular employee without receiving a 
subsidy.
    As noted under the discussion of subsidized employment, ``supported 
employment'' as defined under the

[[Page 37459]]

Rehabilitation Act of 1973 (29 U.S.C. 705(35)), may be counted as OJT 
if it includes significant on-site training in the knowledge and skills 
essential to the full and adequate performance of the job. For example, 
a State Vocational Rehabilitation agency may provide a client with an 
onsite ``job coach'' who teaches job skills in the context of 
productive work. If ``supported employment'' includes an employer 
subsidy and other supportive services but does not include on-site 
training, it should be counted as subsidized employment.
    We defined OJT as a component of employment, whether unsubsidized 
or subsidized. However, some elements of training may involve 
specialized preparation to prepare participants for a specific position 
with an employer and do not constitute employment. Such training may be 
more akin to vocational educational training. While we have tried to 
define work activities so that they do not overlap, OJT combines some 
elements of subsidized employment, vocational education and other forms 
of training. We are interested in receiving comments about whether we 
should broaden the definition beyond paid employment to include other 
aspects of training.
    Job search and job readiness assistance means the act of seeking or 
obtaining employment, preparation to seek or obtain employment, 
including life skills training, and substance abuse treatment, mental 
health treatment, or rehabilitation activities for those who are 
otherwise employable. Job search and job readiness assistance 
participants should be supervised on an ongoing basis no less 
frequently than daily. Readers should refer to Sec.  261.34 (which is 
not revised in this interim final rule) for a discussion of the time 
limitations that apply to this activity.
    ``Job search and job readiness assistance'' is a single component 
for Federal participation standards. The ``job search'' aspect of this 
component is largely self-explanatory and we define it as ``the act of 
seeking or obtaining employment,'' which should encompass all 
reasonable job search initiatives. As such, ``job search'' includes 
making contact with potential employers, whether by telephone, in 
person or via the Internet, to learn of suitable job openings, applying 
for vacancies, and interviewing for jobs.
    Our definition of ``job readiness assistance'' comprises two types 
of activities. The first is preparation necessary for an individual to 
seek or obtain employment. This includes activities such as preparing a 
resume or job application, training in interviewing skills, instruction 
in work place expectations (including instruction on appropriate attire 
and behavior on the job), and training in effective job seeking, as 
well as life skills training. The second is substance abuse treatment, 
mental health treatment, or rehabilitation activities for those who are 
otherwise employable. Such treatment or therapy must be determined to 
be necessary and certified by a qualified medical or mental health 
professional. Some individuals in the TANF caseload are capable of 
getting and keeping a job but for a substance abuse, mental heath, or 
other condition that treatment or rehabilitation activities would 
resolve. We have included these services as part of our definition to 
help such individuals make the transition from welfare to work.
    As with other work activities, a State may only count an 
individual's actual hours of participation in substance abuse 
treatment, mental health treatment, or rehabilitation activities and 
must document those hours as required at Sec. Sec.  261.60 and 261.61. 
If an individual does not have sufficient hours in substance abuse 
treatment, mental health treatment, or rehabilitation activities alone 
to count in the participation rate, he or she may still be counted in 
the calculation of the State's work participation rate by combining 
them with other allowable activities. Individuals in substance abuse 
treatment, mental health treatment, or rehabilitation activities are 
subject to the same hours requirements to count for participation that 
individuals in any other activities must meet. Please refer to 
Sec. Sec.  261.31 and 261.32 for more details about the number of hours 
needed to count a family in the participation rates.
    Our goal in incorporating substance abuse treatment, mental health 
treatment, and rehabilitative activities for those who are otherwise 
employable into this interim final rule is to ensure that States can 
meet the needs of all individuals in their caseloads struggling to 
escape welfare dependency. We are interested in receiving comments 
about our approach in this area.
    For substance abuse treatment, mental health treatment or 
rehabilitation activities that are not part of job search and job 
readiness assistance, States should be advised that a portion of those 
activities may count toward the work participation rate. If a portion 
of substance abuse treatment, mental health treatment or rehabilitation 
service meets a common-sense definition of work, then the hours 
associated with that work activity may count under the appropriate work 
category, such as work experience. For example, a State may place an 
individual who is otherwise able to work but for the need to reinforce 
substance abuse treatment into a special program in which a single 
provider coordinates work and treatment in a halfway house environment. 
As part of that treatment program, the individual also fulfills 
assigned supervised, documented work responsibilities for the benefit 
of all the residents, such as preparing meals, housecleaning, or 
scheduling group activities. In that case, the State may report the 
hours the individual was in the work portion of the program, i.e., 
performing work that meets the requirements of these rules. The time 
the individual spent in the treatment component does not count in the 
work category.
    Some States currently incorporate as part of job search and job 
readiness assistance programs that would fall outside our new 
definition. For example, at least one State incorporates activities 
``that are essential to the health, safety and welfare of families,'' 
including activities associated with a child's dental checkups, 
immunization, and school attendance. Parenting skills training or 
participating in Head Start is part of the definition in more than one 
State. Another State includes personal care during recovery from a 
medical problem, bed rest, hospitalization, and activities that promote 
a healthier lifestyle, such as smoking cessation. These are valuable 
and important things for a family to address or may be medically 
appropriate, but they do not constitute work or direct preparation for 
work. Thus, these activities may not count as job search and job 
readiness assistance. Only programs that involve seeking and preparing 
for work can meet this definition.
    Current State definitions of job search and job readiness also 
include one or more of the other eleven countable work activities. For 
example, one State lists remedial education and English as a Second 
Language (ESL) as part of job search and job readiness. These 
activities more closely fit our definition of job skills training 
directly related to employment or education directly related to 
employment and should be counted under those activities, as 
appropriate.
    Some States have asked us what constitutes a week for the 
limitations on counting no more than six weeks per fiscal year of job 
search and job readiness assistance, no more than four of which may be 
consecutive. We believe that the most commonly understood and simplest 
way to answer this question is to use the ordinary

[[Page 37460]]

definition of a week: seven consecutive days. Whether the State starts 
counting an individual's participation on a Monday, a Wednesday or any 
other day, a week ends seven days later, regardless of how many hours 
the individual participated in the course of those seven days. If an 
individual participates for more than four consecutive weeks or a total 
of six weeks in a fiscal year, the State may not count those hours 
toward the participation rate.
    Community service programs mean structured programs in which TANF 
recipients perform work for the direct benefit of the community under 
the auspices of public or nonprofit organizations. We limit community 
service programs to projects that serve a useful community purpose. 
This includes programs in fields such as health, social service, 
environmental protection, education, urban and rural redevelopment, 
welfare, recreation, public facilities, public safety, and child care. 
Community service programs must be designed to improve the 
employability of recipients not otherwise able to obtain employment and 
must be supervised on an ongoing basis no less frequently than daily. A 
State agency shall take into account, to the extent possible, the prior 
training, experience, and skills of a recipient in making appropriate 
community service assignments.
    This definition limits the activity to what many commonly think of 
as ``community service.'' It excludes, for example, activities such as 
participation in a substance abuse treatment program, mental health and 
family violence counseling, life skills classes, parenting classes, job 
readiness instruction, and caring for a disabled household member, 
which while important and beneficial, are not primarily directed to 
benefiting the greater community. As we stated in the preamble to the 
original final TANF rule (64 FR 17778, April 12, 1999), ``The fact that 
something has value or is integral to a countable activity does not 
necessarily mean it can count as participation.'' We reaffirm that 
perspective under this interim final rule.
    Community service programs must include structured activities that 
both provide a community service and also improve the employability of 
participants. Some existing State community service programs allow and 
count unstructured activities that are undertaken with little or no 
supervision. One State, for example, considers shoveling a neighbor's 
sidewalk or helping a friend with errands to be community service. 
Another State counts serving as a foster parent as a community service. 
Although these activities benefit the community, they do not 
necessarily involve real supervision or help an individual move toward 
self-sufficiency. Unlike other work activities, Congress added the term 
``programs'' after community service, suggesting that allowable 
activities should involve structure and supervision. Thus, shoveling 
sidewalks would meet this criterion only if done as part of a 
neighborhood maintenance program undertaken by a public or nonprofit 
agency. In such an environment, this activity would not only address 
unmet community needs, but also would help participants develop basic 
works skills, improve work habits, and help move participants toward 
employment.
    In addition, community service programs do not include activities 
that meet the definition of another allowable TANF work activity. 
Several States, for example, count job search and job readiness 
activities, and vocational educational training as part of a community 
service program. Doing so effectively avoids statutory limitations on 
these allowable TANF work activities, such as the six-week limitation 
on counting ``job search and job readiness'' activities, the 12-month 
limitation on vocational educational training, and the 30-percent limit 
on counting individuals in vocational educational training. Some States 
also count participation in otherwise unallowable educational 
activities as community service. Under our definition, States may not 
define countable community service programs so broadly as to circumvent 
statutorily-imposed restrictions on other TANF activities.
    We recognize that there may be instances in which other activities 
are embedded within the community service activity. For example, an 
individual providing clerical support might attend computer training 
classes as part of the community service if the assigned activity 
requires it. Short-term training or similar activities may be counted 
as community service as long as such activities are of limited duration 
and are a necessary or regular part of the community service. 
Activities that are not an integral part of community service cannot 
count. For example, substance abuse treatment may be a prerequisite for 
participation in work activities, but it does not count under community 
service because it is not an integral part of the community service 
activity.
    Examples of programs and activities that fit under our definition 
of community service include, but are not limited to, work performed 
for a school (e.g., serving as a teacher's aide), Head Start program 
(e.g., helping as a parent volunteer), church (e.g., preparing meals 
for the needy), or government/nonprofit agency (e.g., providing 
clerical support), as well as participation in volunteer organizations 
such as Americorps, Volunteers in Service to America (VISTA), or 
private volunteer organizations.
    Vocational educational training (not to exceed 12 months with 
respect to any individual) means organized educational programs that 
are directly related to the preparation of individuals for employment 
in current or emerging occupations requiring training other than a 
baccalaureate or advanced degree. Vocational educational training 
participants should be supervised no less frequently than daily.
    Vocational educational training programs should be limited to 
activities that give individuals the knowledge and skills to perform a 
specific occupation. Under AFDC and the Job Opportunities and Basic 
Skills (JOBS) Training programs, basic and remedial education, 
education in English proficiency, and postsecondary education were 
statutorily authorized activities. However, PRWORA did not include 
these activities as separate work activities. Although they may help 
prepare individuals for employment, they are generally not considered 
vocational education or training and Congress purposely concentrated 
the TANF work activities on those focused on employment.
    Some existing State vocational educational training programs allow 
other educational activities such as basic skills, language training, 
and postsecondary education leading to a baccalaureate or advanced 
degree. We are explicitly restricting these practices to prevent the 
use of the term ``vocational educational training'' from covering 
virtually any educational activity. In particular, the TANF program was 
not intended to be a college scholarship program for postsecondary 
education. Programs authorized by the Higher Education Act of 1965 (and 
subsequent amendments) support these longer-term educational 
activities. In contrast, activities such as basic education and 
language training qualify as education directly related to employment.
    Some States count education leading to a high school diploma as 
vocational educational training. Although vocational education is often 
provided in high school, minor parents attending high school, even if 
in a vocational education track, should be counted as

[[Page 37461]]

participating in ``satisfactory attendance at secondary school or in a 
course of study leading to a certificate of general equivalence.'' 
Doing so avoids triggering the lifetime 12-month limit on the use of 
vocational educational training.
    We recognize that there may be instances in which basic skills 
education is embedded within a vocational educational training 
activity. Such basic skills education may be counted as vocational 
educational training as long as it is of limited duration and is a 
necessary or regular part of the vocational educational training. Basic 
skills education of this nature may enhance preparation for the labor 
market by giving participants an opportunity to apply their learning in 
the context of their future jobs.
    Our definition of vocational educational training narrows the scope 
of what counts for this activity to programs that prepare participants 
for a specific trade, occupation, or ``vocation.'' This definition is 
consistent with definitions used in other Federal programs that provide 
vocational education, such as the Carl D. Perkins Vocational and 
Applied Technology Education Act of 1990. Even so, this definition 
could overlap with other TANF work activities that provide training, 
including on-the-job training and job skills training. Since we want to 
define work activities that are mutually exclusive, we are interested 
in comments on how States currently implement this component and 
whether the definition should be broadened.
    Vocational educational training must be provided by education or 
training organizations, which may include, but are not limited to, 
vocational-technical schools, community colleges, postsecondary 
institutions, proprietary schools, non-profit organizations, and 
secondary schools that offer vocational education.
    Under vocational educational training, States may not count 
unsupervised homework time as part of the hours of participation. We 
do, however, permit hours to count where a State structures a 
vocational educational training program to include monitored study 
sessions and it can document the hours of participation.
    Job skills training directly related to employment means training 
and education for job skills required by an employer to provide an 
individual with the ability to obtain employment or to advance or adapt 
to the changing demands of the workplace. Job skills training can 
include customized training to meet the needs of a specific employer or 
it can be general training that prepares an individual for employment. 
This can include literacy instruction or language instruction when such 
instruction is explicitly focused on skills needed for employment or 
combined in a unified whole with job training. Job skills training 
directly related to employment should be supervised on an ongoing basis 
no less frequently than daily.
    Some States include barrier removal activities as job skills 
training, such as substance abuse counseling and treatment, mental 
health services, and other rehabilitative activities. While we 
encourage States to work with individuals in these areas, the 
definition of job skills training focuses on educational or technical 
training that is designed specifically to help individuals move into 
employment.
    Education directly related to employment, in the case of a 
recipient who has not received a high school diploma or a certificate 
of high school equivalency means education related to a specific 
occupation, job, or job offer. This includes courses designed to 
provide the knowledge and skills for specific occupations or work 
settings, but may also include adult basic education and ESL. Where 
required as a prerequisite for employment by employers or occupations, 
this activity may also include education leading to a General 
Educational Development (GED) or high school equivalency diploma. 
Participants in education directly related to employment should be 
supervised on an ongoing basis no less frequently than daily.
    Participants should make ``good or satisfactory progress'' in order 
for their hours to count. This includes a standard of progress 
developed by the educational institution or program in which the 
recipient is enrolled. Good or satisfactory progress should be judged 
by both a qualitative measure of progress, such as grade point average, 
as well as a quantitative measure, such as a time frame within which a 
participant is expected to complete such education. We are interested 
in receiving comments that describe other possible criteria or 
definitions for what constitutes making ``good or satisfactory 
progress.''
    As under other TANF educational activities, States may not count 
unsupervised homework time as part of the hours of participation for 
this activity. We do permit hours to count where a State structures a 
program of education directly related to employment to include 
monitored study sessions and it can document the hours of 
participation.
    Satisfactory attendance at secondary school or in a course of study 
leading to a certificate of general equivalence, in the case of a 
recipient who has not completed secondary school or received such a 
certificate means regular attendance, in accordance with the 
requirements of the secondary school or course of study at a secondary 
school, or in a course of study leading to a certificate of general 
equivalence, in the case of a recipient who has not completed secondary 
school or received such a certificate. The former is aimed primarily at 
minor parents still in high school, whereas the latter could apply to 
recipients of any age. Unlike ``education directly related to 
employment,'' this activity need not be restricted to those for whom 
obtaining a GED is a prerequisite for employment. However, this 
activity may not include other related educational activities, such as 
adult basic education or language instruction unless it is linked to 
attending a secondary school or leading to a GED. Participants in this 
activity should be supervised on an ongoing basis no less frequently 
than daily.
    In addition to regular school attendance at a secondary school or 
in a course of study leading to a certificate of general equivalence, 
participants should be making ``good or satisfactory progress'' for the 
activity to count. This includes a standard of progress developed 
either by the State or by the educational institution or program in 
which the recipient is enrolled. In addition, it must include both a 
qualitative measure of progress, such as grade point average, as well 
as a quantitative measure, such as a time frame within which a 
participant is expected to complete such education. We are interested 
in receiving comments that describe possible criteria or definitions 
for what constitutes making ``good or satisfactory progress.''
    As under other TANF educational activities, States may not count 
unsupervised homework time as part of the hours of participation for 
this activity. We do permit hours to count where a secondary school or 
structured GED program includes monitored study sessions and it can 
document the hours of participation.
    Providing child care services to an individual who is participating 
in a community service program means providing child care to enable 
another TANF recipient to participate in a community service program. 
Participants in this activity should be supervised on an ongoing basis 
no less frequently than daily.
    It does not include providing child care to enable a TANF recipient 
to participate in any of the other eleven allowable work activities. 
Child care

[[Page 37462]]

provided to TANF recipients (and others) in other activities typically 
involves payment for services rendered and would be classified as 
unsubsidized employment. Indeed, providing child care for TANF 
recipients in community service could also be considered under other 
TANF work activities, such as unsubsidized employment, work experience, 
or community service. We are interested in comments that describe how 
this activity differs and might be distinguished from other work 
activities.
    We caution States to implement this activity responsibly. Because 
assistance is time-limited, States should ensure that the activity is 
effective in helping move the provider toward self-sufficiency. 
Training, certification or mentoring will help make the activity 
meaningful and could be a first step toward the provider's employment 
in the child care field.
    The Deficit Reduction Act of 2005 also requires us to include 
families receiving assistance under a separate State program that is 
funded with money counted towards the State's MOE requirement and to 
specify the circumstances under which a parent who resides with a child 
who is a recipient of assistance should be included in the work 
participation rates. The simplest way for us to do this was to use a 
new term, ``work-eligible individual'' to describe anyone whose 
participation in work activities contributes to determining whether the 
family counts in the calculation of the work participation rate. We 
drew the term from the heading to the statutory section with this new 
requirement.
    Thus we define a work-eligible individual as one of two types of 
adults. The first is an adult (or minor child head-of-household) 
receiving assistance under TANF or a separate State program, unless 
excluded. The second is a non-recipient parent living with a child 
receiving assistance, unless the parent is a member of one of three 
excluded groups of parents described below.
    In drafting this provision of the regulations, we considered in 
turn each type of family in which a parent resides with a child 
recipient of assistance to determine whether it was appropriate to 
include that group of families in the calculation of the work 
participation rates. We chose to exclude the following non-recipient 
parents living with a child receiving assistance from the definition of 
work-eligible individual: a minor parent who is not a head-of-household 
(or a spouse of head-of-household); an alien who is ineligible to 
receive assistance due to his or her immigration status; and, at State 
option on a case-by-case basis, a recipient of Supplemental Security 
Income (SSI) benefits. We have excluded these groups because they 
either cannot receive TANF-funded services or it would be inappropriate 
to require them to work. For example, many immigrant families lack a 
work authorization or permit and requiring these adults to work would 
be a violation of their immigration status. In the case of non-
recipient minor parents, we want to encourage them to stay in school 
and complete their education.
    Unless otherwise excluded above, we chose to include all other non-
recipient parents living with a child receiving assistance as work-
eligible individuals. This new language primarily adds child-only cases 
to the work participation rates, but could include some two-parent 
cases where both parents live in the household but one is not part of 
the assistance unit. In particular, it adds families in which non-
recipient parents were removed from a case due to a sanction or a State 
time limit. We have included these groups because expecting parents to 
participate in work activities is consistent with the goal of reducing 
dependency by promoting work. Further, such a policy improves the 
consistency of the work participation rate calculation across States, 
specifically called for in the Deficit Reduction Act of 2005.
    To illustrate the importance of including these families, consider 
the situation of a parent whose needs have been removed from the case 
due to a work-related penalty. The effect on a family's grant of 
removing a parent's needs from the assistance unit is often no 
different from the effect of a sanction that uses a fixed percentage or 
dollar amount. Yet, under the original TANF rules, cases with a 
parent's needs removed were excluded from the calculation of work 
participation rates because they became child-only cases, whereas those 
subject to fixed percentage or dollar amount sanction methods were, by 
law, excluded for a maximum of only three months in a 12-month period. 
Under the interim final rule, we bring consistency to how we treat all 
sanction methods in the participation rates. Similarly, families in 
which non-recipient parents whose needs have been removed from the case 
for other types of sanctions will now be included in the calculation of 
work participation rates.
    We give States the option of including on a case-by-case basis 
families in which a non-recipient parent receives SSI. SSI recipients 
are not eligible for TANF benefits and we recognize that many are 
unable to work. Therefore it would not be appropriate to require 
inclusion of their families in the rates. However, the Social Security 
Administration is working to remove disincentives to work from the SSI 
program, and we would like to encourage States to support these efforts 
through their TANF programs. Therefore, we will allow States to receive 
credit toward the TANF participation rates for any parents that are 
able to participate in these efforts by including their families in 
both the numerator and the denominator of the calculation of the 
participation rate on a case-by-case basis.
    We also chose to exclude from the definition of a work-eligible 
individual a parent providing care for a disabled family member living 
in the home who does not attend school on a full-time basis. The State 
must provide medical documentation to support the need for the parent 
to remain in the home to care for the disabled family member. We 
recognize that parents responsible for disabled family members often 
encounter problems finding affordable and appropriate care and may not 
be able to participate in TANF work activities to the same extent as 
other adults. We therefore exclude them from the participation rate 
calculation. We chose not to count their participation as one of TANF's 
work activities, as several States did under prior rules, because this 
activity cannot be easily supervised and is not focused on preparing 
individuals for unsubsidized employment.
    In drafting this interim final rule, it has been our goal to ensure 
that States can meet the needs of all individuals in their caseloads. 
We are interested in receiving comments about our approach in this 
area, particularly with respect to a State's ability to serve families 
struggling to escape welfare dependency in which there is an individual 
with a disability.
    Finally, readers should note that the definition of ``work-eligible 
individual'' does not include individuals in families served under an 
approved Tribal TANF program, even if those families receive State MOE 
funding, unless the State includes those Tribal families in calculating 
work participation rates, as permitted under Sec.  261.25.

Subpart A--What Are the Provisions Addressing Individual 
Responsibility?

    We made no changes to this subpart.

[[Page 37463]]

Subpart B--What Are the Provisions Addressing State Accountability?

Section 261.20 How will we hold a State accountable for achieving the 
work objectives of TANF?

    At the heart of PRWORA was the expectation that we hold States 
accountable for moving families from welfare to self-sufficiency 
through work. Each State had to meet two separate work participation 
rates that reflected how well it succeeded in engaging adults in work 
activities. The minimum participation rate for adults in all families 
(the overall rate) started at 25 percent in FY 1997 and rose to 50 
percent in FY 2002 and thereafter. The minimum participation rate for 
adults in two-parent families (the two-parent rate) was 75 percent in 
fiscal years 1997 and 1998, increasing to 90 percent afterward. A State 
that failed to meet the required participation rates was subject to a 
monetary penalty. The Deficit Reduction Act of 2005 retains the 50 
percent participation requirement for all families and the 90 percent 
requirement for two-parent families, but includes families in separate 
State programs in the calculation of the respective work participation 
rates.
    Our original TANF rule included similar but separate regulatory 
provisions for the ``overall'' and ``two-parent'' participation rates. 
These same distinctions and provisions are continued in this interim 
final rule, but we extend the calculation of work participation rates 
to include families with a work-eligible individual in order to conform 
to our new wording on calculating the work participation rates. We also 
added a reference to the years that the participation rates apply.

Section 261.21 What overall work rate must a State meet?

    Under PRWORA, the overall participation rate for adults in families 
started at 25 percent in FY 1997 and increased by five percentage 
points each year to 50 percent in FY 2002 and thereafter. Under our 
prior TANF rules, this section of the regulation included a chart of 
the minimum participation rates required by fiscal year. The Deficit 
Reduction Act of 2005 continues the overall work participation rate at 
50 percent in FY 2006 and thereafter. Under the interim final rule, we 
have deleted the former phased-in participation rate chart and updated 
the language to reflect these statutory requirements.

Section 261.22 How will we determine a State's overall work rate?

    To determine a State's participation rate, PRWORA called for 
dividing the number of families receiving TANF assistance that include 
an adult or a minor child head-of-household engaged in work activities 
by the total number of such families, excluding families sanctioned 
that month for refusal to participate in work activities, as long as 
they had not been penalized for more than three months in the preceding 
12-month period. A State could also exclude from the denominator 
single-parent families with a child under the age of one for not more 
than a total of 12 months or include or exclude families receiving 
assistance under a tribal family assistance plan or under a tribal 
Native Employment Works (NEW) program.
    The Deficit Reduction Act of 2005 modifies the work participation 
rate calculation to include families with an adult or minor child head-
of-household under State programs funded with qualified State 
expenditures and other work-eligible individuals, which we have defined 
in Sec.  261.2. In Sec. Sec.  261.22(a)(2) and (b)(1), we simply modify 
the prior language to reflect this new calculation.
    In general terms, the original participation rate calculation 
excluded two categories of families. First, it excluded families 
subject to a work sanction for not more than three months in the 
preceding twelve months. Second, it excluded (for a maximum of 12 
months) families in which a single custodial parent is caring for a 
child less than one year old. In this interim final rule, we clarify 
that States may apply both of these exclusions on a case-by-case basis 
for families with a work-eligible individual Sec. Sec.  261.22(b)(3) 
and (c)(2).
    As we note in the preamble to Sec.  261.24, we do not consider a 
two-parent family with a disabled work-eligible individual to be a two-
parent family for work participation rate purposes. The statute directs 
us to exclude these families from the two-parent work participation 
rate calculation, but not from the overall work participation rate 
calculation.
    Similar to the policy we allowed under the original TANF rule, 
States may now count families for a partial month if a work-eligible 
individual is engaged in work for the minimum average number of hours 
in each full week that the family receives assistance.
    This policy is now added to the rule at Sec.  261.22(d)(1). States 
that pay benefits retroactively also have the option to consider the 
family to be receiving assistance during the period of retroactivity 
under Sec.  261.22(d)(2).

Section 261.23 What two-parent work rate must a State meet?

    Under PRWORA, the overall participation rate for two-parent 
families started at 75 percent in FY 1997 and increased to 90 percent 
in FY 1999 and thereafter. Under prior TANF rules, this section of the 
regulation included a chart of the minimum participation rates required 
by fiscal year. The Deficit Reduction Act of 2005 continues the two-
parent work participation rate at 90 percent in FY 2006 and thereafter. 
Under the interim final rule, we have deleted the former phased in 
participation rate chart and updated the language to reflect these 
ongoing statutory requirements and dates.

Section 261.24 How will we determine a State's two-parent work rate?

    The Deficit Reduction Act of 2005 modifies the statute to include 
in the two-parent work participation rate calculation two-parent 
families in ``State programs funded with qualified State 
expenditures.'' It also gave us the authority to include other two-
parent families with work-eligible individuals, which we have defined 
in Sec.  261.2. In Sec. Sec.  261.24(a)(2), (b)(1) and (b)(2) we modify 
the language to reflect the new statutory participation rate 
calculation.
    The original two-parent participation rate calculation also 
excluded families subject to a work sanction for not more than 3 months 
in the preceding 12 months. We modify this exclusion at Sec.  
261.24(b)(2) to apply to two-parent families with work-eligible 
individuals.
    Additionally, under Sec.  261.24(d) we clarify two provisions of 
current policy: (1) We count toward the participation rate those 
families receiving assistance for a partial month if a work-eligible 
individual is engaged in work for the minimum average number of hours 
in each full week that the family receives assistance; and (2) States 
that pay benefits retroactively also have the option to consider the 
family to be receiving assistance during the period of retroactivity.
    Unchanged by the Deficit Reduction Act of 2005, we will continue to 
sum the participation hours of both parents in the assistance unit when 
calculating the two-parent rate. This differs from the way two-parent 
families are treated in the overall work rate, which requires that all 
of the participation requirements be met by one of the adults in the 
assistance unit. Also, as under PRWORA and the original rule in 
paragraph (e) of this section, we do not

[[Page 37464]]

consider a two-parent family with a disabled work-eligible individual 
to be a two-parent family for work participation rate purposes.

Section 261.25 Do we count Tribal families in calculating the work 
participation rate?

    This section of the prior rule permits a State to include families 
that are receiving assistance under an approved Tribal family 
assistance plan or under a Tribal work program in calculating the 
State's participation rate. We have made a slight change to this 
section in the interim final rule by adding the term ``with a work-
eligible individual'' after family to be consistent with our revised 
calculation methods and the definition of a work-eligible individual in 
Sec.  261.2.

Subpart C--What Are the Work Activities and How Do They Count?

    We revised only two sections of subpart C.

Section 261.31 How many hours must a work-eligible individual 
participate for the family to count in the numerator of the overall 
rate?

    As we explained in Sec.  261.2, we added a new definition of a 
work-eligible individual for purposes of calculating the work 
participation rates. The only changes we have made to Sec.  261.31 are 
to incorporate this phrase into the heading and to substitute the 
phrase ``work-eligible individual'' for the word ``individual'' where 
it is appropriate.
    We would like to emphasize that under these rules States retain the 
flexibility to assign an individual to a combination of activities, for 
example blending school and work or training and work or job search and 
community service, to reach the hours needed to count a family in the 
rate. We encourage States to use this approach where it best serves the 
needs of their clients.
    A work-eligible individual who participates in a work experience or 
community service program that is subject to FLSA requirements cannot 
be required to participate in that work activity for more hours than 
the welfare grant divided by the minimum wage. For some families, the 
TANF grant divided by the minimum wage does not result in enough hours 
to satisfy TANF's minimum hourly requirements. In general, a TANF grant 
of less than $446 would result in fewer than 20 hours of countable 
participation per week through an activity that is subject to the FLSA 
requirements. (This amount is based on the Federal minimum wage; it 
would be smaller in States that have a higher State minimum wage.) For 
a family of three, the maximum TANF grant in about 30 States is less 
than $446 per month; however, the FLSA calculation is not limited to 
the TANF grant.
    According to the Department of Labor's guidance entitled ``How 
Workplace Laws Apply to Welfare Recipients'' (May 1997), a State may 
count the cash value of food stamps toward participation requirements 
if the State adopts a food stamp workfare program. In addition, a State 
could adopt a Simplified Food Stamp Program, which would allow it to 
match its food stamp exemptions to those of its TANF program. For 
example, the Food Stamp Program exempts single parents with a child 
under age 6 from participation. Adopting a Simplified Food Stamp 
Program would allow a State to count food stamp benefits toward the 
hours of required participation for this otherwise exempt group. By 
adding the value of food stamps, recipients in most States could meet 
current TANF's requirement for 20-hour per week of core activities. 
Indeed, the combined TANF/Food Stamp benefit in all States for a family 
of three or more exceeds the $446 threshold.
    Even after counting the value of food stamps, in some States TANF 
families with just one or two people in the assistance unit may still 
not have a large enough combined TANF/food stamp grant to generate the 
20 hours per week of participation needed to satisfy TANF's core 
activity requirement. The combined benefits also may not be enough for 
families that have unearned income, such as Social Security and child 
support, and do not receive the maximum TANF grant. Moreover, some TANF 
families do not receive food stamps, so there is no food stamp benefit 
to add to the calculation.
    Under this interim final rule, we allow States to count any family 
that participates the maximum hours it is allowed under the minimum 
wage requirement of the FLSA as having satisfied the 20-hour per week 
core activity requirement if actual participation falls short of 20 
hours per week. We are limiting this policy to States that have adopted 
a food stamp workfare program and a Simplified Food Stamp Program to 
ensure that recipients participate to the fullest extent possible and 
that the calculation of the work participation rate is based on uniform 
standards across all States. The Simplified Food Stamp Program must be 
structured to match food stamp exemptions to those of the TANF program 
so that work requirements could be applied to as many work-eligible 
individuals as possible. Families that need additional hours beyond the 
core activity requirement must satisfy them in some other TANF work 
activity.
    This policy respects the protections that the FLSA affords to 
individuals in positions subject to the minimum wage requirement. At 
the same time, it gives added flexibility in the work participation 
rate for States that maximize the hours they can require of individuals 
in such positions.
    We considered remaining silent on FLSA; however, given the 
challenge of meeting the work participation rates under the Deficit 
Reduction Act of 2005, we thought it important to address this issue in 
a consistent and fair manner. Nearly all States have some cases that 
cannot meet the 20-hour minimum required in core work activities to 
count toward the work participation rate. The FLSA clarification 
provides States with increased flexibility to assign work activities 
and meet work participation rates while treating participants subject 
to the FLSA requirements fairly. We also considered establishing a 
maximum number of hours that a State could use to meet the core hour 
requirement, such as 5 hours per week. While this would be an 
improvement over existing rules, a 5-hour cap would only address a 
portion of the affected cases and would be administratively complex; 
therefore we decided against this approach.

Section 261.32 How many hours must a work-eligible individual 
participate for the family to count in the numerator of the two-parent 
rate?

    In similar fashion to Sec.  261.31 above, we substituted the phrase 
``work-eligible individual'' for the word ``individual'' in the heading 
and in the section as needed to clarify how States can count hours and 
the calculation of the two-parent work participation rate. Again, we 
stress that States may combine the activities to which it assigns 
individuals, blending, for example, school and work or training and 
work or job search and community service, to reach the hours needed to 
count a family in the work participation rate.
    As we do for single-parent families, when two-parent families have 
work-eligible individuals in work activities subject to the minimum 
wage requirement of the FLSA, we will count any family that 
participates the maximum hours allowable as having satisfied the 30-
hour per week (or 50-hour per week, if the family receives federally-
funded child care) core activity requirement, even if actual 
participation falls short of 30 (or 50) hours per week. For a more 
detailed

[[Page 37465]]

discussion of this policy, please refer to the preamble to Sec.  
261.31.

Subpart D--How Will We Determine Caseload Reduction Credit for Minimum 
Participation Rates?

    Under PRWORA, the caseload reduction credit reduces the required 
work participation rate that a State must meet for a fiscal year by the 
percentage that a State reduces its overall caseload in the prior 
fiscal year compared to its caseload under the title IV-A State plan in 
effect in FY 1995, excluding reductions due to Federal law or to State 
changes in eligibility criteria. The Deficit Reduction Act of 2005 
recalibrates the caseload reduction year by establishing a new FY 2005 
base year, which is reflected in this interim final rule in Sec. Sec.  
261.40, 261.41 and 261.42.
    Because of the sharp caseload decline since FY 1995, the caseload 
reduction credit had virtually eliminated participation requirements 
for most States. By recalibrating the base year for the caseload 
reduction credit, this provision encourages States to help families 
become independent.

Section 261.40 Is there a way for a State to reduce the work 
participation rates?

    In this section, we have eliminated the obsolete reference to FY 
1995 and replaced it with the new base year of FY 2005, as required by 
the Deficit Reduction Act of 2005. The caseload reduction credit for a 
fiscal year equals the percentage point decline in the caseload, net of 
eligibility changes, between FY 2005 and the prior-year caseload. To 
simplify the language at Sec.  261.40(a)(3), we have also created a new 
term--``comparison year''--to refer to the fiscal year that precedes 
the fiscal year to which the credit applies.
    For the two-parent participation rate, our interim final rule 
continues to allow a State to use the caseload decline, net of 
eligibility changes, of either the two-parent caseload or the overall 
caseload.
    As under current policy, Sec.  261.40(b)(1) of the interim final 
rule clarifies that the calculation of the caseload reduction credit 
must disregard caseload reductions due either to changes in Federal law 
or to changes that a State has made in its eligibility criteria in 
comparison to the criteria in effect in the new base year of FY 2005. 
However at Sec.  261.40(b)(2) we clarify that a State may reduce or 
offset the disregard for caseload reductions due to changes in 
eligibility criteria that increase caseloads. In other words, the 
revised regulatory language simply clarifies our continuing policy: We 
will calculate a net impact of eligibility changes (i.e., caseload 
decreases minus increases) if the State provides information on changes 
that increase the caseload. A State is under no obligation to provide 
the impacts of changes that increase the caseload. Such impacts merely 
serve to offset the effects of eligibility changes that decrease the 
caseload and as such are to a State's advantage because they may make 
for a larger credit.
    We will continue to base the caseload decline on the combined TANF 
and Separate State Program caseload figures for families receiving 
assistance. As indicated at Sec.  261.40(c), we will use the ACF-199, 
TANF Data Report, and the ACF-209, SSP-MOE Data Report, to establish 
both the FY 2005 base-year and the comparison-year caseloads. We have 
deleted references to earlier data reports needed for the FY 1995 base 
year. This rule continues to allow States to correct erroneous data and 
make adjustments to include unduplicated data.

Section 261.41 How will we determine the caseload reduction credit?

    Again in this section, we have substituted FY 2005 for any prior 
reference to FY 1995, as required by the Deficit Reduction Act of 2005. 
Our interim final rule maintains the same general caseload reduction 
methodology, while simplifying some of the reporting requirements.
    In particular, we have eliminated the requirement formerly located 
at Sec.  261.41(a)(1), (b)(5) and (b)(6) that States report caseload 
closure and application denial information because we have found that 
this information is not always relevant or helpful in estimating the 
impact of an eligibility change. Instead, a State should submit 
whatever data or analyses are most relevant for estimating the average 
monthly impact of individual policy changes on the comparison-year 
caseload and include that information as an attachment to its ACF 202--
TANF Caseload Reduction Report. Those materials should clearly show the 
step-by-step processes the State uses to arrive at each impact and 
should demonstrate how the State took into account the effect of the 
change over time. In conjunction with this interim final rule, we are 
revising the Caseload Reduction Report form to accommodate the 
revisions to the credit calculations and to reduce the reporting burden 
on States.
    The interim final rule continues to require under Sec.  
261.41(b)(6) that a State certify that it has provided the public an 
opportunity to comment on the estimates and methodology and 
incorporated all net reductions resulting from Federal and State 
eligibility changes. We have, however, dropped the prior requirement 
that States submit a summary of public comments received about the 
proposed methodology, as we have not found this helpful to the process 
of calculating the credits.
    The interim final rule also clarifies at Sec.  261.41(c)(2) the 
language permitting a State requesting a caseload reduction credit for 
its two-parent caseload to base its estimate on either the change in 
its two-parent caseload or on the decline in its overall caseload. We 
made no changes to paragraphs (d), (e) or (f) of the prior rule.

Section 261.42 Which reductions count in determining the caseload 
reduction credit?

    We revised language in Sec.  261.42(a) to clarify that the caseload 
reduction credit calculation must disregard caseload reductions due 
either to Federal law or to changes in State eligibility criteria in 
comparison to the criteria in effect in FY 2005; however, a State may 
also reduce the disregard for caseload reductions due to changes in 
eligibility criteria that increase caseloads. As we explained in the 
preamble to Sec.  261.40, this change only clarifies our ongoing policy 
of calculating the net impact of eligibility changes (i.e., caseload 
decreases minus increases) where a State provides information on the 
impacts of policies that expanded eligibility. In addition, we also 
incorporated into the regulation at Sec.  261.42(a)(3) our existing 
policy that a State may not receive a caseload reduction credit that 
exceeds the actual caseload decline between FY 2005 and the comparison 
year.
    At Sec.  261.42(b), we also clarified in the regulatory language 
that a State include Separate State Program cases in both its base-year 
and its comparison year caseloads. We have eliminated the reference to 
``cases made ineligible for Federal benefits by Pub. L. 104-93.'' It is 
no longer relevant due to the change in the base year to FY 2005, 
required by the Deficit Reduction Act of 2005. Indeed, the new base 
year also means many caseload reductions due to State changes in 
eligibility criteria no longer apply because such policies were in 
effect in the new, recalibrated base year of FY 2005.

Section 261.43 What is the definition of a ``case receiving 
assistance'' in calculating the caseload reduction credit?

    Our interim final rule does not make any changes to the definition 
of a ``case receiving assistance'' in calculating the

[[Page 37466]]

caseload reduction credit. The only change we have made in this section 
is the elimination of the reference to a State's implementation date 
formerly in Sec.  261.43(b) which is no longer applicable, with the 
statutory change in the base year to FY 2005.

Section 261.44 When must a State report the required data on the 
caseload reduction credit?

    Our interim final rule continues to require that a State report the 
necessary documentation on caseload reductions for the preceding fiscal 
year by December 31. We have removed the reference to our intent to 
notify a State of its caseload reduction credit no later than March 31. 
Discussions with States about their caseload reduction methodology, 
negotiations about necessary changes, and requesting and receiving 
additional data and documentation have often gone beyond the prior 
notification date of March 31. This in no way represents a change in 
our intention to issue caseload reduction credits as early in a fiscal 
year as possible.

Subpart F--How Do We Ensure the Accuracy of Work Participation 
Information?

    Under our prior rules, subpart F was entitled ``How Do Welfare 
Reform Waivers Affect State Penalties?'' Because this subpart now only 
applies to one State, we moved the subpart to subpart H, with 
appropriate re-designation and renumbering changes. We also think the 
new work verification provisions of the Deficit Reduction Act of 2005 
more logically follow the discussion of participation requirements and 
the caseload reduction credit, so we have added them under a new 
subpart F.
    Under the Deficit Reduction Act of 2005, HHS is required to 
promulgate regulations to ensure consistent measurement of work 
participation rates. The statute directs the Secretary to include 
information with respect to (1) determining whether the activities of a 
recipient of assistance may be treated as a work activity; (2) 
establishing uniform methods for reporting hours of work of a recipient 
of assistance; (3) identifying the types of documentation needed by the 
State to verify reported hours of work; and (4) specifying the 
circumstances under which a parent who resides with a child who is a 
recipient of assistance should be included in the work participation 
rates.
    A reliable and consistent work participation measurement system 
requires uniformity among States in identifying work-eligible 
individuals and in the counting of work hours. To help achieve this 
goal, we defined a work-eligible individual and each of the work 
activities in Sec.  261.2 and created new sections describing methods 
for reporting and the types of documentation needed to verify a work-
eligible individual's hours of participation. To verify work 
participation information under these rules, each State must establish 
and maintain the procedures and internal controls outlined below. The 
following provides the specific new verification requirements we added 
and the statutory authority for these requirements.

Section 261.60 What methods may a State use to report a work-eligible 
individual's hours of participation?

    Under the prior TANF rule, some States asked whether they were 
required to report actual hours of participation or whether they could 
report required or scheduled hours. We replied that ``The State must 
report the actual hours of participation for each work activity. 
Reporting required (or scheduled) hours of participation is 
inconsistent with the `complete and accurate' standard and is not 
acceptable.'' (See the answer to question 42 under TANF 
Reporting Questions under TANF Program Policy Questions and Answers, 
which can be found on our Web site at: http://www.acf.dhhs.gov/programs/ofa/polquest/sectone.htm.)
    Our interim final rule at Sec.  261.60(a) makes the existing policy 
of counting only actual and not scheduled hours explicit in the 
regulations. The new legislative language in the Deficit Reduction Act 
of 2005 makes clear that Congress intended that only actual hours of 
work activities should count toward the participation rates. Allowing 
scheduled hours would both introduce inconsistencies among States and 
reduce the incentive for States to ensure that recipients actually 
participate for the hours they are assigned. Thus, each State must have 
in place a system for determining whether the hours they report toward 
the participation rates correspond to hours in which work-eligible 
individuals actually participate in work activities. The State must 
describe this system as part of its Work Verification Plan, which we 
explain in detail at Sec.  261.62.
    Under Sec.  261.60(b) of these interim final rules, we continue to 
permit States to follow ordinary practice for counting work time by 
basing it on the hours for which the individual was paid, thus allowing 
for occasional absences due to paid holidays and sick leave. We 
recognize that all clients, regardless of the activity in which they 
participate, may miss work or training because of a holiday or a 
temporary illness.
    Thus, our interim final rule permits States to count limited 
excused absences for individuals in unpaid allowable work activities. A 
State may define and count reasonable short-term, excused absences for 
hours missed due to holidays and a maximum of 10 additional days of 
excused absences in any 12-month period, no more than two of which may 
occur in a month. In order to count an excused absence as actual hours 
of participation, the individual must have been scheduled to 
participate in an allowable work activity for the period of the absence 
that the State reports as participation.
    We believe the 10-day limitation for additional days beyond 
holidays is an appropriate accommodation that takes into consideration 
varying work-site and educational practices as well as unexpected 
events that cause a work-site to close or an individual to miss 
scheduled hours. Each State must describe its ``excused absence'' 
policies and practice as part of its Work Verification Plan described 
below in Sec.  261.62. We considered not addressing excused absences 
for unpaid participants but rejected this alternative in order to treat 
recipients in all activities equitably. We also considered permitting 
more days of excused absences but decided on 10 based on a typical 
accrued leave scenario for working families. For example, many places 
of employment allow employees to accrue one half day of leave per two-
week pay period, which accounts for about 13 days over a calendar year. 
These individuals often work 40 hours per week. Our decision to allow 
10 days is based on required hours of 20 or 30 hours per week in non-
paid work.
    We want to emphasize that this ``excused absence'' policy applies 
to what may be counted in the Federal participation rate. The policy in 
no way limits a State's flexibility to excuse absences or otherwise 
make accommodations in the participation requirements it imposes on 
individuals. That is why the participation requirement is only 50 
percent. An individual's requirements are set by the State balancing 
the goals of the program, the needs of the family, and obligations 
under the Americans with Disabilities Act (ADA) and Section 504 of the 
Rehabilitation Act of 1973. Thus, the State may require more or fewer 
hours of the individual than needed to count the family toward the 
Federal participation rate. States may also have a more expansive or a 
more restrictive list of allowable activities than those

[[Page 37467]]

that count to meet the Federal participation rate.
    Under Sec.  261.60(c) of the interim final rule, we make clear 
that, in the case of self-employment, as we noted in our discussion of 
the definition of unsubsidized employment in Sec.  261.2, we will not 
permit a State to count more hours toward the participation rate for a 
self-employed individual than the number derived by dividing the 
individual's self-employment income (gross income less business 
expenses) by the Federal minimum wage. A State may propose an 
alternative method of determining self-employment hours as part of its 
Work Verification Plan.
    Finally as a reminder of current policy, because some weeks fall 
across more than one month, we allow States to choose one of three 
methods to calculate the average hours per week for such a month. A 
State may decide that the week falls in the month that includes the 
majority of the days of that week; it may include the week in the month 
in which the Friday falls; or it may count each month of the fiscal 
year as having 4.33 weeks. We considered establishing a single method 
to promote consistent work participation measurement but ultimately 
decided against regulating in this area. Any differences in State 
approaches average out over the fiscal year and thus do not result in 
inconsistent measurement. In our view, the appeal of a single method 
does not justify the administrative burden on States that would need to 
change their data reporting systems.

Section 261.61 How must a State document a work-eligible individual's 
hours of participation?

    To clarify recordkeeping requirements with respect to 
participation, the interim final rule at Sec.  261.61(a) adds an 
explicit requirement that a State must verify through documentation in 
the case file all hours of participation that it reports. The Work 
Verification Plan required at Sec.  261.62 must describe the forms of 
documentation that the State will use. Under this requirement, a State 
may not report data to us on the basis of ``exception reporting'' where 
States assume that clients participate in all scheduled hours unless it 
receives a report to the contrary from a service provider.
    As explained at Sec.  261.61(b), we expect that many States will 
continue to use pay stubs as the basis for documenting hours of 
participation in unsubsidized employment, provided by either the 
employee or employer at State-specified periods. This approach has 
significant advantages: It uses an existing system of valid documents 
for which the employer has great incentives to ensure accuracy, and it 
minimizes reporting burden. Other possibilities include timecards, 
sign-in/sign-out sheets, and rosters with recorded hours of work.
    We encourage States to develop systems that minimize requests for 
documentation from an employer of an employee's hours of participation. 
We want to ensure that our documentation and verification requirements 
do not discourage work by placing an undue burden on the employer 
because a primary goal of TANF is to help clients achieve self-
sufficiency through unsubsidized work.
    Under Sec.  261.61(c) of the interim final rule, we permit States 
to report projected actual hours of unsubsidized or subsidized 
employment or OJT for up to six months at a time on the basis of prior, 
documented actual hours of work. This rule is similar to the 
``prospective budgeting'' that was used to calculate earned income and 
grant amounts under the former AFDC program. If a State chooses to 
project actual hours of work, the State must provide its policies and 
practices in its Work Verification Plan required under Sec.  261.62(b).
    An example will illustrate what we envision. Based on valid 
documentation such as pay stubs, or employer reports, a State knows 
that a client averages 32 hours of work per week. As long as the State 
receives no conflicting information, the State may report 32 hours of 
participation a week in employment for a maximum of the next six 
months. At the end of this six-month period, the State must obtain new 
valid documentation or re-verify the client's current, actual average 
hours and these hours may be reported for another six-month period. If, 
at any time, the State becomes aware of a change in the client's work 
situation, the new actual hours must be documented and may be 
prospectively reported for six months. For example, if a client 
requests a grant adjustment due to either increased or decreased wages, 
this report would require documentation and a restatement of the actual 
hours of participation.
    In developing this option, we considered whether the timeframe 
should be shorter, for example three months. However, we believe that a 
six-month period appropriately balances the administrative burden with 
the Deficit Reduction Act's new emphasis on verification and 
documentation. We want to emphasize that this method of reporting 
projected actual hours is only permitted for paid employment under the 
activities of unsubsidized employment, subsidized employment or OJT.
    For non-employment activities, as outlined in Sec.  261.61(d), we 
believe States should require service providers to document the hours 
of their clients' participation. Documentation could include time 
sheets, service provider attendance records and school attendance 
records. If there are other documents that would substantiate the hours 
an individual participates in these activities, the State should 
specify them in its plan. Contractual arrangement with service 
providers of work activities should require documentation of the hours 
in which an assigned recipient participates.
    Section 261.61(e) relates to reporting self-employment hours. In 
such cases, there is neither an employer to issue a pay stub nor a 
supervisor or teacher to monitor participation. Therefore, the State 
needs another approach to documenting the hours it reports for the 
participation rate. Under these circumstances, we will allow States to 
count the number of hours derived by dividing the individual's self-
employment income (gross income less business expenses) by the Federal 
minimum wage. A State may propose an alternative method of determining 
self-employment hours as part of its Work Verification Plan. We will 
not approve plans that provide for an individual's self-reporting of 
participation without additional verification.

Section 261.62 What must a State do to verify the accuracy of its work 
participation information?

    The Deficit Reduction Act of 2005 requires the Secretary to issue 
rules on determining whether activities may be counted as work 
activities, verifying countable hours of work, and determining who is a 
work-eligible individual. Under Sec.  261.62(a), a State must establish 
and employ procedures for: (1) Determining whether its work activities 
may count for participation rate purposes; (2) determining how to count 
and verify reported hours of work; (3) identifying who is a work-
eligible individual; and (4) internal controls to ensure compliance 
with the procedures; and (5) submit a complete Work Verification Plan 
to the Secretary for approval. We outline our expectations and 
guidelines for these requirements below.
    Procedures for determining whether work activities may count for 
participation: Under Sec.  261.62(b)(1)(i) for each of its work 
activities, a State must establish procedures to ensure that the 
activity is consistent with one of the work definitions in Sec.  261.2. 
Hours of participation must be reported for the proper countable work 
activity. For

[[Page 37468]]

example, our definition of a community service program excludes 
activities that do not directly benefit the community. Therefore, 
family- and self-improvement activities can no longer be counted as a 
community service work activity in the participation rate. For each 
work activity, the State's procedures should specify the types of 
situations and range of activities which will be included.
    Procedures for determining how to count and verify reported hours 
of work: Under Sec.  261.62(b)(1)(ii), for each countable work activity 
in which a work-eligible individual participates, States must report 
the actual hours of participation in the report month and calculate and 
report the average hours of participation per week for each month in 
the quarter. Acceptable documentation for the reported hours must be 
based on affirmative reports that the individual actually participated 
for the reported hours, rather than an exception reporting system.
    Under Sec.  261.62(b)(1)(iii), for each of the work activities, a 
State must describe in its Work Verification Plan the documentation it 
uses to monitor participation and ensure that it reports actual hours 
of participation. While all activities must be supervised no less than 
daily to count in the work participation rate, we are establishing a 
range of documentation guidelines that vary by type of activity. Job 
search and job readiness assistance should be documented daily due to 
the short-term nature of this activity. Other unpaid work activities, 
including work experience, community service programs, vocational 
educational training, and providing child care to participants in 
community service programs, require documentation of hours of 
participation no less than every two weeks. For paid employment, as we 
explain in the preamble to Sec.  261.61(c), States may report projected 
actual hours for up to six months at a time. Readers should refer to 
Sec.  261.61 for additional detail about documentation requirements.
    Currently, States may report the family and individual-level data 
that HHS uses to calculate work participation rates on either a sample 
or population basis. To minimize the documentation verification burden 
on States that report using a sample, we expect to focus audits and 
reviews on the sample cases used to calculate participation rates. 
These sample cases should contain all the documentation needed to count 
and verify reported hours of work and identify who is a work-eligible 
individual. It is important for States using population data to ensure 
that all cases contain all the documentation needed to count and verify 
reported hours of work and identify who is a work-eligible individual. 
We would be interested in suggestions or approaches as to how to 
minimize the documentation burden for the States that report the entire 
universe of population data.
    Procedures for identifying who is a work-eligible individual: 
[Sec. Sec.  261.62(b)(2) and (3)] The Deficit Reduction Act of 2005 
requires the Secretary to identify the circumstances under which a 
parent who resides with a child who is a recipient of assistance should 
be included in the work participation rates. Thus, we have defined a 
work-eligible individual in Sec.  261.2 and have added a data element 
``Work-eligible Individual Indicator'' to the quarterly data reports. 
This definition includes all adults and minor child heads-of-household 
receiving assistance and some non-recipient parents.
    Identifying adult and minor child head-of-household recipients as 
work-eligible individuals should not be difficult--they have been 
included in the work participation rates since the inception of the 
TANF program. However, we now require that some non-recipient parents 
be included to ensure consistent work participation rates. For example, 
a parent whose needs have been removed from the grant due to a work-
related sanction is included in the definition of a work-eligible 
individual and in the work participation rate. (Please refer to the 
discussion in the preamble to Sec.  261.2 for more detail about the 
definition of a work-eligible individual.) State procedures must be 
able to identify all individuals in TANF and separate State programs 
claimed for MOE (SSP-MOE) families who meet the definition of a work-
eligible individual.
    Internal controls to ensure compliance with the procedures: Each 
State, under Sec.  261.62(b)(5) must develop internal controls and 
procedures that are sufficient to verify and validate the work 
participation rates. Internal controls include the State's mechanism 
for monitoring the quality of its work participation data and may 
entail such approaches as a secondary-stage supervisory review, special 
studies, regularly scheduled audits or ongoing sampling and quality 
assurance processes that are used to monitor adherence to established 
policies and work verification procedures by staff and contractors.
    Work Verification Plan: Paragraph (b) of Sec.  261.62 describes 
what must be included in a State's Work Verification Plan. The plan 
must include a description of the procedures and documentation 
requirements outlined above. In addition, under Sec.  261.62(b)(3) a 
State must include a description of how it: Accurately inputs into its 
automated data processing system; properly tracks the hours; and 
accurately reports the hours. Paragraph (b)(4) requires a description 
of the procedures for ensuring that only hours of participation in an 
activity that meets a Federal definition are transmitted as countable 
work activities and paragraph (b)(5) requires a description of the 
internal controls to ensure a consistent measurement of the work 
participation rates, including any quality assurance processes and 
sampling specifications. Under paragraph (c) we state that we will 
review a State's plan for completeness and approve it if we believe it 
will result in accurate reporting of work participation information.
    States may develop internal control and verification systems that 
match their unique program resources and operational requirements. Some 
States rely on client information systems and/or use integrated data 
warehouses to collect and process work participation information. These 
States are able to compile electronically all or most of the work 
participation data items, control for the special rules and conditions 
that apply to the Federal work activities, compute the average hours 
across all activities for the month, perform item-by-item edit checks, 
and control for internal consistency and completeness of the work 
participation data. Some systems can validate the work data against the 
National Directory of New Hires database or State Employment Security 
files. Other States may rely on TANF case managers to accurately track 
the participation data, including the participation hours and 
application of the special rules and conditions.
    Some current systems may be inadequate to meet the new verification 
and validation requirements of the statute and this rule. States may 
need to develop and conduct quality assurance systems and tests. Using 
these procedures, States could: (1) Perform case reviews to validate 
the accuracy of the data reported; (2) examine documentation for the 
reported hours of work; (3) test how the hours of participation were 
calculated; (4) check how data is tracked through the system; (5) 
review the verification procedures to ensure they are doing what was 
intended; and (6) check what procedures State staff, local staffs, and 
contractors are actually using to document, count and report hours of 
participation.

[[Page 37469]]

    The State's Work Verification Plan also should describe the State's 
procedures for controlling for data errors in inputting work 
participation items to the TANF report file. These include 
transcription and coding errors, data omissions, computational errors, 
and compilation errors. The plan should document the checks used to 
isolate electronic systems and programming errors and the steps to 
ensure that all work participation report items are internally 
consistent. If sampling is used to perform quality assurance tasks to 
test the validity of the participation information, the State should 
include the sampling specifications in its verification plan.

Section 261.63 When is the State's Work Verification Plan Due?

    In accordance with the Deficit Reduction Act of 2005, paragraph (a) 
requires that each State submit its interim verification procedures for 
validating work activities reported in the TANF Data Report and, if 
applicable, the SSP-MOE Data Report to the Secretary no later than 
September 30, 2006. In addition, under paragraph (b), a State must 
submit revisions requested by the Department within 60 days of receipt 
of our notice, and must submit and operate under an approved Work 
Verification Plan no later than September 30, 2007.
    Paragraph (c) describes the time frame for submitting a revised 
verification plan to the Secretary for approval. A State must submit 
its revised Work Verification Plan by the end of the quarter in which 
the State modifies its procedures or internal controls. Validating work 
activities is an ongoing process that uses internal controls to check 
that staff is properly applying the verification procedures, to ensure 
that computer systems have been accurately programmed to implement the 
verification procedures, and to ensure the verification procedures are 
working properly. As problems are identified, a State may need to 
modify its verification procedures and/or internal controls.

Section 261.64 How will we determine if the State is meeting the 
requirement to establish and maintain work verification procedures that 
ensure an accurate measurement of work participation?

    The Deficit Reduction Act of 2005 adds a new penalty provision to 
the Social Security Act at section 409(a)(15) for a State's failure to 
establish or comply with its work participation verification 
procedures. We will determine whether to impose this penalty based on 
two conditions. First, as provided in paragraphs (a) and (b), the State 
will be liable for a penalty if it fails to establish its work 
verification procedures by submitting its interim Work Verification 
Plan by September 30, 2006, or it fails to have its complete plan 
approved by September 30, 2007. A complete Work Verification Plan 
includes all the information required by Sec.  261.62(b) and a 
certification that it accurately reflects State operating procedures.
    Second, as set forth in paragraph (c), beginning in FY 2008, we 
will use the single audit under OMB Circular A-133 in conjunction with 
other reviews, audits, and data sources to assess the validity of a 
State's internal control procedures and the accuracy of the data filed 
by States to calculate the work participation rates. We will determine 
whether a State is penalty-liable based on the findings drawn from a 
sample of cases during the single audit or via another Federal review. 
Therefore, States must maintain case documentation and pertinent 
findings produced through its verification process for use by the 
single State audit or ACF in its review of the State's work 
participation verification system.

Section 261.65 Under what circumstances will we impose a work 
verification penalty for failure to submit a work verification plan or 
for failure to maintain adequate internal controls to ensure a 
consistent measurement of the work participation rates?

    The new statutory penalty language at section 409(a)(15)(B) of the 
Social Security Act requires us to base the penalty on the State's 
degree of noncompliance with its work verification procedures, and that 
it equal an amount of not less than one percent and not more than five 
percent of the State's adjusted SFAG. Under paragraph (a) of this 
section, we will take action to impose a penalty if the State has not 
met the requirements of Sec.  261.64. Under paragraph (b), if a State 
fails to submit its interim Work Verification Plan by the due date of 
September 30, 2006, or fails to revise its procedures based on Federal 
guidance and submit the complete plan by September 30, 2007, that we 
approve, we will impose a penalty of five percent, because the State 
will not have complied with the fundamental requirements of the law.
    Under paragraph (c), if, beginning in FY 2008, we determine, 
through audits or special reviews, that the State has not maintained 
adequate documentation, verification and internal control procedures to 
ensure the accuracy of the data used in calculating the work 
participation rates over the course of a fiscal year we will base the 
penalty on the number of times the State fails to meet the 
requirements. We will impose a penalty based on the number of years 
that a State fails to comply, i.e., one percent of the adjusted SFAG 
for the first year, two percent for the second year, three percent for 
the third year until a maximum of five percent is reached. If a State 
subsequently complies with its work verification procedures for two 
consecutive years after any failure, we will consider a subsequent 
failure to be the first occurrence again.
    If a penalty is assessed, we will impose it in the immediately 
succeeding fiscal year. States that are subject to a penalty for 
failure to comply with work verification procedures may claim 
reasonable cause as specified at Sec.  262.5. They may also submit a 
corrective compliance plan to remedy the deficiency as described at 
Sec.  262.6. States that elect to enter into a corrective compliance 
plan will have the same time frame for correcting this violation that 
applies to the penalty for failing to satisfy the minimum work 
participation rates and the penalty for failing to comply with the 
five-year limit on the receipt of Federal assistance under Sec.  
262.6(e)(1). Thus, any State that is subject to a penalty for failing 
to establish or comply with the work participation verification 
procedures must fully correct the violation by the end of the first 
fiscal year ending at least six months after our receipt of the State's 
corrective compliance plan. We may also require an amendment to the 
State Verification Plan as one of the steps the State must take to 
correct or discontinue the violation. We have added this requirement to 
Sec.  262.6(f).

Part 262--Accountability Provisions--General

Section 262.1 What penalties apply to States?

    The Deficit Reduction Act of 2005 adds an additional penalty at 
section 409(a)(15) of the Social Security Act for States that fail to 
establish or comply with work participation verification procedures. If 
we determine that this penalty applies, then we must reduce the 
adjusted SFAG payable for the immediately succeeding fiscal year by not 
less than one percent and not more than five percent. (See the 
discussion in the preamble discussion for subpart F of part 261 of this 
chapter.) States may avail themselves of the penalty resolution process 
provided in Sec. Sec.  262.4 through 262.7, which may enable the State 
to avoid this penalty. We added

[[Page 37470]]

this new penalty at (a)(15) and (c)(2) of this section.

Section 262.2 When do the TANF penalty provisions apply?

    The penalty for States that fail to establish work participation 
verification procedures takes effect on October 1, 2006. If a State 
does not comply with these new work participation verification 
procedures by October 1, 2007, it will be subject to the penalty. We 
have added this provision as paragraph (d) of this section. Postponing 
penalty action until the beginning of FY 2008 for compliance will 
provide States with sufficient time to implement fully the changes 
associated with the development of work verification procedures.

Section 262.3 How will we determine if a State is subject to a penalty?

    In the preamble to Sec. Sec.  261.64 and 261.65, we noted that we 
will impose the penalty for failure to establish or comply with work 
participation verification procedures based on two conditions. The 
first condition will depend on whether or not the State has submitted 
acceptable work participation verification procedures to us. The second 
condition will depend on the findings drawn from a sample of cases 
during the single audit or via another federal review. We will use the 
single audit under OMB Circular A-133 as well as other avenues (e.g., 
other reviews, audits, and data sources) as appropriate to determine 
whether the penalty applies. We have added these procedures to 
paragraph (a)(1) of this section.

Section 262.6 What happens if a State does not demonstrate reasonable 
cause?

    States that are subject to a penalty for failure to establish or 
comply with work participation verification procedures will have the 
opportunity to claim reasonable cause as specified at Sec.  262.5 and/
or submit a corrective compliance plan to remedy the deficiency as 
described in this section.
    In order for a State to avoid a penalty, the State must fully 
correct or discontinue the violation within the time frame specified in 
the corrective compliance plan. In paragraph (e)(1) of this section, we 
specified the fixed time frame in which a State must fully correct or 
discontinue the violation for two penalties: Failure to meet the 
minimum work participation rates and failure to comply with the five-
year limit on the receipt of Federal TANF assistance. We have 
determined that the same fixed time frame should apply to this new 
penalty as well. Therefore, States subject to this penalty that elect 
to enter into a corrective compliance plan must fully correct the 
violation by the end of the first fiscal year ending at least six 
months after our receipt of the State's corrective compliance plan. We 
have added this penalty to Sec.  262.6(e)(1). Also, we may require, on 
a case-by-case basis, an amendment to the State's verification 
procedures/plan as one of the steps the State must take to correct or 
discontinue the violation. We included this requirement at Sec.  
262.6(f).
    States that are subject to a penalty for failure to meet one of the 
required minimum work participation rates also have the opportunity to 
claim reasonable cause, as specified at Sec.  262.5. As a reminder, 
under the current process, States would not typically learn the results 
of the work participation rates for a fiscal year until the third or 
fourth quarter of the following year. For example, for FY 2007, after 
we receive the final quarter of State work participation data at the 
end of the first quarter of FY 2008, it will take several months to 
analyze the data and determine which States failed to meet the FY 2007 
work participation rates and therefore are liable for a penalty. Any 
State that failed to meet one of the required rates then would receive 
a notice with several options, including, as noted above, requesting a 
reasonable cause exception from the penalty and entering into a 
corrective compliance plan to correct the violation fully. Please refer 
to the regulations at 45 CFR 262.4 et seq. for a complete explanation 
of that process.
    We recognize that this interim final rule imposes new requirements 
on States, which, in some States, will require legislative action. We 
invite States that believe that it will be impossible to meet the work 
participation rates without State legislative action to submit comments 
explaining why it will be impossible to meet the required rates and how 
we should use the reasonable cause exception to provide relief from the 
work participation penalty.

Part 263--Expenditures of State and Federal TANF Funds

Subpart A--What Rules Apply to a State's Maintenance of Effort?

Section 263.2 What kinds of State expenditures count toward meeting a 
State's basic MOE expenditure requirement?
    We made changes to the maintenance of effort regulations in Sec.  
263.2(a)(4) to reflect the impact of the provision in the Deficit 
Reduction Act of 2005 on counting spending for certain pro-family 
activities. Similarly, we clarified existing matching policy under a 
new Sec.  263.2(e) and renumbered the former section (e) as section 
(f). We also added a new paragraph (g) to clarify that State funds used 
to meet any matching requirement under the Healthy Marriage Promotion 
and Responsible Fatherhood Grant may count to meet the MOE requirement 
in Sec.  263.1.
    As provided under PRWORA, States are subject to a cost-sharing 
amount known as the maintenance-of-effort (MOE) requirement. If a State 
fails to meet the required minimum all-family or two-parent work 
participation rate for a fiscal year, then the State must spend at 
least 80 percent of its FY 1994 historic State expenditures in that 
fiscal year. If the State meets both minimum work program participation 
rate requirements, then the required spending level decreases to 75 
percent of its FY 1994 historic State expenditures.
    Before the Deficit Reduction Act of 2005, States could only count 
toward their MOE requirement, expenditures to provide assistance, 
benefits, and/or services to or on behalf of eligible families, 
regardless of the TANF purpose that the expenditure is reasonably 
calculated to accomplish. Under our original rule, an ``eligible 
family'' must meet two fundamental criteria. First, the family must, at 
a minimum, consist of a child living with a custodial parent or other 
caretaker relative, or consist of a pregnant woman. Second, to receive 
benefits, the family must be financially needy according to the 
quantified income and resource (if applicable) criteria established by 
the State and contained in the State's TANF plan.
    The Deficit Reduction Act of 2005 maintains the same MOE spending 
levels. However, the new law adds a provision ``Counting of Spending on 
Certain Pro-Family Activities'' at 409(a)(7)(B)(i)(V) of the Social 
Security Act. This provision allows States to count expenditures on 
pro-family activities, if the expenditure is reasonably calculated to 
prevent and reduce the incidence of out-of-wedlock births (TANF purpose 
three), or encourage the formation and maintenance of healthy two-
parent married families (TANF purpose four).
    This new provision allows States to claim for MOE all qualified 
pro-family expenditures for non-assistance benefits and services 
provided to or on behalf of an individual or family, regardless of 
financial need or family composition, if the activity is reasonably 
calculated to accomplish either TANF purpose three or TANF purpose 
four. We reflect this

[[Page 37471]]

new provision in the MOE regulation at Sec.  263.2(a)(4). However, 
States must continue to limit the provision of Federal TANF and MOE-
funded ``assistance,'' as defined in Sec.  260.31(a) to eligible 
families, regardless of the TANF purpose.
    Congress also created a new TANF discretionary funding stream 
(Grants for Healthy Marriage Promotion and Responsible Fatherhood) in 
the Deficit Reduction Act of 2005. Because Congress placed these funds 
in title IV-A of the Social Security Act, all State expenditures for 
allowable activities under the Healthy Marriage Promotion and Promoting 
Responsible Fatherhood programs specified in sections 403(a)(2)(A)(iii) 
and 403(a)(2)(C)(ii) of the Act may count toward the State's MOE 
requirement, unless a limitation, restriction or prohibition under this 
subpart applies.
    Section 409(a)(7)(B)(iv)(IV) of the Act allows States to count 
expenditures made as a condition of receiving Federal funds under title 
IV, part A of the Social Security Act toward their MOE requirement. The 
Healthy Marriage Promotion Grants are under title IV, part A of the 
Social Security Act. Therefore, if grantees are required to contribute 
a matching share of the total approved costs of Healthy Marriage 
Promotion and Responsible Fatherhood projects under subsections 
403(a)(2)(A)(iii) and 403(a)(2)(C)(ii) of the Act, then State 
expenditures made to meet any required non-Federal share may count 
toward the State's MOE requirement, provided the expenditure also meets 
all applicable MOE requirements, restrictions, and limitations. This 
provision is outlined in Sec.  263.2(g).
    The regulations at 45 CFR Part 92, which apply to the TANF program, 
cover matching or cost-sharing requirements. These rules permit States 
to count toward their MOE requirement non-Federal cash or in-kind 
qualified expenditures on allowable activities by a third party, 
provided there is an agreement to do so in writing by the two parties. 
We previously clarified this point in TANF Policy Announcement TANF-
ACF-PA-2004-01, dated December 1, 2004. This may include Healthy 
Marriage and Responsible Fatherhood providers in a State to meet any 
required non-Federal share. In the interest of clarity, we have added a 
paragraph discussing the counting of third-party expenditures towards 
the MOE requirement at Sec.  263.2(e). This amendment does not reflect 
a change in policy.
Section 263.6 What kinds of expenditures do not count?
    The Deficit Reduction Act of 2005 does not change the prohibition 
at section 409(a)(7)(B)(iv)(IV) of the Act. Under this prohibition, 
States may not count expenditures made ``as a condition of receiving 
Federal funds other than under this part'' toward its TANF MOE 
requirement. However, paragraph (c) of our original rule does not 
accurately reflect this provision, as it stipulates that ``Expenditures 
that a state makes as a condition of receiving Federal funds under 
another program * * *'' may not count toward the State's MOE 
requirement. Therefore, we have corrected paragraph (c) to say that the 
prohibition applies to expenditures that a State makes as a condition 
of receiving Federal funds under another program that is not in Part 
IV-A of the Act. This should avoid any misunderstanding and ensure that 
States know that they may count the non-Federal share of expenditures 
on allowable activities under the healthy marriage promotion or 
promoting responsible fatherhood programs in sections 403(a)(2)(A)(iii) 
or 403(a)(2)(C)(ii) of the Act.

Part 265--Data Collection and Reporting Requirements

    Under the TANF program, States must meet a number of specific data 
reporting requirements. Some of these reporting requirements are 
explicit, primarily in section 411(a) of the Social Security Act, while 
others are implicit. For example, States are the source of information 
for reports that the Secretary must submit to Congress and also for the 
accountability provisions and determination of penalties.
    These data requirements support two complementary purposes: (1) 
They provide information about the effectiveness and success of States 
in meeting the TANF purposes; and (2) they assure State accountability 
for key programmatic requirements. In particular, they ensure 
measurement of State performance in achieving the work participation 
rates in section 407 and other objectives of the Social Security Act.
    These purposes can only be achieved if data are comparable across 
States and over time. Section 411(a)(7) of the Social Security Act 
permits the Secretary to prescribe such regulations as may be necessary 
to define the data elements required in the reports mandated by section 
411(a). This is one of the few places in which the TANF law requires 
regulation by the Secretary and therefore reflects the importance of 
collecting comparable data.
    The data requirements of section 411(a) reflect particular features 
of the program which are important for measuring the success of TANF. 
States have collected and reported similar data on the characteristics, 
financial circumstances, and assistance received by families for many 
years. These data enable Congress and the public to observe how changes 
in welfare policies affect the demographic characteristics and the 
financial circumstances of families receiving assistance, as well as 
the self-sufficiency services provided by States. Similar data 
facilitate comparisons across States and over time and promotes better 
understanding of what is happening nationwide--how States are assisting 
needy families; how they are promoting job preparation, work, and 
marriage; what is happening to out-of-wedlock birth trends among 
assisted families; and what kinds of support two-parent families are 
receiving.
    Section 411(a)(1)(A)(xii) of the Act specifically requires States 
to report on ``information necessary to calculate participation rates 
under section 407.'' Given the significance of the work rates for 
achieving the objectives of TANF and for determining whether States 
face penalties, this is an area where accurate and timely measurement 
is particularly important.
    Our primary goal in implementing the data collection and reporting 
requirements of the Act is to collect the data necessary to monitor 
program performance or required by statute. A secondary goal of this 
interim final rule is to give States clear guidance about what these 
requirements entail and the consequences of failing to meet the 
requirements. At the same time, however, we are sensitive to the issue 
of paperwork burden and are committed to minimizing the reporting 
burden on States, consistent with the TANF statutory framework.
    As an aid to States, we will continue to support personal computer-
based software packages to facilitate data entry and to create 
transmission files for each quarterly data report. These system 
supports also provide some edits to ensure data consistency. The 
transmission files use a standard file format for electronic submission 
to ACF. For the aggregated sections of the quarterly reports, we have 
created web-based reporting systems that permit easy access to States 
for adding and modifying their aggregated quarterly data reports on-
line.
    As discussed under the Paperwork Reduction Act of 1995 (PRA) 
provisions

[[Page 37472]]

of this preamble, we have submitted copies of this interim final rule 
and data reporting requirements to the Executive Office of Management 
and Budget (OMB) for its review of the information collection 
requirements. We encourage States, organizations, individuals, and 
others to submit comments regarding the information collection 
requirements to ACF (at the address above) and to the Office of 
Information and Regulatory Affairs, OMB, Room 3208, New Executive 
Office Building, Washington, DC 20503, ATTN: ACF/HHS Desk Officer. We 
will make necessary revisions in these instruments following the 
comment period and will issue them to States through the ACF policy 
issuance system.
    The following discussion provides information on the changes we 
have made in part 265. We discuss the specific new data elements and 
the statutory authority for the new data elements.

Section 265.1 What does this part cover?

    Paragraph (c) specifies the quarterly report that must be filed by 
States that claim MOE expenditures for separate State program(s). Under 
the prior TANF regulation, the quarterly report for separate State 
programs was required only if a State wanted to qualify for a caseload 
reduction credit or receive a high performance bonus. Now, this report 
is mandatory as required by section 411(a)(1)(A) of the Act as modified 
by the Deficit Reduction Act of 2005. We discuss this report and the 
specific data elements in the report more fully in Sec.  265.3 below.

Section 265.2 What definitions apply to this part?

    In addition to the definition contained in this provision, the data 
collection and reporting regulations rely on the general TANF 
definitions in Sec. Sec.  260.30 through 33 and the definitions of a 
work-eligible individual and the work activities in Sec.  261.2.

Section 265.3 What reports must the State file on a quarterly basis?

    Each State must file two reports on a quarterly basis--the TANF 
Data Report and the TANF Financial Report. Also, each State that claims 
MOE expenditures for a separate State program(s) must file an 
additional report on a quarterly basis--the SSP-MOE Data Report.
    Under prior TANF regulations, we discussed the statutory 
authorities for the TANF Data Report data elements that States will 
continue to collect. Below, we discuss the statutory authorities for 
all newly required data elements of the TANF Data Report. However, for 
ease of understanding, we have included Sec.  265.3 in the interim rule 
in its entirety.
Section 265.3(b)(1) TANF Data Report: Disaggregated Data--Section One
    Paragraph (b)(1) of this section requires that each State file the 
disaggregated case record information, as specified in section 411(a) 
of the Act, on families receiving TANF assistance.
    The information we require to be collected is, for the most part, 
the same information that was collected under the prior TANF 
regulations. However, we have made several changes to the prior data 
collection instrument. We added a data element to identify work-
eligible individuals for calculating the work participation rates. The 
statutory authority for the new data element comes from Sections 407(i) 
and 411(a)(1)(A)(xii) of the Social Security Act. We modified the 
definition of a two-parent family for work participation rate purposes 
and the instructions to the data element, Type of Family for Work 
Participation, to reflect the work-eligible individual concept. As 
clarification, we have also included the definitions of each work 
activity as defined at Sec.  261.2.
Section 265.3(b)(4) TANF Data Report: Aggregated Data--Section Four
    Paragraph (b)(4) of this section requires that each State that opts 
to report data for sections one and/or two based on a stratified sample 
must file quarterly aggregated caseload data by stratum for each month 
of the quarter. We did not explicitly regulate on submitting section 
four of the TANF Data Report under prior TANF regulation. However, it 
was implicit in prior TANF regulations as we did require States to 
follow the procedures in the TANF Sampling Manual in reporting data 
based on samples. The TANF Sampling Manual required States that used 
stratified sampling to report the information in section four of the 
TANF Data Report. Section four of the TANF Data Report was issued on 
January 19, 2000 in TANF-ACF-PI-2000-1 along with the TANF Sampling 
Manual. The only change we are making to section four is one additional 
code to designate whether the caseload data for a stratum is for 
section one or for section two of the TANF Data Report.
Section 265.3(d) SSP-MOE Data Report
    Paragraph (d) requires a State that claims MOE expenditures for a 
separate State program(s) to report case record data on separate MOE 
programs. This implements the Deficit Reduction Act of 2005 changes to 
section 411(a)(1)(A) of the Act.
    The data elements we are requiring States to collect on separate 
State programs are identical in content to, but fewer in number than 
the demographic and work activity data we are requiring in paragraph 
(b) of this section and are unchanged except as explained under the 
revised individual SSP-MOE Data Report sections below.
Section 265.3(d)(1) SSP-MOE Data Report: Disaggregated Data--Section 
One
    Paragraph (d)(1) requires that each State that claims MOE 
expenditures for a separate State program(s) file the disaggregated 
case record information, as specified in section 411(a) of the Act, on 
families receiving SSP-MOE assistance.
    Generally, the information we require to be reported is the same 
information that was collected under the prior TANF regulations. There 
are several changes to the prior data collection instrument. We have 
added a data element to identify work-eligible individuals for 
calculating the work participation rates. The statutory authority for 
the new data element comes from sections 407(i) and 411(a)(1)(A)(xii) 
of the Social Security Act. We modified the definition of a two-parent 
family for work participation rate purposes and the instructions to the 
data element, Type of Family for Work Participation, to reflect the 
work-eligible individual concept. As clarification, we have also 
included the definitions of each work activity as defined at Sec.  
261.2.
Section 265.3(d)(2) SSP-MOE Data Report: Disaggregated Data--Section 
Two
    Paragraph (d)(2) of this section requires that each State that 
claims MOE expenditures for a separate State program(s) file the 
disaggregated case record information, as specified in section 411(a) 
of the Act, on families no longer receiving SSP-MOE assistance.
    The second section of the SSP-MOE Data Report contains 28 data 
elements applicable to families no longer receiving assistance. The 
data elements in section two are identical to those in section one and 
are unchanged from the data elements collected in this section under 
prior TANF regulations.
Section 265.3(d)(3) SSP-MOE Data Report: Aggregated Data--Section Three
    Paragraph (d)(3) of this section requires that each State that 
claims MOE expenditures for a separate State program(s) file quarterly 
aggregated information.

[[Page 37473]]

    This third section of the SSP-MOE Data Report contains twelve data 
elements. These data elements are unchanged from what we collected 
under prior TANF regulations.
Section 265.3(d)(4) SSP-MOE Data Report: Aggregated Data--Section Four
    Paragraph (d)(4) of this section requires that each State that 
claims MOE expenditures for a separate State program(s) and that opts 
to report data for sections one and/or two of the SSP-MOE Data Report 
based on a stratified sample file quarterly aggregated caseload data by 
stratum for each month in the quarter. We did not explicitly regulate 
on submitting section four of the SSP-MOE Data Report under prior TANF 
regulation. However, it was implicit in prior regulations as we did 
require States to follow the procedures in the TANF Sampling Manual in 
reporting data based on samples. The TANF Sampling Manual required 
States that used stratified sampling to report the information in 
section four of the SSP-MOE Data Report. Section four of the SSP-MOE 
Data Report was issued on January 19, 2000 in TANF-ACF-PI-2000-1 along 
with the TANF Sampling Manual. The only change to section four is one 
additional code to designate whether the caseload data for a stratum is 
for section one or for section two of the SSP-MOE Data Report.
Section 265.4 When are quarterly reports due?
    For States that claim MOE expenditures for separate State 
program(s), revised paragraph (b) of this section implements section 
409(a)(2) of the Act which requires that States file quarterly reports 
within 45 days following the end of the fiscal quarter or be subject to 
a penalty. Under the prior regulations, the quarterly SSP-MOE Data 
Report was required only if a State wanted to qualify for a caseload 
reduction credit or receive a high performance bonus. Under the Deficit 
Reduction Act of 2005, section 411(a)(1)(A) of the Social Security Act 
now requires that States report quarterly on their separate State 
program(s) for which they claim MOE expenditures.
Section 265.8 Under what circumstances will a State be subject to a 
reporting penalty for failure to submit quarterly reports?
    Under the interim final rule, the SSP-MOE Data Report is now 
included as a required quarterly report. Failure to submit this report 
by the due dates may subject the State to a reporting penalty as 
required by section 409(a)(2) of the Act and revised section 
411(a)(1)(A) of the Act. This change is reflected in Sec.  265.8(a)(1) 
and Sec.  265.8(b). We also changed this section to remove the penalty 
trigger previously located at Sec.  265.8(c) if a State fails to 
include the definitions of work activities in its annual report. This 
information is now required as part of the Work Verification Plan. For 
ease of understanding, we have included the revised section in its 
entirety.

IV. Paperwork Reduction Act

    This rule contains information collection requirements that have 
been submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (PRA). Under this Act, no persons are 
required to respond to a collection of information unless it displays a 
valid OMB control number. If you have any comments on these information 
collection requirements, please submit them to OMB within 30 days. The 
address is: Office of Management and Budget, Paperwork Reduction 
Project, 725 17th Street, NW., Washington, DC 20503, Attn: ACF/HHS Desk 
Officer.
    This interim final rule imposes some new requirements and modifies 
others. They are:
     A new requirement that States establish documentation, 
verification and internal control procedures to ensure valid work 
participation rates, based on regulatory specifications. States will be 
required to submit the procedures to HHS no later than September 30, 
2006. We will review the procedures and approve them if they meet the 
requirements. If the procedures fail to address or meet the 
requirements, States will be given 60 days to revise and correct them. 
If a State fails to establish, submit, or correct the procedures within 
specified timeframes, the State will be liable for a full five percent 
penalty for the year.
     A modification and reduction in burden of the caseload 
reduction credit information collection based on the recalibration of 
the caseload reduction credit.
     A modification of the reasonable cause/corrective 
compliance information collection burden based on the requirements of 
the participation rate verification procedures.
     A modification of the TANF Data Report and the SSP-MOE 
Data Report based on how we define work-eligible individuals, 
especially with regard to child-only cases.
    The estimated burdens for these data collections (existing burden 
plus additional burden) are:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Average burden
           Instrument or requirement                Number of        Yearly         hours per     Total burden         Original total burden hours
                                                   respondents     submittals       response          hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preparation and Submission of Data Verification              54               1             640          34,560  Not Applicable.
 Procedures--Sec.  Sec.   261.60-261.63.
Caseload Reduction Documentation Process, ACF-               54               1             120           6,480  8,640.
 202--Sec.  Sec.   261.41 & 261.44.
Reasonable Cause/Corrective Compliance                       54               2             240          25,920  17,280.
 Documentation Process--Sec.  Sec.   262.4,
 262.6, & 262.7; Sec.   261.51.
TANF Data Report--Part 265.....................              54               4           2,193         473,688  465,169.
SSP-MOE Data Report--Part 265..................              29               4             714          82,824  78,213.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We are submitting this information collection to OMB for approval. 
These requirements will not become effective until approved by OMB. 
Copies of the proposed collection may be obtained by writing to the 
Administration for Children and Families, Office of Administration, 
Office of Information Services, 370 L'Enfant Promenade, SW., 
Washington, DC 20447, Attn: ACF Reports Clearance Officer. All requests 
should be identified by the title of the information collection. E-mail 
address: [email protected] Written comments to OMB for the 
information collection should be sent directly to: Office of Management 
and Budget, Paperwork Reduction Project, 725 17th Street, NW., 
Washington, DC 20503, Attn: Desk Officer for the Administration for 
Children and Families.

V. Regulatory Flexibility Analysis

    The Secretary certifies, under 5 U.S.C. 605(b), as enacted by the 
Regulatory Flexibility Act (Pub. L. 96-354), that this interim final 
rule will not result in

[[Page 37474]]

a significant impact on a substantial number of small entities. The 
primary impact of these rules is on State governments and on the 
operation of the Federal Government. Neither is considered a small 
entity under the Regulatory Flexibility Act.
    In developing this interim final rule, we sought to implement the 
new requirements of the Deficit Reduction Act of 2005 in a way that 
does not impinge on a State's ability to design effective and 
responsive programs. At the same time, we sought to address concerns 
about inconsistency of work measures among States and to focus renewed 
attention on strengthening efforts to help more low-income families 
enter the workforce and succeed at work. We considered alternatives 
along the spectrum of these goals and believe the policies adopted in 
this interim final rule achieve a balance between the aims of the DRA 
to improve effectiveness of the program and preserving States' ability 
to continue using creativity and ingenuity to help families succeed 
under the TANF work goals and objectives. The balance we strove to 
attain encompassed such issues as: how to count and verify allowable 
work activities; who is a work-eligible individual; and how to ensure 
that State internal control procedures will result in accurate and 
consistent work participation information.
    In determining how to count and verify allowable work activities, 
we considered establishing a single documentation standard in which 
States would verify an individual's participation in work activities 
each day. We rejected this alternative as excessive and cumbersome for 
States to implement; moreover we feared it might discourage employers 
from hiring TANF recipients, thus undermining the program. Instead, as 
we describe above, we chose a set of guidelines that allows variation 
in documentation by the type of work activity in question. Not only 
does this let a State tailor its documentation procedures to the nature 
of the activity, but also it approximates the standards in the working 
world.
    With regard to the definition of a work-eligible individual, we 
considered a range of alternatives looking at each type of family in 
which a parent resides with a child recipient of assistance to 
determine whether it was appropriate to include that group of families 
in the calculation of the work participation rates. As we examined each 
of these types of families, we considered the ability of each to work 
and sought to balance this ability to work with the need for consistent 
work participation rates as envisioned under the Deficit Reduction Act 
and State flexibility.
    As an alternative to our regulatory approach to monitoring State 
internal control procedures for verifying work participation 
information, we considered developing a system in which we would 
regularly draw one or more samples of cases and validate critical data 
needed to calculate the work participation rates, using an error 
percentage as a means of determining whether a State might be liable 
for a work verification penalty. Ultimately, we decided this 
alternative would be too burdensome, reminiscent of quality control 
systems of the past. We determined that the best approach was to 
describe in detail what we expect States to include in the Work 
Verification Plan and then to use the existing audit process as the 
principal means of assessing the accuracy of work participation data. 
We discuss this approach to regulating in greater detail throughout the 
preamble to these rules.

VI. Regulatory Impact Analysis

    Executive Order 12866 requires that regulations be reviewed to 
ensure that they are consistent with the priorities and principles set 
forth in the Executive Order. The Department has determined that this 
interim final rule is consistent with these priorities and principles. 
These regulations primarily implement statutory changes to TANF 
included in the Deficit Reduction Act of 2005.

VII. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that a covered agency prepare a budgetary impact statement before 
promulgating a rule that includes any Federal mandate that may result 
in the expenditure by State, local, and Tribal governments, in the 
aggregate, or by the private sector, of $100 million or more in any one 
year.
    If an agency must prepare a budgetary impact statement, section 205 
requires that it select the most cost-effective and least burdensome 
alternative that achieves the objectives of the rule consistent with 
the statutory requirements. Section 203 requires a plan for informing 
and advising any small government that may be significantly or uniquely 
impacted.
    The Department has determined that this interim final rule, in 
implementing the new statutory requirements, would not impose a mandate 
that will result in the expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of more than 
$100 million in any one year. In enacting the provisions of the Deficit 
Reduction Act, the Congress maintained the basic funding structure and 
flexibility of the TANF program. Over each of the next five years, the 
TANF block grant will provide States with $16.5 billion in Federal 
funds and a total of over $27 billion annually when including State 
Maintenance of Effort (MOE) funding. With the continued commitment of 
full funding for TANF, along with $2.1 billion in reported unobligated 
TANF balances at the end of FY 2005, States will have the resources to 
successfully meet the requirements of the Deficit Reduction Act. The 
funding level for States remains fixed and is based on historic levels 
of welfare spending when states used to serve a cash-dependent welfare 
caseload of more than twice its current size. States retain significant 
flexibility in the use of their TANF dollars to design their programs 
and have wide flexibility to determine eligibility criteria, benefit 
levels and the type of services and benefits available to TANF 
recipients.
    In addition, over five years (FYs 2007-2011), the Department 
estimates that the States will pay penalties of $51 million due to 
failure to meet work requirements. In general, our estimate assumes 
that most States will meet the work participation rates, because States 
retain considerable programmatic flexibility, along with increased 
motivation to develop a stronger focus on moving people to work and 
more accurate reporting systems. For those States that fail to meet 
work participation requirements, we do not anticipate assessing 
penalties until FY 2009. Once penalty liability is identified States 
will have an opportunity to correct the problem prior to the assessment 
of a penalty. We estimate issuing penalties amounting to $7 million in 
FY 2009, $16 million in FY 2010 and $28 million in FY 2011. Our 
estimated penalty assessment level increases during this period, in 
part, because the penalty percentage rate is progressive. Accordingly, 
we have not prepared a budgetary impact statement or prepared a plan 
for informing impacted small governments.

VIII. Congressional Review

    This regulation is not a major rule as defined in 5 U.S.C. Chapter 
8.

IX. Assessment of Federal Regulation and Policies on Families

    Section 654 of the Treasury and General Government Appropriations 
Act of 1999 requires Federal agencies to determine whether a proposed 
policy or regulation may negatively affect family well being. If the 
agency's determination

[[Page 37475]]

is affirmative, then the agency must prepare an impact assessment 
addressing seven criteria specified in the law. The Department has 
conducted a Family Policymaking Assessment in accordance with this 
requirement and determined that these regulations will not have a 
negative impact on family well being as defined in the legislation.

X. Executive Order 13132

    Executive Order 13132, Federalism, requires that Federal agencies 
consult with State and local government officials in the development of 
regulatory policies with federalism implications. Consistent with 
Executive Order 13132, we specifically solicit comment from State and 
local government officials on this interim final rule. We will 
seriously consider these comments in developing the final rule.

List of Subjects

45 CFR Parts 261 and 262

    Administrative practice and procedure, Day care, Employment, Grant 
programs-social programs, Penalties, Public assistance programs, 
Reporting and recordkeeping requirements, Vocational education.

45 CFR Part 263

    Administrative practice and procedure, Day care, Employment, Grant 
programs-social programs, Loan programs-social programs, Penalties, 
Public assistance programs.

45 CFR Part 265

    Administrative practice and procedure, Day care, Employment, Grant 
programs-social programs, Penalties, Public assistance programs, 
Reporting and recordkeeping requirements.

    Dated: March 23, 2006.
Wade F. Horn,
Assistant Secretary for Children and Families.
    Approved: May 25, 2006.
Michael O. Leavitt,
Secretary of Health and Human Services.
    For the reasons stated in the preamble, we are amending 45 CFR 
chapter II by revising part 261, part 262, part 263, and part 265 as 
set forth below:

0
1. The authority citation for part 261 is revised to read as follows:

    Authority: 42 U.S.C. 601, 602, 607, and 609; Pub. L. 109-171.

0
2. Revise Sec.  261.1 to read as follows:


Sec.  261.1  What does this part cover?

    This part includes the regulatory provisions relating to the 
mandatory work requirements of TANF and State work participation data 
verification requirements.

0
3. Revise Sec.  261.2 to read as follows:


Sec.  261.2  What definitions apply to this part?

    (a) The general TANF definitions at Sec. Sec.  260.30 through 
260.33 of this chapter apply to this part.
    (b) Unsubsidized employment means full-or part-time employment in 
the public or private sector that is not subsidized by TANF or any 
other public program.
    (c) Subsidized private sector employment means employment in the 
private sector for which the employer receives a subsidy from TANF or 
other public funds to offset some or all of the wages and costs of 
employing a recipient.
    (d) Subsidized public sector employment means employment in the 
public sector for which the employer receives a subsidy from TANF or 
other public funds to offset some or all of the wages and costs of 
employing a recipient.
    (e) Work experience (including work associated with the 
refurbishing of publicly assisted housing) if sufficient private sector 
employment is not available means a work activity, performed in return 
for welfare, that provides an individual with an opportunity to acquire 
the general skills, training, knowledge, and work habits necessary to 
obtain employment. The purpose of work experience is to improve the 
employability of those who cannot find unsubsidized employment. This 
activity must be supervised by an employer, work site sponsor, or other 
responsible party on an ongoing basis no less frequently than daily.
    (f) On-the-job training means training in the public or private 
sector that is given to a paid employee while he or she is engaged in 
productive work and that provides knowledge and skills essential to the 
full and adequate performance of the job. On-the-job training must be 
supervised by an employer, work site sponsor, or other responsible 
party on an ongoing basis no less frequently than daily.
    (g) Job search and job readiness assistance means the act of 
seeking or obtaining employment, preparation to seek or obtain 
employment, including life skills training, and substance abuse 
treatment, mental health treatment, or rehabilitation activities for 
those who are otherwise employable. Such treatment or therapy must be 
determined to be necessary and certified by a qualified medical or 
mental health professional. Job search and job readiness assistance 
activities must be supervised by the TANF agency or other responsible 
party on an ongoing basis no less frequently than daily.
    (h) Community service programs mean structured programs and 
embedded activities in which TANF recipients perform work for the 
direct benefit of the community under the auspices of public or 
nonprofit organizations. Community service programs must be limited to 
projects that serve a useful community purpose in fields such as 
health, social service, environmental protection, education, urban and 
rural redevelopment, welfare, recreation, public facilities, public 
safety, and child care. Community service programs are designed to 
improve the employability of recipients not otherwise able to obtain 
employment, and must be supervised on an ongoing basis no less 
frequently than daily. A State agency shall take into account, to the 
extent possible, the prior training, experience, and skills of a 
recipient in making appropriate community service assignments.
    (i) Vocational educational training (not to exceed 12 months with 
respect to any individual) means organized educational programs that 
are directly related to the preparation of individuals for employment 
in current or emerging occupations requiring training other than a 
baccalaureate or advanced degree. Vocational educational training must 
be supervised on an ongoing basis no less frequently than daily.
    (j) Job skills training directly related to employment means 
training or education for job skills required by an employer to provide 
an individual with the ability to obtain employment or to advance or 
adapt to the changing demands of the workplace. Job skills training 
directly related to employment must be supervised on an ongoing basis 
no less frequently than daily.
    (k) Education directly related to employment, in the case of a 
recipient who has not received a high school diploma or a certificate 
of high school equivalency means education related to a specific 
occupation, job, or job offer. Education directly related to employment 
must be supervised on an ongoing basis no less frequently than daily.
    (l) Satisfactory school attendance at secondary school or in a 
course of study leading to a certificate of general equivalence, in the 
case of a recipient who has not completed secondary school or received 
such a certificate means regular attendance, in accordance with the 
requirements of the secondary school or course of study, at a secondary 
school or in a course of study leading to a certificate of general 
equivalence, in

[[Page 37476]]

the case of a recipient who has not completed secondary school or 
received such a certificate. This activity must be supervised on an 
ongoing basis no less frequently than daily.
    (m) Providing child care services to an individual who is 
participating in a community service program means providing child care 
to enable another TANF recipient to participate in a community service 
program. This activity must be supervised on an ongoing basis no less 
frequently than daily.
    (n)(1) Work-eligible individual means an adult (or minor child 
head-of-household) receiving assistance under TANF or a separate State 
program or a non-recipient parent living with a child receiving such 
assistance unless the parent is:
    (i) A minor parent and not the head-of-household or spouse of the 
head-of-household;
    (ii) An alien who is ineligible to receive assistance due to his or 
her immigration status; or
    (iii) At State option on a case-by-case basis, a recipient of 
Supplemental Security Income (SSI) benefits.
    (2) The term also excludes:
    (i) A parent providing care for a disabled family member living in 
the home who does not attend school on a full-time basis, provided that 
the need for such care is supported by medical documentation; and
    (ii) An individual in a family receiving MOE-funded assistance 
under an approved Tribal TANF program, unless the State includes the 
Tribal family in calculating work participation rates, as permitted 
under section 261.25.

0
4. Revise Subpart B to read as follows:

Subpart B--What Are the Provisions Addressing State Accountability?

Sec.
261.20 How will we hold a State accountable for achieving the work 
objectives of TANF?
261.21 What overall work rate must a State meet?
261.22 How will we determine a State's overall work rate?
261.23 What two-parent work rate must a State meet?
261.24 How will we determine a State's two-parent work rate?
261.25 Does a State include Tribal families in calculating these 
rates?


Sec.  261.20  How will we hold a State accountable for achieving the 
work objectives of TANF?

    (a) Each State must meet two separate work participation rates in 
FY 2006 and thereafter, one--the two-parent rate based on how well it 
succeeds in helping work-eligible individuals in two-parent families 
find work activities described at Sec.  261.30, the other--the overall 
rate based on how well it succeeds in finding those activities for 
work-eligible individuals in all the families that it serves.
    (b) Each State must submit data, as specified at Sec.  265.3 of 
this chapter, that allows us to measure its success in requiring work-
eligible individuals to participate in work activities.
    (c) If the data show that a State met both participation rates in a 
fiscal year, then the percentage of historic State expenditures that it 
must expend under TANF, pursuant to Sec.  263.1 of this chapter, 
decreases from 80 percent to 75 percent for that fiscal year. This is 
also known as the State's TANF ``maintenance-of-effort'' (MOE) 
requirement.
    (d) If the data show that a State did not meet a minimum work 
participation rate for a fiscal year, a State could be subject to a 
financial penalty.
    (e) Before we impose a penalty, a State will have the opportunity 
to claim reasonable cause or enter into a corrective compliance plan, 
pursuant to Sec. Sec.  262.5 and 262.6 of this chapter.


Sec.  261.21  What overall work rate must a State meet?

    Each State must achieve a 50 percent minimum overall participation 
rate in FY 2006 and thereafter, minus any caseload reduction credit to 
which it is entitled as provided in subpart D of this part.


Sec.  261.22  How will we determine a State's overall work rate?

    (a)(1) The overall participation rate for a fiscal year is the 
average of the State's overall participation rates for each month in 
the fiscal year.
    (2) The rate applies to families with a work-eligible individual.
    (b) We determine a State's overall participation rate for a month 
as follows:
    (1) The number of TANF and SSP-MOE families that include a work-
eligible individual who meet the requirements set forth in Sec.  261.31 
for the month (i.e., the numerator), divided by,
    (2) The number of TANF and SSP-MOE families that include a work-
eligible individual, minus the number of such families that are subject 
to a penalty for refusing to work in that month (i.e., the 
denominator). However, if a family with a work-eligible individual has 
been penalized for refusal to participate in work activities for more 
than three of the last 12 months, we will not exclude it from the 
participation rate calculation.
    (3) At State option, we will include in the participation rate 
calculation families with a work-eligible individual that have been 
penalized for refusing to work no more than three of the last 12 
months.
    (c)(1) A State has the option of not requiring a single custodial 
parent caring for a child under age one to engage in work.
    (2) At State option, we will disregard a family with such a parent 
from the participation rate calculation for a maximum of 12 months.
    (d)(1) If a family receives assistance for only part of a month, we 
will count it as a month of participation if a work-eligible individual 
is engaged in work for the minimum average number of hours in each full 
week that the family receives assistance in that month.
    (2) If a State pays benefits retroactively (i.e., for the period 
between application and approval of benefits), it has the option to 
consider the family to be receiving assistance during the period of 
retroactivity.


Sec.  261.23  What two-parent work rate must a State meet?

    Each State must achieve a 90 percent minimum two-parent 
participation rate in FY 2006 and thereafter, minus any caseload 
reduction credit to which it is entitled as provided in subpart D of 
this part.


Sec.  261.24  How will we determine a State's two-parent work rate?

    (a)(1) The two-parent participation rate for a fiscal year is the 
average of the State's two-parent participation rates for each month in 
the fiscal year.
    (2) The rate applies to two-parent families with two work-eligible 
individuals. However, if one of the parents is a disabled work-eligible 
individual, we will not consider the family to be a two-parent family; 
i.e., we will not include such a family in either the numerator or 
denominator of the two-parent rate.
    (b) We determine a State's two-parent participation rate for the 
month as follows:
    (1) The number of two-parent TANF and SSP-MOE families in which 
both parents are work-eligible individuals and together they meet the 
requirements set forth in Sec.  261.32 for the month (i.e., the 
numerator), divided by,
    (2) The number of two-parent TANF and SSP-MOE families in which 
both parents are work-eligible individuals during the month, minus the 
number of such two-parent families that are subject to a penalty for 
refusing to work in that month (the denominator). However, if a family 
with a work-eligible individual has been penalized for more than three 
months of the last 12 months, we will

[[Page 37477]]

not exclude it from the participation rate calculation.
    (3) At State option, we will include in the participation rate 
calculation families with a work-eligible individual that have been 
penalized for refusing to work no more than three of the last 12 
months.
    (c) For purposes of the calculation in paragraph (b) of this 
section, a two-parent family includes, at a minimum, all families with 
two natural or adoptive parents (of the same minor child) who are work-
eligible individuals and living in the home, unless both are minors and 
neither is a head-of-household.
    (d)(1) If the family receives assistance for only part of a month, 
we will count it as a month of participation if a work-eligible 
individual in the family (or both work-eligible individuals, if they 
are both required to work) is engaged in work for the minimum average 
number of hours in each full week that the family receives assistance 
in that month.
    (2) If a State pays benefits retroactively (i.e., for the period 
between application and approval of benefits), it has the option to 
consider the family to be receiving assistance during the period of 
retroactivity.


Sec.  261.25  Does a State include Tribal families in calculating the 
work participation rate?

    At State option, we will include families with a work-eligible 
individual that are receiving assistance under an approved Tribal 
family assistance plan or under a Tribal work program in calculating 
the State's participation rates under Sec. Sec.  261.22 and 261.24.

0
5. Revise Sec.  261.31 to read as follows:


Sec.  261.31  How many hours must a work-eligible individual 
participate for the family to count in the numerator of the overall 
rate?

    (a) A work-eligible individual counts as engaged in work for a 
month for the overall rate if:
    (1) He or she participates in work activities during the month for 
at least a minimum average of 30 hours per week; and
    (2) At least 20 of the above hours per week come from participation 
in the activities listed in paragraph (b) of this section.
    (b) The following nine activities count toward the first 20 hours 
of participation: Unsubsidized employment; subsidized private-sector 
employment; subsidized public-sector employment; work experience; on-
the-job training; job search and job readiness assistance; community 
service programs; vocational educational training; and providing child 
care services to an individual who is participating in a community 
service program.
    (c) Above 20 hours per week, the following three activities may 
also count as participation: Job skills training directly related to 
employment; education directly related to employment; and satisfactory 
attendance at secondary school or in a course of study leading to a 
certificate of general equivalence.
    (d) We will consider a work-eligible individual who participates in 
a work experience or community service program for the maximum number 
of hours per week that a State may require by dividing the combined 
monthly TANF grant and food stamp allotment by the appropriate minimum 
wage under the minimum wage requirement of the Fair Labor Standards Act 
(FLSA) to have participated 20 hours per week if actual participation 
falls short of 20 hours per week. This policy is limited to States that 
have adopted a food stamp workfare program and a Simplified Food Stamp 
Program. For families that need additional hours beyond the core 
activity requirement, these hours must be satisfied in some other TANF 
work activity.

0
6. Revise Sec.  261.32 to read as follows:


Sec.  261.32  How many hours must work-eligible individuals participate 
for the family to count in the numerator of the two-parent rate?

    (a) Subject to paragraph (d) of this section, a family with two 
work-eligible parents counts as engaged in work for the month for the 
two-parent rate if:
    (1) Work-eligible parents in the family are participating in work 
activities for a combined average of at least 35 hours per week during 
the month, and
    (2) At least 30 of the 35 hours per week come from participation in 
the activities listed in paragraph (b) of this section.
    (b) The following nine activities count for the first 30 hours of 
participation: Unsubsidized employment; subsidized private-sector 
employment; subsidized public-sector employment; work experience; on-
the-job training; job search and job readiness assistance; community 
service programs; vocational educational training; and providing child 
care services to an individual who is participating in a community 
service program.
    (c) Above 30 hours per week, the following three activities may 
also count for participation: Job skills training directly related to 
employment; education directly related to employment; and satisfactory 
attendance at secondary school or in a course of study leading to a 
certificate of general equivalence.
    (d) We will consider a family with two work-eligible parents in 
which one or both parents participate in a work experience or community 
service program for the maximum number of hours per week that a State 
may require by dividing their combined monthly TANF grant and food 
stamp allotment by the appropriate minimum wage under the minimum wage 
requirement of the Fair Labor Standards Act (FLSA) to have participated 
30 hours per week if actual participation falls short of 30 hours per 
week. This policy is limited to States that have adopted a food stamp 
workfare program and a Simplified Food Stamp Program. For families that 
need additional hours beyond the core activity requirement, these hours 
must be satisfied in some other TANF work activity.
    (e)(1) If the family receives federally funded child care 
assistance and an adult in the family is not disabled or caring for a 
severely disabled child, then the work-eligible individuals must be 
participating in work activities for an average of at least 55 hours 
per week to count as a two-parent family engaged in work for the month.
    (2) At least 50 of the 55 hours per week must come from 
participation in the activities listed in paragraph (b) of this 
section.
    (3) Above 50 hours per week, the three activities listed in 
paragraph (c) of this section may also count as participation.
    (4) We will consider family with two work-eligible parents 
receiving federally funded child care in which one or both parents 
participate in a work experience or community service program for the 
maximum number of hours per week that a State may require by dividing 
their combined monthly TANF grant and food stamp allotment by the 
appropriate minimum wage under the minimum wage requirement of the Fair 
Labor Standards Act (FLSA) to have participated 50 hours per week if 
actual participation falls short of 50 hours per week. This policy is 
limited to States that have adopted a food stamp workfare program and a 
Simplified Food Stamp Program. For families that need additional hours 
beyond the core activity requirement, these hours must be satisfied in 
some other TANF work activity.

0
7. Revise Subpart D to read as follows:

Subpart D--How Will We Determine Caseload Reduction Credit for 
Minimum Participation Rates?

Sec.

[[Page 37478]]

261.40 Is there a way for a State to reduce the work participation 
rates?
261.41 How will we determine the caseload reduction credit?
261.42 Which reductions count in determining the caseload reduction 
credit?
261.43 What is the definition of a ``case receiving assistance'' in 
calculating the caseload reduction credit?
261.44 When must a State report the required data on the caseload 
reduction credit?


Sec.  261.40  Is there a way for a State to reduce the work 
participation rates?

    (a)(1) If the average monthly number of cases receiving assistance, 
including assistance under a separate State program (as provided at 
Sec.  261.42(b)), in a State in the preceding fiscal year was lower 
than the average monthly number of cases that received assistance, 
including assistance under a separate State program in that State in FY 
2005, the minimum overall participation rate the State must meet for 
the fiscal year (as provided at Sec.  261.21) decreases by the number 
of percentage points the prior-year caseload fell in comparison to the 
FY 2005 caseload.
    (2) The minimum two-parent participation rate the State must meet 
for the fiscal year (as provided at Sec.  261.23) decreases, at State 
option, by either:
    (i) The number of percentage points the prior-year two-parent 
caseload, including two-parent cases receiving assistance under a 
separate State program (as provided at Sec.  261.42(b)), fell in 
comparison to the FY 2005 two-parent caseload, including two-parent 
cases receiving assistance under a separate State program; or
    (ii) The number of percentage points the prior-year overall 
caseload, including assistance under a separate State program (as 
provided at Sec.  261.42(b)), fell in comparison to the FY 2005 overall 
caseload, including cases receiving assistance under a separate State 
program.
    (3) For the credit calculation, we will refer to the fiscal year 
that precedes the fiscal year to which the credit applies as the 
``comparison year.''
    (b)(1) The calculations in paragraph (a) of this section must 
disregard caseload reductions due to requirements of Federal law and to 
changes that a State has made in its eligibility criteria in comparison 
to its criteria in effect in FY 2005.
    (2) At State option, the calculation may offset the disregard of 
caseload reductions in paragraph (b)(1) of this section by changes in 
eligibility criteria that increase caseloads.
    (c)(1) To establish the caseload base for FY 2005 and to determine 
the comparison-year caseload, we will use the combined TANF and 
Separate State Program caseload figures reported on the Form ACF-199, 
TANF Data Report, and Form ACF-209, SSP-MOE Data Report, respectively.
    (2) To qualify for a caseload reduction, a State must have reported 
monthly caseload information, including cases in separate State 
programs, for FY 2005 and the comparison year for cases receiving 
assistance as defined at Sec.  261.43.
    (d)(1) A State may correct erroneous data or submit accurate data 
to adjust program data or to include unduplicated cases within the 
fiscal year.
    (2) We will adjust both the FY 2005 baseline and the comparison-
year caseload information, as appropriate, based on these State 
submissions.
    (e) We refer to the number of percentage points by which a caseload 
falls, disregarding the cases described in paragraph (b), as a caseload 
reduction credit.


Sec.  261.41  How will we determine the caseload reduction credit?

    (a)(1) We will determine the overall and two-parent caseload 
reduction credits that apply to each State based on the information and 
estimates reported to us by the State on eligibility policy changes 
using application denials, case closures, or other administrative data 
sources and analyses.
    (2) We will accept the information and estimates provided by a 
State, unless they are implausible based on the criteria listed in 
paragraph (d) of this section.
    (3) We may conduct on-site reviews and inspect administrative 
records on applications, case closures, or other administrative data 
sources to validate the accuracy of the State estimates.
    (b) In order to receive a caseload reduction credit, a State must 
submit a Caseload Reduction Report to us containing the following 
information:
    (1) A listing of, and implementation dates for, all State and 
Federal eligibility changes, as defined at Sec.  261.42, made by the 
State since the beginning of FY 2006;
    (2) A numerical estimate of the positive or negative average 
monthly impact on the comparison-year caseload of each eligibility 
change (based, as appropriate, on application denials, case closures or 
other analyses);
    (3) An overall estimate of the total net positive or negative 
impact on the applicable caseload as a result of all such eligibility 
changes;
    (4) An estimate of the State's caseload reduction credit;
    (5) A description of the methodology and the supporting data that a 
State used to calculate its caseload reduction estimates; and
    (6) A certification that it has provided the public an appropriate 
opportunity to comment on the estimates and methodology, considered 
their comments, and incorporated all net reductions resulting from 
Federal and State eligibility changes.
    (c)(1) A State requesting a caseload reduction credit for the 
overall participation rate must base its estimates of the impact of 
eligibility changes on decreases in its comparison-year overall 
caseload compared to the FY 2005 overall caseload baseline established 
in accordance with Sec.  261.40(d).
    (2) A State requesting a caseload reduction credit for its two-
parent rate must base its estimates of the impact of eligibility 
changes on decreases in either:
    (i) Its two-parent caseload compared to the FY 2005 comparison-year 
two-parent caseload baseline established in accordance with Sec.  
261.40(d); or
    (ii) Its overall caseload compared to the FY 2005 comparison-year 
overall caseload baseline established in accordance with Sec.  
261.40(d).
    (d)(1) For each State, we will assess the adequacy of information 
and estimates using the following criteria: its methodology; its 
estimates of impact compared to other States; the quality of its data; 
and the completeness and adequacy of its documentation.
    (2) If we request additional information to develop or validate 
estimates, the State may negotiate an appropriate deadline or provide 
the information within 30 days of the date of our request.
    (3) The State must provide sufficient data to document the 
information submitted under paragraph (b) of this section.
    (e) We will not calculate a caseload reduction credit unless the 
State reports case-record data on individuals and families served by 
any separate State program, as required under Sec.  265.3(d) of this 
chapter.
    (f) A State may only apply to the participation rate a caseload 
reduction credit that we have calculated. If a State disagrees with the 
caseload reduction credit, it may appeal the decision as an adverse 
action in accordance with Sec.  262.7 of this chapter.


Sec.  261.42  Which reductions count in determining the caseload 
reduction credit?

    (a)(1) A State's caseload reduction credit must not include 
caseload decreases due to Federal requirements or State changes in 
eligibility rules since

[[Page 37479]]

FY 2005 that directly affect a family's eligibility for assistance.
    (2) At State option, a State's caseload reduction credit may 
include caseload increases due to Federal requirements or State change 
in eligibility rules since FY 2005 if used to offset caseload decreases 
in paragraph (a)(1) of this section.
    (3) A State may not receive a caseload reduction credit that 
exceeds the actual caseload decline between FY 2005 and the comparison 
year.
    (4) A State may count the reductions attributable to enforcement 
mechanisms or procedural requirements that are used to enforce existing 
eligibility criteria (e.g., fingerprinting or other verification 
techniques) to the extent that such mechanisms or requirements identify 
or deter families otherwise ineligible under existing rules.
    (b) A State must include cases receiving assistance in separate 
State programs as part of its FY 2005 caseload and comparison-year 
caseload. However, if a State provides documentation that separate 
State program cases overlap with or duplicate cases in the TANF 
caseload, we will exclude them from the caseload count.


Sec.  261.43  What is the definition of a ``case receiving assistance'' 
in calculating the caseload reduction credit?

    (a) The caseload reduction credit is based on decreases in 
caseloads receiving assistance (other than those excluded pursuant to 
Sec.  261.42) both in a State's TANF program and in separate State 
programs that address basic needs and are used to meet the MOE 
requirement.
    (b) A State that is investing State MOE funds in eligible families 
in excess of the required 80 percent or 75 percent basic MOE amount 
need only include the pro rata share of caseloads receiving assistance 
that is required to meet basic MOE requirements.


Sec.  261.44  When must a State report the required data on the 
caseload reduction credit?

    A State must report the necessary documentation on caseload 
reductions for the preceding fiscal year by December 31.

Subpart F--[Redesignated as Subpart H]

0
8. Redesignate Subpart F as subpart H.


Sec.  261.60  [Redesignated as Sec.  261.80.]

0
9. Redesignate Sec.  261.60 as Sec.  261.80.

0
10. Add a new subpart F to read as follows:

Subpart F--How Do We Ensure the Accuracy of Work Participation 
Information?

Sec.
261.60 What methods may a State use to report a work-eligible 
individual's hours of participation?
261.61 How must a State document a work-eligible individual's hours 
of participation?
261.62 What must a State do to verify the accuracy of its work 
participation information?
261.63 When is the State's Work Verification Plan due?
261.64 How will we determine if the State is meeting the requirement 
to establish and maintain work verification procedures that ensure 
an accurate measurement of work participation?
261.65 Under what circumstances will we impose a work verification 
penalty for failure to submit a work verification plan or for 
failure to maintain adequate internal controls to ensure consistent 
measurement of the work participation rate?


Sec.  261.60  What methods may a State use to report a work-eligible 
individual's hours of participation?

    (a) A State must report the actual hours that an individual 
participates in an activity, subject to the qualifications in 
paragraphs (b) and (c) and Sec.  261.61(c). It is not sufficient to 
report the hours an individual is scheduled to participate in an 
activity.
    (b) For the purposes of calculating the work participation rates, 
actual hours may include the hours for which an individual was paid, 
including paid holidays and sick leave. For participation in unpaid 
work activities, it may also include excused absences for hours missed 
due to holidays and a maximum of an additional 10 days of excused 
absences in any 12-month period, no more than two of which may occur in 
a month. In order to count an excused absence as actual hours of 
participation, the individual must have been scheduled to participate 
in an allowable work activity for the period of the absence that the 
State reports as participation. A State must describe its excused 
absence policies and definitions as part of its Work Verification Plan, 
specified at Sec.  261.62.
    (c) A State may not count more hours toward the participation rate 
for a self-employed individual than the number derived by dividing the 
individual's self-employment income (gross income less business 
expenses) by the Federal minimum wage. A State may propose an 
alternative method of determining self-employment hours as part of its 
Work Verification Plan.


Sec.  261.61  How must a State document a work-eligible individual's 
hours of participation?

    (a) A State must support each individual's hours of participation 
through documentation in the case file. In accordance with Sec.  
261.62, a State must describe in its Work Verification Plan the 
documentation it uses to verify hours of participation in each 
activity.
    (b) For an employed individual, the documentation may consist of, 
but is not limited to pay stubs, employer reports, or time and 
attendance records substantiating hours of participation. A State may 
presume that an employed individual participated in unsubsidized 
employment for the total number of hours for which that individual was 
paid.
    (c) For unsubsidized employment, subsidized employment, and OJT, a 
State may report projected actual hours of employment participation for 
up to six months based on current, documented actual hours of work. Any 
time a State receives information that the client's actual hours of 
work have changed, or no later than the end of any six-month period, 
the State must re-verify the client's current actual average hours of 
work, and may report these projected actual hours of participation for 
another six-month period.
    (d) For an individual who is not employed, the documentation for 
substantiating hours of participation may consist of, but is not 
limited to, time sheets, service provider attendance records, or school 
attendance records.
    (e) For an individual who is self-employed, the documentation must 
comport with standards set forth in the State's approved Work 
Verification Plan. Self-reporting by a participant without additional 
verification is not sufficient documentation.


Sec.  261.62  What must a State do to verify the accuracy of its work 
participation information?

    (a) To ensure accuracy in the reporting of work activities by work-
eligible individuals on the TANF Data Report and, if applicable, the 
SSP-MOE Data Report, each State must:
    (1) Establish and employ procedures for determining whether its 
work activities may count for participation rate purposes;
    (2) Establish and employ procedures for determining how to count 
and verify reported hours of work;
    (3) Establish and employ procedures for identifying who is a work-
eligible individual;
    (4) Establish and employ internal controls to ensure compliance 
with the procedures; and

[[Page 37480]]

    (5) Submit to the Secretary for approval the State's Work 
Verification Plan in accordance with paragraph (b) of this section.
    (b) A State's Work Verification Plan must include the following:
    (1) For each countable work activity:
    (i) A description demonstrating how the activity meets the relevant 
definition at Sec.  261.2;
    (ii) A description of how the State determines the number of 
countable hours of participation for self-employed individuals; and
    (iii) A description of the documentation it uses to monitor 
participation and ensure that the actual hours of participation are 
reported;
    (2) A description of the State's procedures for identifying all 
work-eligible individuals, as defined at Sec.  261.2;
    (3) A description of how the State ensures that, for each work-
eligible individual, it:
    (i) Accurately inputs data into the State's automated data 
processing system;
    (ii) Properly tracks the hours though the automated data processing 
system; and
    (iii) Accurately reports the hours to the Department;
    (4) A description of the procedures for ensuring it does not 
transmit to the Department a work-eligible individual's hours of 
participation in an activity that does not meet a Federal definition of 
a countable work activity; and
    (5) A description of the internal controls that the State has 
implemented to ensure a consistent measurement of the work 
participation rates, including the quality assurance processes and 
sampling specifications it uses to monitor adherence to the established 
work verification procedures by State staff, local staff, and 
contractors.
    (c) We will review a State's Work Verification Plan for 
completeness and approve it if we believe that it will result in 
accurate reporting of work participation information.


Sec.  261.63  When is a State's Work Verification Plan Due?

    (a) Each State must submit its interim Work Verification Plan for 
validating work activities reported in the TANF Data Report and, if 
applicable, the SSP-MOE Data Report no later than September 30, 2006.
    (b) If HHS requires changes, a State must submit them within 60 
days of receipt of our notice and include all necessary changes as part 
of a final approved Work Verification Plan no later than September 30, 
2007.
    (c) If a State modifies its verification procedures for TANF or 
SSP-MOE work activities or its internal controls for ensuring a 
consistent measurement of the work participation rate, the State must 
submit for approval an amended verification plan by the end of the 
quarter in which the State modifies the procedures or internal 
controls.


Sec.  261.64  How will we determine if the State is meeting the 
requirement to establish and maintain work verification procedures that 
ensure an accurate measurement of work participation?

    (a) We will determine that a State has met the requirement to 
establish work verification procedures if it submits an interim Work 
Verification Plan by September 30, 2006 and a complete Work 
Verification Plan that we approve by September 30, 2007.
    (b) A ``complete'' Work Verification Plan means that:
    (1) The plan includes all the information required by Sec.  
261.62(b); and
    (2) The State certifies that the plan includes all the information 
required by Sec.  261.62(b) and that it accurately reflect the 
procedures under which the State is operating.
    (c) For conduct occurring after October 1, 2007, we will use the 
single audit under OMB Circular A-133 in conjunction with other 
reviews, audits, and data sources, as appropriate, to assess the 
accuracy of the data filed by States for use in calculating the work 
participation rates.


Sec.  261.65  Under what circumstances will we impose a work 
verification penalty for failure to submit a work verification plan or 
for failure to maintain adequate procedures to ensure a consistent 
measurement of the work participation rate?

    (a) We will take action to impose a penalty under Sec.  
262.1(a)(15) of this chapter if:
    (1) The requirements under Sec. Sec.  261.64(a) and (b) have not 
been met; or
    (2) We determine that the State has not maintained adequate 
documentation, verification, or internal control procedures to ensure 
the accuracy of the data used in calculating the work participation 
rates.
    (b) If a State fails to submit an interim or complete Work 
Verification Plan by the due dates in Sec.  261.64(a), we will reduce 
the SFAG payable for the immediately succeeding fiscal year by five 
percent of the adjusted SFAG.
    (c) If a State fails to maintain adequate internal controls to 
ensure a consistent measurement of work participation, we will reduce 
the adjusted SFAG by the following percentages for a fiscal year:
    (1) One percent for the first year;
    (2) Two percent for the second year;
    (3) Three percent for the third year;
    (4) Four percent for the fourth year; and
    (5) Five percent for the fifth and subsequent years.
    (d) If a State complies with the requirements in this subpart for 
two consecutive years, then any penalty imposed for subsequent failures 
will begin anew, as described in paragraph (c) of this section.
    (e) If we take action to impose a penalty under Sec. Sec.  
261.64(b) or (c), we will reduce the SFAG payable for the immediately 
succeeding fiscal year.

PART 262--ACCOUNTABILITY PROVISIONS--GENERAL

0
1. The authority citation for part 262 is revised to read as follows:

    Authority: 31 U.S.C. 7501 et seq.; 42 U.S.C. 606, 609, and 610; 
Pub. L. 109-171.


0
2. In Sec.  262.1, revise paragraphs (a)(13) and paragraph (a)(14), add 
paragraph (a)(15), and revise paragraph (c) to read as follows:


Sec.  262.1  What penalties apply to States?

    (a) * * *
    (13) A penalty equal to the amount of the State's Welfare-to-Work 
formula grant for failure to meet its basic MOE requirement during a 
year in which it receives the formula grant;
    (14) A penalty of not less than one percent and not more than five 
percent of the adjusted SFAG for failure to impose penalties properly 
against individuals who refuse to engage in required work in accordance 
with section 407 of the Act; and
    (15) A penalty of not less than one percent and not more than five 
percent of the adjusted SFAG for failure to establish or comply with 
work participation verification procedures.
* * * * *
    (c)(1) We will take the penalties specified in paragraphs (a)(1), 
(a)(2), and (a)(7) of this section by reducing the SFAG payable for the 
quarter that immediately follows our final decision.
    (2) We will take the penalties specified in paragraphs (a)(3), 
(a)(4), (a)(5), (a)(6), (a)(8), (a)(9), (a)(10), (a)(11), (a)(12), 
(a)(13), (a)(14), and (a)(15) of this section by reducing the SFAG 
payable for the fiscal year that immediately follows our final 
decision.
* * * * *

0
3. Amend Sec.  262.2 by adding a new paragraph (d) as follows:


Sec.  262.2  When do the TANF penalty provisions apply?

* * * * *
    (d) The penalty specified in Sec.  262.1(a)(15) takes effect on 
October 1,

[[Page 37481]]

2006, for failure to establish work participation verification 
procedures and on October 1, 2007, for failure to comply with those 
procedures.

0
4. Amend Sec.  262.3 by revising paragraph (a)(1) to read as follows:


Sec.  262.3  How will we determine if a State is subject to a penalty?

    (a)(1) We will use the single audit under OMB Circular A-133, in 
conjunction with other reviews, audits, and data sources, as 
appropriate, to determine if a State is subject to a penalty for 
misusing Federal TANF funds (Sec.  263.10 of this chapter), 
intentionally misusing Federal TANF funds (Sec.  263.12 of this 
chapter), failing to participate in IEVS (Sec.  264.10 of this 
chapter), failing to comply with paternity establishment and child 
support requirements (Sec.  264.31 of this chapter), failing to 
maintain assistance to an adult single custodial parent who cannot 
obtain child care for a child under 6 (Sec.  261.57 of this chapter), 
failing to reduce assistance to a recipient who refuses without good 
cause to work (Sec.  261.54 of this chapter), and after October 1, 2007 
failing to comply with work participation verification procedures 
(Sec.  261.64 of this chapter).
* * * * *

0
5. Amend Sec.  262.6 by revising paragraphs (e) and (f) to read as 
follows:


Sec.  262.6  What happens if a State does not demonstrate reasonable 
cause?

* * * * *
    (e) The corrective compliance plan must correct or discontinue the 
violation within the following time frames:
    (1) For a penalty under Sec. Sec.  262.1(a)(4), (a)(9), or (a)(15), 
by the end of the first fiscal year ending at least six months after 
our receipt of the corrective compliance plan; and
    (2) For the remaining penalties, by a date the State proposes that 
reflects the minimum period necessary to achieve compliance.
    (f) During the 60-day period following our receipt of the State's 
corrective compliance plan, we may request additional information and 
consult with the State on modifications to the plan including in the 
case of a penalty under Sec.  262.1(a)(15), modifications to the 
State's work verification procedures and Work Verification Plan.
* * * * *

PART 263--EXPENDITURES OF STATE AND FEDERAL TANF FUNDS

0
1. The authority section for Part 263 is revised to read as follows:

    Authority: 42 U.S.C. 604, 607, 609, and 862a; Pub. L. 109-171.


0
2. Revise Sec.  263.2 to read as follows:


Sec.  263.2  What kinds of State expenditures count toward meeting a 
State's basic MOE expenditure requirement?

    (a) Expenditures of State funds in TANF or separate State programs 
may count if they are made for the following types of benefits or 
services:
    (1) Cash assistance, including the State's share of the assigned 
child support collection that is distributed to the family, and 
disregarded in determining eligibility for, and amount of the TANF 
assistance payment;
    (2) Child care assistance (see Sec.  263.3);
    (3) Education activities designed to increase self-sufficiency, job 
training, and work (see Sec.  263.4);
    (4) Any other use of funds allowable under section 404(a)(1) of the 
Act including:
    (i) Nonmedical treatment services for alcohol and drug abuse and 
some medical treatment services (provided that the State has not 
commingled its MOE funds with Federal TANF funds to pay for the 
services), if consistent with the goals at Sec.  260.20 of this 
chapter; and
    (ii) Pro-family activities that are consistent with the goals at 
Sec. Sec.  260.20(c) or (d) of this chapter, but do not constitute 
``assistance'' as defined in Sec.  260.31(a) of this chapter; and
    (5)(i) Administrative costs for activities listed in paragraphs 
(a)(1) through (a)(4) of this section, not to exceed 15 percent of the 
total amount of countable expenditures for the fiscal year.
    (ii) Costs for information technology and computerization needed 
for tracking or monitoring required by or under part IV-A of the Act do 
not count towards the limit in paragraph (5)(i) of this section, even 
if they fall within the definition of ``administrative costs.''
    (A) This exclusion covers the costs for salaries and benefits of 
staff who develop, maintain, support, or operate the portions of 
information technology or computer systems used for tracking and 
monitoring.
    (B) It also covers the costs of contracts for the development, 
maintenance, support, or operation of those portions of information 
technology or computer systems used for tracking or monitoring.
    (b) With the exception of paragraph (a)(4)(ii) of this section, the 
benefits or services listed under paragraph (a) of this section count 
only if they have been provided to or on behalf of eligible families. 
An ``eligible family'' as defined by the State, must:
    (1) Be comprised of citizens or aliens who:
    (i) Are eligible for TANF assistance;
    (ii) Would be eligible for TANF assistance, but for the time limit 
on the receipt of federally funded assistance; or
    (iii) Are lawfully present in the United States and would be 
eligible for assistance, but for the application of title IV of PRWORA;
    (2) Include a child living with a custodial parent or other adult 
caretaker relative (or consist of a pregnant individual); and
    (3) Be financially eligible according to the appropriate income and 
resource (when applicable) standards established by the State and 
contained in its TANF plan.
    (c) Benefits or services listed under paragraph (a) of this section 
provided to a family that meets the criteria under paragraphs (b)(1) 
through (b)(3) of this section, but who became ineligible solely due to 
the time limitation given under Sec.  264.1 of this chapter, may also 
count.
    (d) Expenditures for the benefits or services listed under 
paragraph (a) of this section count whether or not the benefit or 
service meets the definition of assistance under Sec.  260.31 of this 
chapter. Further, families that meet the criteria in paragraphs (b)(2) 
and (b)(3) of this section are considered to be eligible for TANF 
assistance for the purposes of paragraph (b)(1)(i) of this section.
    (e) Expenditures for benefits or services listed under paragraph 
(a) of this section may include allowable costs borne by others in the 
State (e.g. local government), including cash donations from non-
Federal third parties (e.g., a non-profit organization) and the value 
of third party in-kind contributions if:
    (1) The expenditure is verifiable and meets all applicable 
requirements in 45 CFR 92.3 and 92.24;
    (2) There is an agreement between the State and the other party 
allowing the State to count the expenditure toward its MOE requirement; 
and
    (3) The State counts a cash donation only when it is actually 
spent.
    (f)(1) The expenditures for benefits or services in State-funded 
programs listed under paragraph (a) of this section count only if they 
also meet the requirements of Sec.  263.5.
    (2) Expenditures that fall within the prohibitions in Sec.  263.6 
do not count.
    (g) State funds used to meet the Healthy Marriage Promotion and 
Responsible Fatherhood Grant match requirement may count to meet the 
MOE requirement in Sec.  263.1, provided the expenditure also meets all 
the other MOE requirements in this subpart.

0
3. Revise Sec.  263.6 to read as follows:

[[Page 37482]]

Sec.  263.6  What kinds of expenditures do not count?

    The following kinds of expenditures do not count:
    (a) Expenditures of funds that originated with the Federal 
government;
    (b) State expenditures under the Medicaid program under title XIX 
of the Act;
    (c) Expenditures that a State makes as a condition of receiving 
Federal funds under another program that is not in Part IV-A of the 
Act, except as provided in Sec.  263.3;
    (d) Expenditures that a State made in a prior fiscal year;
    (e) Expenditures that a State uses to match Federal Welfare-to-Work 
funds provided under section 403(a)(5) of the Act; and
    (f) Expenditures that a State makes in the TANF program to replace 
the reductions in the SFAG as a result of penalties, pursuant to Sec.  
264.50 of this chapter.

PART 265--DATA COLLECTION AND REPORTING REQUIREMENTS

0
1. The authority citation for part 265 is revised to read as follows:

    Authority: 42 U.S.C. 603, 605, 607, 609, 611, and 613; Pub. L. 
109-171.


0
2. Amend Sec.  265.1 by revising paragraph (c) to read as follows:


Sec.  265.1  What does this part cover?

* * * * *
    (c) If a State claims MOE expenditures under a separate State 
program(s), this part describes the case record information 
(disaggregated and aggregated) on individuals and families in the 
quarterly SSP-MOE Data Report that each State must file.
* * * * *

0
3. Revise Sec.  265.2 to read as follows:


Sec.  265.2  What definitions apply to this part?

    (a) Except as provided in paragraph (b) of this section, the 
general TANF definitions at Sec. Sec.  260.30 through 260.33 and the 
definitions of a work-eligible individual and the work activities in 
Sec.  261.2 of this chapter apply to this part.
    (b) For data collection and reporting purposes only, family means:
    (1) All individuals receiving assistance as part of a family under 
the State's TANF or separate State program (including noncustodial 
parents, where required under Sec.  265.5(g)); and
    (2) The following additional persons living in the household, if 
not included under paragraph (b)(1) of this section:
    (i) Parent(s) or caretaker relative(s) of any minor child receiving 
assistance;
    (ii) Minor siblings of any child receiving assistance; and
    (iii) Any person whose income or resources would be counted in 
determining the family's eligibility for or amount of assistance.

0
4. Revise Sec.  265.3 to read as follows:


Sec.  265.3  What reports must the State file on a quarterly basis?

    (a) Quarterly reports. (1) Each State must collect on a monthly 
basis, and file on a quarterly basis, the data specified in the TANF 
Data Report and the TANF Financial Report (or, as applicable, the 
Territorial Financial Report).
    (2) Each State that claims MOE expenditures for a separate State 
program(s) must collect on a monthly basis, and file on a quarterly 
basis, the data specified in the SSP-MOE Data Report.
    (b) TANF Data Report. The TANF Data Report consists of four 
sections. Two sections contain disaggregated data elements and two 
sections contain aggregated data elements.
    (1) Disaggregated Data on Families Receiving TANF Assistance--
Section one. Each State must file disaggregated information on families 
receiving TANF assistance. This section specifies identifying and 
demographic data such as the individual's Social Security Number and 
information such as the amount of assistance received, educational 
level, employment status, work participation activities, citizenship 
status, and earned and unearned income. The data must be provided for 
both adults and children.
    (2) Disaggregated Data on Families No Longer Receiving TANF 
Assistance--Section two. Each State must file disaggregated information 
on families no longer receiving TANF assistance. This section specifies 
the reasons for case closure and data similar to the data required in 
section one.
    (3) Aggregated Data--Section three. Each State must file aggregated 
information on families receiving, applying for, and no longer 
receiving TANF assistance. This section of the TANF Data Report 
requires aggregate figures in such areas as: The number of applications 
received and their disposition; the number of recipient families, adult 
recipients, and child recipients; the number of births and out-of-
wedlock births for families receiving TANF assistance; the number of 
noncustodial parents participating in work activities; and the number 
of closed cases.
    (4) Aggregated Caseload Data by Stratum--Section four. Each State 
that opts to use a stratified sample to report the quarterly TANF 
disaggregated data must file the monthly caseload data by stratum for 
each month in the quarter.
    (c) The TANF Financial Report (or Territorial Financial Report). 
(1) Each State must file quarterly expenditure data on the State's use 
of Federal TANF funds, State TANF expenditures, and State expenditures 
of MOE funds in separate State programs.
    (2) If a State is expending Federal TANF funds received in prior 
fiscal years, it must file a separate quarterly TANF Financial Report 
(or, as applicable, Territorial Financial Report) for each fiscal year 
that provides information on the expenditures of that year's TANF 
funds.
    (3) Territories must report their expenditure and other fiscal data 
on the Territorial Financial Report, as provided at Sec.  264.85 of 
this chapter, in lieu of the TANF Financial Report.
    (d) SSP-MOE Data Report. The SSP-MOE Data Report consists of four 
sections. Two sections contain disaggregated data elements and two 
sections contain aggregated data elements.
    (1) Disaggregated Data on Families Receiving SSP-MOE Assistance--
Section one. Each State that claims MOE expenditures for a separate 
State program(s) must file disaggregated information on families 
receiving SSP-MOE assistance. This section specifies identifying and 
demographic data such as the individual's Social Security Number, the 
amount of assistance received, educational level, employment status, 
work participation activities, citizenship status, and earned and 
unearned income. The data must be provided for both adults and 
children.
    (2) Disaggregated Data on Families No Longer Receiving SSP-MOE 
Assistance--Section two. Each State that claims MOE expenditures for a 
separate State program(s) must file disaggregated information on 
families no longer receiving SSP-MOE assistance. This section specifies 
the reasons for case closure and data similar to the data required in 
section one.
    (3) Aggregated Data--Section three. Each State that claims MOE 
expenditures for a separate State program(s) must file aggregated 
information on families receiving and no longer receiving SSP-MOE 
assistance. This section of the SSP-MOE Data Report requires aggregate 
figures in such areas as: The number of recipient families, adult 
recipients, and child recipients; the total amount of assistance for 
families receiving SSP-MOE assistance; the number of non-custodial 
parents participating in work activities; and the number of closed 
cases.
    (4) Aggregated Caseload Data by Stratum--Section four. Each State 
that

[[Page 37483]]

claims MOE expenditures for a separate State program(s) and that opts 
to use a stratified sample to report the SSP-MOE quarterly 
disaggregated data must file the monthly caseload by stratum for each 
month in the quarter.
    (e) Optional data elements. A State has the option not to report on 
some data elements for some individuals in the TANF Data Report and the 
SSP-MOE Data Report, as specified in the instructions to these reports.
    (f) Non-custodial parents. A State must report information on a 
non-custodial parent (as defined in Sec.  260.30 of this chapter) if 
the non-custodial parent:
    (1) Is receiving assistance as defined in Sec.  260.31 of this 
chapter;
    (2) Is participating in work activities as defined in section 
407(d) of the Act; or
    (3) Has been designated by the State as a member of a family 
receiving assistance.

0
5. Revise Sec.  265.4 to read as follows:


Sec.  265.4  When are quarterly reports due?

    (a) Each State must file the TANF Data Report and the TANF 
Financial Report (or, as applicable, the Territorial Financial Report) 
within 45 days following the end of the quarter or be subject to a 
penalty.
    (b) Each State that claims MOE expenditures for a separate State 
program(s) must file the SSP-MOE Data Report within 45 days following 
the end of the quarter or be subject to a penalty.
    (c) A State that fails to submit the reports within 45 days will be 
subject to a penalty unless the State files complete and accurate 
reports before the end of the fiscal quarter that immediately succeeds 
the quarter for which the reports were required to be submitted.

0
6. Revise Sec.  265.8 to read as follows:


Sec.  265.8  Under what circumstances will we take action to impose a 
reporting penalty for failure to submit quarterly and annual reports?

    (a) We will take action to impose a reporting penalty under Sec.  
262.1(a)(3) of this chapter if:
    (1) A State fails to file the quarterly TANF Data Report, the 
quarterly TANF Financial Report (or, as applicable, the Territorial 
Financial Report), or the quarterly SSP-MOE Data Report (if applicable) 
within 45 days of the end of the quarter;
    (2) The disaggregated data in the TANF Data Report or the SSP-MOE 
Data Report are not accurate or a report does not include all the data 
required by section 411(a) of the Act (other than section 
411(a)(1)(A)(xii) of the Act) or the nine additional elements necessary 
to carry out the data collection system requirements, including the 
social security number;
    (3) The aggregated data elements in the TANF Data Report or the 
SSP-MOE Data Report required by section 411(a) of the Act are not 
accurate and the report does not include the data elements necessary to 
carry out the data collection system requirements and to verify and 
validate the disaggregated data;
    (4) The TANF Financial Report (or, as applicable, the Territorial 
Financial Report) does not contain complete and accurate information on 
total expenditures and expenditures on administrative costs and 
transitional services; or
    (5) The annual report under Sec.  265.9 does not contain the 
description of transitional services provided by a State to families no 
longer receiving assistance due to employment.
    (b) If we determine that a State meets one or more of the 
conditions set forth in paragraph (a) of this section, we will notify 
the State that we intend to reduce the SFAG payable for the immediately 
succeeding fiscal year.
    (c) We will not impose the penalty at Sec.  262.1(a)(3) of this 
chapter if the State files the complete and accurate quarterly report 
or the annual report before the end of the fiscal quarter that 
immediately succeeds the fiscal quarter for which the reports were 
required.
    (d) If the State does not file all reports as provided under 
paragraph (a) of this section by the end of the immediately succeeding 
fiscal quarter, the penalty provisions of Sec. Sec.  262.4 through 
262.6 of this chapter will apply.
    (e) Subject to paragraphs (a) through (c) of this section and 
Sec. Sec.  262.4 through 262.6 of this chapter, for each quarter for 
which a State fails to meet the reporting requirements, we will reduce 
the SFAG payable by an amount equal to four percent of the adjusted 
SFAG (or a lesser amount if the State achieves substantial compliance 
under a corrective compliance plan).

[FR Doc. 06-5743 Filed 6-28-06; 8:45 am]
BILLING CODE 4184-01-P