With this proposal, OMB seeks to ensure the highest integrity in the financial management and operation of Federal programs and to strengthen accountability for Federal dollars by improving policies that protect against waste, fraud, and abuse. At the same time, OMB aims to increase the impact and accessibility of programs by minimizing time spent complying with unnecessarily burdensome administrative requirements, and so to re-orient recipients toward achieving program objectives. Through close and sustained collaboration with Federal and non-Federal partners, OMB has developed ideas articulated in this proposal that would ensure that grants are awarded based on merit; that management increases focus on performance outcomes; and that rules governing the allocation of Federal fund are streamlined, and better focus the Single Audit oversight tool to reduce waste, fraud, and abuse.

This proposal—the complete text of which is available online, or in hard copy by telephone request (see To View This Proposal section)—follows the February 28, 2012 Advance Notice of Proposed Guidance (ANPG) published in the Federal Register . Both that notice and this proposal were developed in response to the November 23, 2009 Executive Order 13520 on Reducing Improper Payments and his February 28, 2011 Presidential Memorandum on Administrative Flexibility, Lower Costs, and Better Results for State, Local, and Tribal Governments. In those documents, the President directed OMB to work with Executive Branch agencies; state, local, and tribal governments; and other key stakeholders to evaluate potential reforms to Federal grants policies. The ANPG built on the work of those collaborations and discussed initial ideas to meet those goals. OMB received over 350 responses to the notice from across the spectrum of stakeholders in the grants community. The notice and comments received in response are available to the public at www.Regulations.gov under docket number OMB-2012-0002.

This proposal was developed after considering the comments received in response to the ANPG. This preamble outlines the broad themes of stakeholder feedback received and how that feedback influenced further development of ideas mentioned in the ANPG into this proposal. With this publication, the public is once again invited to comment on the proposed reforms. Comments received in response to this proposal will be used to further refine the reforms discussed prior to the issuance of new guidance.

This proposed guidance would supersede and streamline requirements from OMB Circulars A-21, A-87, A-110, and A-122 (which have been placed in 2 CFR Parts 220, 225, 215, and 230); Circulars A-89, A-102, and A-133; the guidance in Circular A-50 on Single Audit Act follow-up; and pending further review, the Cost Principles for Hospitals at 45 CFR Part 74, Appendix E. The proposal consolidates the guidance previously contained in the aforementioned citations into a streamlined and consolidated format that aims to improve both the clarity and accessibility of the guidance. If and when this proposal is finalized, OMB will integrate this guidance into Title 2 of the Code of Federal Regulations.

Similar to existing guidance that this proposal would supersede, the new guidance would be applicable to grants and cooperative agreements that involve state, local, and tribal governments as well as institutions of higher education, and nonprofit organizations. Parts of it may also apply to for-profit entities in limited circumstances as described in section .101 Applicability and the Federal Acquisition Regulation. Single Audit Act requirements will continue to apply to all Federal awards, including contracts, though cost-reimbursement contracts may continue to be subject to additional audit requirements. This guidance does not supersede any existing authority under law or by Executive Order or the Federal Acquisition Regulation.

OMB is proposing new streamlined guidance for grants in order to meet the standards of a high-performing 21st-Century government. Only by streamlining this guidance can we increase the efficiency and effectiveness of the Federal grant-making process to ensure best use of the more than $500 billion in Federal funds that are spent through grants.

As the President articulated in Executive Order 13563 of January 18, 2011, on Improving Regulation and Regulatory Review (76 FR 3821; January 21, 2011; http://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf ), each Federal agency must “tailor its regulations to impose the least burden on society, consistent with regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations.” To that end, it is important that Federal agencies identify those “rules that may be outmoded, ineffective, insufficient, or excessively burdensome,” and “modify, streamline, expand, or repeal them in accordance with what has been learned.” The President reinforced his commitment in Executive Order 13579 of July 11, 2011 on Regulation and Independent Regulatory Agencies (76 FR 41587; July 14, 2011; http://www.gpo.gov/fdsys/pkg/FR-2011-07-14/pdf/2011-17953.pdf ).

As in other areas involving Federal requirements, the President is committed to making government more accountable to the American people while eliminating requirements that are unnecessary and reforming those requirements that are overly burdensome. Eliminating unnecessary requirements for financial assistance will allow recipients of Federal awards to re-orient efforts spent on compliance with complex requirements towards achievement of programmatic objectives. As part of this commitment, the President believes that the Federal government has an obligation to eliminate roadblocks to effective performance in carrying out and completing grants and cooperative agreements. Essential to this reform effort is reducing “red tape” that is attached to the financial assistance the Federal government provides annually in the form of grants and cooperative agreements. These awards provide important benefits and services to the public, and most of the awards go to state, local and tribal governments as well as to institutions of higher education, hospitals, and non-profit organizations. In order to ensure that the public receives the most value, it is essential that these programs function as effectively and efficiently as possible, and that there is a high level of accountability to prevent waste, fraud, and abuse.

To this end, the President on February 28, 2011, issued his Memorandum on Administrative Flexibility, Lower Costs, and Better Results for State, Local, and Tribal Governments, (Daily Comp. Pres. Docs.; http://www.gpo.gov/fdsys/pkg/DCPD-201100123/pdf/DCPD-201100123.pdf ). In the Memorandum, the President explained that “Federal program requirements over the past several decades have sometimes been onerous, and they have not always contributed to better outcomes. With input from our state, local, and tribal partners, we can, consistent with law, reduce unnecessary regulatory and administrative burdens and redirect resources to services that are essential to achieving better outcomes at lower cost.” In addition to other actions, the President instructed the OMB Director to “review and where appropriate revise guidance concerning cost principles, burden minimizations, and audits for state, local, and tribal governments in order to eliminate, to the extent permitted by law, unnecessary, unduly burdensome, duplicative, or low-priority recordkeeping requirements and effectively tie such requirements to achievement of outcomes.” OMB has endeavored to deliver on that mission with this proposal.

Equally as essential to a 21st-Century government as removing unnecessary and overly burdensome requirements that interfere with efficient and effective program performance is strengthening accountability by “intensifying efforts to eliminate payment error, waste, fraud, and abuse” in Federal programs, as the President emphasized in Executive Order 13520 of November 20, 2009, on Reducing Improper Payments (74 FR 62201; November 25, 2009; http://www.gpo.gov/fdsys/pkg/FR-2009-11-25/pdf/E9-28493.pdf ). Accordingly, as the President explained, it is important for Federal agencies “to more effectively tailor their methodologies for identifying and measuring improper payments to those programs, or components of programs, where improper payments are most likely to occur.” This proposed guidance is aimed at achieving these goals by focusing our Single Audit tool on the programs and practices that pose the greatest risk of improper payments, waste, fraud, and abuse.

This proposal would streamline the language from eight existing OMB circulars into one document. This consolidation is aimed at eliminating duplicative or almost duplicative language in order to clarify where policy is substantively different across types of entities, and where it is not. As a result, the proposed guidance includes sections and parts of sections which are clearly delineated by the type of entity to which they apply. For Federal agencies, auditors, and pass-through entities that engage with multiple types of entities in the course of managing grants, this consolidation is intended to clarify where policies are uniform across entities or differ, protecting variances in policy where required by the unique nature of each type of entity.

Accordingly, section .101 Applicability outlines how each subchapter of the proposed circular will apply across types of entities. All provisions of this circular would apply uniformly to grant and cooperative agreement awards made to state, local, and tribal governments, institutions of higher education, and nonprofit organizations except where specific variations by entity are described within this circular. The provisions of Subchapter G Audit Requirements will apply to all awards made to the above-mentioned types of entities as described in section .702 Basis for Determining Federal Award Expenditures. These provisions would apply equally to recipients and subrecipients receiving Federal awards. The proposal states that Federal agencies may apply the provisions of Subchapters B through F to commercial organizations, foreign governments, organizations under the jurisdiction of foreign governments, and international organizations. The provisions of subchapter G would not apply to non-U.S.-based entities expending Federal awards. OMB may consider providing further guidance in the future around best practices for applying the policies in subchapters B-F to commercial and non-U.S. based entities.

OMB is interested in receiving broad public feedback to further refine these ideas. Comments received will be considered as OMB develops a refined final guidance document. Following the implementation of these reforms, OMB will continue to monitor their effects to evaluate whether (and the extent to which) the reforms are achieving their desired results, and will consider making further modifications as appropriate.

This proposal reflects input from over a year of work by the Federal and non-Federal financial assistance community. In response to the President's direction that OMB and Federal agencies identify ways to make the oversight of Federal funds more effective and more efficient, OMB worked with the Office of Science and Technology Policy (OSTP) to convene meetings with both Federal and non-Federal stakeholders to discuss possible reform efforts. These meetings resulted in OMB receiving a series of reform ideas in late 2011 that were developed into the ANPG published on February 28th, 2012. That notice and the more than 350 comments received in response to it are available to the public on www.regulations.gov.

On October 27, 2011, the OMB Director issued Memorandum M-12-01, Creation of the Council on Financial Assistance Reform ( http://www.whitehouse.gov/sites/default/files/omb/memoranda/2012/m-12-01.pdf ). To “create a more streamlined and accountable structure to coordinate financial assistance,” the Memorandum established the interagency Council on Financial Assistance Reform (COFAR) as a replacement for two Federal boards (the Grants Policy Council and the Grants Executive Board). The 10-member COFAR is composed of OMB's Office of Federal Financial Management (Co-Chair); the eight largest grant-making agencies, which are the Departments of Health and Human Services (a Co-Chair), Agriculture, Education, Energy, Homeland Security, Housing and Urban Development, Labor, and Transportation; and one additional rotating member to represent the perspectives of other agencies, which for the first two-year term is the National Science Foundation.

As the COFAR begins to solidify its role in the grants community, it has committed to engaging in outreach efforts with both Federal and non-Federal stakeholders, both in response to this proposal and going forward. Since the COFAR's first meeting on November 4, 2011, and through its review of the comments received in response to the ANPG, it has worked to formulate and further develop reform ideas to create the 21st-Century version of financial management policy for Federal assistance awards. These reform ideas as presented originally in the February notice, the broad themes of comments that were received in response to them, and the refined proposals presented here are outlined below in Part II of this notice. Part III is the actual draft text of the proposed guidance.

In the ANPG, OMB invited comments from the public on all issues addressed in the advance notice, and further invited the public to suggest additional reform suggestions. The goal of publishing the ANPT was to provide the broadest possible collection of stakeholders in the grants community with visibility on these ideas and the opportunity to participate in the discussion.

In response to the notice, OMB received more than 350 comments which were carefully considered in the development of this proposal. Accordingly, this section will continue the discussion by outlining the ideas that were proposed in the advance notice, the broad themes identified in the comments that were received across stakeholders, and the resulting reforms that OMB is proposing in this guidance. In addition, this section addresses particularly popular ideas for reform beyond the ANPG that were proposed by commenters and considered by OMB.

OMB views this proposal as an important opportunity to solicit stakeholder feedback, and the first opportunity for the public to comment on specific language under consideration. The language proposed here is subject to revision; the feedback received will influence the extent to which this language becomes final. In some cases, we have noted in this section where there is language in the proposal that was particularly difficult to craft, and where feedback on the policy direction outlined will be especially useful in charting the future path.

The reform ideas under discussion are outlined below in four main categories:

1. Section A: Reforms to Administrative Requirements (the government-wide Common Rule implementing Circular A-102; Circular A-110; and Circular A-89).

2. Section B: Reforms to Cost Principles (Circulars A-21, A-87, and A-122).

3. Section C: Reforms to Audit Requirements (Circulars A-133 and A-50).

4. Section D: Additional Suggestions Outside of the Guidance Reform.

In addition, more minor changes are listed in the crosswalk provided on the OMB Web site with this proposal.

This section discusses proposed changes to the government-wide common rule implementing Circular A-102 on Grants and Cooperative Agreements with State and Local Governments; Circular A-110 on Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations (2 CFR part 215); and Circular A-89 on Catalog of Federal Domestic Assistance. The following are ideas for reform that were discussed in the February 28th Advance Notice of Proposed Guidance.

The ANPG solicited comments on consolidating the administrative requirements in OMB Circulars A-102 and A-110 into a uniform set of administrative requirements for all grant recipients.

The goal of this consolidation would be to eliminate duplicative (or almost duplicative) language while clarifying where there are important substantive policy variances across entities. This consolidation is aimed at eliminating confusion for entities—such as Federal agencies, auditors and pass-through entities—that deal with more than one type of grant-recipient entity, and for whom greater clarity about which language is universal and which is not could be useful. Further, this language has been updated to reflect common 21st-Century business practices, such as electronic submissions of information, and to anticipate an even greater reliance on advances in information technology to move, store, and share data in the future. Finally, consolidation of the guidance aims to ensure that references across the guidance to other topics and sections are streamlined to most efficiently facilitate the understanding of complete policies.

Comments received in response to this idea in the ANPG fell broadly into two categories. Those commenters who deal habitually with more than one type of grant-recipient entity were generally in favor or open to consolidation, noting that consolidating duplicative or similar language and clarifying policy differences would relieve administrative burden. Other entities were less likely to see any potential benefit from the consolidation.

Some responders expressed concern that consolidation of circulars could lead to the broader application of onerous policies that previously had applied to a narrow set of entities. OMB has endeavored to craft the proposed language in such a way as to avoid this outcome, but will appreciate feedback if there are places where policies have inadvertently been broadened in an unfavorable way. Other responders worried that consolidation of the circulars might make it more difficult to make future changes that may only be applicable to one set of entities. OMB is sensitive to this concern, and believes that we will be able to remain responsive to the needs of all stakeholders through the ongoing outreach efforts of the COFAR, regardless of the level of integration of guidance in the circulars.

In this proposal, Subchapters A-E consolidate the administrative requirements as discussed. In drafting the consolidated version of the administrative requirements, OMB for the most part used language from OMB Circular A-110, and then endeavored to explicitly articulate where there were separate provisions for state, local, and tribal governments carried over from A-102, as described in the crosswalk published on the OMB Web site with this notice. In section .504 Procurement standards, sections .40- .41 of A-110 were replaced with section .36 of A-102. OMB will be particularly interested in feedback from entities previously subject to the provisions of A-110 as to whether the new provision would result in increased administrative burden.

The ANPG solicited comments on requiring agency consideration of the merit of each proposal and the financial risk associated with each applicant prior to making an award. The goal of this requirement would be to articulate as a government-wide policy a set of policies that, though widely practiced, have not previously been universally required across Federal agencies. Requiring agencies to design and implement a merit-based review process and to transparently disclose the criteria for that review in notices of funding availability will help ensure that all applicants for Federal assistance are guaranteed a fair and consistent review, and that they have the information they need to craft the strongest possible applications. Further requiring agencies to review the financial risk posed by applicants will ensure that agencies are able to take appropriate steps to provide oversight for the award to mitigate any risks that may be present. This could supplement the oversight provided by audit activities which take corrective action well after the funds have been spent, and could result in complementary pro-active prevention of waste, fraud, and abuse.

Some of the comments received indicated concern that the proposal could hamper effective review policies and practices that agencies currently use. OMB has endeavored in crafting this language to ensure that these requirements do nothing to constrict the policies of agencies that already have robust review processes in place. As drafted, the requirements for merit-based review and financial risk review are separate and distinct, and each provides great flexibility to agencies.

Tribal entities expressed concern that this policy could contravene the requirements of the Indian Self-Determination and Education Assistance Act (ISDEAA). OMB notes that where the requirements in this guidance (and any OMB guidance) conflict with Federal statute, the statute always governs. These proposals should be read as applicable only when they do not conflict with existing statutes, as described in section .101 Applicability.

Many commenters noted that the requirements of the Single Audit Act should already provide agencies with all necessary information about financial risk. Indeed, the proposed guidance includes Single Audit reports as one type of information that agencies may use in these reviews, but further options are available in the event that, for a particular set of circumstances, the Single Audit is not the most appropriate tool.

In this proposal, section .205 Agency Review of Merit of Proposals and Risk Posed by Applicants includes this requirement as discussed. The language in the proposal intentionally provides significant flexibility to agencies with respect to how these requirements are implemented. In particular, the requirement for an assessment of risk may be conducted at any point prior to an agency making an award, and therefore need only include review of applications likely to be selected for funding. OMB believes that this flexibility is important given the diverse nature of Federal programs and the types of information that might be most appropriate in different cases. Recognizing that these reviews can be equally burdensome for both Federal agencies and for recipients, OMB expects that agencies will not to use this latitude to design overly burdensome requirements.

The ANPG discussed requiring Federal agencies to provide 90-day advance forecast of funding opportunities in an updated Catalog of Federal Financial Assistance (CFFA) that would replace the existing Catalog of Federal Domestic Assistance (CFDA). The goal of this reform would be to provide applicants with enough time to prepare the best possible applications. At the time of the Federal Register Notice, OMB suggested that the CFFA, as an existing database of Federal programs, might be the most efficient tool to implement this requirement.

Many Federal agencies noted that implementation of a 90-day advance notice would be impossible in the event that appropriations take place late in the fiscal year, in which case agencies need to publish funding opportunities as soon as possible. Given the frequent need for agencies to publish solicitations expeditiously after appropriations, OMB proposes to help ensure that applicants have adequate time to apply by instead articulating a minimum amount of time for the solicitation to be open on grants.gov. Generally, comments received from recipient entities were in favor of providing applicants with as much time as possible to craft quality applications.

This proposal replaces the idea of 90-day advance notice in the CFFA with a requirement to ensure that all notices of funding opportunity be open for a minimum of 30 days on grants.gov, unless required by statute or unless exigent circumstances dictate otherwise as determined by the agency head. This language is proposed in section .204 Announcements of Funding Opportunities.

This proposal also refers to the Catalog of Federal Domestic Assistance by using the new name of the Catalog of Federal Financial Assistance. The final decision to change the name will be made in the context of ongoing COFAR governance of the Integrated Acquisition Environment and System for Award Management which currently hosts the CFDA and other governmentwide systems that support the grants community. This process will include consideration of any relevant system-related consequences to a name change.

In addition to these proposed changes to guidance, OMB is working with Federal agencies on the development of the Federal Program Inventory (FPI) over the course of 2013-2014. The FPI uses a broader definition of Federal Program than the definition proposed in this guidance, which refers specifically to the CFFA. The Federal Program Inventory will likely include linkages to CFFA. For more detail on the FPI see A-11 Part 6 Section 280.

The ANPG discussed incorporating into circulars the existing requirement for certain categories of information to be published in announcements of public funding opportunities. See OMB Memorandum M-04-01 of October 15, 2003 ( http://www.whitehouse.gov/omb/memoranda_fy04_m04-01 ), which announced the Federal Register notice that OMB published at 68 FR 58146 (October 8, 2003).

This is not a policy reform, but rather consolidation within the circular of separate guidance implemented in 2003 to further consolidate all applicable guidance for grants into one clear location.

Most comments received in response to the Advance Notice were generally in favor or had no objections to this consolidation.

This proposal incorporates this requirement in section .204 Announcements of Funding Opportunities.

The ANPG discussed that information collection requests are limited to standardized data elements approved by OMB, as required under the Paperwork Reduction Act of 1995 (PRA), plus OMB-approved exceptions for all applications and reports. This is not a policy reform, but rather an indicator of the importance OMB places on compliance with the requirements of the Paperwork Reduction Act of 1995, and an indication that OMB will be using the PRA process to ensure that agencies make use of standard approved collections wherever possible to encourage broader goals of data standardization across government. As this standard of review is implemented, Federal agencies may find that fewer non-standard information collections are approved, if not required by statute.

Comments in response to the ANPG generally did not object to continued use of the Paperwork Reduction Act. Some comments emphasized in particular that use of government-wide systems to support information collections, such as Grants.gov, should be consistently funded and supported as standardization of information collections continues.

This proposal includes this language in section .206 Standard Application Requirements. In addition, the proposed language eliminates references to specific OMB-approved forms, and refers only broadly to OMB-approved information collections. This proposed language is not intended to have an immediate effect on the forms used, but is intended to broaden applicability so that, as the Federal government replaces forms with electronic collections of data elements, this guidance will continue to apply. Final guidance will be accompanied by a full list of the OMB-approved information collections that are available. For example, where section __.206 Standard Application Requirements refers to “the information approved by OMB for governmentwide use for applications,” the list accompanying final guidance will refer section 206 to the 424 family of forms and any other OMB-approved information collections for applications, though in the future, the data currently included in the 424 forms may be collected differently.

In response to the ANPG, OMB received a number of suggestions for ways that existing guidance could be clarified. OMB reviewed these and anticipates that clarifications made in the draft language in subchapters A-E may address many of them. The most notable clarifications are as follows:

A. Subchapter C Federal Award Notice and Subchapter D Inclusion of Terms and Conditions in Federal Award Notice lay out mostly new uniform requirements for the information that agencies are required to provide to recipients at the time that an award is made. This language is based on work done by the Grants Executive Board and Grants Policy Committee, two interagency councils that preceded the COFAR in providing policy leadership to the grants community. In particular, this language includes the requirement to include a unique award identifier in the notice. OMB will continue working with Federal agencies to provide further guidance on the inclusion of this data element.

B. Section 501 Subrecipient Monitoring and Management is created to co-locate guidance on oversight of subawards that previously was located in different places in different OMB Circulars. This is an attempt to provide greater clarity into the expectations for subaward oversight across the Federal government.

C. Language in section 502 Standards for Financial and Program Management and other minor language throughout the guidance is updated to align the objectives for performance monitoring and measurement with those described for Federal agencies in OMB Circular A-11.

D. Language in section .504 Procurement Standards (d) updates the threshold for small purchase procedures to be consistent with the simplified acquisition threshold at 41 U.S.C. 403(11) (currently at $150,000).

E. Language in Section .506 Records and Retention (c)(1) is simplified to clarify that the 3-year period for retention of documents starts on the day the award recipient submits its final expenditure report.

F. Section .808 on Closeout adds language that Federal agencies complete all closeout actions for Federal awards no later than 180 days after the final report is received. OMB will consider whether further guidance on closeout is needed.

Finally, some state government entities asked that the threshold for requirements applicable to equipment be raised above $5,000, but further discussions indicated that the level of that threshold varies significantly at the state level. In order to provide for consistent award management across entities, OMB considers $5,000 to continue to be the most appropriate level for this degree of accountability.

This section discusses proposed changes to the OMB cost-principle circulars that have been placed at 2 CFR Parts 220, 225, and 215 (Circulars A-21, Cost Principles for Educational Institutions; Circular A-87, Cost Principles for State, Local and Indian Tribal Governments; and Circular A-122, Cost Principles for Non-Profit Organizations ), and, pending possible future review, to the Cost Principles for Hospitals that are in the regulations of the Department of Health and Human Services at 45 CFR Part 75, Appendix E ( Principles for Determining Costs Applicable to Research and Development Under Grants and Contracts with Hospitals ). The following ideas for reform were discussed in the ANPG.

The ANPG solicited comments on consolidating the cost principles in OMB Circulars A-21, A-87, and A-122, and the Cost Principles for Hospitals that are in the regulations of the Department of Health and Human Services at 45 CFR Part 75, Appendix E, into a uniform set of cost principles for all grant recipients.

The goal of this consolidation would be to eliminate duplicative (or almost duplicative) language while clarifying where there are important substantive policy variances across entities. This is aimed at eliminating confusion for entities such as Federal agencies, auditors, and pass-through entities that deal with more than one type of grant recipient entity, and for whom greater clarity about which language is universal and which is not could be useful. Further, the goal is to provide updated language to reflect common 21st-Century business practices, such as electronic submissions of information. Finally, consolidation of the guidance aims to ensure that references across the guidance to other topics and sections are streamlined to most efficiently facilitate the complete understanding of each policy.

Comments received in response to this idea in the ANPG fell broadly into the same two categories as those regarding consolidation of the circulars for administrative requirements. Those commenters who deal habitually with more than one type of grant recipient entity were generally in favor or open to consolidation, noting that consolidating duplicative or similar language and clarifying policy differences would relieve administrative burden. Other entities, in particular in the university community, who do not habitually deal with other types of grant recipients, were less likely to see any potential benefit from the consolidation.

Some responders expressed concern that consolidation of circulars into one set of guidance could lead to the broader application of onerous policies that previously had applied to a narrow set of entities. OMB has endeavored to craft the proposed language in such a way as to avoid this outcome, but will appreciate feedback if there are places where policies have inadvertently been broadened in an unfavorable way. Other responders worried that the proposed consolidation might make it more difficult to make changes that would only be applicable to one set of entities. OMB is sensitive to this concern, and believes that we will be able to remain responsive to the needs of all stakeholders through the ongoing outreach efforts of the COFAR, regardless of the level of integration of guidance.

In this proposal, Subchapter F and Appendices IV-X consolidate the cost principles except those for hospitals, as discussed below. The majority of the consolidation is in Subchapter F, which outlines the basic considerations and the selected items of cost. Appendices IV-X provide specific guidance for negotiating indirect cost rates that varies by specific type of entity. Based on initial feedback, OMB proposes to conduct further review of the cost principles for hospitals, and will make a future determination about the extent to which they should be added in a reserved Appendix XI to this guidance based on the outcome of the review.

OMB will be particularly interested in feedback from the public on the language used in the consolidated cost principles, and whether any particular entity perceives a change in policy that appears unfavorable. OMB also notes that in response to concern from tribal entities that the consolidated cost principles may conflict with the cost principles provided in the ISDEAA, the subordination of this guidance to that statute was specifically articulated in section .101 Applicability.

The ANPG discussed two different possibilities for offering flat indirect cost rates; one that would be a mandatory and universal discount from a negotiated rate, and a second that would give entities the option of choosing a flat discount from a previously negotiated rate.

The goal of this discussion was to explore whether the savings that could be accrued by avoiding the complexities of the negotiation process could be recaptured both by recipients and Federal agencies through a slightly lower rate that would split the difference in the cost of the process evenly. It seemed that there could be a win-win amount that allowed the Federal government to pay a lower rate, but still provide an overall savings for recipients.

Commenters were universally against the idea of a mandatory flat discounted rate. Some who responded were in favor of having an optional flat rate, but almost all commenters indicated that if the flat rate were below the negotiated rate, it would almost always be worth it to negotiate for the difference.

Two new suggestions emerged that had not been discussed in the ANPG. One was to provide the option for entities and Federal agencies to agree to extend the period of utilization of a rate once negotiated. The second idea was proposed by the nonprofit community, and entailed explicitly requiring pass-through entities to honor rates that are negotiated at the Federal level.

Finally, some expressed interest in the availability of a minimum flat rate for entities that had never had a negotiated indirect cost rate. Such entities could adopt this rate for an interim period, while developing capacity to engage in negotiations.

As a result of this feedback, this proposal does not further contemplate a flat negotiated rate, but rather provides in section .616 Indirect (F&A) costs for all types of entities the option of extending negotiated rates for up to 4 years subject to approval of the indirect cost cognizant agency. This one-time extension will only be approved if there have been no major changes in indirect costs. If an extension is granted the entity would not be allowed to request a rate review until the extension period ends. OMB hopes that this extension of the negotiated rate may provide a reduction in burden by reducing the frequency of negotiations.

In addition, also in section .616 Indirect (F&A) Costs, a minimum flat rate of 10% of modified total direct costs has been added to ensure that entities without the capacity for a full negotiation receive a minimum reimbursement for no more than four years while they develop the capacity to engage in full negotiations. Finally, section .501 Subrecipient Monitoring and Management explicitly requires pass-through entities to either honor the indirect cost rates negotiated at the Federal level, negotiate a rate in accordance with Federal guidelines, or provide the minimum flat rate. This is aimed at ensuring that entities who receive Federal funds primarily indirectly nevertheless are appropriately reimbursed for the allowable costs associated with the award.

The ANPG discusses OMB's intent to identify possible alternatives to current reporting requirements for validating the costs of salaries and wages. The discussion points to three pilots that are currently ongoing as possibly instructive examples of alternatives.

Consideration of alternatives to time and effort reporting reflects the long-term goal of tying assessment to the achievement of programmatic objectives rather than measurement of effort (hours) expended. OMB has learned that though this is an important long-term goal, based on the diverse nature of programs across the Federal government and related variations in methodologies for measuring achievement and outcomes, time and effort reporting continues to be viewed by the audit community as an important tool for confirming appropriate use of funds.

In response to the ANPG, institutions of higher education in particular pointed out that current requirements are particularly restrictive because they include specific examples of compliance with current requirements which, over time, have become the rule. These commenters recommended broadening time and effort reporting language to omit specific examples and instead feature the essential principles for accountability based on strong internal controls that entities could then implement however is most appropriate for them. Some in the auditing community similarly commented that while open to streamlined guidance, they recommend OMB ensure that the standards for appropriate internal controls and audits remain clear.

This proposal addresses these ideas with language in section .621 Selected Items of Cost, item C-10 Compensation—Personal Services. Within this language, OMB has consolidated reporting requirements that previously differed across types of entities and eliminated specific examples in order to clarify the broad principles of how an entity may establish the internal controls that would allow them to validate these costs. It recognizes the potential to integrate the necessary information in automated payroll distribution systems where clear internal controls govern those systems, thereby reducing duplication.

OMB will be interested in feedback from the audit community on whether the draft language provides sufficient guidance to result in a set of requirements that will be easily audited. Further, OMB will be interested in feedback from the recipient community on whether the language proposed adequately provides enough flexibility for entities to meet these standards in the way most appropriate to their particular organizations, and in ways that may change over time as technology continues to advance.

The ANPG discusses expanding the application of the 1.3% indirect (F&A) costs adjustment for utility costs of research to more institutions of higher education.

The goal of this reform idea would be to eliminate unfairness inherent in a policy that provides a benefit to a limited group of institutions based on arbitrary criteria without consideration of applicability to other institutions. The Utility Cost Adjustment (UCA) currently provides an extra 1.3% percentage points in addition to the negotiated indirect cost rate to 65 institutions of higher education for research grants. The ANPG noted that OMB would work with Department of Defense's Office of Naval Research and the Department of Health and Human Services' Division of Cost Allocation to develop guidelines and a format for entities to apply for this benefit in a streamlined way that ensured the adjustment was only provided where real costs exist. Further, the notice discussed requiring entities to demonstrate a plan to bring utility costs down over time.

The need for action is a result of the fact that utility costs, while included in indirect cost rate negotiations, are generally recorded only at the building level, making it difficult to document the utility cost that should be allocated to Federal awards as opposed to other activities. This is particularly true for research, where funded activities are likely to use more energy than teaching, for example. The current situation is further complicated by the fact that the 1.3% adjustment itself is long outdated and based on limited information. Thus, there is a strong sense in the Federal community that some additional way to verify the accuracy of the adjustment is also overdue.

Commenters from the university community were in favor of expanding the adjustment, but many who currently receive the adjustment preferred that it not be expanded if the expansion would mean a reduction in funds to those who currently receive it, or in other words, a cost neutral expansion. Further, commenters argued strongly that the expansion should not be linked to a burdensome application or justification process, nor a burdensome process to document reductions in cost over time.

OMB has received feedback from rate setting agencies that given the complexities of documenting utility costs, it is likely that any type of study or application done to justify costs would be difficult to achieve with accuracy and without inducing significant administrative burden and expense for both recipient entities and Federal agencies.

As a potential solution, language in Appendix IV of this proposal would replace the 1.3% utility cost adjustment that is currently in effect with two options for reimbursement of utility costs. The first would allow any institution of higher education to meter their utility usage at the sub-building level instead of by building. When metering utility usage by function is not feasible, entities may add a multiplier to their square footage used for research to calculate “effective” square footage for purposes of utility cost calculation. Taken together, these two options should provide a more accurate reimbursement of utility costs through the normal indirect cost rate negotiation process than the current practice of metering by building does. OMB will be interested in responses to this proposal from institutions of higher education, particularly with regard to whether metering at the sub-building level within buildings is a feasible option for them or whether changes in metering practice are prohibitively expensive, the extent to which the calculation of the effective square footage is viewed as a fair proxy for utility costs, and whether this is likely to significantly increase the accuracy of utility cost reimbursements.

The ANPG discussed clarifying the circumstances under which institutions of higher education and other entities where appropriate, may charge directly allocable administrative support as a direct cost. Included in this discussion were examples of appropriately direct chargeable project-specific activities such as managing substances such as chemicals, data and image management, complex project management, and security.

The goal of this reform idea was to ensure that charges are appropriately classified in order to provide support for all of the costs directly associated with a Federal award. It is further aimed at addressing a concern raised by institutions of higher education for which administrative tasks directly associated with a research grant routinely make up a significant proportion of directly allocable activities and costs.

Comments received, including from the university community, indicated a preference that any further guidance rely on the overarching cost principles, which indicate that an item or activity may be charged directly to a grant if it is clearly allocable to that award, as opposed to an activity that supports multiple projects. This principle remains true regardless of whether the work performed is administrative in nature.

This proposal reflects that principle, and guidance proposed in section .615 Direct Costs indicates that all work that is directly allocable to one award may be charged to that award, regardless of the type of task. With this proposal OMB hopes to provide consistently across the cost principles that direct costs are those allocable to one award, while indirect costs are those that cannot easily be so allocated.

The ANPG discussed explicitly including the cost of computing devices not otherwise subject to inventory controls (i.e. cost less than the organization's equipment threshold) as allowable direct cost supplies. Applicants for Federal awards would be required to document these items as a separate line-item in their budget requests, but would not be required to conduct the more stringent inventory controls in place for equipment.

The goal of this clarification would be to ensure that charges are appropriately classified in order to provide support for all of the costs directly associated with a Federal award, while reducing the burdens of securing special permission to purchase what have become routine supplies. This is not intended to result in a net cost increase, but rather to provide clarity in how allowable costs are routinely charged. The need for this clarification is a result of the fact that while computing devices routinely cost less than the $5,000 equipment threshold, they are seen as highly valuable items. These facts have led to diverse opinions as to whether these devices should be treated as equipment versus supplies, and to audit findings of incorrect documentation.

Commenters in the recipient community were generally in favor of this reform, but specified a preference that these items not require separate line items in budget requests as the ANPG contemplated. Those with this preference noted that specifying separate line items would limit existing rebudgeting authority in a way that would lead to less efficient administration of grants. The audit community argued in contrast that computing devices are both highly valuable and contain highly sensitive data, and so should be subject to more detailed inventory requirements as they would be if classified as equipment. Others proposed that because these items may be used for more than one award, they should be treated as indirect costs.

This proposal discusses this idea in section .621 Selected items of cost, Item C-31 Material and Supplies Costs, Including Costs of Computing Devices. The language proposed reflects feedback OMB received from Federal agencies that the sensitivity of data stored on computing devices should not be a factor in determining cost accounting, since protection of that data is a separate area of internal control. Recipient entities are responsible for the security and encryption of their data regardless of how the devices are accounted for. Further, the costs of documenting inventories for these items would be significant and generally detrimental to the efficient administration of the grant. Given the low cost of these items (generally far below the $5,000 threshold) the proposed language anticipates that they fit naturally within the category contemplated as supplies, and should be explicitly included there, without further requirements to add a line item in the budget. Further, OMB believes these items are similar in their allocability to other items typically in the supply category, which are directly allocable because of their programmatic relevance for the execution of an award, but which may have some unavoidable excess capacity.

The ANPG discussed harmonizing cost principles with existing language in Circulars A-110 and A-102 to clarify that $5,000 is the threshold for an allowable maximum residual inventory of unused supplies as long as the cost was properly allocable to the original agreement at the time of purchase. The notice included language to the effect that these supplies may be retained for use on another Federal award at no cost, though that language did not align with existing guidance found in Circulars A-110 and A-102.

The goal of this clarification is to minimize confusion about appropriate disposal or re-expensing of unused inventories at the conclusion of an award and at ensuring consistency in the application of the cost principles. Federal agencies view this requirement as important, because below this level the costs for the agency to recover, inventory, store, and dispose of these items would exceed the benefit of such efforts. Though the auditing community expressed some concern, particularly about what would be done when the recipient did not have another Federal award for which to retain the supplies, the majority of comments received on this idea were in favor of it.

This proposal clarifies language in section .621 Selected Items of Cost, Item C-31 Material and Supply Costs, including Costs of Computing Devices. This language is harmonized with language in the draft administrative requirements that states that $5,000 is the threshold for an allowable maximum residual inventory of unused supplies as long as the cost was properly allocable to the original agreement at the time of purchase. Consistent with existing administrative requirements, there is no requirement to retain the supplies for use on another Federal award.

The ANPG discussed eliminating requirements for institutions of higher education, and other entities where appropriate, to conduct studies of cost reasonableness for large research facilities.

The goal of this reform would be to reduce paperwork that is costly to generate and duplicative of more useful information that is otherwise provided to the awarding agency. The cost reasonableness studies mentioned compare a specific set of data compared against a data set compiled by the National Science Foundation. This comparison does not yield information that is as useful as the information that is routinely reviewed by agencies any time a grant proposal includes a proposal for construction of a new facility. These routine reviews cover actual costs included in all aspects of the project, which program managers are able to evaluate using their expertise and knowledge of reasonableness of these proposals in comparison with others and with market prices. The specific studies in question have been found not to add additional value to this process.

Comments received in response to this idea were generally positive. This proposal eliminates the previously existing language.

The ANPG discussed eliminating the restrictions on the use of the portion of indirect cost recoveries associated with depreciation or use allowances. These restrictions are duplicative of the indirect cost rate negotiation process, during which appropriate indirect costs are documented, justified, and negotiated. This requirement put restrictions on the use of funds which were received as reimbursements for costs already incurred appropriately in accordance with negotiated indirect cost rates. Articulating requirements for how recipients should spend reimbursements is fundamentally duplicative.

Further, in this same item of cost, all references to use allowances have been eliminated. Use allowance was an alternative accounting method which was necessary at the time of the last update to OMB circulars because not all entities were capable of using the depreciation method. Now, however, the depreciation method is widely if not universally used, and use allowance has become an obsolete reference.

Comments received in response to this idea were generally positive. As a result, this proposal eliminates restrictions on depreciation reimbursements in section .621 Selected Items of Cost, item C-15 Depreciation.

The ANPG discussed eliminating requirements for institutions of higher education, and other entities where appropriate, to conduct a lease-purchase analysis to justify interest costs, and to notify the cognizant Federal agency prior to relocating federally sponsored activities from a facility financed by debt. The goal of this reform would be to reduce paperwork that is costly to generate and does not yield information that is useful to the awarding agency.

Where recipient entities are required to invest equity of their own in facilities they purchase, and where they must provide the up-front financing and are reimbursed based on the ongoing costs of facilities, OMB finds that entities have appropriate incentives to make the most cost-effective decisions about whether to lease or purchase a facility without providing additional paperwork to the Federal government. Further, Federal agencies have provided feedback that such paperwork does not meaningfully affect funding decisions.

Comments received in response to this reform idea were generally positive. This proposal therefore eliminates this requirement.

The ANPG discussed updating the cost principles to reflect the media now used for those notices. The goal of this reform would be to update guidance to conform to 21st-Century business processes. Comments received in response to this reform idea were generally positive.

This proposal updates this language accordingly, specifically in section .621 Selected Items of Cost, and item C-42 Recruiting Costs.

The ANPG discussed clarifying that budgeting for contingency funds associated with a Federal award for the construction or upgrade of a large facility or instrument, or for IT systems, is an acceptable and necessary practice, and that the method by which contingency funds are managed and monitored is at the discretion of the Federal funding agency. The goal of this reform would be to ensure that contingencies inherent in grant-funded projects are planned for in accordance with Generally Accepted Accounting Principles (GAAP) and with standard project-management practices. The language seeks to accomplish this while making clear that reserve funds which recipients would draw down in advance of a particular event actually occurring, are unallowable.

Comments received in response to this reform idea were generally positive. Some in the audit community suggested limiting contingency budgets to a percentage of the total award; however, Federal agencies considered that this would be contrary to GAAP, and difficult to do at the government-wide level given the diverse nature of Federal programs. OMB acknowledges Federal agencies' program managers as experts in the particular needs of their programs, and expects them to look carefully at all award budgets, including contingency budgets, to ensure that they are appropriate to the scope and scale of the project at hand. Some comments received indicated a preference for establishing advance draw-down reserve funds, but OMB finds that this would result in undue risk of improper payments, and additional administrative burden to recover such funds if they were not needed.

This proposal includes language to this effect in section. 621 Selected Items of Cost, C-12 Contingency Provisions.

The ANPG discussed whether OMB should request that the CASB consider increasing from $25 million to $50 million in Federal awards per year (based on the average of an entity's three most recent years) the minimum threshold for institutions of higher education to file a cost accounting standards disclosure statement. Comments received in response to this reform idea were generally positive, though members of the university community argued that institutions of higher education should not be subject to CAS requirements for financial assistance, since in the intent of these standards is duplicative of OMB guidance for grants but the language adds layers of complexity. Further, comments argued that universities should be exempt from requirements to file disclosure statements, on the basis that they are audited on the compliance of their internal policies with cost-accounting standards described in OMB guidance, making the added disclosure duplicative. Further, they find the process to obtain approvals of updates to the form itself to be often subject to frustrating delays. Comments from the auditing community indicate that any audit finding would ultimately rest on whether the entity's internal policies comply with OMB guidance, though some noted that the form itself provides a useful overview of cost accounting practices that have been pre-approved by the Federal government, providing a helpful starting point for any review. OMB recognizes that these requirements are applied solely to universities, posing an additional requirement on a particular group of entities without a clear justification for singling out that particular group.

Ultimately, OMB finds it essential for all recipients to document their cost accounting standards and to provide auditors with any and all documentation required to satisfy audit inquiries. As a result, OMB has reviewed the proposed language in section .502 Standards for Financial and Program Management, paragraph (c). The existing requirement from A-110 that all recipients document their cost accounting practices remains sufficiently comprehensive and unchanged, but this proposal adds a cross reference to section. 506 on Record Retention and Access, which specifically authorizes awarding agencies, Inspectors General, and the Comptroller General of the United States to access these records. In addition, language has been added in section .708 Auditee Responsibilities to require recipients to provide auditors with any and all documentation required to complete the required audit. Finally, in the Single Audit Compliance Supplement, OMB would add language asking auditors to verify that recipients comply with the documentation requirements and to report any non-compliance appropriately as an audit finding.

OMB has also removed the CAS standards from the guidance, and eliminated the requirement for universities to file a disclosure statement that must be approved by the awarding agency. This change applies only to the guidance for grants and cooperative agreements; this in no way alters requirements under the Federal Acquisition Regulation governed by the CASB that apply to entities receiving awards of contracts.

The ANPG discussed allowing for excess or idle capacity in consolidated data centers, telecommunications, and public safety facilities. The goal of this reform is to acknowledge the unique requirements inherent in consolidation of data centers as encouraged by the President in order to deliver a 21st-Century government. Data centers and other types of facilities require excess capacity at their creation in order to accommodate increases and fluctuations in usage later on. Other telecommunications facilities and public-safety emergency-response facilities have similar characteristics.

Comments received in response to this idea were generally positive. This proposal incorporates this idea in section .621 Selected Items of Cost, item C-24 Idle Facilities and Idle Capacity.

The ANPG discussed adding a new item of cost specifically to allow recipients to be reimbursed for expenses associated with the effort to collect improper payment recoveries or related activities. The goal of this reform is to better encourage recipient entities to assist the Federal government to meet the President's directive to improve the Federal government's ability to recover improper payments. The draft language is intended to allow recipients to keep an amount of funds collected to cover expenses of collection efforts, where the amount collected is likely to exceed the expense of collection.

These costs may be considered either indirect or direct costs as most appropriate for the entity in question. Amounts collected that exceed the expense of collection shall be treated in accordance with accepted cash management standards.

Though most comments received in response to this reform idea were generally in favor of it, some in the university community noted that where these are indirect costs, which are capped, additional allowability would not affect them. This proposal includes language in section .621 Selected items of cost, item C-8 Collections of Improper Payments to clarify allowable treatment of these costs.

The ANPG discussed adding an item of cost to the guidance to clarify that gains or losses related to debt arrangements on capital assets due to speculative financing arrangements (such as hedges or derivatives) are unallowable. The goal of this reform idea was to protect the government from the scenario where recipients were charging losses from financing arrangements to awards as direct costs, but not crediting gains when accrued. Comments received in response to this reform were generally negative. Many institutions argued that they necessarily use these types of arrangements in order to balance legitimate investment portfolios that are part of institution-wide financial management plans, not exclusively for management of Federal awards. Nonprofits operating internationally argued that these types of financing arrangements are necessary in order to hedge against risk of currency fluctuations.

OMB concurs with the observations in the comments, and notes that OMB guidance governing grants is not intended to govern how an institution manages its financial portfolio beyond the assets related to Federal awards. Further, we find that the cases where recipients are inappropriately charging losses directly to awards would already be unallowable under existing guidance and would result in an audit finding, so additional guidance is not needed to mitigate these risks. Based on comments received, OMB has not included language to this effect.

The ANPG discussed providing non-profit organizations an example of the required certification (Certificate of Indirect Costs) similar to the information that is already provided for state, local, and tribal governments. The goal of this reform idea would be to provide uniformity in documentation requirements across different types of entities.

Though comments from the nonprofit community were generally favorable, the university community objected to this reform and argued that the certificate of indirect costs should be eliminated for all types of entities. They argued that there are other remedies available to the Federal government if an institution is alleged to have committed fraud, and the certification includes unfortunate language that diminishes the spirit of the collaboration between these organizations and the Federal government. Though OMB continues to see value in the certification of indirect costs by a senior official of the entity, this proposal modifies the language in the certification to be aligned with the language in the state/local/tribal certification, which articulates the certification using more positive language. This proposal is included in Appendix V—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Non-Profit Organizations, and provides slightly modified language for institutions of higher education in Appendix IV—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education.

The ANPG discussed providing for non-profit organizations an example of indirect cost proposal documentation requirements similar to the information provided for state, local, and tribal governments. The goal of this reform idea would be to provide uniformity in documentation requirements across different types of entities. Comments received in response to this idea as originally articulated were generally neutral. However, a broader principle of this reform effort has been to eliminate examples from the proposed guidance, as they can ultimately cause more confusion than clarity as over time they tend to be treated as the rule. Instead, OMB will provide guidance on documentation for justification of indirect cost rates that will more likely take the form of an instruction manual such as the one previously published by the Department of Labor (found at http://www.dol.gov/oasam/programs/boc/costdeterminationguide/main.htm#toc ) rather than specific examples. As a result, this proposal does not provide such an example, and further eliminates such examples for other types of entities.

In response to the ANPG, OMB received a number of suggestions for ways that existing guidance could be clarified beyond those articulated in the ANPG. OMB reviewed these and anticipates that clarifications made in the draft language in subchapter F may address many of them. Particular examples of requests that may have significant policy implications are:

A. Agency Exceptions to Use of Negotiated Cost Rates (Section .616 Indirect (F&A) costs)). Many entities, in particular institutions of higher education, raised concern that Federal agencies do not always honor negotiated indirect cost rates, despite existing language in relevant circulars that appears to instruct them to do so. OMB recognizes that agencies do make exceptions to the general policy of reimbursing indirect costs at governmentwide negotiated rates. Further, OMB recognizes that the current system calculates indirect cost rates as an average across all Federal awards. As a result, for any given award, the actual associated indirect cost will fall either above or below the negotiated rates, theoretically in even proportions.

In this proposal section .616 provides draft language to clarify the circumstances under which agencies may make exceptions to the negotiated rate. These include where exceptions are provided for in statute or regulation, or where the agency head has made a determination that the exception is important to the success of the program based on documented justification. Agency heads shall notify OMB of any approved deviations, so that OMB maintains a governmentwide view of the application of negotiated rates. OMB anticipates that programs with longstanding historical exceptions, such as NIH training grants, will continue within the new approval process. This stringent requirement for agency head approval should provide better transparency and understanding of these exceptions, and properly limit these exceptions to help ensure they are justified when they occur.

In addition, new language in section .502 Standards for Financial and Program Management provides that voluntary committed cost sharing is not expected under Federal research proposals and is not to be used as a factor in the review of applications or proposals, except where otherwise required by statute. This is intended to ensure that research proposals are evaluated on their merit, and that cost sharing expectations where they exist are consistent for all applicants.

B. Clarifications of cost principles for information technology. OMB received several suggestions from the National Association of State Chief Information Officers (NASCIO) that requested clarification of the cost principles for information-technology systems. The first of these was a request that the item of cost for interest articulate that financing costs are allowable for intangible assets as well as capital assets such as large buildings. OMB has included proposed language to this effect in section .621 Selected Items of Cost. In addition, NASCIO requested that OMB clarify guidance on whether provisions in section .503 Property Standards (d) Equipment may apply to equipment for information technology systems which have been consolidated. In particular, NASCIO requested including IT systems among the equipment which, when no longer needed by the Federal program for which it was originally purchased, may be used to support other Federally-funded activities. OMB has included proposed language to this effect in the above mentioned section.

C. Clarification of costs related to family-related leave and dependent care. Existing guidance has long allowed recipient institutions to establish their own documented institutional policies around fringe benefits and travel, and to fund external meetings and conferences provided they meet the conditions established by the relevant item of cost. However, OMB received suggestions from the American Association of University Women and other organizations indicating that because family-related leave and dependent care are not discussed specifically in OMB guidance, there may be confusion over the documentation required to establish their allowability. In response, we have included specific language in section .621, item C-11 Compensation—Fringe Benefits, C-32 Meetings and Conferences (external) and C-53 Travel Costs to clarify the requirements for documentation of these costs. This language does not require adoption of any new practices, and best mitigates risk of abuse of these policies by clearly aligning them with the existing requirement that any such costs are only allowable to the extent they are reasonable and consistent with written institution-wide policy and practice.

D. Participant support costs. Existing guidance that applies only to nonprofit entities states that participant support costs are allowable when approved by the awarding agencies, and also notes that these costs are generally not included in calculations of modified total direct costs. This proposal would expand that language to all recipient entities in order to eliminate ambiguity in the guidance and to ensure appropriate Federal oversight and reimbursement for these types of expenses. Proposed language is in section .621, item C35 Participant Support Costs.

This section discusses ideas for changes that would be made to the audit guidance that is contained in Circular A-133 on Audits of States, Local Governments, and Non-Profit Organizations and in Circular A-50 on Audit Follow-up. The following ideas for reform were discussed in the ANPG.

The ANPG discussed whether changing the Single Audit framework could enable agencies to focus their oversight and follow-up resources in the most efficient and effective way for targeting improper payments, waste, fraud, and abuse. The notice discussed options to raise the threshold for single audits from $500,000 to $1 million. Further, the notice discussed whether audits for entities expending between $1 million-$3 million could be streamlined to only two types of compliance requirements.

The goal of these reform ideas was to allow agencies to concentrate their audit oversight and follow-up resources more closely on areas of highest risk of waste, fraud, and abuse, consistent with EO 13520. For this purpose, OMB considers degree of risk as a combination of the likelihood that there is an internal control weakness multiplied by the possible consequence in dollars if there is. This calculation recognizes that an entity spending the greatest amount of money with the greatest likelihood of an internal control weakness poses the greatest risk to integrity of Federal funds.

One of the questions OMB posed to commenters in the ANPG was the extent to which entities make use of the Single Audit in order to manage programs and provide oversight over subrecipients. The answer to this question in a great majority of responses was that entities do make use of the Single Audit as an important oversight tool, and if the threshold were significantly raised entities would have to make use of different tools to provide oversight over Federal funds. Entities who would fall below the raised threshold inquired about what types of oversight could replace the Single Audit if it were no longer in place.

OMB received significant feedback from the audit community (e.g. certified public accountants, state auditors, and their professional organizations) that argued against a streamlined audit for entities expending between $1 million and $3 million in Federal awards. This community argued that inconsistencies in the types of entities receiving funds within a particular program would make it difficult to specify the one or two types of compliance requirements that would universally apply. Further, pass-through entities expressed concern that varying requirements significantly by program and size of entity would make it more administratively burdensome to oversee over subawards.

OMB also received several additional suggestions about how to re-configure the single audit coverage framework in order to best target risk. These suggestions included raising the threshold for determinations of major programs, changing the requirement for auditors to evaluate type B programs, raising the threshold for the amount of questioned costs, and requiring audited financial statements for all entities that fall below a new, higher single audit threshold.

As a result, this proposal contains the following changes in Subchapter G, Audit Requirements:

(A) Audit threshold. The threshold for the Single Audit Requirement would be raised from $500,000 to $750,000. This change would allow agencies to focus audit-follow-up resources on higher-risk entities. Further, this provides administrative burden relief to the roughly 5,000 non-Federal entities expending less than $750,000 in Federal awards while maintaining single audit coverage over more than 99 percent of the funds that are currently covered.

(B) Major Program Determination. This proposal includes changes to all four steps of the risk-based approach to focus on the areas of highest risk and reduce the number of major programs tested. Under the risk-based approach the auditor calculates a threshold (based on amount of Federal dollars expended) above which programs are designated “Type A” and below which they are “Type B”; and follows a prescribed process to assess program risk to identify which programs will be audited as major programs. The auditor uses the guidance in the Compliance Supplement to test major program requirements and provides opinion level audit assurance on each major program. (See section .719 Major Program Determination) The proposed changes to this process are as follows:

1. Increase the minimum threshold for a program to be Type A from $300,000 to $500,000 (but do not change the alternative three percent of total Federal awards expended). (Step 1)

2. Refocus the criteria for a Type-A program to qualify as high-risk. Revised criteria would result in a Type A program being designated as high-risk only when in the most recent period the program failed to receive an unqualified opinion; had a material weakness in internal controls; or had questioned costs exceeding five percent of the program's expenditures. This change puts the focus of the risk determination on the most central questions of whether the program received a qualified opinion or had weak internal controls, as opposed to whether the program may have received any minor finding that may or may not have been essential to the financial integrity of the program. The requirement that a Type-A program be audited as major at least once every three years, regardless of whether it is high- or low-risk remains unchanged. (Step 2)

3. Reduce the number of high-risk Type-B programs that must be tested as major programs from at least one half to at least one fourth of the number of the low-risk Type A programs and allow the auditor to stop the Type-B program risk assessment process after this number of high risk Type-B programs are identified. (Steps 3 and 4)

4. Simplify the calculation to determine relatively small Type-B programs for which the auditor is not required to perform a risk assessment from the current stepped approach to a flat 25 percent of the Type A/B threshold. The change allows more Type-B programs to be classified as relatively small. (Step 3)

5. Reduce the minimum coverage required under the percentage-of-coverage rule from the current 50 percent for a regular auditee and 25 percent for a low-risk auditee to at least 40 percent for a regular and 20 percent for a low-risk auditee. (Step 4)

These changes to the major program determination will result in more targeted audit coverage of programs with internal control weaknesses. They provide appropriate burden relief for non-Federal entities that materially comply as evidenced by an unqualified audit opinion, and no material weaknesses in internal controls or material questioned costs. Because large non-Federal entities (such as a larger state government) often have at least one audit finding in a program, under existing guidance, for these entities, almost all Type A programs may qualify as high-risk. The proposed changes provide an incentive for these non-Federal entities to focus on correcting the deficiencies that indicate underlying weaknesses in internal controls.

(C) Questioned Costs. Increase the minimum threshold for reporting questioned costs from $10,000 to $25,000 to focus on the audit findings presenting the greatest risk. This will eliminate smaller audit findings which require the investment of follow-up resources yet are unlikely to indicate significant weaknesses in internal controls. (See section .717 Audit Findings)

In addition, to address questions about the required level of subrecipient oversight, OMB has consolidated and clarified relevant guidance on subrecipient monitoring requirements in section .501 Subrecipient Monitoring and Management.

If these reforms to the audit threshold were implemented, OMB would consider issuing further guidance about the transition to the GAGAS-only audit and the extent to which recipients with known weaknesses would be required to resolve them before being subject to it.

The ANPG discussed streamlining the types of compliance requirements found in the OMB Circular A-133 Compliance Supplement. The notice discussed streamlining these requirements by targeting a subset for increased testing, larger sample sizes, or lower levels of materiality, while de-emphasizing others, with an exception allowing Federal agencies on a program-specific basis to place higher emphasis on those other specific types of requirements believed to prevent waste, fraud, or abuse.

The goal of this reform idea would be to refocus the Compliance Supplement to better target areas of risk, thereby reducing the audit burden on non-Federal entities and allowing agencies to concentrate their oversight and audit follow-up resources on the requirements targeting the highest risk of improper payments, waste, fraud, and abuse.

Comments on this section from the audit community pointed out that to specify the amount of testing done for a particular type of compliance requirement would be incredibly complex across programs, and would likely conflict with the generally accepted auditing standards, which require auditors to use their professional judgment about the level of testing necessary for any particular entity. Moreover, recipients were concerned that the exception that allowed Federal agencies to add back requirements that they felt were necessary for the program would result in even more administrative burden.

One popular observation, particularly from state governments, was that in earlier iterations of discussions on these topics a reform idea was to eliminate certain types of compliance requirements altogether; many of these commenters argued that this elimination could be a clean way to reduce burden across programs.

As a result of this feedback, OMB proposes to limit the types of compliance requirements in the compliance supplement to the following group of key compliance requirements which, if violated, are most likely to result in improper payments, waste, fraud, or abuse. This approach is consistent with early recommendations received and OMB's October 2009 Single Audit Internal Control Project for American Recovery and Reinvestment Act (ARRA), which limited testing to the following basic types of compliance requirements:  1

A. Activities Allowed or Unallowed and B. Allowable Costs/Cost Principles (combined)—The amounts reported as expenditures and claimed for matching will be tested for allowable activities and charges that were reasonable, allowable, and allocable under applicable OMB guidance and terms and conditions of award or grant agreement. Some review of H. Period of Availability of Federal Funds would likely be incorporated in a determination of allowability under this requirement. The Matching part of G. Matching, Level of Effort, and Earmarking would also be covered, since testing under this requirement will include a determination of whether costs claimed for matching are allowable, allocable, and reasonable. Documentation of appropriate matching claimed would still be reviewed under L. Reporting.

C. Cash Management —The non-federal entity followed procedures to minimize the time elapsing between the transfer of funds from the U.S. Treasury, or pass-through entity, and their disbursement.

E. Eligibility —The records show that those who received services or benefits, either directly or on behalf of someone else, were eligible to receive them: benefits were provided in the right amount, to the right person, for the right purpose, and at the right time.

L. Reporting —Federal financial reports, performance reporting, claims for advances and reimbursement, and amounts claimed as matching are accurate and include all activity of the reporting period, are supported by applicable accounting records, and are fairly presented in accordance with program requirements. As noted above, this would include review of documentation of amount reported for matching.

M. Subrecipient Monitoring —The pass-through entity (1) Made sub-awards only to eligible entities, (2) identified awards, compliance requirements, and payments to the subrecipient prior to disbursement, (3) monitored subrecipient activities to ensure subrecipient compliance, and (4) performed the audit resolution function (e.g., ensured proper audit submitted on time, followed up on audit findings, including issuance of a management decision, and ensuring that subrecipients took timely and appropriate corrective action).

N. Special Tests and Provision —Requirements that are unique to each federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program which could have a direct and material effect on a major program.

The seven compliance requirements that would be eliminated from the compliance supplement would be D. Davis Bacon, F. Equipment and Real Property Management, the latter two components of G. Matching, Level of Effort, and Earmarking, H. Period of Availability of Federal Funds except where tested to verify allowable/unallowable costs, I. Procurement and Suspension and Debarment, J. Program Income and K. Real Property Acquisition and Relocation Assistance.

In order to accommodate programs where these requirements are essential to the oversight of the program and required by statute or regulation, OMB will consider requests from agencies to add one or more of these requirements back under special tests and provisions. Such requests for inclusion would only be accepted when compliance is required by statute or regulation, and when the federal agency (1) makes a strong case for how non-compliance with these types of requirements could result in increased risk of improper payments, waste, fraud, or abuse; and (2) provides a targeted compliance supplement write-up identifying improper-payment risks and focusing audit tests to address these risks. If adopted, OMB will take appropriate steps to ensure consistency between programs for the same compliance requirement.

OMB believes that this approach will focus Single Audit resources where the risks to financial integrity are greatest and eliminate the more minute detail from audit reports that distracts agencies from identifying and addressing significant weaknesses in programs. This change is not reflected in the draft proposal but would be implemented through the first Compliance Supplement to be issued after the proposed change becomes final.

The ANPG discussed various policy options to strengthen audit follow-up at the Federal agency level. Ideas contemplated included:

• Requiring agencies to designate a senior accountable agency official to oversee the audit resolution process;

• Requiring agencies to implement audit-risk metrics including timeliness of report submission, number of audits that did not have an unqualified auditor opinion on major programs, and number of repeat audit findings;

• Encouraging agencies to engage in cooperative audit resolution with recipients; and

• Encouraging agencies to take a pro-active approach to resolving weaknesses and deficiencies, whether they are identified with single specific programs or cut across the systems of an audited recipient.

Further, to improve audit follow-up, the notice contemplated digitizing Single Audit reports into a searchable database to support analysis of audit results by Federal agencies and pass-through entities.

The goal of these reforms is to strengthen audit resolution policies to result in agencies taking a more pro-active and collaborative approach towards following-up on audit findings, which should result in a decrease in audit findings and program risk over time. Combined with the reforms above to focus the Single Audit on the major programs and types of compliance requirements likely to result in the greatest risk of waste, fraud, and abuse, this reform would strengthen the oversight and response to those high-risk findings that were identified. As underlying programmatic weaknesses are resolved and repeat findings reduced, both recipients' and agencies' audit burdens would be lessened.

Comments received in response to these ideas were generally positive, and this proposal includes language on these ideas in section .713 Responsibilities. One additional suggestion OMB received was to consider making audit reports publicly available through the Federal Audit Clearinghouse. OMB acknowledges that making these reports public would reduce burden on the pass-through entities as they work to follow-up with subrecipients to obtain reports needed for oversight. OMB will work with the Federal Audit Clearinghouse to determine if privacy concerns over personally-identifiable information and confidential-business information can be overcome. One idea is that these concerns could be addressed by explicitly placing the responsibility on non-Federal entity uploading the reports to ensure that no such information is included. OMB has included draft language in this proposal section. 713 Responsibilities to reflect the possibility that these concerns will be sufficiently resolved.

OMB will consider providing additional guidance on agency use of cooperative audit-resolution mechanisms and metrics to track audit effectiveness in order to ensure agencies are held accountable for improvements to use of the Single Audit process. OMB believes that taken together these steps will result in a more robust single audit framework providing strong oversight over high-risk programs, entities, and findings and providing incentives for prompt corrective action to strengthen the overall integrity of our Federal financial-assistance programs.

The ANPG discussed strengthening language that would reinforce cross-agency coordination of audits and audit follow-up.

The goal is to reduce redundancy and burden by making more explicit the existing requirement that the Federal cognizant or oversight agency coordinate audits or reviews by other Federal awarding agencies that are made in addition to the Single Audit. This proposed change would not affect the ability of Inspectors General to conduct audit work as deemed necessary in accordance with the Inspector General Act of 1978, as amended.

This proposal includes language to this effect in section .713 Responsibilities, which, though not a change in policy, makes clear that it is the responsibility of the cognizant or oversight agency to coordinate audits or reviews by other Federal agencies that are made in addition to the Single Audit.

The ANPG discussed the idea that for subrecipients receiving a majority of their awards directly from the Federal government, the Federal cognizant or oversight agency might be the most appropriate entity to conduct follow-up on audit findings that cut across multiple programs.

The goal of this reform is to eliminate duplicative audit follow-up work performed by a pass-through entity without providing significant additional work to Federal agencies that already will be following up on these same audit findings, as well as to simplify the follow-up for the subrecipient.

Comments received in response to this reform were generally positive, though some commenters particularly in the university community argued that pass-through entities should not be at all responsible for conducting audit follow-up for subrecipients that receive a majority of their funds directly.

This proposal attempts to address this issue at both the Federal and pass-through level by making management decisions available through the Federal Audit Clearinghouse, on the possibility that privacy-related concerns articulated above can be resolved. This proposal articulates that the cognizant or oversight agency will provide management decisions for all findings in which it has funds directly implicated, and will make those management decisions publicly available so that other Federal awarding agencies and pass-through entities may decide to rely on them, or may decide to issue their own decisions, as appropriate. This should streamline the audit-resolution process and result in relieved administrative burden both for the Federal awarding agencies and pass-through entities as well as for the subrecipient.

In response to the ANPG, OMB received a number of additional suggestions for ways that existing guidance on audit requirements could be clarified. OMB reviewed these and anticipates that clarifications made in the draft language in Subchapter G—Audit Requirements will address many of them.

One additional idea for reform suggested by many in the Federal agency and audit community was to reduce the amount of time for audit submission from the current nine months down to three months or six months. OMB supports this idea, but notes that it will require changes to legislation to accomplish.

In addition to the ideas discussed above, OMB received many ideas for reforms to Federal grant policies which have merit but are not properly addressed through changes to governmentwide guidance. Some of these ideas include better coordination of regulations that are applicable or have an impact on Federal grant; use of the Federal rule-making process for agency grants policies; improvements in data quality across systems that support the Federal grants community; looking at regulations governing electronic imaging for documents for both grants and contracts; facilitating better coordination, consistency, and transparency between indirect cost rate setting agencies; and improving the training available to Federal grants professionals. OMB is committed to continuing improvements in the policies, practices, and systems that support the Federal grants community under the continuing leadership of the COFAR. OMB and the COFAR will continue to work together to reach out to stakeholders to continue these discussions and to evaluate where further improvements may continue to be made.

Title III, Part C  1 of the Energy Policy and Conservation Act of 1975 (EPCA or the Act), Public Law 94-163 (42 U.S.C. 6311-6317, as codified), added by Public Law 95-619, Title IV, § 441(a), established the Energy Conservation Program for Certain Industrial Equipment, which includes provisions covering the commercial heating and air-conditioning equipment that is the subject of this notice. 2 In general, this program addresses the energy efficiency of certain types of commercial and industrial equipment. Relevant provisions of the Act include definitions (42 U.S.C. 6311), energy conservation standards (42 U.S.C. 6313), test procedures (42 U.S.C. 6314), labelling provisions (42 U.S.C. 6315), and the authority to require information and reports from manufacturers (42 U.S.C. 6316).

Section 342(a) of EPCA concerns energy conservation standards for small, large, and very large, air-cooled commercial package air conditioning and heating equipment (also known generally as unitary air conditioning and heating equipment). (42 U.S.C. 6313(a)) This category of equipment has a rated capacity between 64,000 Btu/h and 760,000 Btu/h. The equipment is designed to heat and cool commercial buildings and is typically located on the building's rooftop. Section 5(b) of the American Energy Manufacturing Technical Corrections Act of 2012 (Pub. L. 112-210 (Dec. 18, 2012) (AEMTCA)) amended Section 342(a)(6) of EPCA, which concerns the amendment of energy conservation standards for certain types of commercial and industrial equipment. At issue here is the inclusion of a requirement for DOE to consider amending the standards for “any covered equipment as to which more than 6 years has elapsed since the issuance of the most recent final rule establishing or amending a standard for the product as of the date of AEMTCA's enactment, December 18, 2012. (42 U.S.C. 6313(a)(6)(C)(vi)) DOE must issue either a notice of determination that the current standards do not need to be amended or a notice of proposed rulemaking containing proposed standards by December 31, 2013. See 42 U.S.C. 6313(a)(6)(C)(i) and (vi) (as amended by AEMTCA). 3

For small, large, and very large air-cooled commercial package air conditioners (ACs) and heating pumps (HPs), the last final rule issued by DOE was on October 18, 2005, which codified both the amended standards for small and large equipment and the new standards for very large equipment set by the Energy Policy Act of 2005, Public Law 109-58 (Aug. 8, 2005) (EPAct 2005). 70 FR 60407. Consistent with the new requirements Congress enacted as part of AEMTCA, DOE is required to publish either a notice of determination that standards for these equipment types do not need to be amended, or a notice of proposed rulemaking proposing amended energy conservation standards for these equipment types.

In order to meet the new requirements added by AEMTCA, DOE is reviewing the standards that are already in place affecting those products listed in 42 U.S.C. 6313(a) for which more than six years have elapsed since the issuance of the most recent final rule. Under Section 6313(a), DOE must either adopt those standards developed by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE)—or to adopt levels more stringent than the ASHRAE levels if there is clear and convincing evidence in support of doing so. AEMTCA added to this procedure a specified deadline within which DOE must act with respect to those standards for which more than six years have elapsed since the issuance of the relevant final rule. (42 U.S.C. 6313(a)(6)(A)(i) and (vi)) Today's notice represents the initiation of the mandatory review process imposed by AEMTCA and seeks input from the public to assist DOE with its determination on whether to amend the current standards pertaining to small, large, and very large air-cooled commercial package air conditioners and heating equipment ranging in cooling capacity from 65,000 Btu/h to 760,000 Btu/h. In making this determination, DOE must evaluate whether there is clear and convincing evidence that more stringent national standards than the ones established pursuant to the ASHRAE-process described above would result in significant energy savings, be technologically feasible and economically justified. By statute, DOE may promulgate or amend existing energy conservation standards only if the resulting standards would (1) yield a significant savings in energy use and (2) be both technologically feasible and economically justified. The current Federal standards, for this equipment, are shown in Table 1.

On October 29, 1999, ASHRAE and the Illuminating Engineering Society of North America (IESNA) adopted Standard 90.1-1999, which included amended efficiency levels for commercial air conditioners and heat pumps. DOE evaluated these efficiency levels and subsequently adopted levels affecting 18 different equipment categories in a 2001 final rule. 66 FR 3336 (Jan. 12, 2001). However, the final rule's notice also indicated that DOE planned to further evaluate commercial air-cooled air conditioners and heat pumps with rated capacities between 65,000 Btu/h and 240,000 Btu/h because the initial analyses indicated that more stringent standards would be technologically feasible and economically justified. Id. at 3349. On June 12, 2001, the Department published a Framework Document that described analytical approaches to evaluate energy conservation standards for these larger commercial air conditioners and heat pumps (i.e. capacities between 65,000 Btu/h and 240,000 Btu/h) and presented this analytical framework to stakeholders at a public workshop. On July 29, 2004, DOE issued an Advance Notice of Proposed Rulemaking (ANOPR) to solicit public comments on its preliminary analyses for this equipment. 69 FR 45461. Subsequently, Congress enacted EPAct 2005, which, among other things, established amended standards for small and large commercial air-cooled air conditioners and heat pumps and new standards for very large air-cooled air conditioners and heat pumps. As a result, EPAct 2005 displaced the rulemaking effort that DOE had already begun. DOE codified these new statutorily-prescribed standards on October 18, 2005. 70 FR 60407.

DOE generally follows specific criteria when prescribing amended standards for covered equipment. See generally 42 U.S.C. 6313(a)(6)(B)-(C). An amended standard for covered equipment must be designed to achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified. Furthermore, DOE may not adopt any amended standard that would not result in the significant conservation of energy. Moreover, DOE may not prescribe a standard for certain equipment, if (1) no test procedure has been established for the equipment, or (2) if DOE determines by rule that, in cases where a standard has been proposed, the proposed standard is not technologically feasible or economically justified. In deciding whether a proposed amended standard is economically justified, DOE must determine whether the benefits of the standard exceed its burdens. DOE must make this determination after receiving comments on the proposed standard, and by considering, to the greatest extent practicable, the following seven factors:

1. The economic impact of the standard on manufacturers and consumers of the equipment subject to the standard;

2. The savings in operating costs throughout the estimated average life of the covered equipment in the type (or class) compared to any increase in the price, initial charges, or maintenance expenses for the covered products that are likely to result from the imposition of the standard;

3. The total projected amount of energy savings, or as applicable, water savings, likely to result directly from the imposition of the standard;

4. Any lessening of the utility or the performance of the covered equipment likely to result from the imposition of the standard;

5. The impact of any lessening of competition, as determined in writing by the Attorney General, that is likely to result from the imposition of the standard;

6. The need for national energy and water conservation; and

7. Other factors the Secretary of Energy (Secretary) considers relevant. (See generally 42 U.S.C. 6313(a)(6)(B))

As part of this decision-making process, there must also be clear and convincing evidence that the adoption of a national standard that is more stringent than the level set by ASHRAE would result in the significant additional conservation of energy and is technologically feasible and economically justified. See generally 42 U.S.C. 6313(a)(6)(A). Accordingly, EPCA requires that there be clear and convincing evidence that the adoption of standards more stringent than those set by ASHRAE would lead to significant energy savings and that achieving those standards would be both technologically feasible and, separately, economically justified using the seven criteria listed above.

In assessing the appropriateness of amending the standards that are currently in place for small, large, and very large commercial air-cooled air conditioners and heat pumps, DOE is planning to conduct in-depth technical analyses in the following areas to meet the statutory criteria for prescribing amended standards: (1) Engineering; (2) energy use; (3) markups; (4) life-cycle cost and payback period; (5) national impacts; (6) manufacturer impacts; (7) emission impacts; (8) utility impacts; (9) employment impacts; and (10) regulatory impacts. These analyses are the same ones DOE routinely applies when evaluating potential standards for a given type of product or equipment. DOE will also conduct several other analyses that support those previously listed, including the market and technology assessment, the screening analysis (which contributes to the engineering analysis), and the shipments analysis (which contributes to the national impact analysis). As detailed throughout this RFI, DOE is specifically publishing this notice as the first step in the analysis process and is specifically requesting input and data from interested parties to aid in the development of the technical analyses.

As part of this analysis, DOE is giving very serious consideration to the possible replacement of the existing efficiency descriptor (i.e., energy efficiency ratio (EER)) with a new energy-efficiency descriptor (i.e., integrated energy efficiency ratio (IEER)). Unlike the EER metric, which utilizes only the efficiency of equipment operating at full load conditions, IEER factors in the equipment's efficiency while operating at part-load conditions of 75%, 50%, and 25% of capacity as well as during full load. This is accomplished by weighting the full- and part-load efficiencies with the average amount of time operating at each loading point; IEER provides a more representative measure of the energy consumption in actual operation. Moreover, IEER incorporates variations of outside temperature from design temperatures for part-load operation that further increase the accuracy of the metric.

Since 2007, ASHRAE has been specifying in its Standard 90.1 the use of an energy efficiency metric that captures part-load performance. ASHRAE first published specifications for part-load energy efficiency in their Standard 90.1-2007 based on the integrated part load value (IPLV). In Addendum's from the 2008 Supplement to Standard 90.1-2007, ASHRAE replaced IPLV for commercial air conditioning and heat pump equipment with IEER, effective January 1, 2010. According to ASHRAE, that change was made to improve the accuracy when rating part-load performance of commercial air conditioning and heating equipment. 4

EPCA authorizes DOE to establish “energy conservation standards” that set either a single performance standard or a single design requirement—not both. See 42 U.S.C. 6311(18). As such, DOE can choose to implement an energy conservation standard using one or the other. In the case of small, large, and very large commercial air-cooled ACs and HPs, ASHRAE Standard 90.1 recommends two performance requirements; EER and IEER. Because EPCA does not specify a particular metric that DOE must use when measuring the efficiency of the equipment at issue in this notice, changing that metric from one type (e.g. EER) to another (e.g. IEER) is permissible. DOE also notes that in amending standards for a given type of product or equipment, DOE must ensure that a potential new standard would not result in reduced stringency when compared to the current Federal standards. See, e.g. 74 FR 36322 and 42 U.S.C. 6313(a)(6)(B)(iii)(I).

As part of its consideration, DOE examined whether part-load performance is currently being used and accepted for rating commercial air conditioners and heat pumps. On January 2, 2009, the Environmental Protection Agency (EPA) issued a draft ENERGY STAR specification for Light Commercial Air Conditioners and Heat Pumps products, i.e., small and large air-cooled air conditioners and air-source heat pumps, which proposed to adopt IEER as part of the minimum energy efficiency criteria. 5 In a January 30, 2009 letter regarding EPA's draft, AHRI expressed support for IEER as well as for the ENERGY STAR program to adopt IEER. Recently, the Consortium for Energy Efficiency (CEE), an organization for energy efficiency advocates, has adopted IEER for its Tier 0, 1, and 2 efficiencies for unitary air conditioning and heat pump products, i.e., small, large, and very large air-, water-, and evaporatively-cooled air conditioners and air- and water-source heat pumps. 6

IEER has also gained support through efforts such as DOE's Commercial Building Energy Alliance (CBEA) technology transfer program, which sponsors the High Performance Rooftop Unit Challenge (RTU Challenge). This program provides a market mechanism that reduces barriers for manufacturers to procure greater than 18-IEER 10-ton equipment and encourages the private sector to commit to adopt energy-efficient equipment. Carrier, Lennox, 7AC Technologies, and Rheem are participating in the RTU Challenge, while participant McQuay has already produced certified equipment that meets or exceeds 18 IEER. In conjunction with manufacturer support, fourteen CBEA-member private entities, 7 such as Target Corp., Macy's, Inc., McDonald's Corp., and others, have also signaled their support and indicated their strong interest in potentially purchasing high-efficiency rooftop units, a sign of their confidence in the RTU Challenge and its ability to use IEER to accurately portray the energy use of commercial air-cooler air conditioners and heat pumps in the field.

Lastly, DOE conducted a market analysis to compare the two metrics based on publicly available ratings of equipment currently available in the market. DOE is making available for comment a document that provides the methodology and results of the investigation of the relationship between IEER and EER for commercial air-cooled air conditioners and heat pumps with cooling capacities between 65,000 Btu/hr and 760,000 Btu/hr (i.e., 5 and 63 tons). In addition, it looks at the variance of heating efficiency (i.e., coefficient of performance or COP) with IEER and EER. The document is available at: http://www1.eere.energy.gov/buildings/appliance_standards/product.aspx/productid/77. Ultimately, if DOE were to decide after considering the comments in response to this notice to migrate to the IEER metric, DOE would transition the existing Federal energy conservation standards to the new metric by identifying the appropriate baseline energy-efficiency levels to use in the analysis. From that point forward, all of the technical and economic analyses would be conducted using the new metric, IEER, in the evaluation of potential amended energy conservation standards for small, large, and very large air-cooled ACs and HPs. Consequently, DOE seeks comments and data regarding its consideration of transitioning metrics and the analysis conducted on the currently available models.

In the next section, DOE identifies a variety of issues on which it seeks input and data in order to aid its development of the technical and economic analyses to determine whether amended energy conservation standards may be warranted. In addition, DOE welcomes comments on other issues relevant to the conduct of this rulemaking that may not specifically be identified in this notice.

DOE recently reviewed and adopted amended test procedures for small, large, and very large, air-cooled commercial package air conditioning and heating equipment in a final rule published on May 16, 2012. 77 FR 28928. These test procedures incorporate by reference certain sections of the Air-Conditioning, Heating, and Refrigeration Institute's (AHRI) 2007 Standard for Performance Rating of Commercial and Industrial Unitary Air-Conditioning and Heat Pump Equipment (AHRI 340/360-2007) along with the addition of a handful of other additional testing specifications. AHRI is an industry trade group representing air conditioning, heating and refrigeration manufacturers.

In light of DOE's consideration to switch from EER to IEER, DOE conducted a preliminary review of the current Federal test procedures for small, large, and very large air-cooled ACs and HPs. As part of its final rule issued on May 16, 2012, DOE adopted AHRI Test Standard 340/360-2007. 77 FR 28928. DOE found that the methods and procedures for testing and rating equipment with an IEER already exist within its test procedure. However, DOE specifically seeks comment on any test procedure issues relating to IEER and the existing Federal procedures that DOE should consider as part of this rulemaking.

(A1) DOE requests comment on the existing DOE test procedure for small, large, and very large air-conditioning equipment and its suitability for establishing a performance rating based on IEER.

The market and technology assessment provides information about the commercial air conditioner and heat pump industry that will be used throughout the rulemaking process. For example, this information will be used to determine whether the existing equipment class structure requires modification based on the statutory criteria for setting such classes and to explore the potential for technological improvements in the design and manufacturing of such equipment. The Department uses qualitative and quantitative information to assess the past and present industry structure and market characteristics. DOE will use existing market materials and literature from a variety of sources, including industry publications, trade journals, government agencies, and trade organizations. Additionally, DOE will consider conducting interviews with manufacturers to assess the overall market for commercial air conditioners and heat pumps.

The current equipment classes as established in EPAct 2005 for small, large, and very large, air-cooled ACs and HPs divide this equipment into twelve equipment classes characterized by rated cooling capacity, equipment type (air conditioner versus heat pump), and heating type. As a starting point, DOE plans to use the existing equipment class structure as shown in Table 1 of 10 CFR 431.97. However, DOE will consider additional equipment classes for capacities or other performance-related features that inherently effect efficiency and justify the establishment of a different energy conservation standard. For instance, additional equipment classes may be warranted to differentiate between split and packaged type units or to further segment the capacities of the equipment covered in this analysis.

(B1) DOE requests feedback on the current equipment classes and seeks information regarding other equipment classes it should consider for inclusion in its analysis.

DOE uses information about existing and past technology options and prototype designs to help identify technologies that manufacturers could use to meet and/or exceed energy conservation standards. In consultation with interested parties, DOE intends to develop a list of technologies to consider in its analysis. Initially, this list will include all those technologies considered to be technologically feasible and will serve to establish the maximum technologically feasible design. DOE is currently considering the specific technologies and design options listed below.

• Electro-hydrodynamic enhanced heat transfer.

• Copper rotor motor with improved efficiency.

• Improved refrigerants.

• Evaporator coil area (keeping the number of coil rows the same).

• Condenser coil area (keeping the number of coil rows the same).

• Coil rows (keeping face area the same).

• Condenser fan diameters.

• Evaporator fan.

• Air leakage paths within the unit.

• Coil row (keeping coil heat transfer the same).

• Microchannel heat exchangers.

• Deep coil heat exchangers.

• Low-pressure-loss filters.

• High efficiency fan motors.

• High efficiency compressors.

• Multiple compressors.

• Thermal expansion valves.

• Electronic expansion valves.

• Air foil centrifugal fans.

• Backward-curved centrifugal fans.

• Synchronous (toothed) belts.

• Direct-drive fans.

• High efficiency propeller condenser.

• High-side solenoid valve or discharge line check-valve to minimize pressure equalization.

• Heat-pipes (for high latent loads).

• Sub-coolers.

• Demand-control ventilation strategy.

(C1) DOE seeks information related to these or other unlisted, efficiency improving technologies as to their applicability to the current market and how these technologies improve efficiency of small, large, and very large commercial air-cooler ACs and HPs as rated by AHRI 340/360-2007.

(C2) Additionally, DOE requests comment on which of the listed technologies and/or other technologies not mentioned that may preferentially improve the IEER more than the EER for commercial air conditioners and heat pumps.

The engineering analysis estimates the cost-efficiency relationship of equipment at different levels of increased energy efficiency. This relationship serves as the basis for the cost-benefit calculations for commercial customers, manufacturers, and the nation. In determining the cost-efficiency relationship, DOE will estimate the increase in manufacturer cost associated with increasing the efficiency of equipment above the baseline to the maximum technologically feasible (“max-tech”) efficiency level for each equipment class. The baseline model is used as a reference point for each equipment class in the engineering analysis and the life-cycle cost and payback-period analyses. Typically, DOE would consider equipment that just meets the minimum energy conservation standard as baseline equipment. However, DOE is considering whether to replace the current cooling performance energy efficiency descriptor, EER, with IEER, and a single EER level can correspond to a range of IEERs. If DOE decides to transition to a new efficiency descriptor, DOE would have to establish a baseline IEER for each equipment class, and could consider the minimum, median, average, or maximum IEER in the applicable range.

(D1) DOE requests comment on approaches that it should consider when determining a baseline IEER for each equipment class, including information regarding the merits and/or deficiencies of such approaches.

(D2) DOE also seeks comment on an appropriate baseline IEER for each equipment class and analysis supporting such selected baseline efficiency levels.

(D3) DOE requests information on max-tech efficiency levels achievable in the current market in terms of IEER, EER, and COP as applicable.

In order to create the cost-efficiency relationship, DOE anticipates that it will structure its engineering analysis using the reverse-engineering (or cost-assessment) approach. A reverse-engineering or cost-assessment approach relies on a teardown analysis of representative baseline efficient to highly efficient units that employ maximum technologically feasible designs. A teardown analysis (or physical teardown) determines the production cost of a piece of equipment by disassembling the equipment “piece-by-piece” and estimating the material and labor cost of each component. A supplementary method called a catalog teardown uses published manufacturer catalogs and supplementary component data to estimate the major physical differences between a piece of equipment that has been physically disassembled and another piece of similar equipment. These two methods would be used together to help DOE determine the cost effectiveness of any standards that it may consider as part of a standards rulemaking to amend the levels currently in place.

(D4) DOE requests feedback on using a reverse engineering approach supplemented with catalog teardowns and requests comment on what the appropriate representative capacities would be for each equipment class.

In the 2004 ANOPR, the Department proposed to address the energy efficiency of commercial air-cooled heat pumps by developing functions relating COP to EER. This method was also used by industry to establish minimum performance requirements for ASHRAE 90.1-1999. AHRI supplied the ASHRAE 90.1-1999 committee with curves relating the COP as a function of EER, and the committee then set the minimum COP levels based on EER. 69 FR 45460, 45468. Due to the previous acceptance of this method, DOE is considering a similar approach for this rulemaking. If DOE transitions to use IEER as the energy efficiency descriptor, then DOE may establish minimum COP levels based on IEER. DOE has conducted a market analysis and evaluated the relationship between IEER and COP in a technical support document published to coincide with this notice. 8 DOE recognizes that COP does not integrate part load efficiency and that a correlation between COP and IEER may not be robust for this reason.

(D5) DOE seeks information about potential issues related to using IEER as the cooling performance efficiency metric when developing a correlation between COP and IEER.

To carry out the life-cycle cost (LCC) and payback period (PBP) calculations, DOE needs to determine the cost to the commercial customer of baseline equipment that satisfies the currently applicable standards, and the cost of the more-efficient unit the customer would purchase under potential amended standards. By applying a multiplier called a “markup” to the manufacturer's selling price, DOE is able to estimate the commercial customer's price.

For DOE's 2004 ANOPR, two types of distribution channels were defined to describe how the equipment passes from the manufacturer to the customer. In the first distribution channel, the manufacturer sells the equipment to a wholesaler. The wholesaler sells the equipment to a mechanical contractor, who then sells it to a general contractor. In the final step to this first channel, the general contractor sells the equipment to the customer/end user (and installs it). In the second distribution channel, the manufacturer sells the equipment directly to the customer through a national account. 69 FR 45460, 45476. For this rulemaking, DOE intends to characterize the distribution of equipment with the same channels developed for the 2004 ANOPR, with modifications to reflect the current status of equipment distribution.

(E1) DOE seeks input from stakeholders on whether the distribution channels described above are still relevant for small and large air-cooled commercial air conditioners and heat pumps, and whether they are also relevant for very large air-cooled equipment.

Based on information that equipment manufacturers provided, commercial customers were estimated to purchase 50 percent of equipment through small mechanical contractors, 32.5 percent through large mechanical contractors, and the remaining 17.5 percent through national accounts. In addition, 30 percent of commercial air-conditioning equipment was estimated to be purchased for the new construction market while the remaining 70 percent was estimated to serve the replacement market. In the case of the replacement market, where equipment is purchased through a mechanical contractor, the mechanical contractor purchases equipment directly from the wholesaler (i.e., a general contractor is not involved). 69 FR 45460, 45476.

(E2) DOE seeks input on the percent of equipment being distributed through the various types of distribution channels, and whether the share of equipment through each channel varies based on equipment capacity.

To develop markups for the parties involved in the distribution of the equipment, DOE utilized several sources including: (1) The Air-conditioning & Refrigeration Wholesalers Association's 1998 Wholesaler PROFIT Survey Report to develop wholesaler markups, (2) the Air Conditioning Contractors of America's (ACCA) financial analysis for the heating, ventilation, air-conditioning, and refrigeration (HVACR) contracting industry to develop mechanical contractor markups, and (3) U.S. Census Bureau economic data for the commercial and institutional building construction industry to develop general contractor markups.

(D3) DOE seeks recent data to establish the markups for the parties involved with the distribution of the equipment addressed by today's notice.

The purpose of the energy use analysis is to assess the energy and peak demand savings potential of different equipment efficiencies in the building types that utilize the equipment. DOE intends to base the energy use analysis for the current effort on building simulation data compiled for the 2004 ANOPR. The simulation database includes hourly profiles for over 1,000 commercial buildings, which were based on building characteristics from the 1995 Commercial Building Energy Consumption Survey (CBECS) for the subset of buildings using the type of equipment covered by the standards. Each building was assigned to a specific location and a typical meteorological year hourly weather file (referred to as TMY2) was used to represent local weather. The simulations capture variability in cooling loads due to factors such as building activity, schedule, occupancy, local weather and shell characteristics. Because the building simulation data developed for the 2004 ANOPR are based on the 1995 CBECS, DOE intends to take a number of steps to update the building simulation database for this analytical effort and with any subsequent proposed rulemaking that DOE may issue.

DOE intends to adjust the 1995 CBECS building weights to match the most recent CBECS (2003), and to account for changes to the distribution of total floor space by geographic region and building type. CBECS 2012 is currently in development but will not be available in time for DOE to use as part of its rulemaking effort. In addition, the 1995 CBECS sample may not include examples of recent innovations in building shell or window technologies that reduce cooling loads. DOE intends on reviewing other data sets, for example, the technology penetration curves used in the National Energy Modeling System (NEMS) commercial demand module, 9 to determine whether a significant fraction of the current building population is not represented by the building simulation database used for the 2004 ANOPR.

The TMY2 weather data set was updated in 2008 to TMY3. For each location in the building database, the two weather data sets will be compared to determine whether there has been a change to either the monthly maximum temperatures or monthly cooling degree days. DOE intends to adjust the estimated cooling loads and energy use accordingly.

The range of capacities covered by the current effort that DOE may consider is likely to be broader than that considered in the 2004 ANOPR, and includes much larger capacity units. For the 2004 ANOPR, a design day simulation was used to determine the total cooling capacity requirement for a building. The simulation assumed this would be met by a number of identical units of fixed capacity. The updated analysis will consider the possibility that a smaller number of larger capacity units may be used. Further, DOE intends to apply the building simulation database to very large equipment (i.e., equipment with capacities between 240,000 Btu/h and 760,000 Btu/h.)

DOE requests comment or seeks input from stakeholders on the following issues pertaining to the energy use analysis:

(F1) For different cooling technologies, the relationship between efficiency and the instantaneous load level;

(F2) The current distribution of equipment efficiencies in the building population;

(F3) For a given cooling load shape, how equipment energy use scales as a function of capacity, i.e., whether two air-conditioning units of a certain capacity use the same total cooling energy as one air-conditioning unit of twice the capacity; and

(F4) Whether the building simulations developed for small and large air-conditioning equipment are applicable to very large equipment.

The purpose of the LCC and PBP analysis is to analyze the effects of potential amended energy conservation standards on customers of commercial air-cooled air-conditioning and heating equipment by determining how a potential amended standard would affect their operating expenses (usually decreased) and their total installed costs (usually increased).

DOE intends to analyze the potential for variability and uncertainty by performing the LCC and PBP calculations on a representative sample of individual commercial buildings. DOE plans to utilize the sample of buildings developed for the energy use analysis and the corresponding simulations results. Within a given building, one or more air-conditioning units may serve the building's space-conditioning needs, depending on the cooling load requirements of the building. As a result, the Department intends to express the LCC and PBP results as the number of ACs and HPs experiencing economic impacts of different magnitudes. DOE plans to model both the uncertainty and the variability in the inputs to the LCC and PBP analysis using Monte Carlo simulation and probability distributions. As a result, the LCC and PBP results will be displayed as distributions of impacts compared to the base case conditions.

(G1) DOE requests comment from stakeholders on the overall method that it intends to use when conducting the LCC and PBP analysis.

Inputs to the LCC and PBP analysis are categorized as: (1) Inputs for establishing the purchase expense, otherwise known as the total installed cost, and (2) inputs for calculating the operating expense.

The primary inputs for establishing the total installed cost are the baseline customer price, standard-level customer price increases, and installation costs. Baseline customer prices and standard-level customer price increases will be determined by applying markups to manufacturer price estimates. The installation cost is added to the customer price to arrive at a total installed cost. For DOE's 2004 ANOPR, DOE developed installation costs from RS Means Mechanical Cost Data. 69 FR 45460, 45480. DOE intends to develop installation costs for any potential rulemaking it may conduct for the equipment addressed by today's notice using the most recent RS Means data available. For the 2004 ANOPR, DOE varied installation cost as a function of equipment weight. Because weight tends to increase with equipment efficiency, installation cost increased with equipment efficiency. 69 FR 45460, 45481. DOE intends to develop similar relationships for this analysis and for any proposed rulemaking that may be issued.

(G2) DOE seeks input on the approach and data sources it intends to use to develop installation costs, specifically, its intention to use the most recent RS Means Mechanical Cost Data and to vary installation cost based on equipment weight.

The primary inputs for calculating the operating costs are equipment energy consumption and power demand, equipment efficiency, electricity prices and forecasts, maintenance and repair costs, equipment lifetime, and discount rates. Both equipment lifetime and discount rates are used to calculate the present value of future operating expenses.

The equipment energy consumption is the site energy use associated with providing space-conditioning to the building. The power demand is the maximum power requirement of the equipment (i.e., the peak demand) for a specific period of time. DOE intends to utilize updated building simulation results from its 2004 ANOPR to establish equipment energy use and demand.

For projecting equipment efficiency, DOE will use the most appropriate metric to characterize efficiency, whether it is EER or IEER. The building simulations conducted for the 2004 ANOPR assigned specific baseline and standard level EERs to the equipment to determine its corresponding energy consumption and peak demand. 69 FR 45460, 45482. If DOE utilizes an IEER as the metric for equipment efficiency, the updating of the building simulation results will address how equipment efficiency, expressed as IEER, will impact energy use and demand.

Electricity prices are the price per kilowatt-hour paid by each customer for electricity. For the 2004 ANOPR, DOE determined electricity prices based on tariffs from a representative sample of electric utilities. 69 FR 45460, 45481-82. This approach calculates energy expenses based on actual electricity prices that customers are paying. DOE intends to retain the tariff-based approach for its analysis and plans to update its electricity prices based on recent or current tariffs. Future electricity prices will likely be forecasted using trends from the Energy Information Administration's most recent Annual Energy Outlook.

(G3) DOE seeks comment on its tariff-based approach for developing electricity prices. DOE seeks input on specific data sources available for collecting tariffs.

Maintenance costs are costs associated with maintaining the operation of the equipment. For DOE's 2004 ANOPR, DOE developed maintenance costs from RS Means Facilities Maintenance & Repair Cost Data. 69 FR 45460, 45485. DOE intends to develop maintenance costs for its analysis using the most recent RS Means data available. For the 2004 ANOPR, DOE estimated that maintenance costs do not vary with equipment efficiency. 69 FR 45460, 45485. DOE intends to use the same assumption as part of its analysis in determining whether amending the current standards is appropriate under the statutory criteria.

(G4) DOE seeks input on the approach and data sources it intends to use to develop maintenance costs, specifically, its intention to use the most recent RS Means Facilities Maintenance & Repair Cost Data and in assuming that maintenance costs do not vary with equipment efficiency.

Repair costs are associated with repairing or replacing components that have failed. For the 2004 ANOPR, DOE estimated that repair costs varied as function of customer equipment price. 69 FR 45460, 45485. DOE intends to determine whether repair costs continue to vary with equipment prices as part of its determination analysis.

(G5) DOE seeks comment as to whether repair costs vary as a function of equipment price. DOE also requests any data or information on developing repair costs.

Equipment lifetime is the age at which the equipment is retired from service. For the 2004 ANOPR, DOE based equipment lifetime on a retirement function, which was based on the use of a Weibull probability distribution, with a resulting median lifetime of 15 years. 69 FR 45460, 45486. DOE intends to use the same retirement function for its analysis.

(G6) DOE seeks comment on its approach of using a Weibull probability distribution to characterize equipment lifetime. DOE also requests any data or information that demonstrates whether equipment lifetime has a median value of 15 years and whether equipment lifetime varies based on equipment class.

The discount rate is the rate at which future expenditures are discounted to establish their present value. For the 2004 ANOPR, DOE derived the discount rates by estimating the cost of capital of companies that purchase air-cooled air-conditioning equipment. 69 FR 45460, 45486-87. DOE intends to apply this approach for its analysis and to update its data sources for calculating the cost of capital of companies that purchase air-cooled air-conditioning equipment.

DOE measures LCC and PBP impacts of potential standard levels relative to a base case that reflects the likely market in the absence of amended standards. DOE plans to develop market-share efficiency data (i.e., the distribution of equipment shipments by efficiency) for the equipment classes DOE is considering, for the year in which compliance with any amended standards would be required.

(G7) DOE requests data on current efficiency market shares (of shipments) by equipment class, and also similar historic data. In particular, DOE needs efficiency data for very large equipment.

(G8) DOE also requests information on expected trends in efficiency over the next five years.

DOE uses shipment projections by equipment class to calculate the national impacts of standards on energy consumption, net present value (NPV), and future manufacturer cash flows.

For the 2004 ANOPR, DOE developed a shipments model for small and large air-cooled air-conditioning and heating equipment driven by historical shipments data. 69 FR 45492. The accuracy of the shipments model is highly dependent on historical shipments data as the data is used not only to build up an equipment stock but also to calibrate the shipments model.

(H1) DOE seeks recent historical shipments data for small, large, and very large air conditioners and heat pumps. Because very large equipment were not considered in the 2004 ANOPR, DOE is especially in need of shipments data for this class of equipment.

The shipments model for the 2004 ANOPR considered three market segments: (1) New commercial buildings acquiring equipment, (2) existing buildings replacing broken equipment, and (3) existing buildings acquiring new equipment for the first time. It considered two stock categories: (1) Equipment that has received only normal maintenance repairs, and (2) equipment that has had its useful life extended through additional repairs. To determine whether a customer would choose to repair rather than replace their air-conditioning equipment, the shipments model explicitly accounted for the combined effects of changes in purchase price, annual operating cost, and the value of commercial floor space on the purchase versus repair decision. Changes to the purchase price and operating costs due to standards were the drivers for shipment estimates for the standards cases relative to the base case (the case without standards). Because purchase price had more of an effect on shipments than operating costs, standards case shipments estimated for the 2004 ANOPR were 0.2-percent to 5-percent lower than the base case, depending on the increased price associated with the standard level. Extended repairs, i.e., repairing the equipment rather than purchasing a new unit, accounted for 80-percent of the shipments decrease with the remaining 20-percent due to forgone shipments to new construction. DOE intends to utilize the same approach to develop the shipments model for this rulemaking

(H2) DOE requests comment on the approach it intends on using to develop the shipments model and shipments forecasts for this rulemaking.

For the 2004 ANOPR, DOE utilized U.S. Census Bureau data to establish historical new construction floor space as well as historical stock floor space. The Annual Energy Outlook was used to forecast both new construction and stock floor space. Together with historical equipment saturation data from CBECS, DOE was able to estimate shipments to the three market segments identified above. The utility function to estimate the repair versus replacement decision was based on income per square foot data from the Building Owners and Managers Association (BOMA) Commercial Building Survey reports, purchase price data estimated from the Bureau of Labor Statistics, and operating cost data derived from the LCC and PBP analysis. 69 FR 45493. DOE intends to update all of the above data sources for the development of the shipments model for its analysis.

(H3) DOE seeks input on the approach and data sources it intends to use in developing the shipments model and shipments forecasts for this analysis.

The purpose of the national impact analysis (NIA) is to estimate aggregate impacts of potential efficiency standards at the national level. Impacts that DOE reports include the national energy savings (NES) from potential standards and the national NPV of the total customer benefits.

To develop the NES, DOE calculates annual energy consumption for the base case and the standards cases. DOE calculates the annual energy consumption using per-unit annual energy use data multiplied by projected shipments.

To develop the national NPV of customer benefits from potential standards, DOE calculates annual energy expenditures and annual equipment expenditures for the base case and the standards cases. DOE calculates annual energy expenditures from annual energy consumption by incorporating forecasted energy prices, using shipment projections and average energy efficiency projections. DOE calculates annual equipment expenditures by multiplying the price per unit times the projected shipments. The difference each year between energy bill savings and increased equipment expenditures is the net savings or net costs.

A key component of DOE's estimates of NES and NPV are the equipment energy efficiencies forecasted over time for the base case and for each of the standards cases. For the 2004 ANOPR, DOE used a combination of historical commercial and residential equipment efficiency data to forecast efficiencies for the base case. To estimate the impact that standards have in the year compliance becomes required, DOE used a “roll-up” scenario which assumes that equipment efficiencies in the base case that do not meet the standard level under consideration would “roll up” to meet the new standard level and equipment shipments at efficiencies above the standard level under consideration are not affected. 69 FR 45460, 45489-90. DOE intends to use the same methods for conducting the NIA for this analysis.

(I1) In addition to historical efficiency data (see section III.H), DOE also requests information on expected trends in efficiency over the long run.

DOE invites all interested parties to submit in writing by March 4, 2013, comments and information on matters addressed in this notice and on other matters relevant to DOE's consideration of a new efficiency descriptor and amended energy conservations standard for commercial air-cooled air conditioners and heat pumps. After the close of the comment period, DOE will begin collecting data, conducting the analyses, and reviewing the public comments, as needed. These actions will be taken to aid in the development of a NOPR for commercial air-cooled air conditioners and heat pumps if DOE decides to replace EER with IEER and amend the standards for such equipment.

DOE considers public participation to be a very important part of the process for developing test procedures. DOE actively encourages the participation and interaction of the public during the comment period in each stage of the rulemaking process. Interactions with and between members of the public provide a balanced discussion of the issues and assist DOE in the rulemaking process. Anyone who wishes to be added to the DOE mailing list to receive future notices and information about this rulemaking should contact Ms. Brenda Edwards at (202) 586-2945, or via email at Brenda.Edwards@ee.doe.gov.

Title III of the Energy Policy and Conservation Act of 1975, as amended, (EPCA or the Act), Public Law 94-163, (42 U.S.C. 6291 et. seq. ) sets forth a variety of provisions designed to improve energy efficiency. 1 Part C)  2 of Title III (42 U.S.C. 6311-6317) establishes an energy conservation program for certain industrial and commercial equipment. Section 6311(1)(A) includes pumps as “covered equipment.” DOE is authorized to set standards for pumps and to establish test procedures and prescribe labeling requirements for them. See 42 U.S.C. 6295(o); 6316(a); 6314; and 6315.

DOE has prepared the framework document to explain the relevant issues, analyses, and processes it anticipates using when considering new energy conservation standards for commercial and industrial pumps. The focus of the public meeting noted above will be to discuss the information presented and issues identified in the Framework Document. At the public meeting, DOE will make presentations and invite discussion on the rulemaking process as it applies to commercial and industrial pumps. DOE will also solicit comments, data, and information from participants and other interested parties.

DOE is planning to conduct in-depth technical analyses in the following areas: (1) Engineering, (2) energy use, (3) equipment price, (4) life-cycle cost and payback period, (5) national impacts, (6) manufacturer impacts, (7) emission impacts, (8) utility impacts, (9) employment impacts, and (10) regulatory impacts. DOE will also conduct several other analyses that support those previously listed, including the market and technology assessment, the screening analysis (which contributes to the engineering analysis), and the shipments analysis (which contributes to the national impact analysis).

DOE encourages those who wish to participate in the public meeting to obtain the Framework Document and to be prepared to discuss its contents. A copy of the Framework Document is available at: http://www1.eere.energy.gov/buildings/appliance_standards/rulemaking.aspx/ruleid/14.

Public meeting participants need not limit their comments to the issues identified in the framework document. DOE is also interested in comments on other relevant issues that participants believe would affect energy conservation standards for this equipment, applicable test procedures, or the preliminary determination on the scope of coverage. DOE invites all interested parties, whether or not they participate in the public meeting, to submit in writing by March 18, 2013, comments and information on matters addressed in the Framework Document and on other matters relevant to DOE's consideration of coverage and standards for commercial and industrial pumps.

The public meeting will be conducted in an informal, facilitated, conference style. There shall be no discussion of proprietary information, costs or prices, market shares, or other commercial matters regulated by U.S. antitrust laws. A court reporter will record the proceedings of the public meeting, after which a transcript will be available for purchase from the court reporter and placed on the DOE Web site at: http://www1.eere.energy.gov/buildings/appliance_standards/rulemaking.aspx/ruleid/14.

After the public meeting and the close of the comment period on the Framework Document, DOE will collect additional data, conduct the analyses as discussed in the Framework Document and at the public meeting, and review the public comments received.

DOE considers public participation to be a very important part of the process for determining whether to establish energy conservation standards and, if so, in setting those standards. DOE actively encourages the participation and interaction of the public during the comment period in each stage of the rulemaking process. Beginning with the Framework Document, and during each subsequent public meeting and comment period, interactions with and among members of the public provide a balanced discussion of the issues to assist DOE in the standards rulemaking process. Accordingly, anyone who wishes to participate in the public meeting, receive meeting materials, or be added to the DOE mailing list to receive future notices and information about this rulemaking should contact Ms. Brenda Edwards at (202) 586-2945, or via email at Brenda.Edwards@ee.doe.gov.

Title III of the Energy Policy and Conservation Act of 1975 (EPCA), as amended (42 U.S.C. 6291 et seq. ), sets forth various provisions designed to improve energy efficiency. Part C of Title III of EPCA (42 U.S.C. 6311-6317), which was redesignated for editorial reasons as Part A-1 upon codification in the U.S. Code, establishes the “Energy Conservation Program for Certain Industrial Equipment,” which covers certain commercial and industrial equipment (hereafter referred to as “covered equipment”).

EPCA specifies a list of equipment that constitutes covered commercial and industrial equipment. (42 U.S.C. 6311(1)(A)-(L). The list includes 11 types of equipment and a catch-all provision for certain other types of industrial equipment classified as covered the Secretary of Energy (Secretary). EPCA also specifies the types of equipment that can be classified as covered in addition to the equipment enumerated in 42 U.S.C. 6311(1). This equipment includes fans and blowers. (42 U.S.C. 6311(2)(B)) Industrial equipment must also be of a type that:

(1) Consumes, or is designed to consume, energy in operation;

(2) To any significant extent, is distributed in commerce for industrial or commercial use;

(3) Is not a covered product as defined in 42 U.S.C. 6291(a)(2) of EPCA, other than a component of a covered product with respect to which there is in effect a determination under 42 U.S.C. 6312(c).

To classify equipment as covered commercial or industrial equipment, the Secretary must determine that classifying the equipment as covered equipment is necessary for the purposes of Part A-1 of EPCA. The purpose of Part A-1 is to improve the efficiency of electric motors, pumps and certain other industrial equipment to conserve the energy resources of the nation. (42 U.S.C. 6312 (b))

DOE has proposed to determine that the commercial and industrial fans and blowers (which DOE considers to be a type of fan with a specific ratio between 1.11 and 1.20) are covered equipment (76 FR 37678 (June 28, 2011)). DOE has developed a Framework Document in further consideration of that determination and any associated energy conservation standards for fans. DOE may consider standby and off mode energy use for commercial and industrial fans as part of this rulemaking because many commercial and industrial fans do not operate continuously.

DOE has prepared the Framework Document to explain the relevant issues, analyses, and processes it anticipates using to determine whether to establish energy conservation standards, and, if so, for the development of such standards. The focus of the public meeting noted above will be to discuss the information presented and issues identified in the Framework Document. At the public meeting, DOE will make presentations and invite discussion on the rulemaking process as it applies to commercial and industrial fans. DOE will also solicit comments, data, and information from participants and other interested parties.

DOE is planning to conduct in-depth technical analyses in the following areas: (1) Engineering, (2) energy-use characterization, (3) equipment price, (4) life-cycle cost and payback period, (5) national impacts, (6) manufacturer impacts, (7) utility impacts, (8) employment impacts, (9) emission impacts, and (10) regulatory impacts. DOE will also conduct several other analyses that support those previously listed, including the market and technology assessment, the screening analysis (which contributes to the engineering analysis), and the shipments analysis (which contributes to the national impact analysis).

DOE encourages those who wish to participate in the public meeting to obtain the Framework Document and to be prepared to discuss its contents. A copy of the Framework Document is available at: http://www1.eere.energy.gov/buildings/appliance_standards/rulemaking.aspx/ruleid/25.

Public meeting participants need not limit their comments to the issues identified in the Framework Document. DOE is also interested in comments on other relevant issues that participants believe would affect energy conservation standards for this equipment, applicable test procedures, or the preliminary determination on the scope of coverage. DOE invites all interested parties, whether or not they participate in the public meeting, to submit in writing by March 18, 2013, comments and information on matters addressed in the Framework Document and on other matters relevant to DOE's consideration of coverage and standards for commercial and industrial fans.

The public meeting will be conducted in an informal, facilitated, conference style. There shall be no discussion of proprietary information, costs or prices, market shares, or other commercial matters regulated by U.S. antitrust laws. A court reporter will record the proceedings of the public meeting, after which a transcript will be placed on the DOE Web site at: http://www1.eere.energy.gov/buildings/appliance_standards/rulemaking.aspx/ruleid/25 and available for purchase from the court reporter.

After the public meeting and the close of the comment period on the Framework Document, DOE will collect additional data, conduct the analyses as discussed in the Framework Document and at the public meeting and review the public comments received.

DOE considers public participation to be a very important part of the process for determining whether to establish energy conservation standards and, if so, in setting those amended standards. DOE actively encourages the participation and interaction of the public during the comment period in each stage of the rulemaking process. Beginning with the Framework Document, and during each subsequent public meeting and comment period, interactions with and among members of the public provide a balanced discussion of the issues to assist DOE in the standards rulemaking process. Accordingly, anyone who wishes to participate in the public meeting, receive meeting materials, or be added to the DOE mailing list to receive future notices and information about this rulemaking should contact Ms. Brenda Edwards at (202) 586-2945, or via email at Brenda.Edwards@ee.doe.gov.

Comments Invited

We invite you to participate in this rulemaking by submitting written comments, data, or views. We also invite comments relating to the economic, environmental, energy, or federalism impacts that might result from adopting the proposals in this document. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. To ensure the docket does not contain duplicate comments, commenters should send only one copy of written comments, or if comments are filed electronically, commenters should submit only one time.

We will file in the docket all comments that we receive, as well as a report summarizing each substantive public contact with FAA personnel concerning this proposed rulemaking. Before acting on this proposal, we will consider all comments we receive on or before the closing date for comments. We will consider comments filed after the comment period has closed if it is possible to do so without incurring expense or delay. We may change this proposal in light of the comments we receive.

Transport Canada, which is the aviation authority for Canada, has issued AD CF-2009-07, dated March 6, 2009 (AD CF-2009-07), to correct an unsafe condition for the BHTC Model 407 helicopters with a tailboom assembly, part number (P/N) 407-030-801-201, -203, or -205. Transport Canada states that a stress analysis of the chemically milled tailboom skin “revealed a possibility of skin cracking due to high stress concentration areas.” Transport Canada advises that this condition, if not detected, could result in “serious damage to the tailboom.”

These helicopters have been approved by the aviation authority of Canada and are approved for operation in the United States. Pursuant to our bilateral agreement with Canada, Transport Canada, its technical representative, has notified us of the unsafe condition described in its AD. We are proposing this AD because we evaluated all known relevant information and determined that an unsafe condition exists and is likely to exist or develop on other products of the same type design.

BHTC has issued Alert Service Bulletin No. 407-08-84, dated August 18, 2008 (ASB), which specifies a new inspection schedule for the tailboom assemblies. BHTC states it has not received any field reports indicating cracked skin in service on the tailboom assemblies. However, in the interest of safety, BHTC states it has elected to introduce a new inspection schedule for the tailboom assemblies. The ASB specifies the new inspection schedule. Transport Canada classified this ASB as mandatory and issued AD CF-2009-07 to ensure the continued airworthiness of these helicopters.

Unless accomplished previously, this proposed AD would require:

• Within 100 hours time-in-service (TIS) or at the next tailboom inspection, whichever comes first, and thereafter at intervals not to exceed 300 hours TIS, cleaning and inspecting the tailboom assembly for a loose rivet, a crack, or other damage. If there is a crack in the tailboom assembly, this proposed AD would require replacing it with an airworthy tailboom assembly before further flight.

• For helicopters with a tailboom assembly that has 6,900 or more hours TIS, this proposed AD would also require, within 25 hours TIS or 30 days, whichever occurs first, cleaning and inspecting the tailboom assembly for a crack, either by using a 10X or higher power magnifying glass (and thereafter repeating the 10X or higher power magnifying glass inspection at intervals not to exceed 150 hours TIS), or by eddy current inspection (and thereafter at intervals not to exceed 500 hours TIS).

• For helicopters with a tailboom assembly that has 8,600 or more hours TIS, or an unknown number of hours TIS, this proposed AD would also require either visually checking for a crack before the first flight of each day, or cleaning and inspecting around each fastener and just above the edge of the upper stabilizer support within 25 hours TIS, or 30 days, whichever comes first, and thereafter at intervals not to exceed 50 hours TIS. The visual check may be performed by the owner/operator (pilot) holding at least a private pilot certificate, and must be entered into the aircraft records showing compliance with this AD. This authorization is an exception to our standard maintenance regulations.

The Transport Canada AD states to perform the inspections of the tailboom “in accordance with inspection procedures as per applicable part” of the ASB. This proposed AD references only specific sections of the ASB for accomplishing the requirements.

We estimate that this proposed AD would affect 551 helicopters of U.S. registry, and estimate the cost of compliance for the first year as follows:

• We assume 1 initial 100-hour TIS inspection and 2 recurring inspections, which would each take about 2.5 hours. At an average labor rate of $85 per hour, this would result in a cost of about $213 per inspection per helicopter or a total annual inspection cost for 3 recurring inspections of about $639 per helicopter.

• We assume 1 initial inspection and thereafter 4 recurring inspections per year for helicopters with a tailboom assembly that has 6,900 or more hours TIS, which would each take 3 hours at the average labor rate of $85 per hour or $255 per helicopter. Multiplying this $255 times the 5 recurring inspections, the total annual cost would be $1,275 per helicopter.

• We assume 1 initial inspection and 12 recurring inspections per year for helicopters with a tailboom assembly that has 8,600 or more hours TIS. If each inspection takes 3.25 hours, at the average labor rate of $85 per hour, each inspection would cost about $276. Multiply $276 times the 13 recurring inspections would result in a total annual inspection cost of $3,588 per helicopter. We expect the cost of pilot checks to be minimal.

• Replacing the tailboom would take 10 work hours at an average labor rate of $85 per hour for a total labor cost of $850 per helicopter. Parts would cost $82,850 for a total cost per helicopter of $83,700. Assuming that 5 helicopters per year would need a replacement tailboom, the fleet replacement cost would total $418,500.

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

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

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

For the reasons discussed, I certify this proposed regulation:

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

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

3. Will not affect intrastate aviation in Alaska to the extent that it justifies making a regulatory distinction; and

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

We prepared an economic evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.

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

We invite you to participate in this rulemaking by submitting written comments, data, or views. We also invite comments relating to the economic, environmental, energy, or federalism impacts that might result from adopting the proposals in this document. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. To ensure the docket does not contain duplicate comments, commenters should send only one copy of written comments, or if comments are filed electronically, commenters should submit only one time.

We will file in the docket all comments that we receive, as well as a report summarizing each substantive public contact with FAA personnel concerning this proposed rulemaking. Before acting on this proposal, we will consider all comments we receive on or before the closing date for comments. We will consider comments filed after the comment period has closed if it is possible to do so without incurring expense or delay. We may change this proposal in light of the comments we receive.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA AD No. 2010-0045, 2nd Correction, dated March 30, 2010, to correct an unsafe condition for the Eurocopter Model MBB-BK 117 C-2 helicopters. EASA advises that during inspections on these model helicopters, bellcrank bearings have been discovered that were incorrectly staked. EASA advises that this condition, if not detected and corrected, may cause the affected bellcrank to shift in the axial direction and cause chafing. This could lead to interference between the bolts connecting the control rods to Bellcrank-Q and Bellcrank-K, possibly resulting in reduced control of the helicopter.

These helicopters have been approved by the aviation authority of the Federal Republic of Germany and are approved for operation in the United States. Pursuant to our bilateral agreement with the Federal Republic of Germany, EASA, its technical representative, has notified us of the unsafe condition described in its AD. We are proposing this AD because we evaluated all known relevant information and determined that an unsafe condition exists and is likely to exist or develop on other helicopters of the same type design.

Eurocopter has issued Alert Service Bulletin No. MBB BK117 C-2-67A-011, Revision 1, dated February 23, 2010 (ASB), which specifies checking the attachment of the bearings, changing the direction of the bellcrank bolt, and, if necessary, replacing damaged parts. EASA classified this ASB as mandatory and issued EASA AD No. 2010-0045, 2nd Correction, dated March 30, 2010, to ensure the continued airworthiness of these helicopters.

This proposed AD would require compliance with the Accomplishment Instructions, paragraph 3.B. and 3.C., of the manufacturer's service bulletin.

We refer to a check of the bearings as an inspection of the bearings. We require an inspection within 100 hours time-in-service rather than mandating a date or requiring that the part accumulate 50 flight hours after installation. We refer to the “attachment” of the bearings as “staking” of the bearings. We added the words “chafing or corrosion” to define damage to the parts. We do not mandate compliance with the entire ASB, but rather specific paragraphs.

We estimate that this proposed AD would affect 96 helicopters of U.S. registry. We estimate that operators may incur the following costs in order to comply with this AD.

• 1 work hour to inspect the bolt, and

• 2 work hours to replace the bolt at an average labor rate of $85 per work hour.

Based on these figures ($85 × 3 hours), we estimate the total cost impact of the proposed AD on U.S. operators in the first year to be $255 per helicopter or $24,480 for the U.S. fleet.

If a bellcrank or bearing block is to be replaced, we estimate the following costs:

• 10 hours to change a bellcrank (assuming all 3 are replaced) for a labor cost of $850 per helicopter, and

• 10 hours to change a bearing block for a labor cost of $850 per helicopter.

Required parts would cost about:

• $4,632 for a Bellcrank-Q,

• $3,294 for a Bellcrank-K,

• $4,411 for a Bellcrank-L, and

• $1,150 for a bearing block.

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

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

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

For the reasons discussed, I certify this proposed regulation:

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

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

3. Will not affect intrastate aviation in Alaska to the extent that it justifies making a regulatory distinction; and

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

We prepared an economic evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.

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

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.

Comments on the collection of information should be received by April 2, 2013. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collection of information in these proposed regulations is in § 1.5000A-3 and § 1.5000A-4. The collection of information is necessary to determine whether the shared responsibility payment provision applies to a taxpayer and compute any shared responsibility payment imposed on a taxpayer. The likely respondents are individuals required to file Federal income tax returns under section 6012(a)(1) of the Internal Revenue Code (Code).

The burden for the collection of information contained in proposed regulation § 1.5000A-3 and § 1.5000A-4 will be reflected in the burden on a form that the IRS will create to request the information in the proposed regulation.

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

Under the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)) and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)) (collectively, the Affordable Care Act), the Federal government, State governments, insurers, employers, and individuals are entrusted with shared responsibility to reform and improve the availability, quality, and affordability of health insurance coverage in the United States. The Affordable Care Act expands Medicaid eligibility for residents of electing States and increases Federal funding for the expansion. The Affordable Care Act also provides individuals and small businesses the ability to purchase private health insurance through State-based, State Partnership, or Federally facilitated competitive market places called Affordable Insurance Exchanges (Exchanges). Through Exchanges, insurance companies will compete for business on a level playing field and qualified consumers will have a choice of health plans to fit their needs.

In addition, the Affordable Care Act includes various insurance market reforms to increase the ability of individuals to enroll in health insurance coverage regardless of preexisting conditions and to eliminate the ability of insurers to charge higher premium prices based on factors other than age, tobacco use, rating area, or family size. Moreover, the Affordable Care Act builds upon the existing private employer-based health insurance system to ensure continued access to high quality health insurance coverage at low cost.

Finally, to ensure effective and efficient implementation of the insurance market reforms, the Affordable Care Act requires a nonexempt individual to maintain minimum essential coverage or make a shared responsibility payment. Section 1501(b) of the Affordable Care Act added section 5000A to a new chapter 48 of subtitle D (Miscellaneous Excise Taxes) of the Code effective for months beginning after December 31, 2013. Section 5000A was subsequently amended by the TRICARE Affirmation Act of 2010, Public Law 111-159 (124 Stat. 1123) and Public Law 111-173 (124 Stat. 1215).

Section 5000A provides nonexempt individuals with a choice: maintain minimum essential coverage for themselves and any nonexempt family members or include an additional payment with their Federal income tax return. Section 5000A(a) and section 5000A(b) provide that nonexempt individuals must have minimum essential coverage for each month beginning after December 31, 2013, or make an additional payment (the shared responsibility payment) with their Federal income tax return for the taxable year that includes such month. Under section 5000A(b)(3)(A), a taxpayer is liable for the shared responsibility payment if any nonexempt individual who may be claimed by the taxpayer as a dependent for a taxable year does not have minimum essential coverage in a month included in that taxable year. Married taxpayers filing a joint return for any taxable year are jointly liable for any shared responsibility payment imposed for the year.

Many individuals are exempt from the shared responsibility payment, including some whose religious beliefs conflict with acceptance of the benefits of private or public insurance and those who do not have an affordable health insurance coverage option available. Section 1311(d)(4)(H) of the Affordable Care Act (42 U.S.C. 18031(d)(4)(H)) directs Exchanges to issue to qualified individuals certificates of exemption from the requirement to maintain minimum essential coverage or the shared responsibility payment under section 5000A. Section 1411 of the Affordable Care Act (42 U.S.C. 18081) generally provides procedures for determining an individual's eligibility for various benefits relating to health coverage, including exemptions from the application of section 5000A. The Department of Health and Human Services and the Department of the Treasury are working in close coordination to release regulations and other guidance related to Exchanges.

On March 27, 2012, the Department of Health and Human Services released final regulations related to the establishment of, and the standards applicable to, Exchanges (45 CFR 155.10 and following sections (Exchange regulations)). Section 155.200(b) of the Exchange regulations directs an Exchange to issue exemption certificates in accordance with sections 1311(d)(4)(H) and 1411 of the Affordable Care Act (42 U.S.C. 18031(d)(4)(H), 18081). The Department of Health and Human Services is publishing proposed regulations detailing the standards by which Exchanges will issue certificates of exemption under section 5000A. Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage Provisions (to be codified at 45 CFR 155.600 and following sections).

Section 5000A(d) and (e) describe individuals who are exempt from making the shared responsibility payment even if they do not have minimum essential coverage for a given month. Under section 5000A(d)(2)(A), an individual is exempt for a month for which an Exchange certifies that the individual is a member of a recognized religious sect or a division thereof described in section 1402(g)(1) and is an adherent of established tenets or teachings of that sect or division. Section 1402(g)(1) provides an exemption from self-employment tax for members of a qualified religious sect or division thereof. A qualified religious sect or division thereof described in section 1402(g)(1) is a sect or division thereof that the Commissioner of Social Security finds: (1) has established tenets or teachings by reason of which its members and adherents are conscientiously opposed to acceptance of the benefits of any private or public insurance that makes payments in the event of death, disability, old age, or retirement or makes payments toward the cost of, or provides services for, medical care (including the benefits of any insurance system established by the Social Security Act); (2) maintains, and has maintained for a substantial period of time, a practice whereby its members make provision for its dependent members that is reasonable in view of their general level of living; and (3) has been in existence at all times since December 31, 1950.

Section 5000A(d)(2)(B) provides that an individual is exempt for a month that the individual is a member of a health care sharing ministry. A health care sharing ministry is an organization: (1) which is described in section 501(c)(3) and exempt from tax under section 501(a); (2) members of which share a common set of ethical or religious beliefs and share medical expenses among themselves in accordance with those beliefs, and regardless of the State in which a member resides or is employed; (3) members of which retain membership even after they develop a medical condition; (4) which has itself (or a predecessor of which has) been in existence at all times since December 31, 1999; (5) members of which have continuously and without interruption shared medical expenses since at least December 31, 1999; and (6) which conducts an annual audit performed by an independent certified public accounting firm in accordance with generally accepted accounting principles the report of which is made available to members of the public upon request.

Section 5000A(d)(3) provides that an individual is exempt for a month that the individual is neither a citizen or national of the United States nor an alien lawfully present in the United States.

Section 5000A(d)(4) provides that an individual is exempt for a month that the individual is incarcerated, except for incarceration pending the disposition of charges.

Section 5000A(e)(1) provides that an individual is exempt for a month for which the individual lacks access to affordable minimum essential coverage. For this purpose, an individual lacks access to affordable coverage if the individual's required contribution (determined on an annual basis) for minimum essential coverage exceeds a percentage (8 percent for 2014) of the individual's household income for the most recent taxable year for which the Secretary of Health and Human Services, in consultation with the Secretary, determines information is available.

In general, section 5000A(c)(4)(B) defines a taxpayer's household income as the sum of the taxpayer's modified adjusted gross income and the modified adjusted gross income of any other member of a taxpayer's family (that is, individuals for whom the taxpayer properly claims a deduction under section 151 (relating to the personal exemption deduction)) who are required to file a Federal income tax return. Under section 5000A(c)(4)(C), modified adjusted gross income means adjusted gross income (within the meaning of section 62) increased by amounts excluded from gross income under section 911 and tax-exempt interest a taxpayer receives or accrues in the taxable year. Unlike section 36B(d)(2)(B), modified adjusted gross income for purposes of section 5000A does not include Social Security benefits that are not includable in gross income. For purposes of determining the affordability of minimum essential coverage under section 5000A(e)(1), the taxpayer's household income is increased by the portion of the required contribution made through a salary reduction arrangement and excluded from gross income.

For purposes of determining household income, a taxpayer's family includes all individuals for whom the taxpayer properly claims a personal exemption deduction under section 151 for the taxable year. See also § 1.36B-1(d). Taxpayers may claim a personal exemption deduction for themselves, a spouse, and each of their dependents. Section 152 provides that a taxpayer's dependent may be a qualifying child or qualifying relative, including an unrelated individual who lives with the taxpayer.

For an employee eligible to purchase coverage under an eligible employer-sponsored plan, the required contribution for purposes of the exemption under section 5000A(e)(1) is the employee's share of the annual premium for self-only coverage. For an individual eligible to purchase coverage under an eligible employer-sponsored plan because the individual is related to an employee, the determination of whether the individual's coverage is affordable is made by reference to the employee's required contribution. For all individuals who are ineligible to purchase coverage under an eligible employer-sponsored plan, the required contribution is the annual premium for the lowest cost bronze plan available on the Exchange where the individual lives reduced by the credit allowable under section 36B for the taxable year (determined as if the individual enrolled in a plan through such Exchange for the entire taxable year).

Section 5000A(e)(2) provides that an individual is exempt for a month included in a calendar year if the individual's household income for the most recent taxable year for which information is available is less than the amount of gross income specified in section 6012(a)(1) for the taxpayer. Section 6012(a)(1) provides, for each filing status, gross income thresholds above which individuals are required to file Federal income tax returns.

As described in this preamble, income-based exemptions under section 5000A(e)(1) and section 5000A(e)(2) rely upon household income for the most recent taxable year that the Secretary of Health and Human Services, after consultation with the Secretary of Treasury, determines information is available. The Secretary of Health and Human Services, after consultation with the Secretary of the Treasury, determined that the household income for these exemptions that is available and relevant is the household income for the year for which an exemption is being claimed. See section III.A.3.b. of the preamble to Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage Provisions (to be codified at 45 CFR 155.600 and following sections, and 45 CFR 156.600 and following sections). The determination by the Secretary of Health and Human Services is reflected in the proposed regulations.

Section 5000A(e)(3) provides that an individual is exempt for a month that the individual is a member of an Indian tribe as defined in section 45A(c)(6). Section 45A(c)(6) describes certain Federally recognized Indian tribes (including any qualified Alaska Native village or regional or village corporation). The Federally recognized Indian tribes are listed in Indian Entities Recognized and Eligible to Receive Services from the United States Bureau of Indian Affairs, 75 FR 60810 (Oct. 1, 2010), as supplemented by 75 FR 661124 (Oct. 27, 2010), or its successor.

Under section 5000A(e)(4), an individual is exempt for a month the last day of which occurs in a period when the individual does not have minimum essential coverage for a continuous period of less than three months (a short coverage gap). The length of a gap in coverage is determined without regard to the calendar years in which months in the gap occur. If an individual has more than one short coverage gap in a calendar year, the exemption applies only to the earliest short coverage gap. Section 5000A(e)(4) authorizes the Secretary to issue regulations that provide for collecting the shared responsibility payment in cases where gaps in coverage straddle more than one taxable year.

Section 5000A(e)(5) provides that an individual is exempt for a month that the Exchange determines, in accordance with guidance promulgated by the Secretary of Health and Human Services, the individual suffered a hardship that prevented the individual from obtaining coverage under a qualified health plan. The Department of Health and Human Services is proposing rules on the criteria for application of the hardship exemption. Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage (to be codified at 45 CFR 155.605(g)).

Under section 5000A(c), the amount of the shared responsibility payment for any taxable year is generally the sum of monthly penalty amounts for all months in the taxable year in which any nonexempt individual for whom the taxpayer is liable under section 5000A(b) did not have minimum essential coverage. The shared responsibility payment amount for any taxable year may not exceed an amount equal to the national average premium for bronze-level qualified health plans offered through Exchanges for the applicable family size involved.

The monthly penalty amount for a month is equal to 1/12 of the greater of the following amounts: (1) The flat dollar amount or (2) the percentage of income. The flat dollar amount is the lesser of the following amounts: (a) the sum of the applicable dollar amounts for all nonexempt individuals without minimum essential coverage for whom the taxpayer is liable or (b) 300 percent of the applicable dollar amount. The applicable dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016, and will be increased for calendar years beginning after 2016 by a cost-of-living adjustment. If a nonexempt individual has not attained the age of 18 as of the beginning of a month, the applicable dollar amount for that individual is one-half of the regular applicable dollar amount.

The percentage of income is calculated as the excess of the taxpayer's household income over the taxpayer's Federal income tax return filing threshold under section 6012(a)(1), multiplied by a percentage figure. The percentage figure is 1 percent for taxable years beginning in 2014, 2 percent for taxable years beginning in 2015, and 2.5 percent for taxable years beginning after 2015.

Section 5000A(f) defines minimum essential coverage as one of the following: (1) Coverage under a specified government sponsored program, (2) coverage under an eligible employer-sponsored plan, (3) coverage under a health plan offered in the individual market within a State, (4) coverage under a grandfathered health plan, and (5) other health benefits coverage that the Secretary of Health and Human Services, in coordination with the Secretary, recognizes for purposes of section 5000A(f).

Under section 5000A(f)(1)(A), specified government sponsored programs include the following: (1) The Medicare program under part A of title XVIII of the Social Security Act, (2) the Medicaid program under title XIX of the Social Security Act, (3) the Children's Health Insurance Program (CHIP) under title XXI of the Social Security Act, (4) medical coverage under chapter 55 of title 10, United States Code, including the TRICARE program, (5) veterans health care programs under chapter 17 or 18 of title 38, as determined by the Secretary of Veterans Affairs, in coordination with the Secretary of Health and Human Services and the Secretary of Treasury, (6) a health plan under section 2504(e) of title 22 relating to Peace Corps volunteers, and (7) the Nonappropriated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defense Authorization Act for Fiscal Year 1995, Public Law 103-337 (10 U.S.C. 1587 note).

Under section 5000A(f)(2), an eligible employer-sponsored plan is, with respect to an employee, a group health plan or group health insurance coverage offered by an employer to the employee that is: (1) a governmental plan, within the meaning of section 2791(d)(8) of the Public Health Service Act, or (2) any other plan or coverage offered in the small or large group market within a State. An eligible employer-sponsored plan also includes a grandfathered health plan offered in a group market.

Under section 1251 of the Affordable Care Act (42 U.S.C. 18011), a grandfathered health plan is a group health plan or health insurance coverage that provided coverage as of the enactment date of the Affordable Care Act (March 23, 2010) or in which an individual was enrolled as of that date. See also § 54.9815-1251T(a) (providing guidance regarding grandfathered health plans).

As described in this preamble, the Department of Health and Human Services, in coordination with the Treasury Department, may designate other health benefits coverage as minimum essential coverage. The Department of Health and Human Services is proposing a regulation that provides criteria and a process by which other types of coverage may be designated as minimum essential coverage. Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage Provisions (to be codified at 45 CFR 156.600 and following sections).

Under section 5000A(f)(3), health coverage that consists of coverage of certain excepted benefits specified in section 2791(c) of the Public Health Service Act (42 U.S.C. 300gg-91(c)) is not minimum essential coverage. There are four categories of excepted benefits. The first category includes accidental death and dismemberment coverage, disability insurance, general liability insurance, automobile liability insurance, workers' compensation, credit-only insurance (for example, mortgage insurance), and coverage for employer-provided on-site medical clinics. See 42 U.S.C. 300gg-91(c)(1). The second category of excepted benefits includes limited-scope dental or vision benefits, long-term care benefits, and benefits provided under certain health flexible spending arrangements. See 42 U.S.C. 300gg-91(c)(2). The third category of excepted benefits includes, but only if offered under a policy, certificate, or contract of insurance separate from, and not coordinated with, any group or individual health plan maintained by the same plan sponsor, coverage only for a specified disease or illness (for example, cancer-only policies) or fixed indemnity insurance (for example, a policy that pays a fixed dollar amount, such as $100, per day of hospitalization or illness regardless of the amount of medical expense incurred). See 42 U.S.C. 300gg-91(c)(3). The last category of excepted benefits includes, but only if offered under a policy, certificate, or contract of insurance separate from the primary health coverage, Medicare supplemental polices (also known as Medigap or MedSupp insurance), TRICARE supplemental policies, and similar supplemental coverage to coverage under a group health plan. See 42 U.S.C. 300gg-91(c)(4).

Under section 5000A(f)(4), an individual is treated as having minimum essential coverage for a month: (1) if the individual is a bona fide resident of a United States possession for the month or (2) if the month occurs during any period described in section 911(d)(1)(A) or section 911(d)(1)(B) that is applicable to the individual. Section 911(d)(1)(A) is applicable to a citizen of the United States who has a tax home outside the United States and is a bona fide resident of a foreign country or countries during an uninterrupted period that includes an entire taxable year. For example, an individual who resides abroad for an entire calendar year is treated as having minimum essential coverage for each month of that calendar year regardless of whether the individual has health coverage of any type. Section 911(d)(1)(B) is applicable to a U.S. citizen or U.S. resident (within the meaning of section 7701(b)) who has a tax home outside the United States and is present in a foreign country or countries for at least 330 full days during a period of 12 consecutive months. In general, an individual who meets either of the foregoing residency requirements under section 911(d)(1) is treated as a qualified individual for purposes of section 911 and may elect to exclude certain foreign earned income and housing costs from gross income.

Under section 5000A(b)(2), an individual liable for the shared responsibility payment under section 5000A must report the payment with the individual's Federal income tax return for the taxable year including the month or months for which the payment is owed.

Under section 5000A(g)(1), the shared responsibility payment is payable upon notice and demand by the Secretary. The shared responsibility payment is generally assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68 (sections 6671 through 6725). Unlike the assessable penalties, however, the Secretary may not file notice of lien or levy on the taxpayer's property for failing to pay the assessed shared responsibility payment. Further, a taxpayer may not be subject to criminal prosecution or penalty for failing to pay the assessed shared responsibility payment in a timely manner.

The proposed regulations provide that, for a month, a nonexempt individual must either have minimum essential coverage or pay the shared responsibility payment.

The proposed regulations provide that, for any calendar month, an individual is treated as having minimum essential coverage if the individual is enrolled in and entitled to receive benefits under a program or plan that is minimum essential coverage for at least one day during the month.

Under section 5000A(b)(3)(A), if an individual with respect to whom the shared responsibility payment is imposed for a month is another individual's dependent (as defined in section 152) for the taxable year including that month, the other individual is liable for the shared responsibility payment for the dependent. The proposed regulations clarify that a taxpayer is liable for the shared responsibility payment imposed with respect to any individual for a month in a taxable year for which the taxpayer may claim a personal exemption deduction for the individual (that is, the dependent) for that taxable year. Whether the taxpayer actually claims the individual as a dependent for the taxable year does not affect the taxpayer's liability for the shared responsibility payment for the individual.

The proposed regulations provide special rules for determining liability for the shared responsibility payment attributable to individuals who are adopted or placed in foster care during a taxable year. If a taxpayer legally adopts a child and is entitled to claim the child as a dependent under section 151 for the taxable year when the adoption occurs, the taxpayer is not liable for a shared responsibility payment attributable to the child for the months before the adoption. Conversely, if a taxpayer who is entitled to claim a child as a dependent under section 151 for the taxable year places the child for adoption during the year, the taxpayer is not liable for a shared responsibility payment attributable to the child for the months after the adoption.

The proposed regulations define shared responsibility family to include all individuals for whom a taxpayer (including a spouse, if married filing jointly) is liable for the shared responsibility payment. The proposed regulations clarify that a taxpayer who is an exempt individual remains liable for a shared responsibility payment imposed for a nonexempt dependent who does not have minimum essential coverage.

Section 5000A(b)(3)(B) provides that, if an individual for whom the shared responsibility payment is imposed for a month files a joint return for the taxable year including that month, the individual and the individual's spouse are jointly liable for the shared responsibility payment. The proposed regulations clarify that whether one spouse is an exempt individual does not affect the joint liability of the two spouses for the shared responsibility payment.

Section 5000A(f)(1)(A) specifies several government sponsored programs as providing minimum essential coverage by referring to the Federal law authorizing a particular program. In most cases, the relevant law describes a single program or a discrete portion of a larger program. For example, section 5000A(f)(1)(A)(i) lists Part A of the Medicare program under title XVIII of the Social Security Act. However, in some cases, the relevant law establishes programs with limited coverage. For instance, some of the programs under title XIX of the Social Security Act do not provide a scope of benefits comparable to the primary Medicaid program under the same title. In addition, the Secretary of Veterans Affairs, in coordination with the Secretaries of Health and Human Services and Treasury, determined that only certain health care programs under chapter 17 or 18 of title 38, United States Code provide comprehensive benefits. The programs with limited coverage are similar to coverage consisting of excepted benefits that is not minimum essential coverage under section 5000A(f)(3). Accordingly, the proposed regulations identify limited benefit programs under title XIX of the Social Security Act that are not minimum essential coverage and specify comprehensive health care programs under chapter 17 or 18 of title 38, United States Code, that are minimum essential coverage.

Section 5000A(f)(2) defines eligible employer-sponsored plan, for an employee, as a group health plan or group health insurance coverage offered by an employer to the employee that is either of the following: (1) A governmental plan (within the meaning of section 2791(d)(8) of the Public Health Service Act (PHSA) (42 U.S.C. 300gg-91(d)(8)) or (2) any other plan or coverage offered in the small or large group market within a State. The terms group health plan and group health insurance coverage are not defined in section 5000A. However, section 5000A(f)(5) provides that any term used in section 5000A that is also used in title I of the Affordable Care Act has the same meaning as when used in that title.

Section 1301(b)(3) of the Affordable Care Act (42 U.S.C. 18021(b)(3)) provides that group health plan has the same meaning as in section 2791(a) of the PHSA (42 U.S.C. 301gg-91(a)(1)). Section 2791(a) of the PHSA provides that group health plan means an employee welfare benefit plan (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1002(1)) to the extent that the plan provides medical care (as defined in section 2791(a)(2) of the PHSA and including items and services paid for as medical care) to employees and their dependents directly or through insurance, reimbursement, or otherwise. Section 3(1) of ERISA defines employee welfare benefit plan as any plan, fund, or program established or maintained by an employer or by an employee organization, or by both, to the extent that the plan, fund, or program is established or maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, various benefits, which may include medical, surgical, or hospital care or benefits.

Group health plans within the meaning of section 1301(b)(3) of the Affordable Care Act (42 U.S.C. 18021(b)(3)) include both insured health plans and self-insured health plans. Accordingly, a self-insured group health plan is an eligible employer-sponsored plan.

Employers are required to offer certain former employees continuation coverage under Federal or State law. Many employers offer health benefits coverage to retired employees. Under the PHSA and ERISA, group health plans and employee welfare benefit plans, respectively, include plans offered to former employees. Accordingly, the proposed regulations clarify that coverage provided by an employer to a former employee, including coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), Public Law 99-272 (100 Stat. 82), and retiree health coverage, qualifies as coverage under an eligible employer-sponsored plan.

Under section 5000A(f)(1)(E), the Secretary of Health and Human Services, in coordination with the Secretary of the Treasury, may designate other health benefits coverage as minimum essential coverage. The Department of Health and Human Services is proposing rules providing standards for determining whether certain other types of health insurance coverage constitute minimum essential coverage and procedures for plan sponsors to follow for a plan to be identified as minimum essential coverage under section 5000A. Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage Provisions (to be codified at 45 CFR 156.600 and following sections).

The term applicable individual is used in section 5000A to describe an individual who is subject to the minimum essential coverage provision under section 5000A(a). Section 5000A(d)(2) through section 5000A(d)(4) describe one category of individuals who are not applicable individuals for purposes of section 5000A. Section 5000A(e)(1) through 5000A(e)(5) describe another category of individuals who are exempt from liability for the shared responsibility payment imposed under section 5000A(b). Although the two categories are distinct in the statute, the consequence for individuals described in either category is the same: individuals in both categories are not subject to the shared responsibility payment for not maintaining minimum essential coverage. Accordingly, the proposed regulations refer to all individuals described in section 5000A(d)(2), (d)(3), or (d)(4), or section 5000A(e)(1), (e)(2), (e)(3), (e)(4), or (e)(5), as exempt individuals. For a month, a nonexempt individual is any individual who is alive for the entire month and is not an exempt individual for the month.

The proposed regulations provide that, in general, an individual is treated as an exempt individual for a month if the individual is an exempt individual for at least one day in the month. In the case of certain individuals who are nonresident aliens (as defined in section 7701(b)(1)(B)), individuals whose household income falls below the return filing threshold, and individuals who experience short coverage gaps, the proposed regulations provide rules on how to determine whether an individual is exempt for a particular month. An individual is exempt for all months included in a taxable year when the individual is a nonresident alien. In the case of an individual whose household income falls below the return filing threshold for a taxable year, the individual is exempt for all months in the taxable year. In the case of an individual experiencing a coverage gap, the individual is exempt for a month included in the first short coverage gap in a calendar year.

Under section 5000A(d)(2)(A), an individual is exempt for a month that the individual has in effect a religious conscience exemption certification. Only an Exchange may grant a religious conscience exemption certification. Individuals who are members of a recognized religious sect or division thereof described in section 1402(g)(1) and who are adherents of the established tenets or teachings of the sect or division are eligible to receive a religious conscience exemption certification.

The proposed regulations clarify that an individual who is not a citizen or national of the United States is exempt for a month if the individual is not lawfully present in the United States in that month within the meaning of 45 CFR 155.20 (referring to lawful immigration status within the United States). In addition, an individual who is not a citizen or national of the United States is treated as not lawfully present in the United States for a month in a taxable year if the individual is a nonresident alien as defined in section 7701(b)(1)(B) for that taxable year.

Section 5000A(d)(4) provides that an individual is exempt for a month for which the individual is incarcerated (other than incarceration pending the disposition of charges). The proposed regulations clarify that an individual confined for at least one day in a jail, prison, or similar penal institution or correctional facility after the disposition of charges is exempt for the month that includes the day.

Section 5000A(e)(1)(A) provides that an individual is exempt for a month for which the individual does not have access to affordable minimum essential coverage. For this purpose, an individual does not have access to affordable coverage for a month if the individual's required contribution (determined on an annual basis) for coverage for the month exceeds 8 percent of the taxpayer's household income for the taxable year. Under section 5000A(e)(1)(D), for any plan year beginning after 2014, the 8 percent figure is replaced by the percentage figure that the Secretary of Health and Human Services determines reflects the excess of the rate of premium growth between the preceding calendar year and 2013 over the rate of income growth for the same period.

For purposes of determining affordability of coverage, in accordance with section 5000A(e)(1)(A), the proposed regulations require that the taxpayer's household income be increased by the portion of the required contribution made through a salary reduction arrangement and excluded from gross income. In many cases, information on the excluded amount may not be available to the IRS or to the employee. Comments are requested on practicable ways, if any, in which the required adjustment to household income may be made with the information available under sections 6051, 6055, 6056, or other provisions of the Code.

If an individual is eligible for coverage under an eligible employer-sponsored plan, whether as an employee or as an individual related to an employee, the individual's qualification for the lack of affordable coverage exemption is determined solely by reference to the cost of coverage under the eligible employer-sponsored plan. The proposed regulations clarify that an employee or related individual is treated as eligible for coverage under an eligible employer-sponsored plan for each month included in the plan year if the employee or related individual could have enrolled in the plan for that month during an open or special enrollment period.

The proposed regulations also clarify that an employed individual who is eligible for coverage under an eligible employer-sponsored plan offered by the individual's employer is not treated as eligible as a related individual for coverage under a plan offered by the employer of another employed individual. Thus, if two or more members of a family are employed and their respective employers offer self-only and family coverage under eligible employer-sponsored plans, each employed individual determines the affordability of coverage using the premium for the self-only coverage offered by the individual's employer. Neither individual may determine the affordability of coverage using the premium for family coverage offered by the other individual's employer. In these cases, each employed individual's self-only coverage may be treated as affordable, even though the aggregate cost of covering all employed individuals may exceed 8 percent of the family's household income. The Department of Health and Human Services is proposing rules that would permit families in these circumstances to qualify for the hardship exemption described in section 5000A(e)(5). Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage Provisions (to be codified at 45 CFR 155.605(g)).

The proposed regulations provide that employee includes a former employee. Thus, an individual eligible to enroll in retiree coverage under a group health plan that is an eligible employer-sponsored plan as defined in section 5000A(f)(2) is treated as eligible to purchase minimum essential coverage under an eligible employer-sponsored plan under the same rules applicable to current employees. The treatment of former employees is consistent with other provisions of the Code, the PHSA, and ERISA that apply to group health plans of employers.

In addition, the proposed regulations provide that an individual eligible to enroll in continuation coverage required under Federal law, such as COBRA, or a comparable State law is eligible to purchase minimum essential coverage under an eligible employer-sponsored plan only if the individual enrolls in the coverage. This treatment of former employees eligible for continuation coverage is consistent with the rules provided in § 1.36B-2(c)(3)(iv).

Section 5000A(e)(1)(B)(i) provides that, in the case of an employee eligible to purchase minimum essential coverage through an eligible employer-sponsored plan, the required contribution is the portion of the annualized premium that the individual would pay (without regard to whether paid through salary reduction or otherwise) for self-only coverage. The proposed regulations clarify that, for an employee eligible for coverage under an eligible employer-sponsored plan, the required contribution is the portion of the annual premium that the employee would pay for the lowest cost self-only coverage.

Section 5000A(e)(1)(C) provides that, in the case of a related individual eligible to purchase minimum essential coverage under an eligible employer-sponsored plan because of the individual's relationship with an employee, the related individual's affordability determination is made by reference to the employee's required contribution. The proposed regulations provide that a related individual is an individual who is eligible for coverage under an eligible employer-sponsored plan because of a relationship to an employee and for whom a personal exemption deduction under section 151 is properly claimed on the employee's Federal income tax return. For example, an employee's spouse is treated as a related individual if the spouse files a joint return with the employee and is eligible for employer-sponsored coverage only under the plan offered to the employee. An individual who is eligible to enroll in an eligible employer-sponsored plan by reason of a relationship to an employee, but who is not claimed as a dependent by the employee, is not treated as a related individual. For purposes of section 5000A, the unclaimed dependent's household income is independently determined.

The proposed regulations clarify that if an employee or related individual is eligible to enroll in an eligible employer-sponsored plan, any eligibility for other coverage (for example, government sponsored minimum essential coverage) is disregarded for purposes of the exemption for lack of affordable coverage.

The proposed regulations further clarify that the required contribution for a related individual's coverage is determined by reference to the premium for the lowest cost coverage under the eligible employer-sponsored plan in which the employee and all related individuals who are included in the employee's family and not otherwise exempt are eligible to enroll. Thus, the required contribution for a spouse and claimed dependents (who are not otherwise exempt) is the premium that the employee would pay for the lowest cost coverage covering the employee, the spouse, and the claimed dependents. The required contribution for self-only coverage under an eligible employer-sponsored plan may cost less than 8 percent of household income, while the required contribution for family coverage under the same employer plan may cost more than 8 percent of household income. In such a case, the employee is not exempt under section 5000A(e)(1), while the employee's spouse and claimed dependents are exempt.

Finally, some individuals who are claimed as dependents by a taxpayer may not be eligible for coverage under the taxpayer's eligible employer-sponsored plan. The affordability of coverage for these individuals is determined in the manner that applies to them individually. Thus, if a taxpayer is not allowed to enroll a niece who is the taxpayer's dependent in the taxpayer's eligible employer-sponsored plan, the required contribution for the niece is not determined by reference to the cost of coverage under the plan. Instead, unless the niece is eligible for coverage under another eligible employer-sponsored plan, her required contribution is determined under the rules applicable to individuals eligible only to purchase coverage in the individual market.

Section 5000A(e)(1)(B)(ii) defines the term required contribution for an individual eligible only to purchase coverage in the individual market. The proposed regulations clarify that, for any individual who is not an employee or related individual eligible for minimum essential coverage under an eligible employer-sponsored plan, the required contribution is the premium for the lowest cost bronze plan available in the individual market through the Exchange serving the rating area where the individual resides, reduced by the maximum amount of any premium tax credit that would be allowable if the individual were enrolled in the plan offered through the Exchange.

As explained in this preamble, under the proposed regulations, both the annual premium for the applicable lowest cost bronze plan and the credit allowable under section 36B are determined by reference to coverage for those members of the individual's family who are not otherwise exempt ( nonexempt family ). Consequently, the required contribution is the same for all members of a nonexempt family who are ineligible for coverage under an eligible employer-sponsored plan.

The proposed regulations provide that the lowest cost bronze plan is the lowest cost bronze-level qualified health plan available in the Exchange serving the rating area that would cover all members of the nonexempt family who are ineligible for coverage under an eligible employer-sponsored plan. Accordingly, the premium for the lowest cost bronze plan is the same for all individuals in a nonexempt family.

The proposed regulations provide special rules for determining the premium for the lowest cost bronze plan if the Exchange does not offer a bronze-level plan that would cover the taxpayer's entire nonexempt family. The proposed regulations provide that, in general, the premium for the lowest cost bronze plan is the sum of the premiums for the lowest cost bronze plans that would, taken together, cover the taxpayer's nonexempt family (for example, for an uncle and two adult dependent nieces, a self-only plan for the uncle and a two-adult or family plan for the nieces). Alternatively, the proposed regulations provide that a taxpayer may elect to use the premium for the lowest cost bronze plan that would apply to a set of individuals that have the same characteristics as the taxpayer's nonexempt family (such as one adult plus children) as if one plan covered all members of the taxpayer's shared responsibility family.

In general, a premium tax credit is allowable under section 36B for any coverage month (within the meaning of § 1.36B-3(c)) that occurs in a taxable year in which a taxpayer is an applicable taxpayer (within the meaning of § 1.36B-2(b)). A month is not a coverage month for an individual, and thus no premium tax credit is allowable for the individual's coverage, if the individual is eligible for minimum essential coverage other than coverage offered in the individual market for that month. In general, an applicable taxpayer is a taxpayer whose household income for the taxable year is between 100 percent and 400 percent of the Federal poverty line for the taxpayer's family size.

Section 36B(b)(1) provides that the premium tax credit for any taxable year is the sum of the premium assistance amounts with respect to all coverage months occurring in the taxable year. Under section 36B(b)(2), for any coverage month, the premium assistance amount is the lesser of the following: (1) The monthly premiums for the month for one or more qualified health plans in which the taxpayer or a member of the taxpayer's family (coverage family) is enrolled through the Exchange serving the rating area where they reside or (2) any excess of the adjusted monthly premium for the month for the applicable second lowest cost silver plan for the taxpayer over an amount equal to 1/2 of the product of the applicable percentage and the taxpayer's household income for the taxpayer. Section 36B, therefore, calculates the allowable credit by treating the family as a single, aggregated unit.

The proposed regulations take a similar family-unit approach to determine the affordability of Exchange coverage. The proposed regulations provide that, for purposes of section 5000A, each individual in the taxpayer's nonexempt family is treated as having enrolled in a qualified health plan through the appropriate Exchange for purposes of determining the credit allowable under section 36B. Therefore, for each individual, a month is treated as a coverage month if the individual is ineligible for minimum essential coverage other than coverage in the individual market for the month. The proposed regulations further provide that the premium assistance amount for the month is the amount that would be allowable under the rules of section 36B if each member of the individual's nonexempt family enrolled in a qualified health plan through an Exchange. Accordingly, for a month that an individual included in a nonexempt family is eligible for minimum essential coverage other than coverage in the individual market, the month is not a coverage month for that individual, the individual is not included in the coverage family for purposes of section 36B, and no premium assistance amount is allowable for the coverage attributable to such individual.

Section 5000A(e)(2) provides that an individual is exempt for a month in a calendar year if the individual's household income for the taxable year is less than the amount of gross income specified in section 6012(a)(1) with respect to the taxpayer. The proposed regulations refer to “the amount of gross income specified in section 6012(a)(1) with respect to the taxpayer” (that is, the minimum amount of gross income that triggers the individual's requirement to file a Federal income tax return under that section) as the applicable filing threshold.

The proposed regulations further clarify that, for any individual who is properly claimed as a dependent, the applicable filing threshold is that of the taxpayer who claims the individual as a dependent. Therefore, if a taxpayer is exempt under section 5000A(e)(2), any individual the taxpayer properly claims as a dependent also is exempt as well. The Treasury Department and the IRS recognize that some taxpayers who do not have sufficient gross income to trigger a return filing requirement nevertheless may have household income that exceeds the return filing threshold. For example, if a taxpayer whose gross income is below the applicable filing threshold files a Federal income tax return in order to claim certain tax benefits (such as the earned income credit or additional child tax credit) and claims a dependent whose gross income triggers a return filing requirement, the household income (which combines the taxpayer's and the dependent's income) may exceed the filing threshold. The Department of Health and Human Services is proposing rules providing that individuals in this circumstance may qualify for a hardship exemption. Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage Provisions (to be codified at 45 CFR 155.605(g)). The Treasury Department and the IRS are considering additional methods of accommodating individuals in these circumstances.

The proposed regulations clarify that a continuous period without minimum essential coverage is determined by reference to calendar months (for example, January or February) in conjunction with the coverage rule in § 1.5000A-1(b). Therefore, if an individual is enrolled in and entitled to receive benefits under a plan identified as minimum essential coverage for one day in a calendar month, the month is not included in the continuous period when determining the application of the short coverage gap exemption. As a result, the proposed regulations provide that an individual qualifies for the short coverage gap exemption if the continuous period without minimum essential coverage is less than three full calendar months and is the first short coverage gap in the individual's taxable year.

In general, section 5000A(e)(4)(B)(i) provides that the length of a continuous period is determined without regard to the calendar years in which months in the period occur. However, whether an individual had coverage during the last month, or the last two months, of a taxable year affects the determination of whether any gap in coverage that the individual experiences in the first month, or the first and second months, of the following taxable year qualifies as a short coverage gap. Accordingly, if a calendar year taxpayer has a continuous period of 3 months or longer that starts in November or December of one taxable year and ends in the next taxable year, then January and any ensuing months of the second taxable year that are included in the period are ineligible for the short coverage gap exemption.

Section 5000A(e)(4) expressly authorizes the Secretary to prescribe rules for the collection of the shared responsibility payment in cases in which continuous periods include months in more than one taxable year. Each Federal income tax return covers a single taxable year and requires the taxpayer to account for coverage of the taxpayer's shared responsibility family during the months included in that taxable year. To require a taxpayer to take into account months in the following taxable year may delay or impede the taxpayer's ability to file a timely Federal income tax return. Accordingly, to provide taxpayers with certainty when filing their Federal income tax returns, the proposed regulations provide that an individual who lacks minimum essential coverage for a period no longer than the last two months of a taxable year will be deemed to have a short coverage gap exemption for those months if the short coverage gap is the first to occur in that taxable year, without regard to whether the individual is covered during the first months of the following taxable year.

The proposed regulations clarify that, for purposes of determining whether a short coverage gap applies, an individual is treated as covered under minimum essential coverage for a month in which the individual qualifies for a section 5000A exemption (other than the short coverage gap exemption). Therefore, the short coverage exemption applies to a month in which no other section 5000A exemption applies, and a month in which an individual is otherwise exempt is not taken into account in determining the length of the continuous period without coverage.

The exemptions for members of recognized religious sects or divisions and for individuals who have suffered a hardship are available only to individuals who have been certified as meeting the relevant criteria by the Exchange serving the rating area where the individuals seeking the exemption reside.

In addition, Exchanges will provide, upon request, exemption certifications for members of health care sharing ministries, incarcerated individuals, and members of Indian tribes. If an individual receives an exemption certification from an Exchange, the taxpayer who is responsible for accounting for that individual's coverage must provide information about the certification on the taxpayer's Federal income tax return. Alternatively, a taxpayer may claim any of these exemptions on the taxpayer's Federal income tax return for the taxable year.

Finally, the income-based exemptions for individuals who lack affordable coverage or have household income below the applicable income tax return filing threshold and the exemption for short coverage gaps may be claimed only on the individual's Federal income tax return for the applicable year. Thus, an individual claiming the affordability exemption under section 5000A(e)(1) for part or all of a taxable year will do so on the Federal income tax return that reports the individual's income establishing qualification for the exemption. An individual who has household income below the applicable Federal income tax return filing threshold and files a Federal income tax return may claim the exemption under section 5000A(e)(2) on the return. However, an individual who has household income below the applicable Federal income tax return filing threshold is not required to file a Federal income tax return to claim the exemption under section 5000A(e)(2).

Pursuant to section 6001, taxpayers are required to maintain all records and information substantiating any claim for exemption on the taxpayer's Federal income tax return, regardless of whether the individual was certified by an Exchange as qualifying for an exemption or first claimed the exemption on a Federal income tax return.

Under section 5000A(b)(1) and 5000A(b)(3)(A), a taxpayer is liable for the shared responsibility payment with respect to any nonexempt individual who is included in the taxpayer's shared responsibility family. The maximum annual amount of the shared responsibility payment for a taxpayer is the national average premium for the bronze level plan available through Exchanges that provides coverage for the applicable family size involved. The proposed regulations clarify that the applicable family size involved for purposes of identifying the appropriate bronze level plan includes only the nonexempt members of the taxpayer's shared responsibility family who do not have minimum essential coverage.

Under section 5000A(c), the annual amount of the shared responsibility payment is the lesser of the applicable national average bronze plan premium or the sum of the monthly penalty amounts. The monthly penalty amount may vary month to month because of changes in the composition of the taxpayer's shared responsibility family. To provide a meaningful value with which the sum of the monthly penalty amounts are compared, the proposed regulations provide that the applicable national average bronze plan premium must similarly be determined for each month and then aggregated for comparison with the sum of the monthly penalty amounts. Consequently, the applicable national average bronze plan premium may vary from month to month during the year to account for changes in the taxpayer's shared responsibility family.

Section 5000A(b)(2) provides that the shared responsibility payment for a month must be included with a taxpayer's Federal income tax return for the taxable year that includes the month. The proposed regulations clarify that the time for assessing the shared responsibility payment is the same time as that prescribed by section 6501 for the taxable year including the month for which the taxpayer is liable for the payment.

Section 5000A(g)(1) provides that the shared responsibility payment is payable upon notice and demand by the Secretary and, except as provided in section 5000A(g)(2), is assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68 of the Code (sections 6671 through 6725). The proposed regulations clarify that the shared responsibility payment is not subject to deficiency procedures of subchapter B of chapter 63 of the Code. In addition, the proposed regulations clarify that interest on the shared responsibility payment accrues in accordance with the rules in section 6601. The proposed regulations further provide that the Secretary may offset any liability for the shared responsibility payment against any overpayment due the taxpayer, in accordance with section 6402(a).

These regulations are proposed to apply for months beginning after December 31, 2013.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to the proposed regulations. Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that the proposed regulations will not have a significant economic impact on a substantial number of small entities. The applicability of the proposed regulations is limited to individuals, who are not small entities as defined by the RFA (5 U.S.C. 601). Accordingly, the RFA does not apply. Therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Code, the proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “Addresses” heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request.

A public hearing has been scheduled for May 29, 2013, beginning at 10:00 a.m., in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of § 601.601(a)(3) of this chapter apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments, and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by May 3, 2013. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal authors of the proposed regulations are William L. Candler and Sue-Jean Kim, Office of the Associate Chief Counsel (Income Tax & Accounting). Other personnel from the Treasury Department and the IRS participated in the development of the regulations.

Accordingly, 26 CFR part 1 is proposed to be amended to read as follows:

We encourage you to participate in this rulemaking by submitting comments and related materials. All comments received will be posted without change to http://www.regulations.gov and will include any personal information you have provided.

If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation. You may submit your comments and material online at http://www.regulations.gov, or by fax, mail, or hand delivery, but please use only one of these means. If you submit a comment online, it will be considered received by the Coast Guard when you successfully transmit the comment. If you fax, hand deliver, or mail your comment, it will be considered as having been received by the Coast Guard when it is received at the Docket Management Facility. We recommend that you include your name and a mailing address, an email address, or a telephone number in the body of your document so that we can contact you if we have questions regarding your submission.

To submit your comment online, go to http://www.regulations.gov, type the docket number USCG-2012-1098 in the “SEARCH” box and click “SEARCH.” Click on “Submit a Comment” on the line associated with this rulemaking.

If you submit your comments by mail or hand delivery, submit them in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying and electronic filing. If you submit comments by mail and would like to know that they reached the Facility, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period and may change the rule based on your comments.

To view comments, as well as documents mentioned in this preamble as being available in the docket, go to http://www.regulations.gov, type the docket number USCG-2012-1098 in the “SEARCH” box and click “SEARCH.” Click on Open Docket Folder on the line associated with this rulemaking. You may also visit the Docket Management Facility in Room W12-140 on the ground floor of the Department of Transportation West Building, 1200 New Jersey Avenue SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

Anyone can search the electronic form of comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). You may review a Privacy Act notice regarding our public dockets in the January 17, 2008, issue of the Federal Register (73 FR 3316).

We do not now plan to hold a public meeting. But you may submit a request for one, using one of the methods specified under ADDRESSES . Please explain why you believe a public meeting would be beneficial. If we determine that one would aid this rulemaking, we will hold one at a time and place announced by a later notice in the Federal Register .

The current regulations under 33 CFR 100 address safety for reoccurring marine events. This marine event does not appear in the current regulations; however, as it is a regulation to provide effective control over regattas and marine parades on the navigable waters of the United States so as to insure safety of life in the regatta or marine parade area, this marine event therefore needs to be temporarily added.

The legal basis for the rule is the Coast Guard's authority to establish special local regulations: 33 U.S.C. 1233. The purpose of the rule is to ensure safety of life on navigable waters of the United States during the Fajardo Offshore Grand Prix.

On March 17, 2013, Puerto Rico Offshore Series, Inc. is sponsoring the Fajardo Offshore Grand Prix, a series of high-speed boat races. The races will be held on the waters of Rada Fajardo in Fajardo, Puerto Rico. Approximately 30 high-speed power boats will be participating in the races. It is anticipated that approximately 25 spectator vessels will be present during the races.

The special local regulations encompass certain waters of Rada Fajardo in Fajardo, Puerto Rico. The special local regulations will be enforced from 1 p.m. until 3 p.m. on March 17, 2013. The special local regulations consist of the following three areas: (1) A race area, where all persons and vessels, except those persons and vessels participating in the high-speed boat races, are prohibited from entering, transiting through, anchoring in, or remaining within; (2) a buffer zone around the race area, where all persons and vessels, except those persons and vessels enforcing the buffer zone or participants transiting to the race area, are prohibited from entering, transiting through, anchoring in, or remaining within; and (3) a spectator area, where all vessels are prohibited from anchoring and from traveling in excess of wake speed unless authorized by the Captain of the Port San Juan or a designated representative. Persons and vessels may request authorization to enter, transit through, anchor in, or remain within the race area, buffer zone, or spectator area by contacting the Captain of the Port San Juan by telephone at (787) 289-2041, or a designated representative via VHF radio on channel 16. If authorization to enter, transit through, anchor in, or remain within the race area, buffer zone, or spectator area is granted by the Captain of the Port San Juan or a designated representative, all persons and vessels receiving such authorization must comply with the instructions of the Captain of the Port San Juan or a designated representative. The Coast Guard will provide notice of the special local regulations by Local Notice to Mariners, Broadcast Notice to Mariners, and on-scene designated representatives.

We developed this proposed rule after considering numerous statutes and executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes or executive orders.

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

The economic impact of this rule is not significant for the following reasons: (1) The special local regulations will be enforced for only two hours; (2) although persons and vessels will not be able to enter, transit through, anchor in, or remain within the race area and buffer zone, or anchor in the spectator area, without authorization from the Captain of the Port San Juan or a designated representative, they may operate in the surrounding area during the enforcement period; (3) persons and vessels may still enter, transit through, anchor in, or remain within the race area and buffer zone, or anchor in the spectator area, during the enforcement period if authorized by the Captain of the Port San Juan or a designated representative; and (4) the Coast Guard will provide advance notification of the special local regulations to the local maritime community by Local Notice to Mariners and Broadcast Notice to Mariners.

Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we have considered the impact of this proposed rule on small entities. The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule will not have a significant economic impact on a substantial number of small entities.

This rule may affect the following entities, some of which may be small entities: The owners or operators of vessels intending to enter, transit through, anchor in, or remain within that portion of Rada Fajardo encompassed within the special local regulations from 1 p.m. until 3 p.m. on March 17, 2013. For the reasons discussed in the Regulatory Planning and Review section above, this rule will not have a significant economic impact on a substantial number of small entities.

If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this rule would have a significant economic impact on it, please submit a comment (see ADDRESSES ) explaining why you think it qualifies and how and to what degree this rule would economically affect it.

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

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

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

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

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

This proposed rule would not cause a taking of private property or otherwise have taking implications under Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights.

This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.

We have analyzed this proposed rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that might disproportionately affect children.

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

This proposed rule is not a “significant energy action” under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use.

This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.

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

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 100 as follows:

Public Participation and Request for Comments

We encourage you to submit comments and related material. All comments received will be posted, without change, to http://www.regulations.gov and will include any personal information you have provided.

Submitting comments: If you submit a comment, please include the docket number for this notice (USCG-2012-0907) and provide a reason for each suggestion or recommendation. You may submit your comments and material online, or by fax, mail or hand delivery, but please use only one of these means. We recommend that you include your name and a mailing address, an email address, or a telephone number in the body of your document so that we can contact you if we have questions regarding your submission.

To submit your comment online, go to http://www.regulations.gov and use “USCG-2012-0907” as your search term. Locate this notice in the search results and click the “Comment Now” box to submit your comment. If you submit your comments by mail or hand delivery, submit them in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying and electronic filing. If you submit them by mail and would like to know that they reached the Facility, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period.

Viewing the comments: To view the comments, go to http://www.regulations.gov and use “USCG-2012-0907” as your search term. Filter the results by checking the box for “Public Submissions” on the left side of the page. If you do not have access to the Internet, you may view the docket online by visiting the Docket Management Facility in Room W12-140 on the ground floor of the Department of Transportation West Building, 1200 New Jersey Avenue SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. We have an agreement with the Department of Transportation to use the Docket Management Facility.

Privacy Act: Anyone can search the electronic form of comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). You may review a Privacy Act, system of records notice regarding our public dockets in the January 17, 2008, issue of the Federal Register (73 FR 3316).

Public meeting: After considering public comments, we may hold one or more future public meetings to provide another forum for public comment. We will announce the time and place of any future public meetings by a later notice in the Federal Register .

Section 822 of the Coast Guard Authorization Act of 2010 (Pub. L. 111-281, 124 Stat. 2905) (CGAA 2010) amended 46 U.S.C. 70102 by imposing the following mandates: (1) the owner or operator of a facility must make a current copy of the Facility Vulnerability Assessment (FVA) available to the “port authority with jurisdiction of the facility” and “State or local law enforcement agencies;” and (2) the owner or operator of a facility must “integrate, to the maximum extent practical,” the facility's security systems “with compatible systems operated or maintained by State, law enforcement agencies, and the Coast Guard.” Section 822 is intended to increase industry stakeholder and government agency (local, State, and Federal) collaboration efforts to identify, prevent, mitigate, and respond to Transportation Security Incidents (TSIs) and other disasters. If the Coast Guard undertakes a future rulemaking to implement Section 822, it would apply to facilities regulated by the Coast Guard under the Maritime Security Transportation Act of 2002 (MTSA).

Existing Coast Guard regulations include a number of provisions that require facility owners and operators to ensure the timely involvement of law enforcement and emergency responders in the event of a TSI or other disaster. Each Facility Security Assessment (FSA) must contain provisions for contingency planning, emergency preparedness and response, and communications capabilities (33 CFR 105.305). Facility Security Officers (FSOs) are required to notify law enforcement personnel and other emergency responders, as soon as possible, to permit their timely response to any TSI (33 CFR 105.205(c)(16)). Each facility access point must provide a primary and backup means of contacting police, security control, or an emergency operations center by telephone, cellular phone, portable radio, or other equivalent means (33 CFR 105.235(c) and (d)). State and local emergency responders are not required to obtain or possess a Transportation Worker Identification Credential (TWIC) in order to gain unescorted access to secure areas of a facility during an emergency situation (33 CFR 101.514(d)).

While the Coast Guard believes that in most instances, the measures detailed above are adequate to ensure the timely involvement of State and local law enforcement and emergency responders, additional regulations may be necessary to close potential gaps that might hinder an appropriate emergency response to a TSI or other disaster.

We have considered a number of possible ways to implement the requirements in Section 822. We describe these approaches below to inform the public of our preliminary thoughts on implementing Section 822 and to solicit public comments to gain a better understanding of the issues that concern affected parties, as well as current industry practices on facility interactions with port authorities, State and local law enforcement agencies, and the Coast Guard. We are also interested in any information and data about the costs associated with these approaches as well as any potential benefit. These comments may assist us in formulating policy as we consider a future rulemaking to implement Section 822.

• Require each MTSA-regulated facility owner or operator to make a copy of the current FVA available to the cognizant Coast Guard Captain of the Port, port authority, and State and local law enforcement agencies, upon request. The owner or operator would share the FVA via electronically secured transfer. Do facilities store FVAs electronically?

Are you able to save them as an encrypted or password-protected file?

• Require each MTSA-regulated facility owner or operator to proactively provide a copy of the current FVA to the port authority and State and local law enforcement agencies at a prescribed time interval (as opposed to making copies of FVAs available to the port authorities and law enforcement upon request). The owner or operator would share the FVA via electronically secured transfer.

Are you able to encrypt or password-protect the FVA electronic copy and/or deliver it on a password-protected CD, flash drive, or other storage medium?

• Require each MTSA-regulated facility owner or operator to share the current FVA with the port authority and State and local law enforcement agencies annually at the annual exercise required under 33 CFR 105.220 or at a newly required annual FVA sharing meeting.

• Require each MTSA-regulated facility owner or operator to share the current FVA with the port authority and State and local law enforcement agencies during the regularly scheduled 5-year resubmission process of the Facility Security Plan (FSP).

• In addition to the requirement to share the current FVA, require each MTSA-regulated facility owner or operator to make the Security Measures Summary (CG-6025) available to the relevant government authorities and law enforcement agencies for review at the end of the required annual exercise or equivalent (33 CFR 105.220).

• In addition to the requirement to share the current FVA, require each MTSA-regulated facility owner or operator to update the FSP to incorporate FVA-sharing measures.

• Require each MTSA-regulated facility owner or operator to have and demonstrate via annual exercises the ability to provide manual alerts regarding a TSI to appropriate State and local law enforcement agencies and the Coast Guard.

Is 15 minutes a reasonable estimate of the additional time needed to comply with this requirement?

• Require each MTSA-regulated facility owner or operator to have and demonstrate via annual exercises the ability to provide automated alerts regarding a TSI to appropriate State and local law enforcement agencies and the Coast Guard.

Is 15 minutes a reasonable estimate of the additional time needed to comply with this requirement?

• Require each MTSA-regulated facility owner or operator to make security data feeds regarding a TSI (e.g., alerts, video feeds, alarms, etc.) available to appropriate State and local law enforcement agencies and the Coast Guard.

Do appropriate levels of technology exist at both the facility and receiving government agency to comply with this requirement, which would consist of sharing telecommunications information such as Internet addresses, phone numbers, passwords, and encryption codes?

• Require each MTSA-regulated facility owner or operator to incorporate a technological solution that integrates their electronic surveillance and communications systems with compatible systems operated or maintained by the appropriate State and local law enforcement agencies and the Coast Guard. There is a range of possible methods for integrating security systems, including Internet connectivity, dedicated telephone lines, and other forms of security system integration.

1. We request comments on the feasibility, costs, and benefits of each of the preliminary alternatives described above. Please be as specific as possible. For estimates of costs a break-out by specific cost element would be preferable to a lump sum. For example, provide separate estimates for the equipment, number of hours and type of worker needed to install the equipment (i.e. master electrician, labor, supervisor), number of hours and type of employee (i.e., trainer, mid-level manager) to prepare and execute training, and on-going maintenance costs. Cost estimates can be provided as ranges.

2. We request comments as to whether there are any data, literature, or studies that demonstrate the feasibility, costs, and benefits of each of the preliminary alternatives described above.

3. We request comments from MTSA-regulated facility owners and operators regarding current industry practices with respect to security system integration between the facility and State and local law enforcement agencies, the Coast Guard and, emergency responders.

4. We request comments as to whether the requirement to integrate facility security systems with those of State and local law enforcement agencies, the Coast Guard, and emergency responders should be limited to only those MTSA-regulated facilities that are identified in risk-based and other applicable types of analyses. If so, please identify the characteristics of those facilities.

5. Aside from the preliminary alternatives described above, please provide any other alternatives on preferred ways to implement the requirements in Section 822. For any such alternatives suggested, please include information and data as to the feasibility, costs, and benefits.

6. We request any additional comments from interested parties on the subject matter of this notice.

This notice is issued under authority of 5 U.S.C. 552(a), 46 U.S.C. 70102(c) and 70124.

We encourage you to participate in this rulemaking by submitting comments and related materials. All comments received will be posted without change to http://www.regulations.gov and will include any personal information you have provided.

If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation. You may submit your comments and material online at http://www.regulations.gov , or by fax, mail, or hand delivery, but please use only one of these means. If you submit a comment online, it will be considered received by the Coast Guard when you successfully transmit the comment. If you fax, hand deliver, or mail your comment, it will be considered as having been received by the Coast Guard when it is received at the Docket Management Facility. We recommend that you include your name and a mailing address, an email address, or a telephone number in the body of your document so that we can contact you if we have questions regarding your submission.

To submit your comment online, go to http://www.regulations.gov , type the docket number [USCG-2012-0365] in the “SEARCH” box and click “SEARCH.” Click on “Submit a Comment” on the line associated with this rulemaking.

If you submit your comments by mail or hand delivery, submit them in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying and electronic filing. If you submit comments by mail and would like to know that they reached the Facility, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period and may change the rule based on your comments.

To view comments, as well as documents mentioned in this preamble as being available in the docket, go to http://www.regulations.gov , type the docket number (USCG-2012-0365) in the “SEARCH” box and click “SEARCH.” Click on Open Docket Folder on the line associated with this rulemaking. You may also visit the Docket Management Facility in Room W12-140 on the ground floor of the Department of Transportation West Building, 1200 New Jersey Avenue SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

Anyone can search the electronic form of comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). You may review a Privacy Act notice regarding our public dockets in the January 17, 2008, issue of the Federal Register (73 FR 3316).

We do not now plan to hold a public meeting. But you may submit a request for one on or before April 11, 2013, using one of the methods specified under ADDRESSES . Please explain why you believe a public meeting would be beneficial. If we determine that one would aid this rulemaking, we will hold one at a time and place announced by a later notice in the Federal Register .

In order to prevent near miss collisions or delays in mooring during the commercial fishing openers, the Coast Guard began issuing temporary final rules to establish temporary safety zones during Commercial Salmon Fishery Openers in 2010. The Coast Guard received no comments or concerns from the public when the temporary final rules were in place.

This Notice of Proposed Rule Making would permanently establish a safety zone of the exact same size and position as that which was established under the temporary final rules.

The legal basis for the proposed rule is the Coast Guard's authority to establish limited access areas: 33 U.S.C 1231; 46 U.S.C Chapter 701, 3306, 3703; 50 U.S.C. 191, 195; 33 CFR 1.05-1, 6.04-1, 6.04-6, 160.5; Public Law 107-295, 116 Stat. 2064; Department of Homeland Security Delegation No. 0170.1.

A representative of the Alaska Marine Highway System requested that the Coast Guard establish a safety zone in the immediate vicinity of the AMHS Port Valdez Ferry Terminal whenever a Commercial Salmon Fishery Opener is declared, because of previous incidents of near collisions in the vicinity of the ferry terminal between AMHS ferry vessels and commercial fishing vessels. During Commercial Salmon Fishery Openers, increased vessel traffic in the vicinity of the AMHS Port Valdez Ferry Terminal adds additional congestion to the waterways and is a cause for navigational safety concerns, especially when the commercial fleet is active along the shoreline adjacent to the AMHS Port Valdez Ferry Terminal.

We believe a permanent safety zone is necessary to ensure the safety of vessels operating in the vicinity of the AMHS Port Valdez Ferry Terminal. The Coast Guard began issuing temporary final rules to establish temporary safety zones during Commercial Salmon Fishery Openers in 2010. Because Commercial Salmon Fishery Openers are not announced until the night before the opener, these temporary final rules were issued late in the evening or at night (becoming effective the following morning) leaving very little time to thoroughly disseminate news of the safety zone to affected waterway users.

The proposed rule would ensure the safety of all vessels in the area during periods of increased vessel traffic because of the Commercial Salmon Fishery Opener. The impact of this rule on commercial and recreational traffic is expected to be minimal because the proposed safety zone will restrict access to only a small portion of the navigable waters of Port Valdez and for a short duration.

The Coast Guard proposes to establish a 200-yard safety zone around the AMHS Port Valdez Ferry Terminal at position 61°07′26″ N; 146°21′50″ W in the navigable waters of Port Valdez. The purpose of the safety zone would be to restrict non-AMHS vessels from entering within a 200-yard radius of the AMHS Port Valdez Ferry Terminal whenever an AMHS ferry is underway within a 200-yard radius of the AMHS Terminal and there is a declared Commercial Salmon Fishery Opener that includes the navigable waters within 200 yards of the terminal. The proposed safety zone would only be enforced when an AMHS ferry is underway within 200 yards of the AMHS Port Valdez Ferry Terminal and there is a declared Commercial Salmon Fishery Opener in effect. The limited size and duration of the proposed safety zone is designed to minimize the impact on other vessels transiting the waters of Port Valdez.

The proposed rule would be enforced whenever an AMHS ferry vessel is underway within 200 yards of the AMHS Port Valdez Ferry Terminal. Enforcement of the safety zone would terminate when the ferry vessel is moored or when the vessel is more than 200 yards away from the terminal.

We developed this proposed rule after considering numerous statutes and executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes or executive orders.

This proposed rule is not a significant regulatory action under section 3(f) of Executive Order 12866, Regulatory Planning and Review, as supplemented by Executive Order 13563, Improving Regulation and Regulatory Review, and does not require an assessment of potential costs and benefits under section 6(a)(3) of Executive Order 12866 or under section 1 of Executive Order 13563. The Office of Management and Budget has not reviewed it under those Orders. The Coast Guard enforcement of this proposed safety zone will be of short duration. The proposed safety zone would be enforced for a limited amount of time, only when there is a declared Commercial Salmon Fishery Opener and there is an AMHS ferry underway within 200 yards of the AMHS Port Valdez Ferry Terminal. Vessels would be able to navigate around the proposed safety zone. Furthermore, vessels may be authorized to transit through the proposed safety zone with the permission of the COTP.

Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we have considered the impact of this proposed rule on small entities. The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities.

This proposed rule would affect the following entities, some of which might be small entities: The owners or operators of vessels intending to transit or anchor in a portion of the navigable waters of Port Valdez whenever a Commercial Salmon Fishery Opener is declared and there is an AMHS ferry underway within 200 yards of the AMHS Port Valdez Ferry Terminal.

This proposed safety zone would not have a significant economic impact on a substantial number of small entities for the following reasons. This proposed safety zone would be activated, and thus subject to enforcement, only when there is an announced Commercial Salmon Fishery Opener and there is an AMHS ferry underway within 200 yards of the AMHS Port Valdez Terminal. Vessel traffic could pass safely around the proposed safety zone. Before the activation of the zone, we would issue maritime advisories widely available to users of the waterway.

If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this rule would have a significant economic impact on it, please submit a comment (see ADDRESSES ) explaining why you think it qualifies and how and to what degree this rule would economically affect it.

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

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

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

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

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

This proposed rule would not cause a taking of private property or otherwise have taking implications under Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights.

This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.

We have analyzed this proposed rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that might disproportionately affect children.

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

This proposed rule is not a “significant energy action” under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use.

This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.

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

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 165 as follows:

Throughout this document wherever “we”, “us” or “our” are used, it is intended to refer to the EPA.

The EPA is proposing to approve in part and disapprove in part the LMP submitted by the State of Idaho on December 14, 2011, for the Sandpoint NAA, and to approve the State's request to redesignate this area to attainment for the PM 10 NAAQS. The Sandpoint NAA LMP submittal included a request to approve revisions to the control measures included in the PM 10 attainment State Implementation Plan (SIP) for the Sandpoint NAA. The EPA is proposing to approve the revised Sandpoint City Ordinance 965 for control of residential burning because it strengthens the SIP. The EPA is also proposing to approve the State's request to remove the Louisiana-Pacific Corporation—Sandpoint operating permit control measure from the SIP because the facility has been shut down, dismantled, and is no longer in operation. However, the EPA is proposing to disapprove the State's request to remove the operating permits for two other sources because these sources are still in operation and the State did not provide a demonstration that removal of the two permits would not interfere with attainment or maintenance of the NAAQS. In addition, the removal of controls that were relied on to demonstrate attainment would disqualify the Sandpoint NAA for LMP eligibility and require that the State submit a full maintenance plan. Because the State submitted the Sandpoint NAA LMP intending to qualify for the LMP option, and did not submit a full maintenance plan, we are proposing to disapprove the separable portion of the submittal that is not consistent with the LMP qualifying criteria. This proposed partial disapproval does not prevent the State from submitting a subsequent SIP revision demonstrating that the removal of the two operating permits does not interfere with attainment or maintenance of the NAAQS.

The EPA's proposed partial disapproval would be simultaneously corrected because we are, in this same action, proposing to fully approve the Sandpoint NAA LMP with all control measures in place. Therefore, upon final action a fully approved LMP would be in place and no further submittal would be required from the State to address the partial disapproval.

“Particulate matter,” also known as particle pollution or PM, is a complex mixture of extremely small particles and liquid droplets. The size of particles is directly linked to their potential for causing health problems. The EPA is concerned about particles that are 10 micrometers in diameter or smaller because those are the particles that generally pass through the throat and nose and enter the lungs. Once inhaled, these particles can affect the heart and lungs and cause serious health effects. People with heart or lung diseases, children and older adults are the most likely to be affected by particle pollution exposure. However, even healthy individuals may experience temporary symptoms from exposure to elevated levels of particle pollution.

On July 1, 1987, the EPA promulgated a NAAQS for PM 10 (52 FR 24634). The EPA established a 24-hour standard of 150 μg/m 3 and an annual standard of 50 μg/m 3 , expressed as an annual arithmetic mean. The EPA also promulgated secondary PM 10 standards identical to the primary standards. In a rulemaking action dated October 17, 2006, the EPA retained the 24-hour PM 10 standard but revoked the annual PM 10 standard (71 FR 61144, effective December 18, 2006).

On August 7, 1987, the EPA designated the Sandpoint area as a PM 10 nonattainment area due to measured violations of the 24-hour PM 10 standard (52 FR 29383). The notice announcing the designation upon enactment of the 1990 CAA Amendments was published on March 15, 1991 (56 FR 11101). On November 6, 1991, the Sandpoint NAA was classified as moderate under sections 107(d)(4)(B) and 188(a) of the CAA (56 FR 56694).

The Sandpoint NAA is located in northern Idaho and includes the communities of Sandpoint, Kootenai, and Ponderay, covering approximately fifteen square miles of Bonner County. The Sandpoint NAA is a low-lying area, at 2085 feet above sea level, surrounded by mountain ranges with varying heights of approximately 3000 to 7000 feet. The Sandpoint NAA is located approximately 46 miles north of Coeur d'Alene, Idaho, and 70 miles northeast of Spokane, Washington.

After the Sandpoint NAA was designated nonattainment for PM 10 , the Idaho Department of Environmental Quality (DEQ) worked with the communities of Sandpoint, Kootenai, and Ponderay to develop a plan to bring the area into attainment no later than December 31, 1996. The State submitted the plan to the EPA on August 16, 1996, as a moderate PM 10 SIP under section 189(a) of the CAA. The moderate PM 10 SIP included a comprehensive residential wood combustion program, controls on fugitive road dust, and emission limitations on industrial sources. The EPA took final action to approve the Sandpoint moderate PM 10 SIP on June 26, 2002 (67 FR 43006). On June 22, 2010, the EPA determined that the Sandpoint NAA had attained the PM 10 NAAQS (75 FR 35302).

On December 14, 2011, the State submitted to the EPA the Sandpoint NAA LMP for approval, and requested that the EPA redesignate the Sandpoint NAA to attainment for the PM 10 NAAQS. The State also requested approval to revise control measures in the Sandpoint PM 10 SIP. In this action, the EPA is proposing to approve in part and disapprove in part the Sandpoint NAA LMP, and to concurrently redesignate the Sandpoint area from nonattainment to attainment for the PM 10 NAAQS.

Section 110(a)(2) of the CAA requires that each SIP revision be adopted after reasonable notice and public hearing. This must occur prior to the revision being submitted by a state to the EPA. The State of Idaho provided notice and an opportunity for public comment on the Sandpoint NAA LMP from October 11, 2011 to November 10, 2011. A notice of public hearing was published in the Coeur d'Alene Press and the Bonner County Daily Bee on October 11, 2011. The State held a public hearing on December 9, 2011, in Sandpoint, Idaho. This SIP revision was submitted by the Governor's designee to the EPA on December 14, 2011. The EPA has evaluated the State's submittal and determined that the State met the requirements for reasonable notice and public hearing under section 110(a)(2) of the CAA.

A nonattainment area may be redesignated to attainment after the area has measured air quality data showing the NAAQS has been attained, and when certain planning requirements are met. Section 107(d)(3)(E) of the CAA, and the General Preamble to Title I provide the criteria for redesignation (57 FR 13498, April 16, 1992). These criteria are further clarified in a policy and guidance memorandum from John Calcagni, Director, Air Quality Management Division, EPA Office of Air Quality Planning and Standards dated September 4, 1992, entitled “Procedures for Processing Requests to Redesignate Areas to Attainment” (Calcagni Memo). The criteria for redesignation are:

1. The Administrator has determined that the area has attained the applicable NAAQS;

2. the Administrator has fully approved the applicable SIP for the area under section 110(k) of the CAA;

3. the state containing the area has met all requirements applicable to the area under section 110 and part D of the CAA;

4. the Administrator has determined that the improvement in air quality is due to permanent and enforceable reductions in emissions; and

5. the Administrator has fully approved a maintenance plan for the area as meeting the requirements of section 175A of the CAA.

On August 9, 2001, the EPA issued guidance on streamlined maintenance plan provisions for certain moderate PM 10 nonattainment areas seeking redesignation to attainment (Memo from Lydia Wegman, Director, Air Quality Standards and Strategies Division, entitled “Limited Maintenance Plan Option for Moderate PM 10 Nonattainment Areas” (LMP Option Memo). The LMP Option Memo contains a statistical demonstration that areas meeting certain air quality criteria will, with a high degree of probability, maintain the standard ten years into the future. Thus, the EPA provided the maintenance demonstration for areas meeting the criteria outlined in the LMP Option Memo. It follows that future year emission inventories for these areas, and some of the standard analyses to determine transportation conformity with the SIP, are no longer necessary.

To qualify for the LMP Option, the area should have attained the PM 10 NAAQS and, based upon the most recent five years of air quality data at all monitors in the area, the 24-hour design value should be at or below 98 µg/m 3 . If an area cannot meet this test, it may still be able to qualify for the LMP Option if the average design value (ADV) for the area is less than the site-specific critical design value (CDV). In addition, the area should expect only limited growth in on-road motor vehicle PM 10 emissions (including fugitive dust) and should have passed a motor vehicle regional emissions analysis test. The LMP Option Memo also identifies core provisions that must be included in the LMP. These provisions include an attainment year emissions inventory, assurance of continued operation of an EPA-approved air quality monitoring network, and contingency provisions.

The transportation conformity rule and the general conformity rule (40 CFR parts 51 and 93) apply to nonattainment areas and maintenance areas covered by an approved maintenance plan. Under either conformity rule, an acceptable method of demonstrating a Federal action conforms to the applicable SIP is to demonstrate that expected emissions from the planned action are consistent with the emissions budget for the area.

While qualification for the LMP Option does not exempt an area from the need to affirm conformity, conformity may be demonstrated without submitting an emissions budget. Under the LMP Option, emissions budgets are treated as essentially not constraining for the length of the maintenance period because it is unreasonable to expect that the qualifying areas would experience so much growth in that period that a violation of the PM 10 NAAQS would result. For transportation conformity purposes, the EPA would conclude that emissions in these areas need not be capped for the maintenance period and therefore a regional emissions analysis would not be required. Similarly, Federal actions subject to the general conformity rule could be considered to satisfy the “budget test” specified in 40 CFR 93.158 (a)(5)(i)(A) for the same reasons that the budgets are essentially considered to be unlimited.

To demonstrate that an area has attained the PM 10 NAAQS, states must submit an analysis of ambient air quality data from an ambient air monitoring network representing peak PM 10 concentrations. The data should be quality-assured and stored in the EPA Air Quality System database. The EPA has reviewed air quality data for the area and has confirmed that the Sandpoint NAA attained the PM 10 NAAQS  1 by the applicable attainment date of December 31, 1996 and continues to attain the PM 10 NAAQS. The EPA's analysis is described below.

The 24-hour PM 10 NAAQS is 150 μg/m 3 . An area has attained this 24-hour standard if the average number of expected exceedances per year is less than or equal to one, when averaged over a three-year period (40 CFR 50.6). To make this determination, three consecutive years of complete ambient air quality data must be collected in accordance with Federal requirements (40 CFR part 58 including appendices).

On June 22, 2010, the EPA determined that the Sandpoint NAA attained the PM 10 NAAQS by December 31, 1996 (75 FR 35302). The EPA has also reviewed more recent ambient air quality data for the 24-hour PM 10 NAAQS, and has determined that the Sandpoint NAA continues to attain the 24-hour PM 10 NAAQS. A summary of the EPA's data review and analysis can be found in the docket for this action (Sandpoint PM 10 NAAQS LMP Memo, dated September 13, 2012).

A comprehensive air quality monitoring plan, intended to meet the requirements of 40 CFR part 58 was submitted by the State to the EPA on January 15, 1980, and approved by the EPA on July 28, 1982 (40 CFR 52.670). Updated monitoring plans have been subsequently submitted and approved, with the most recent submittal dated July 1, 2012 and approved on October 25, 2012. The monitoring plan describes the PM 10 monitoring network throughout Idaho, which includes the Sandpoint monitoring site. In the Sandpoint NAA LMP submittal, the State states that the Idaho DEQ has monitored PM 10 in Sandpoint since 1985, and that data from 1996 through 2008 show that PM 10 concentrations remain well below the 24-hour PM 10 NAAQS. In addition, the State states that the Sandpoint monitoring site is operated in compliance with the EPA monitoring guidelines set forth in 40 CFR part 58, Ambient Air Quality Surveillance. Data from the Sandpoint monitoring site has been quality assured by Idaho DEQ and submitted to the EPA Air Quality System (AQS), accessible through the EPA AirData Web site at http://www.epa.gov/airdata/ .

To qualify for redesignation, the SIP for the area must be fully approved under section 110(k) of the CAA, and must satisfy all requirements that apply to the area. As discussed in Section II.B. above, the State submitted the Sandpoint PM 10 SIP to the EPA on August 16, 1996. The EPA fully approved the Sandpoint PM 10 SIP on June 26, 2002, as satisfying all requirements that apply to the area (67 FR 43006). Thus, the area has a fully approved nonattainment area SIP under section 110(k) of the CAA.

Section 107(d)(3)(E) of the CAA requires that for an area to be redesignated to attainment the state must meet all applicable requirements under section 110 and Part D of the CAA. The EPA interprets this to mean that the state must meet all requirements that applied to the area prior to, and at the time of, the submission of a complete redesignation request. The following is a summary of how the State meets these requirements.

Section 110(a)(2) of the CAA contains general requirements for nonattainment plans. These requirements include, but are not limited to: submittal of a SIP adopted by the state after reasonable notice and public hearing; provisions for establishment and operation of appropriate apparatus, methods, systems and procedures necessary to monitor ambient air quality; implementation of a permit program; provisions for Part C—Prevention of Significant Deterioration (PSD) and Part D—New Source Review (NSR) permit programs; criteria for stationary source emission control measures, monitoring and reporting; provisions for modeling; and provisions for public and local agency participation. See the General Preamble for further explanation of these requirements (57 FR 13498, April 16, 1992). For purposes of redesignating the Sandpoint NAA, the EPA has reviewed the Idaho SIP and finds that the State has satisfied all applicable requirements under CAA section 110(a)(2) for the PM 10 NAAQS. The EPA's approval of the State's SIP for attainment and maintenance of the PM 10 NAAQS under CAA section 110 can be found at 40 CFR 52.673.

CAA part D contains general requirements applicable to all areas designated nonattainment. The general requirements are followed by a series of subparts specific to each pollutant. All PM 10 nonattainment areas must meet the general provisions of Subpart 1 and the specific PM 10 provisions in Subpart 4, “Additional Provisions for Particulate Matter Nonattainment Areas.” The following paragraphs discuss these requirements as they apply to the Sandpoint NAA.

CAA section 172(c) contains general requirements for nonattainment area plans. A thorough discussion of these requirements can be found in the General Preamble (57 FR 13538, April 16, 1992). CAA section 172(c)(2) requires nonattainment plans to provide for reasonable further progress (RFP). Section 171(1) of the CAA defines RFP as “such annual incremental reductions in emissions of the relevant air pollutant as are required by this part (part D of title I) or may reasonably be required by the Administrator for the purpose of ensuring attainment of the applicable national ambient air quality standard by the applicable date.” The requirements for RFP, identification of certain emissions increases and other measures needed for attainment were satisfied with the approved Sandpoint moderate PM 10 SIP (67 FR 43006). On June 22, 2010, the EPA determined that the Sandpoint NAA attained the PM 10 NAAQS by December 31, 1996 (75 FR 35302), therefore the State has demonstrated that no further showing of RFP or quantitative milestones is necessary.

Section 172(c)(3) of the CAA requires a comprehensive, accurate, current inventory of actual emissions from all sources in the Sandpoint NAA. The State included an emissions inventory dated March 31, 2006 in the Sandpoint NAA LMP submittal. The State used 1999 as a base year for the emissions inventory because the State determined that it is representative of emissions during the five year period (1996-2001) associated with air quality data demonstrating attainment, and that a more current inventory would not find higher total emissions rates that those estimated for 1999. The State has demonstrated that the 1999 base year emissions inventory is current, accurate, and comprehensive, and therefore meets the requirements of section 172(c)(3) of the CAA.

The CAA requires all nonattainment areas to meet several requirements regarding NSR. A state must have an approved major NSR program that meets the requirements of CAA section 172(c)(5). The Part D NSR rules for PM 10 nonattainment areas in Idaho were approved by the EPA on July 23, 1993 (58 FR 39445) and amended on January 16, 2003 (68 FR 2217). Revisions to Idaho's NSR rules were most recently approved by the EPA on November 26, 2010 (75 FR 72719). Within the boundaries of the Sandpoint NAA, the requirements of the Part D NSR program will be replaced by the State's Prevention of Significant Deterioration (PSD) program requirements upon the effective date of redesignation.

Once an area is redesignated, the state must continue to operate an appropriate air monitoring network in accordance with 40 CFR part 58 to verify the attainment status of the area. On January 15, 1980, the State submitted a comprehensive air quality monitoring plan, intended to meet the requirements of 40 CFR part 58. The EPA approved the plan on July 28, 1982 (40 CFR 52.760). This monitoring plan has been updated, with the most recent submittal dated July 1, 2012 and approved on October 25, 2012. The monitoring plan describes the PM 10 monitoring network throughout Idaho, including the Sandpoint monitoring site. The Sandpoint monitoring site is operated in compliance with the EPA monitoring guidelines set forth in 40 CFR part 58, Ambient Air Quality Surveillance. In addition, the Sandpoint NAA LMP submittal provides a commitment to continue operation of the PM 10 monitoring network in accordance with 40 CFR part 58, and to annually verify continued attainment of the 24-hour PM 10 NAAQS in Sandpoint.

The CAA requires that contingency measures take effect if an area fails to meet RFP requirements or fails to attain the NAAQS by the applicable attainment date. On June 22, 2010, the EPA determined that the Sandpoint NAA attained the PM 10 NAAQS by the applicable attainment date of December 31, 1996 (75 FR 35302), therefore contingency measures are no longer required under Section 172 (c)(9) of the CAA. However, contingency provisions are required for maintenance plans under Section 175(a)(d). Please see section IV.I. for a description of Idaho's maintenance plan contingency provisions.

CAA sections 189(a), (c) and (e) apply to moderate PM 10 nonattainment areas. Any of these requirements which were applicable and due prior to the submission of the redesignation request must be fully approved into the SIP before redesignating the area to attainment. With respect to the Sandpoint NAA, these requirements include:

(a) Provisions to assure that reasonably available control measures were implemented by December 10, 1993 (section 189(a)(1)(C));

(b) either a demonstration that the plan provided for attainment as expeditiously as practicable but not later than December 31, 1994, or a demonstration that attainment by that date was impracticable (section 189(a)(1)(B));

(c) quantitative milestones which were achieved every three years and which demonstrate RFP toward attainment by December 31, 1994 (section 189(c)(1)); and

(d) provisions to assure that the control requirements applicable to major stationary sources of PM 10 also apply to major stationary sources of PM 10 precursors except where the Administrator determined that such sources do not contribute significantly to PM 10 levels which exceed the NAAQS in the area (section 189(e)).

Provisions for reasonably available control measures, attainment demonstration, and RFP milestones were fully approved into the SIP upon the EPA approval of the Sandpoint PM 10 SIP for the Sandpoint NAA on June 26, 2002 (67 FR 43006). The EPA approved changes to Idaho's major NSR rules on July 17, 2012 (77 FR 41916) and November 26, 2010 (75 FR 72719). Idaho's major nonattainment NSR rules and PSD rules include control requirements that apply to major stationary sources of PM 10 and PM 10 precursors in nonattainment and attainment/unclassifiable areas.

Section 107(d)(3)(E)(iii) of the CAA provides that a nonattainment area may not be redesignated unless the EPA determines that the improvement in air quality is due to permanent and enforceable reductions in emissions resulting from implementation of the SIP. Therefore, a state must be able to reasonably attribute the improvement in air quality to permanent and enforceable emission reductions by demonstrating that air quality improvements are the result of actual enforceable emission reductions. This showing should consider emission rates, production capacities, and other related information. The analysis should assume that sources are operating at permitted levels (or historic peak levels) unless evidence is presented that such an assumption is unrealistic.

Permanent and enforceable control measures in the Sandpoint PM 10 SIP include controls on residential wood combustion, fugitive road dust, and industrial sources of emissions. The Sandpoint NAA LMP submittal describes the efforts started in 1995 to control residential wood combustion in the City of Sandpoint, which included a public awareness campaign, an uncertified woodstove replacement program, and a new city ordinance related to woodstoves and burning. The public awareness program provided citizens with information about stove sizing, installation, proper operation and maintenance, general health risks of wood smoke, new stove technology, and alternatives to wood heating. The replacement program resulted in the removal of 84 uncertified wood stoves which were replaced by natural gas units, certified wood stoves, and pellet stoves. In addition, the Sandpoint NAA LMP submittal describes Sandpoint Ordinance 965, which restricts the sale and installation of uncertified solid fuel heating appliances, and implements a wood burning curtailment program in the City of Sandpoint.

The Sandpoint NAA LMP submittal also describes measures to reduce particulate matter emissions due to winter sanding of road surfaces in the City of Sandpoint including changing the type and volume of sanding material used, using alternative materials, and increasing the frequency of street sweeping. Sandpoint City Ordinance 939, adopted in 1994, requires applicators of anti-skid material to use only material that meets certain standards for percentages of fines and durability. In addition, the Sandpoint Independent Highway District and Idaho Transportation Department have acquired equipment to apply liquid de-icer and have also designated certain roads in Sandpoint as an “anti-skid free zone.”

Finally, the Sandpoint NAA LMP submittal describes the control measures relied on to address industrial source emissions. The State developed emissions limits for facilities in the Sandpoint NAA through the Tier II Operating Permit Program, with input from each facility to ensure the reductions in potential to emit were feasible and offered sufficient operational flexibility. Portions of the Tier II operating permits for three sources, Louisiana Pacific Corporation—Sandpoint, Lake Pre-Mix, and Interstate Concrete and Asphalt were approved into the Sandpoint PM 10 SIP on June 26, 2002 (67 FR 43006).

The controls on residential wood combustion, fugitive road dust, and industrial sources of emissions described above were approved by the EPA into the Sandpoint PM 10 SIP, and are both permanent and Federally-enforceable (67 FR 43006). However, Idaho's Sandpoint NAA LMP submittal included a request to remove the three Tier II operating permits from the Sandpoint PM 10 SIP. The EPA is proposing to approve the State's request to remove the Louisiana-Pacific Corporation—Sandpoint operating permit from the SIP because the facility has ceased operations and has been dismantled. The EPA is proposing to disapprove the State's request to remove the two other operating permits (Lake Pre-Mix, and Interstate Concrete and Asphalt) because the submittal did not include a demonstration that removal of the two permits would not interfere with attainment or maintenance of the PM 10 NAAQS. This proposed partial disapproval does not prevent the State from submitting a subsequent SIP revision to remove the two Tier II operating permits with the required demonstration.

The EPA has concluded that areas that qualify for the LMP Option will meet the NAAQS, even under worst case meteorological conditions. Therefore, under the LMP Option, the maintenance demonstration is presumed to be satisfied if an area meets the criteria to qualify for a LMP. An application of the LMP qualifying criteria to the Sandpoint NAA is provided below. By qualifying for a LMP, the State presumptively demonstrates that the air quality improvements in the Sandpoint NAA are the result of permanent emission reductions and not a result of either economic trends or meteorology.

In this action, we are proposing to approve the LMP in accordance with the principles outlined in the LMP Option Memo. Upon final approval, the Sandpoint NAA will have a fully approved maintenance plan.

The LMP Option Memo outlines the requirements for an area to qualify for a LMP. First, the area should be attaining the NAAQS. On June 22, 2010, the EPA determined that the Sandpoint NAA attained the PM 10 NAAQS by December 31, 1996 (75 FR 35302). The EPA has reviewed more recent ambient air quality data for the 24-hour PM 10 NAAQS, and has determined that the Sandpoint NAA continues to attain the 24-hour PM 10 NAAQS. Please see section V.A. for a detailed discussion.

Second, the average design value (ADV) for the past five years of monitoring data must be at or below the critical design value (CDV). The CDV is a margin of safety value at which an area has been determined to have a one in ten probability of exceeding the NAAQS. The LMP Option Memo provides two methods to review monitoring data for the purpose of determining qualification for a LMP. The first method is a comparison of a site's ADV with the CDV of 98 µg/m 3 for the 24-hour PM 10 NAAQS. A second method that applies to the 24-hour PM 10 NAAQS is the calculation of a site-specific CDV and a comparison of the site-specific CDV with the ADV for the past five years of monitoring data. The State's LMP submittal provides a comparison of five-year ADVs compared to the 24-hour and annual CDVs for the years 2004-2008, as described in the first method for review of monitoring data to determine qualification for a LMP. The State's analysis demonstrates that the Sandpoint NAA has met the LMP design value criteria since 1999, the base year for the most recent emissions inventory. The EPA has reviewed the calculations and concurs with the State's findings. The EPA also calculated ADVs using more recent data and found that the Sandpoint NAA meets the LMP design value criteria for the period 2007-2011. The EPA's design value calculations and analysis can be found in the docket for this action (Sandpoint PM 10 NAAQS LMP Memo, dated September 13, 2012). Therefore, the EPA finds that the Sandpoint NAA meets the design value criteria outlined in the LMP Option Memo.

Third, the area must meet the motor vehicle regional emissions analysis test described in attachment B of the LMP Option Memo. Using the methodology outlined in the LMP Option Memo, the State has submitted an analysis of whether increased emissions from on-road mobile sources would increase PM 10 concentrations in the Sandpoint NAA to levels that would threaten the assumption of maintenance that underlies the LMP policy. Based on monitoring data for the period 2004-2008, the State has determined that the Sandpoint NAA passes the motor vehicle regional emissions analysis test. The EPA has reviewed the calculations in the State's Sandpoint NAA LMP submittal and concurs with this conclusion.

The LMP Option Memo requires all controls relied on to demonstrate attainment remain in place for a NAA to qualify for a LMP. The controls on residential wood combustion, fugitive road dust, and industrial sources of emissions described above were approved by the EPA into the Sandpoint PM 10 SIP, and are both permanent and Federally-enforceable (67 FR 43006). However, Idaho's Sandpoint NAA LMP submittal included a request to remove the three Tier II operating permits from the Sandpoint PM 10 SIP. The EPA is proposing to approve the State's request to remove the Louisiana-Pacific Corporation—Sandpoint operating permit from the SIP because the facility has ceased operations and has been dismantled. The EPA is proposing to disapprove the State's request to remove the two other operating permits (Lake Pre-Mix, and Interstate Concrete and Asphalt) because the submittal did not include a demonstration that removal of the two permits would not interfere with attainment or maintenance of the PM 10 NAAQS. This proposed partial disapproval does not prevent the State from submitting a subsequent SIP revision to remove the two Tier II operating permits with the required demonstration. Because the industrial source controls relied upon to demonstrate attainment remain in place for those sources that have not been permanently shut down, the State still meets the qualification criteria under the LMP Option Memo.

As described above, the Sandpoint NAA meets the qualification criteria set forth in the LMP Option Memo, and therefore qualifies for a LMP. The LMP Option Memo also indicates that once a State submits a LMP and it is in effect, the State will be expected to determine, on an annual basis, that the LMP criteria are still being met. If the State determines that the LMP criteria are not being met, it should take action to reduce PM 10 concentrations enough to requalify for the LMP. One possible approach the State could take is to implement contingency measures. Section V. I. provides a description of contingency provisions submitted as part of the Sandpoint NAA LMP submittal. In the Sandpoint NAA LMP submittal, the State commits to evaluate, on an annual basis, the LMP criteria for the Sandpoint NAA.

As a result of the above analysis, the EPA is proposing to approve the LMP for the Sandpoint NAA and the State's request to redesignate the Sandpoint NAA to attainment for the PM 10 NAAQS.

Pursuant to the LMP Option Memo, the state's approved attainment plan should include an emissions inventory which can be used to demonstrate attainment of the NAAQS. The inventory should represent emissions during the same five-year period associated with air quality data used to determine whether the area meets the applicability requirements of the LMP Option. The state should review its inventory every three years to ensure emissions growth is incorporated in the inventory if necessary.

The State's Sandpoint NAA LMP submittal includes an emissions inventory completed in 2006, with a base year of 1999. The State determined that using 1999 as a base year in the inventory would be representative of the first five years of clean data (i.e., having no violations of the PM 10 NAAQS). The Sandpoint NAA LMP submittal states that since 1999, the only major stationary source in the Sandpoint NAA has ceased operation and has been dismantled. The submittal also provides ambient monitoring data to analyze population growth as it relates to particulate matter concentrations. Based on this data, the State has concluded that population growth is not interfering with improvements in particulate matter ambient air quality. The State concludes that the 1999 emissions inventory is representative of emissions during the five year period (1996-2001) associated with air quality data demonstrating attainment, and that a more current inventory would not find higher total emissions rates than those estimated for 1999. The Sandpoint NAA LMP submittal meets the EPA guidance, as described above, for purposes of an attainment emissions inventory.

PM 10 monitoring was established in the Sandpoint area in 1985. The monitoring network was developed and has been maintained in accordance with Federal siting and design criteria in 40 CFR part 58, and in consultation with EPA Region 10. The EPA most recently approved the State's air monitoring plan on October 25, 2012. In the Sandpoint NAA LMP submittal, the State states that it will continue to operate its monitoring network to meet the EPA requirements at 40 CFR part 58.

CAA section 175A states that a maintenance plan must include contingency provisions, as necessary, to ensure prompt correction of any violation of the NAAQS which may occur after redesignation of the area to attainment. As explained in the LMP Option Memo and the Calcagni Memo, these contingency provisions are considered to be an enforceable part of the Federally-approved SIP. The maintenance plan should clearly identify the provisions to be adopted, a schedule and procedures for adoption and implementation, and a specific time limit for action by the state. The maintenance plan should identify the events that would “trigger” the adoption and implementation of a contingency provision, the contingency provision that would be adopted and implemented, and the schedule indicating the time frame by which the state would adopt and implement the provision. The LMP Option Memo and Calcagni Memo state that the EPA will determine the adequacy of a contingency plan on a case-by-case basis. At a minimum, it must require that the State will implement all measures contained in the CAA part D nonattainment plan for the area prior to redesignation.

In the Sandpoint NAA LMP submittal, the State has included maintenance plan contingency provisions to ensure the area continues to meet the PM 10 NAAQS. The primary contingency provision is the Episodic Curtailment Program in Sandpoint City Ordinance 965 which restricts and controls burning activities to reduce particulate matter emissions. Ordinance 965 has been strengthened by the City of Sandpoint to protect both the PM 10 NAAQS and the PM 2.5 NAAQS. The ordinance specifies “triggers” for implementing provisions, based on forecasted PM 10 and PM 2.5 levels. The Sandpoint NAA LMP also references Idaho regulations previously approved into the SIP which provide the State with broad authority to require or revise a permit of any stationary source, at any time, should it be determined that emission rate reductions are necessary to attain or maintain the PM 10 NAAQS.

The contingency provisions submitted by the State have been adopted, are currently being implemented in the Sandpoint area, and contain triggers based on forecasted PM 10 levels for implementing specific provisions to reduce particulate matter emissions from home wood heating. Therefore, the EPA believes the contingency provisions submitted in the Sandpoint NAA LMP are adequate to meet CAA section 175A requirements.

Under the LMP Option, emissions budgets are treated as essentially not constraining for the maintenance period because it is unreasonable to expect that qualifying areas would experience so much growth in that period that a NAAQS violation would result. While areas with maintenance plans approved under the LMP Option are not subject to the budget test, the areas remain subject to the other transportation conformity requirements of 40 CFR part 93, subpart A. Thus, the metropolitan planning organization (MPO) in the area or the state must document and ensure that:

(a) Transportation plans and projects provide for timely implementation of SIP transportation control measures (TCMs) in accordance with 40 CFR 93.113;

(b) transportation plans and projects comply with the fiscal constraint element as set forth in 40 CFR 93.108;

(c) the MPO's interagency consultation procedures meet the applicable requirements of 40 CFR 93.105;

(d) conformity of transportation plans is determined no less frequently than every three years, and conformity of plan amendments and transportation projects is demonstrated in accordance with the timing requirements specified in 40 CFR 93.104;

(e) the latest planning assumptions and emissions model are used as set forth in 40 CFR 93.110 and 40 CFR 93.111;

(f) projects do not cause or contribute to any new localized carbon monoxide or particulate matter violations, in accordance with procedures specified in 40 CFR 93.123; and

(g) project sponsors and/or operators provide written commitments as specified in 40 CFR 93.125.

Upon approval of the Sandpoint NAA LMP, the Sandpoint area is exempt from performing a regional emissions analysis, but must meet project-level conformity analyses as well as the transportation conformity criteria mentioned above.

For Federal actions required to address the specific requirements of the general conformity rule, one set of requirements applies particularly to ensuring that emissions from the action will not cause or contribute to new violations of the NAAQS, exacerbate current violations, or delay timely attainment. One way that this requirement can be met is to demonstrate that “the total of direct and indirect emissions from the action (or portion thereof) is determined and documented by the State agency primarily responsible for the applicable SIP to result in a level of emissions which, together with all other emissions in the nonattainment area, would not exceed the emissions budgets specified in the applicable SIP” (40 CFR 93.158(a)(5)(i)(A)).

The decision about whether to include specific allocations of allowable emissions increases to sources is one made by the state air quality agencies. These emissions budgets are different than those used in transportation conformity. Emissions budgets in transportation conformity are required to limit and restrain emissions. Emissions budgets in general conformity allow increases in emissions up to specified levels. The State has not chosen to include specific emissions allocations for Federal projects that would be subject to the provisions of general conformity.

In the Sandpoint NAA LMP submittal, the State requested that the EPA approve revisions to the Sandpoint PM 10 SIP. The State requested approval of revisions to the Sandpoint City Ordinance 965 which regulates residential wood burning to protect both the PM 10 and PM 2.5 NAAQS. The revision aligns the ordinance with the EPA Air Quality Index public advisory levels, establishes triggers for burn curtailment based on forecasted levels of PM 10 and PM 2.5 , adopts Federal standards of performance for new residential wood heaters, and includes a violation and penalty provision. The EPA is proposing to approve the revised Sandpoint City Ordinance 965 into the Sandpoint PM 10 SIP because it strengthens the SIP.

In addition, the State requested that the EPA remove three Tier II operating permits (Louisiana-Pacific Corporation—Sandpoint, Lake Pre-Mix, and Interstate Concrete and Asphalt) from the Sandpoint PM 10 SIP, originally approved on June 26, 2002 (67 FR 43006). The Sandpoint NAA LMP submittal asserts that the State did not submit these operating permits as part of the attainment demonstration and that the EPA, without a request from the State, approved portions of the permits into the SIP.

As a result of the State's request, the EPA reviewed the administrative record of the Sandpoint PM 10 SIP approval action. The State's Sandpoint PM 10 SIP submittal included an attainment demonstration that relied on industrial source emission reductions (See 67 FR 43006, June 26, 2002). As noted in the EPA's June 26, 2002, approval, the State chose to establish the necessary PM 10 industrial source controls through the State's Tier II Operating Permit Program. The administrative record for the Sandpoint PM 10 SIP included a letter from the Idaho DEQ to the EPA indicating which portions of the operating permits for the specific sources were appropriate to approve into the Sandpoint PM 10 SIP (IDEQ Letter PM 10 Industrial Source Controls, May 16, 2002). The EPA approved portions of the three operating permits containing the source controls into the Sandpoint PM 10 SIP to meet the CAA requirement that emission reductions be both permanent and Federally-enforceable (40 CFR 52.670(c)). A footnote to 40 CFR 52.670(c) explains that “EPA does not have the authority to remove these source-specific requirements in the absence of a demonstration that their removal would not interfere with attainment or maintenance of the NAAQS, violate any prevention of significant deterioration increment or result in visibility impairment.” The footnote further explains that the “Idaho Department of Environmental Quality may request removal by submitting such a demonstration to EPA as a SIP revision.”

At this time, the EPA is proposing to approve the State's request to remove the source operating permit for Louisiana-Pacific Corporation—Sandpoint because the facility has ceased operations and has been dismantled. Removing the permit for the permanently shut down facility from the SIP will not interfere with attainment or maintenance of the PM 10 NAAQS. The facility report from the EPA's Enforcement and Compliance History Online Web site is provided in the docket for this action (Louisiana-Pacific Corporation -Sandpoint Facility Report). The EPA is proposing to disapprove the State's request to remove the two operating permits for Lake Pre-Mix and Interstate Concrete and Asphalt from the Sandpoint PM 10 SIP because the submittal did not include a demonstration that the removal of the permits would not interfere with attainment or maintenance of the NAAQS, and because removal of the permits would disqualify the State from the LMP option and require the submittal of a full maintenance plan. As previously noted, the EPA's partial disapproval does not prevent the State from providing the demonstration required to remove the two permits from the SIP in the future.

The EPA's proposed partial disapproval will be simultaneously corrected because we are, in this same action, proposing to fully approve the Sandpoint NAA LMP with all control measures in place. Therefore, upon final action a fully approved LMP will be in place and no further submittal will be required from the State to address the partial disapproval.

The EPA is proposing to approve in part and disapprove in part the Sandpoint NAA LMP submitted by the State and to approve the State's request to redesignate this area to attainment for the PM 10 NAAQS. The State's Sandpoint NAA LMP submittal included a request to approve revisions to the control measures included in the PM 10 attainment SIP for the Sandpoint NAA. The EPA is proposing to approve the revised Sandpoint City Ordinance 965 for control of residential burning because it strengthens the SIP. The EPA is also proposing to approve the State's request to remove the Louisiana-Pacific Corporation—Sandpoint operating permit control measure from the SIP because the facility has ceased operations and has been dismantled. However, the EPA is proposing to disapprove the State's request to remove the operating permits for two other sources because these sources are still in operation and the State did not provide a demonstration that removal of the two permits would not interfere with attainment or maintenance of the NAAQS. In addition, the removal of controls that were relied on to demonstrate attainment would disqualify the Sandpoint NAA for LMP eligibility and require that the State submit a full maintenance plan. Because the State submitted the Sandpoint NAA LMP intending to qualify for the LMP option, and did not submit a full maintenance plan, we are proposing to disapprove the separable portion of the submittal that is not consistent with the LMP qualifying criteria. This proposed partial disapproval does not prevent the State from submitting a request for approval of a SIP revision demonstrating that the removal of the two operating permits does not interfere with attainment or maintenance of the NAAQS.

The EPA's proposed partial disapproval would be simultaneously corrected because we are, in this same action, proposing to fully approve the Sandpoint NAA LMP with all control measures in place. Therefore, upon final action a fully approved LMP would be in place and no further submittal would be required from the State to address the partial disapproval.

Under the Clean Air Act, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. Accordingly, this action merely approves state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this action:

• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Order 12866 (58 FR 51735, October 4, 1993);

• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq. );

• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);

• Is not subject to the requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act; and

• Does not provide the EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).

In addition, this rule does not have tribal implications as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), because the SIP is not approved to apply in Indian country located in the state, and the EPA notes that it will not impose substantial direct costs on tribal governments or preempt tribal law.

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://www.regulations.gov . Follow the search instructions on that Web site to view public comments.

Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

To ensure effective and efficient implementation of the insurance market reforms, the Affordable Care Act requires a nonexempt individual to maintain minimum essential coverage or make a shared responsibility payment. The Affordable Care Act specifies the categories of individuals who are eligible to receive exemptions from the shared responsibility payment under section 5000A of the Code, which provides nonexempt individuals with a choice: Maintain minimum essential coverage for themselves and any nonexempt family members or include an additional payment with their federal income tax return. Many individuals are exempt from the shared responsibility payment, including some whose religious beliefs conflict with acceptance of the benefits of private or public insurance and those who do not have an affordable health insurance coverage option available. Section 1311(d)(4)(H) of the Affordable Care Act (42 U.S.C. 18031(d)(4)(H)) directs the new health insurance marketplaces, called Affordable Insurance Exchanges (Exchanges), to issue certifications of exemption from the shared responsibility payment under section 5000A of the Code to eligible individuals. Section 1411 of the Affordable Care Act (42 U.S.C. 18081) generally provides procedures for determining an individual's eligibility for various benefits relating to health coverage, including exemptions from the application of section 5000A of the Code.

This proposed rule sets forth standards and processes under which the Exchange will conduct eligibility determinations for and grant certificates of exemption from the shared responsibility payment. Furthermore, it supports and complements rulemaking conducted by the Secretary of the Treasury with respect to section 5000A of the Internal Revenue Code (the Code), as added by section 1501(b) of the Affordable Care Act, published elsewhere in this issue of the Federal Register . The intent of this rule is to implement the relevant provisions while continuing to afford states substantial discretion in the design and operation of an Exchange, with greater standardizations provided where directed by the statute or where there are compelling practical, efficiency, or consumer protection reasons.

Under section 5000A(f)(1)(E), the Secretary of Health and Human Services, in coordination with the Secretary of the Treasury, may designate other health benefits coverage as minimum essential coverage. This proposed rule provides standards for determining whether certain other types of health insurance coverage constitute minimum essential coverage and procedures for sponsors to follow for a plan to be identified as minimum essential coverage under section 5000A. This rule proposes to designate certain types of existing health coverage as minimum essential coverage. Other types of coverage, not statutorily specified and not designated as minimum essential coverage in this regulation, may be recognized as minimum essential coverage if certain substantive and procedural requirements are met as proposed in this rule. These additional categories of minimum essential coverage, both those designated per se and those that may apply for recognition are neither group health insurance coverage nor individual health insurance. Consumers with types of coverage that are recognized as minimum essential coverage in accordance with this rule would be determined to have minimum essential coverage for purposes of the minimum essential coverage requirement if the coverage is certified to be substantially compliant with the requirements of Title I of the Affordable Care Act that apply to non-grandfathered plans in the individual market.

Section 1501(b) of the Affordable Care Act added section 5000A of the Internal Revenue Code (the Code) to a new chapter 48 of subtitle D (Miscellaneous Excise Taxes) of the Code effective for months beginning after December 31, 2013. Section 5000A of the Code, which was subsequently amended by the TRICARE Affirmation Act of 2010, Public Law 111-159 (124 Stat. 1123) and Public Law 111-173 (124 Stat. 1215), requires that nonexempt individuals either maintain minimum essential coverage or make a shared responsibility payment, includes standards for the calculation of the shared responsibility payment, describes categories of individuals who may qualify for an exemption from the shared responsibility payment, and provides the definition of “minimum essential coverage.”

Section 1311(d)(4)(H) of the Affordable Care Act specifies that the Exchange will, subject to section 1411 of the Affordable Care Act, grant certifications of exemption from the shared responsibility payment specified in section 5000A of the Code. Section 1311(d)(4)(I)(i) of the Affordable Care Act specifies that the Exchange will transfer to the Secretary of the Treasury a list of the individuals to whom the Exchange provided such a certification. Section 1411(a)(4) of the Affordable Care Act provides that the Secretary of Health and Human Services (the Secretary) will establish a program for determining whether a certification of exemption from the shared responsibility requirement and penalty will be issued by an Exchange under section 1311(d)(4)(H) of the Affordable Care Act. We propose to interpret this provision as authorizing the Secretary to determine “whether,” with respect to the nine exemptions provided for under section 5000A of the Code, Exchanges would perform the role of issuing certifications of exemption under section 1311(d)(4)(H) of the Affordable Care Act, whether eligibility for the exemption would be determined solely through tax filing, or whether both processes would be available. Under this interpretation, the responsibility under section 1311(d)(4)(H) of the Affordable Care Act to issue certifications of exemption would be “subject to” these determinations by the Secretary under section 1411(a)(4) of the Affordable Care Act, and Exchanges would thus only be required to issue certifications of exemption with respect to exemptions not exclusively assigned to IRS.

Section 1321 of the Affordable Care Act discusses state flexibility in the operation and enforcement of Exchanges and related requirements. Section 1321(a) of the Affordable Care Act provides broad authority for the Secretary to establish standards and regulations to implement the statutory requirements related to Exchanges and other components of title I of the Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010. Section 1311(k) of the Affordable Care Act specifies that Exchanges may not establish rules that conflict with or prevent the application of regulations promulgated by the Secretary under Subtitle D of Title I of the Affordable Care Act.

In accordance with our interpretation of these sections of the Affordable Care Act, and the authority provided by, inter alia, section 1321(a) of the Affordable Care Act, we propose that under the program established under section 1411(a)(4) of the Affordable Care Act, the Exchange would determine eligibility for and grant certificates of exemption as described below. We also note that consistent with prior guidance, a state-based Exchange can be approved to operate by HHS if it uses a federally-managed service to make eligibility determinations for exemptions.

On March 27, 2012 the Department of Health and Human Services (HHS) published the final rule entitled “Patient Protection and Affordable Care Act; Establishment of Exchanges and Qualified Health Plans; Exchange Standards for Employers” (77 FR 18309). The provisions of the final rule, herein referred to as the Exchange final rule, encompass the key functions of Exchanges related to eligibility, enrollment, and plan participation and management. In the Exchange final rule, 45 CFR 155.200(b) provided that a minimum function of an Exchange is to grant certificates of exemption consistent with sections 1311(d)(4)(H) and 1411 of the Affordable Care Act. This proposed rule cross-references several provisions in the Exchange final rule, notably the limited situations where eligibility and verification processes used in determining eligibility for enrollment in a qualified health plan (QHP) through the Exchange and for insurance affordability programs can also be used by Exchanges for the purpose of determining whether an individual is eligible for an exemption from the shared responsibility payment.

Section 5000A(f) of the Code designates certain types of coverage as minimum essential coverage. The term “minimum essential coverage” includes all of the following: Government sponsored programs (the Medicare program under part A of title XVII of the Social Security Act (the Act); the Medicaid program under title XIX of the Social Security Act; the CHIP program under title XXI of the Act; medical coverage under chapter 55 of title 10, United States Code, including the TRICARE program; a health care program under chapter 17 or 18 of title 38, United States Code, as determined by the Secretary of Veterans Affairs, in coordination with the Secretaries of Health and Human Services and Treasury; a health plan under section 2504(e) of title 22, United States Code (relating to Peace Corps volunteers); or the Nonappropriated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defense Authorization Act for Fiscal Year 1995); coverage under an eligible employer-sponsored plan; coverage under a health plan offered in the individual market within a State; and coverage under a grandfathered health plan. In addition, section 5000A(f)(1)(E) of the Code directs the Secretary of Health and Human Services, in coordination with the Secretary of Treasury, to designate other health benefits coverage, such as a state health benefits risk pool, as minimum essential coverage for purposes of their enrollees satisfying the minimum coverage requirement. This proposed regulation would designate certain additional types of coverage qualify as minimum essential coverage and also proposes a process by which other types of coverage could be recognized as minimum essential coverage.

On August 3, 2010, HHS published a request for comment (the RFC) inviting the public to provide input regarding the rules that will govern the Exchanges. In particular, HHS asked states, tribal representatives, consumer advocates, employers, insurers, and other interested stakeholders to comment on the standards Exchanges should meet. The comment period closed on October 4, 2010.

The public response to the RFC yielded comment submissions from consumer advocacy organizations, medical and health care professional trade associations and societies, medical and health care professional entities, health insurers, insurance trade associations, members of the general public, and employer organizations. The majority of the comments were related to the general functions and standards for Exchanges, qualified health plans (QHPs), eligibility and enrollment, and coordination with Medicaid. While this proposed rule does not directly respond to comments from the RFC, the comments received are described, where applicable, in discussing specific regulatory proposals. We intend to respond to relevant comments from the RFC, along with comments received on this proposed rule, as part of the final rule.

In addition to the RFC, HHS has consulted with stakeholders through regular meetings with the National Association of Insurance Commissioners (NAIC), regular contact with states through the Exchange grant process, and meetings with tribal representatives, health insurance issuers, trade groups, consumer advocates, employers, and other interested parties. For example, we received feedback from health care sharing ministries about the process for how individual members can obtain certificates of exemption based on their membership in a health care sharing ministry, and an expression of interest in a process for allowing health care sharing ministries to obtain recognition that they meet the standards under section 5000A(d)(2)(B) of the Code. We also received information from various stakeholder groups regarding types of “other coverage” as described in section 5000A(f)(1)(E) of the Code. Similar consultation will continue throughout the development of further Exchange guidance on exemptions and “other coverage.”

The provisions of this proposed rule include the addition of subpart G to 45 CFR part 155, which includes standards for Exchanges related to conducting eligibility determinations for and granting certificates of exemption from the shared responsibility payment. We also propose to amend § 155.200(a) to add a reference to indicate that, consistent with existing language in § 155.200(b), granting certificates of exemption is a minimum function of the Exchange. Furthermore, we add subpart G to 45 CFR part 156 which includes standards related to minimum essential coverage.

As noted above, this proposed rule is published in coordination with the Department of Treasury's proposed rule, “Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage” (Treasury proposed rule). This regulation includes numerous cross-references to the Treasury proposed rule, published elsewhere in this issue of the Federal Register .

We propose to make a technical correction to the definition of “applicant” to note that it does not apply to an applicant seeking an exemption pursuant to proposed subpart G. We propose a separate definition for “applicant” that is specific to exemptions in § 155.600.

We propose to make a technical correction to the definition of “application filer” to note that it does not apply to an application filer seeking an exemption pursuant to proposed subpart G. We propose a separate definition for “application filer” that is specific to exemptions in § 155.600.

The Exchange final rule specifies that the Exchange will perform the minimum functions described in subparts D, E, H, and K of part 155. In accordance with section 1311(d)(4)(H) of the Affordable Care Act and existing 45 CFR 155.200(b), in paragraph (a), we propose to add that the Exchange would also perform the functions described in subpart G of this part related to eligibility determinations for exemptions.

In paragraph (a) of § 155.600, we propose definitions for terms that apply throughout subpart G. First, we propose to define “applicant” as an individual who is seeking an exemption from the shared responsibility payment for him or herself through an application submitted to the Exchange. We provide this definition to distinguish the use of applicant in this subpart from the definition in § 155.20 of this chapter, which is specific to an individual who is submitting an application for an eligibility determination for enrollment in a QHP.

We propose to define “application filer” as an applicant, an individual who expects to be liable for the shared responsibility payment, in accordance with 26 CFR 1.5000A-1(c) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register , for an applicant, an authorized representative, or if the applicant is a minor or incapacitated, someone acting responsibly for an applicant. This is consistent with the definition that is used for the eligibility process for enrollment in a QHP and for insurance affordability programs, with one exception. In this proposed rule, we use the liability structure established in 26 CFR 1.5000A-1(c) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register to assist in defining the range of potential application filers, while the definition of application filer in § 155.20 uses the tax household or Medicaid household, as they are the relevant units for eligibility for enrollment in a QHP and for insurance affordability programs. We note that we expect to modify the proposed language in § 155.227 (78 FR 4711) to incorporate the minor changes necessary to clarify that authorized representatives can assist individuals seeking exemptions. Similarly, we intend to modify the proposed language in § 155.225 (78 FR 4710) to clarify that certified application counselors can assist individuals seeking exemptions. We seek comment on how authorized representatives and certified application counselors can best support individuals seeking certificates of exemption from the Exchange.

We propose to define “exemption” as an exemption from the shared responsibility payment. While sections 5000A(d)(2) through (4) of the Code describe individuals who are not “applicable individuals” for purposes of the requirement to maintain minimum essential coverage in section 5000A of the Code, and sections 5000A(e)(1) through (5) of the Code describe individuals who are exempt from liability for the shared responsibility payment imposed under section 5000A(b) of the Code, the consequence for individuals described in either category is the same: Individuals in both categories are not subject to the shared responsibility payment for not maintaining minimum essential coverage.

We propose to define “health care sharing ministry” in the same manner as provided in 26 CFR 1.5000A-3(b) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register .

We propose to define “required contribution” in the same manner as provided in 26 CFR 1.5000A-3(e) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register .

We propose to define “Indian tribe” in the same manner as in 26 CFR 1.5000A-3(g) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register , which in turn references the definition in section 45A(c)(6) of the Code. We note that section 45A(c)(6) of the Code describes certain federally-recognized Indian tribes (including any qualified Alaska Native village or regional or village corporation).

We welcome comment on these definitions.

Consistent with 45 CFR 155.300(c), in paragraph (b), we propose that for purposes of this subpart, any attestation that an applicant is to provide under this subpart may also be provided by an application filer on behalf of the applicant.

In paragraph (c) of § 155.600, we propose that for the purposes of this subpart, the Exchange must consider information through electronic data sources, other information as provided by the applicant, or other information as available in the records of the Exchange to be reasonably compatible with an applicant's attestation if the difference or discrepancy does not impact the eligibility for the relevant exemption that the applicant requested. This is the same standard that is used in 45 CFR 155.300(d) for eligibility for enrollment in a QHP and for insurance affordability programs. This proposal minimizes the administrative burden on applicants by limiting additional requests for information to only those situations in which there is good cause for such requests. We note that as provided in subpart D, this threshold does not preclude flexibility for Exchanges in further defining reasonable compatibility, particularly with regard to specific categories of exemptions, as long as the Exchange adheres to this general standard as well.

We also propose to add paragraphs (d) and (e) in order to specify that the accessibility and notice requirements in § 155.205(c) and § 155.230, respectively, apply to exemptions as well, given that the definition of applicant in this subpart is otherwise specific to exemptions. We note that 45 CFR 155.230(d), as proposed (78 FR 4594), specifies that notices will be provided either through standard mail, or, if an individual elects, electronically, provided that standards for use of electronic notices are met as set forth in 42 CFR 435.918, as proposed in the same issue of the Federal Register . Further discussion of this approach is at 78 FR 4601-4602 and 4635.

Section 5000A of the Code provides nine categories of exemptions. Of these nine categories, section 5000A expressly provides that certifications of exemptions in two categories (religious conscience and hardship) be provided by the Exchange under section 1311(d)(4)(H) of the Affordable Care Act. Under the program established under section 1411(a)(4) of the Affordable Care Act for determining whether certifications of exemptions are to be issued by Exchanges under section 1311(d)(4)(H) of the Affordable Care Act, we are proposing that Exchanges would issue certificates of exemption in these two categories. With respect to the other seven exemptions, for reasons set forth below, we propose that under the program provided for in section 1411(a)(4) of the Affordable Care Act, Exchanges would issue certifications of exemption with respect to three additional categories of exemption (with exemptions also available through the tax filing process). In the four remaining exemption categories, however, we propose that under the program established under section 1411(a)(4) of the Affordable Care Act, certifications would not be issued by Exchanges under section 1311(d)(4)(H) of the Affordable Care Act, and the determination of whether an individual is eligible for an exemption under section 5000A of the Code in these categories would be made exclusively by IRS through the tax filing process.

In this section, we propose standards related to the five categories of exemptions that we are proposing that the program under section 1411(a)(4) of the Affordable Care Act assign to Exchanges, and discuss our reasons for assigning the remaining four categories of exemptions exclusively to the IRS at the end of this section.

In paragraph (a) of § 155.605, we propose that except as specified in paragraph (g), the Exchange would determine an applicant eligible for and grant a certificate of exemption for a month if the Exchange determines that he or she meets the requirements for one of the categories of exemptions described in this section for at least one day in the month, consistent with 26 CFR 1.5000A-3 of the Treasury proposed rule, published elsewhere in this issue of the Federal Register . We note that an individual will not need to submit a separate application for each month in which he or she is applying for an exemption. We also note that the proposed standards for hardship exemptions specify that depending on the circumstances for each specific hardship exemption category, the certificate may be provided for an entire calendar year or instead for a specific month or period of months, including periods of time that stretch across more than one calendar year (for example, in the case of a hardship that occurs for the first time in December); this is discussed further in the preamble associated with paragraph (g) of this section.

We note that an individual may be eligible for multiple exemptions simultaneously; while there is no practical reason to have multiple exemptions in effect at any given time, we believe that an applicant should be able to apply for multiple exemptions in case some are denied, and also receive any exemptions for which he or she is eligible. We considered specifying that the Exchange could only accept an application for one category of exemption at a time from an applicant, but did not propose this approach because we believe that it increases the length of time required to conclude the overall eligibility process in cases where the initial application is denied. Further, we considered specifying that once the Exchange granted a certificate of exemption based on one category, it would not provide additional exemptions for the same time period. However, we believe that the statute does not provide the flexibility for the Exchange to deny an exemption to an applicant who is otherwise eligible, and think that the number of applicants who will continue to pursue exemptions after receiving one for a coverage month is too small to increase administrative burden in any significant way. We solicit comments regarding this approach.

In paragraph (b), we propose that except as specified, an applicant is required to submit a new application for each year for which an applicant would like to be considered for an exemption through the Exchange, and that an exemption will only be provided for a calendar year that the applicant submitted an application. This proposal is based on the recognition that for many categories of exemptions, an applicant's exemption status may change from year to year. There are exceptions for exemptions provided based on membership in an Indian tribe and for religious conscience, in recognition that an individual's qualification for these exemptions is expected to remain the same from year to year. There are also exceptions for hardship, since some categories of hardship will be provided for one or more months and may be provided for periods of time that stretch across more than one calendar year (for example, in the case of a hardship that occurs for the first time in December), and some categories of hardship can only be provided after the close of a calendar year. We welcome comments on this approach and how the Exchange can expedite and streamline the process.

We considered whether to specify that the Exchange send a notice to each individual who had an exemption certificate from the Exchange for a calendar year, in order to remind him or her regarding the opportunity to apply to for an exemption for the following calendar year, and whether this could also be an individual option. We solicit comments regarding the use of such a reminder and on a renewal process more generally.

In paragraphs (c) through (g) of this section, we propose standards for eligibility for an exemption through the Exchange. First, in paragraph (c), we propose to codify the statutory eligibility standards for the exemption based on religious conscience. In paragraph (c)(1), we propose that the Exchange will determine an applicant eligible for an exemption for a month if he or she is a member of a recognized religious sect or division described in section 1402(g)(1) of the Code, and an adherent of established tenets or teachings of such sect or division for such month, in accordance with 26 CFR 1.5000A-3(a) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register . We note that the statute prescribes the religious sects and divisions that are covered by this exemption, and that as such, HHS does not have discretion to expand it to cover other groups.

In paragraph (c)(2), we propose eligibility standards regarding the duration of the exemption for religious conscience. In paragraph (c)(2)(i), we propose that the Exchange grant the exemption for religious conscience to an applicant that meets the standards of paragraph (c)(1) of this section for a month on a continuing basis, until such time that the applicant either reaches the age of 18, or reports that he or she no longer meets the standards provided in (c)(1) of this section. This proposal is based on our understanding that membership in the religious sects or divisions described in section 1402(g)(1) of the Code will not typically change from year to year, along with the provision in § 155.620(b), which provides that an applicant who receives a certificate of exemption from the Exchange must report changes with respect to the eligibility standards for exemptions established in this section. Further, the provision in § 155.620(a) also provides that if an individual reports to the Exchange that they no longer meet the standards established in paragraph (c)(1) of this section, such as if the individual chooses to terminate his or her membership in a religious sect or division, the Exchange will redetermine his or her eligibility, which will result in the Exchange discontinuing the individual's exemption. We solicit comment on this approach.

We propose to add paragraph (c)(2)(ii) to specify how the Exchange should handle a situation in which an individual who has a certificate of exemption based on religious conscience that was granted prior to the individual reaching the age of 18 turns 18. We believe that a special process is necessary in this situation so that any future exemption is based on the individual's own attestation and not an attestation provided by a parent or legal guardian. Accordingly, we propose that the Exchange send such an individual a notice when he or she reaches the age of 18 that informs the individual that he or she needs to submit a new exemption application if he or she would like to maintain the certificate of exemption. If the applicant submits a new application that reflects uninterrupted membership, and it is approved, the Exchange will provide a new certificate of exemption that is retroactive and leaves no gap.

We propose to add paragraph (c)(3) to specify that the Exchange will grant an exemption in this category prospectively or retrospectively, including after the close of the calendar year, which provides flexibility for applicants and ensures that this exemption will be available as needed during the tax filing process, as it can only be provided by the Exchange.

In paragraph (d), we propose that the Exchange will determine an applicant eligible for an exemption for a month if the applicant is a member of a health care sharing ministry for such month in accordance with 26 CFR 1.5000A-3(b) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register . This exemption is discussed further in the preamble associated with 26 CFR 1.5000A-3(b) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register . We note that unlike the exemption for religious conscience, our understanding is that membership in a health care sharing ministry can fluctuate over time, particularly as we understand that membership is contingent on a financial contribution. Consequently, we propose that an applicant must re-apply for this exemption each calendar year. Further, for the same reason, we note that the language of this proposal specifies that the Exchange will only determine an individual eligible for an exemption in this category if he or she is a member of a health care sharing ministry at the time the application for an exemption is submitted; that is, the Exchange would not provide this exemption based on likely or probable future membership, including likely or probable membership beyond the calendar year. Lastly, consistent with these proposals, we propose to add paragraph (d)(2) to specify that the Exchange may only provide an exemption in this category retrospectively. We note that an individual may also receive this exemption retrospectively through the tax filing process. Furthermore, as proposed below in § 155.610(h), after December 31 of a given calendar year, the Exchange will not accept an application for an exemption in this category for months for such calendar year. We solicit comments on this approach.

In paragraph (e), we propose the eligibility standards for the exemption based on incarceration. We specify that the Exchange must determine an individual eligible for an exemption for a month that he or she meets the definition specified in 26 CFR 1.5000A-3(d) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register , which covers anyone who is confined after the disposition of charges in a jail, prison, or similar penal institution or correctional facility, which we believe can be implemented identically to the standard used for eligibility for enrollment in a QHP. We note that this proposed language does not provide for this exemption to be granted in cases where future incarceration is in doubt; rather, we propose that the Exchange will only provide this exemption for months in which an individual was incarcerated. We also considered specifying that this exemption could be provided based on an expectation of continued incarceration, but ultimately decided not to provide an exemption in this case since individuals are frequently released from incarceration ahead of the initially-expected release date, at which point they would need to obtain minimum essential coverage unless they apply for and are determined eligible for a separate exemption. Further, unlike some other categories of exemptions, it seems unlikely that an applicant who is seeking an exemption based on incarceration is doing so to obtain guidance regarding a purchasing decision, which is the primary purpose of providing prospective exemptions. We solicit comments on this approach.

We propose to add paragraph (e)(2) to specify that the Exchange may only provide an exemption in this category retrospectively. We note that an individual may also receive this exemption retrospectively through the tax filing process. Furthermore, as proposed below in § 155.610(h), after December 31 of a given calendar year, the Exchange will not accept an application for an exemption in this category for months for such calendar year.

In paragraph (f), we propose eligibility standards for the exemption based on membership in an Indian tribe. In paragraph (f)(1), we propose to codify that the Exchange must determine an applicant eligible for an exemption for a month if he or she is a member of an Indian tribe for such month, in accordance with 26 CFR 1.5000A-3(g) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register . We note that the definition of Indian used in the statute for this exemption is the same as is used for the cost-sharing and special enrollment provisions in subparts D and E, respectively.

In paragraph (f)(2), we propose eligibility standards regarding the duration of the exemption for membership in an Indian tribe, such that the Exchange must grant the exemption for membership in an Indian tribe to an applicant who meets the standards of paragraph (f)(1) of this section for a month on a continuing basis, until such time that the individual reports that he or she no longer meets the standards provided in (f)(1) of this section. This proposal is based on our understanding that an individual's membership in an Indian tribe, as defined in section 45A(c)(6) of the Code, will not typically change from year to year. As such, we seek to reduce the administrative burden on the Exchange and individuals who are members of Indian tribes. We note that the provision in § 155.620(a) also provides that if an individual reports to the Exchange that they no longer meet the standards established in paragraph (f)(1) of this section, such as if the individual chooses to terminate his or her membership in an Indian tribe, as defined in section 45A(c)(6) of the Code, the Exchange will redetermine his or her eligibility, which will result in the Exchange discontinuing the individual's exemption. We solicit comment on this approach.

We propose to add paragraph (f)(3) to specify that the Exchange will grant an exemption in this category during the year prospectively or retrospectively. We note that an individual may also receive this exemption retrospectively through the tax filing process. This permits flexibility depending on when an application is submitted.

In paragraph (g), we propose eligibility standards for the exemption based on hardship, which is defined in section 5000A(e)(5) of the Code as applying to, “any applicable individual who for any month is determined by the Secretary under section 1311(d)(4)(H) of the Affordable Care Act to have suffered a hardship with respect to the capability to obtain coverage under a qualified health plan.” In developing some of these standards, we considered the standards established by the Commonwealth of Massachusetts. We note that we propose specific time standards for each category of hardship, and we solicit comments regarding whether these are appropriate, or if we should adopt a more uniform approach across the category.

First, in paragraph (g)(1) of § 155.605, we propose that the Exchange provide an exemption for hardship for a month or months in which an applicant experienced financial or domestic circumstances, including unexpected natural or human-caused events, such that he or she has a significant, unexpected increase in essential expenses; the expense of purchasing health insurance would have caused him or her to experience serious deprivation of food, shelter, clothing or other necessities; or he or she has experienced other factors similar to those described in paragraphs (g)(1)(i) and (ii) of this section that prevented him or her from obtaining minimum essential coverage. We propose broad language to include a range of personal scenarios that could negatively impact an applicant such that he or she would be eligible for this exemption, and we expect to clarify these criteria in future guidance. This proposal provides necessary flexibility for the Exchange to tailor an exemption for hardship to particular circumstances that impact an individual, but cannot adequately be predicted in advance. We expect that these circumstances will include, but not be limited to, situations in which an applicant is homeless, receives a shut-off notice from a utility company, faces a natural disaster, or experiences other unexpected natural or human-caused event causing significant damage to the applicant or his or her home. We request comment on these criteria, including on whether additional standards should be established in regulation or guidance. We note that we strive to set clearly defined standards as much as possible without preventing an applicant in need from being determined eligible for an exemption for hardship. We also solicit comments regarding whether the proposed time standard can be effectively implemented, or whether we should instead specify that a hardship under this paragraph that occurs at any point during a year should result in a hardship exemption for that entire year, as well as potentially for the entire next year, depending on when the hardship occurred.

Second, in paragraph (g)(2), we propose that the Exchange provide an exemption for hardship for a calendar year if an applicant, or another individual for whom the applicant attests will be included in the applicant's family (as defined in 26 CFR 1.5000A-1(d)(6)), is unable to afford coverage for such calendar year in accordance with 26 CFR 1.5000A-3(e) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register , calculated using projected annual household income. We propose identical standards to those defined for the lack of affordable coverage exemption in 26 CFR 1.5000A-3(e), except that the Exchange would use projected household income to determine whether coverage is affordable under this exemption, instead of actual household income from the tax return for the year for which the exemption is requested. We note that the preamble associated with 26 CFR 1.5000A-3(e) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register recognizes that the information necessary to determine the portion of the required contribution made through a salary reduction arrangement and excluded from gross income may not be available to the applicant or the IRS. Accordingly, Treasury has solicited comments about practicable ways to administer this requirement. We also solicit comments regarding whether the approach in paragraph (g)(5) of this section should also be applied to this hardship category.

We propose these standards as a component of hardship, rather than as a separate category of exemption, in order to ensure that an applicant can prospectively receive this exemption during a calendar year, and in doing so, obtain the information needed to make a purchasing decision and also qualify to purchase a catastrophic plan. We also clarify that we propose that this exemption is not available for a calendar year for an application that is submitted after the last date on which an applicant could enroll in a QHP through the Exchange for the calendar year for which the exemption is requested. This is because this exemption is designed to ensure that an applicant can obtain the information needed to make a purchasing decision, including for a catastrophic plan, which is not applicable after the last date on which enrollment would be possible. After this point, an individual will be able to seek an exemption on his or her tax return for the year.

We specify in paragraph (g)(3) of § 155.605 that the Exchange provide an exemption for hardship for a calendar year if an individual taxpayer who was not required to file an income tax return for such calendar year because his or her gross income was below the filing threshold, but who nevertheless filed to receive a tax benefit, claimed a dependent who was required to file a tax return, and the combined household income exceeded the applicable return filing threshold outlined in 26 CFR 1.5000A-3(f)(2) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register .

We propose to add paragraph (g)(4) to specify that the Exchange provide an exemption for hardship for a calendar year for an individual who has been determined ineligible for Medicaid for one or more months during the benefit year solely as a result of a State not implementing section 2001(a) of the Affordable Care Act. We provide an exemption for hardship in this circumstance to address situations in which a state's decision regarding the Medicaid expansion included in the Affordable Care Act results in an individual being ineligible for Medicaid. We believe that this determination is an appropriate use of the hardship exemption given that the Affordable Care Act anticipates that Medicaid will be available to such individuals. With this situation noted, we believe that many such individuals could also receive exemptions based on the standards specified in paragraph (g)(2) of this section (the inability to afford coverage), or section 5000A(e)(2) of the Code (income below filing threshold), and so propose this paragraph to ensure that any such individuals remaining are not liable for a shared responsibility payment regardless of a state's decision with respect to the Medicaid expansion under the Affordable Care Act. We seek comment on whether this exemption should be limited to such individuals who are also not eligible for advance payments of the premium tax credit (that is, with projected annual household income below the poverty threshold).

We propose to add paragraph (g)(5) of § 155.605 to specify that the Exchange provide an exemption for hardship for a calendar year if an applicant and one or more employed members of his or her family, as defined in 26 CFR 1.5000A-1(d)(6) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register , are each determined eligible for self-only coverage in separate eligible employer-sponsored plans that are affordable, pursuant to 26 CFR 1.5000A-3(e) for one or more months during the calendar year, but for whom the aggregate cost of employer-sponsored coverage for all the employed members of the family exceeds 8 percent of the household income for that month or those months, in accordance with 26 CFR 1.5000A-3(e). This proposal aligns with 26 CFR 1.5000A-3(e)(3)(i) and (ii), which specify that for an employed individual, the affordability of coverage under an eligible employer-sponsored plan offered through such individual's employer is determined based on the cost of self-only coverage, regardless of whether the employed individual is eligible for family coverage under another eligible employer-sponsored plan because of the individual's relationship to another employed individual in the family. Thus, this hardship category is designed to provide relief for employed members of a family who have affordable self-only coverage options available and as a result do not qualify for the lack of affordable coverage exemption under 26 CFR 1.5000A-3(e) even though the family's aggregate cost of covering all of the employed members may exceed 8 percent of household income. We note that this category only covers those individuals who are actually offered self-only coverage in an eligible employer-sponsored plan, as the lack of affordable coverage exemption in paragraph 26 CFR 1.5000A-3(e) already provides an exemption based on affordability computed using the cost of family coverage for children and others who are not offered self-only coverage in an eligible employer-sponsored plan.

Lastly, as noted above, section 5000A of the Code provides for four additional categories of exemptions that we propose, under our authority in section 1411(d)(4) of the Affordable Care Act to determine whether certificates of exemptions are issued by Exchanges under section 1311(d)(4)(H) of the Affordable Care Act, to make available solely through the tax filing process and not to be subject to certification by Exchanges. Specifically, we propose that the Exchange would not issue certifications of exemption with respect to household income below the filing threshold (other than the limited hardship exemption proposed in § 155.605(g)(3) and described above); not being lawfully present; short coverage gaps; and inability to afford coverage (other than the limited hardship exemption proposed in § 155.605(g)(2) and described above).

The exemptions for inability to afford coverage under section 5000A(e)(1) of the Code and income below the filing threshold under section 5000A(e)(2) of the Code necessitate an assessment of actual household income, which will be unavailable until after the close of the tax year and which would be provided to the individual through the tax filing process, making a process of seeking a duplicative certification from an Exchange an unnecessary administrative burden. Under the authority in section 5000A(e)(1)(A) and (e)(2) of the Code to determine the year for which income will be evaluated for purposes of these exemptions, the Secretary (in consultation with the Secretary of Treasury) has determined that the relevant year is the taxable year that includes a month for which an individual seeks one of these exemptions. Verification of an individual's household income once the year is over is a matter of tax administration and tax compliance. Accordingly, we are proposing under our authority in section 1411(d)(4) that certifications by Exchanges not be issued with respect to these two exemptions (other than the hardship exemption proposed in § 155.605(g)(2) and § 155.605(g)(3)).

With respect to the exemption based on an individual not being lawfully present under section 5000A(d)(3) of the Code, we do not believe it is appropriate to provide for a process under which an individual would be required to present himself or herself to an Exchange as not lawfully present. Consequently, we are proposing that this exemption also be implemented exclusively through the tax filing process.

Lastly, with respect to the exemption for short coverage gaps under section 5000A(e)(4) of the Code, as short coverage gaps can only be confirmed after the year has concluded, and as IRS will have authoritative information about whether an individual has coverage based on information reported by health insurance issuers under section 6055 of the Code, we propose that this exemption also be implemented exclusively through the tax filing process, as proposed at 26 CFR 1.5000A-5 of the Treasury proposed rule, published elsewhere in this issue of the Federal Register , in order to reduce administrative burden on individuals and the Exchange. We solicit comment on this approach and if there are alternative approaches that HHS should consider.

In § 155.610, we propose the process by which the Exchange will determine an applicant's eligibility for exemptions.

In paragraph (a), we propose to specify that the Exchange will use an application established by HHS in order to collect the information necessary to determine eligibility and grant a certificate of exemption for an applicant, unless the Exchange receives approval to use an alternative application in accordance with paragraph (b). We also clarify that in cases in which relevant information has already been collected through the eligibility process for enrollment in a QHP and for insurance affordability programs, the Exchange will use this information for the purpose of eligibility for an exemption to the maximum extent possible. This proposal promotes an efficient process that minimizes the burden on the applicant, and is parallel to the approach used for eligibility for enrollment in a QHP and for insurance affordability programs, as specified in 45 CFR 155.405. We intend to provide the HHS-developed application in the near future, and expect it will share data elements with the application defined in 45 CFR 155.405 for information that is common to the two applications.

In paragraph (b) of § 155.610, we propose that the Exchange may seek approval from HHS for an alternative application. We further specify that such alternative application must only request the minimum information necessary for the purposes identified in paragraph (a) of this section. Our intent is to simplify the application process by reducing the collection of unnecessary information. As such, we seek to preserve flexibility for Exchanges to utilize an alternative application if it efficiently assists individuals in applying for exemptions while also minimizing potential administrative burdens.

We also note that there are exemptions that share common data and verifications with the eligibility process for enrollment in a QHP and for insurance affordability programs. There are also situations in which an individual may submit the application described in 45 CFR 155.405, and ultimately need an exemption, including when he or she is determined ineligible for enrollment in a QHP based on being incarcerated (other than incarceration pending the disposition of charges); when available coverage is unaffordable in accordance with proposed § 155.605(g)(2); and when he or she is ineligible for Medicaid based solely on a state's decision with respect to the Medicaid expansion under the Affordable Care Act. As such, in paragraph (c) of § 155.610, we propose that if an individual submits the application in 45 CFR 155.405 and then requests an exemption, the Exchange must use the information collected on the application for coverage and not duplicate any verification processes that share the standards specified in this subpart. We solicit comments on how best to coordinate these processes to ensure maximum administrative simplicity for all involved parties.

In paragraph (d) of § 155.610, we propose the Exchange must accept the application for an exemption from an application filer, and provide tools for the submission of an application. Section 1413(b)(1)(A)(ii) of the Affordable Care Act, 45 CFR 155.405(a) specifies that the single, streamlined application for enrollment in a QHP through the Exchange and insurance affordability programs via an Internet Web site, by telephone, by mail, and in person. However, the Affordable Care Act does not contain similarly specific language for the application for an exemption; consequently, we have opted to not specify particular channels here. With that said, we believe that this language would allow the Exchange to deploy any or all of the methods described in 45 CFR 155.405. We solicit comments regarding whether we should specify some or all of the channels specified in 45 CFR 155.405.

In paragraph (e) of § 155.610, we propose that the Exchange will specify that an applicant who has a social security number (SSN) will provide such number to the Exchange. This provision is particularly important in the exemption process because the Secretary of the Treasury uses the SSN to coordinate information in the tax filing process. Further, the SSN provides the Exchange with additional abilities to ensure program integrity. However, we clarify in paragraphs (e)(2) and (e)(3) that the Exchange may not require an individual who is not seeking an exemption for him or herself to provide a SSN, except that the Exchange will require an application filer to provide the SSN for a non-applicant tax filer only if the applicant attests that the tax filer has a SSN and filed a tax return for the year for which tax data would be utilized to verify household income and family size for a hardship exemption as discussed in § 155.605(g) that involves such verification. This proposal follows the approach used for eligibility for insurance affordability programs, as specified in 45 CFR 155.305(e)(6), and ensures that information collected by the Exchange is only that information which is necessary to support the eligibility process. We solicit comments on the applicability of this provision in the context of the exemption eligibility process.

In paragraph (f) of § 155.610, we propose that the Exchange will grant a certificate of exemption to any applicant determined eligible in accordance with the standards for exemptions provided in § 155.605. As specified in section 1311(d)(4)(H) of the Affordable Care Act, the responsibility of the Exchange is to “grant a certification”, which is what will be provided to the IRS to support the tax filing process. Depending on the exemption for which an applicant receives a certificate, the certificate may cover a month, multiple months, a calendar year, or multiple calendar years, and may represent multiple exemption categories, to the extent that an individual receives multiple exemptions for a single tax year.

In paragraph (g)(1) of § 155.610, we propose that the Exchange will determine eligibility for exemptions promptly and without undue delay. This proposal uses the same timing threshold used throughout subpart D, including in 45 CFR 155.310(e)(1), with respect to eligibility determinations for enrollment in a QHP and for insurance affordability programs. We note in paragraph (g)(2) in § 155.610 that the assessment of timeliness of eligibility determinations by the Exchange is based on the period from the date of the application until the date on which the Exchange notifies the applicant of its decision. We expect that the Exchange will monitor the timeliness of eligibility determinations and strive to improve performance over time. We solicit comments regarding specific performance standards for the eligibility process described in this subpart, and whether we should define an outer bound in which an eligibility determination will be made (e.g., 45 days).

In paragraph (h), we propose to clarify that except for the exemption for religious conscience under § 155.605(c) and for hardship described in § 155.605(g), after December 31 of a given calendar year, the Exchange will not accept an application for an exemption for months for such calendar year. As described above, the other seven categories of exemptions will be available through the tax filing process, which we believe is a more appropriate and efficient avenue through which to receive exemptions after the coverage year is over. With the exception of the two exemptions that can only be granted by the Exchange, we consider the availability of exemptions from the Exchange necessary only until an individual can file an income tax return claiming an exemption for a given coverage year. We solicit comments regarding this approach, and whether there should be additional categories of exemptions for which the Exchange will grant exemptions after the close of a calendar year.

In paragraph (i) of § 155.610, we propose that the Exchange will provide timely written notice to an applicant of any eligibility determination for an exemption made in accordance with this subpart. We note that as proposed in § 155.600(e), written notice can be provided through electronic means, consistent with § 155.230(d). We further note that, for purposes of tax administration, if the Exchange determines an applicant eligible for a certificate of exemption, the notification provided will include an exemption certificate number, which we will further define in systems guidance. An individual will use this certificate number as part of the tax filing process.

In paragraph (j) of § 155.610, we propose that an individual who has been certified by an Exchange as qualifying for an exemption will retain the records that demonstrate not only receipt of the certificate of exemption but also qualification for the underlying exemption. For tax purposes, the Code provides that every taxpayer must keep records sufficient to establish all information required to be shown on any return the taxpayer must file. These records include any records and information substantiating any claim for exemption on the taxpayer's federal income tax return. We note that to the extent that the Exchange provides a certificate of exemption for which the underlying verification is based in part on the special circumstances exception proposed in § 155.615(h), an individual will retain records that demonstrate receipt of the certificate of exemption, as well as the circumstances that warranted the use of the special circumstances exception.

Section 1411(b)(5) of the Affordable Care Act provides that an applicant who is seeking an exemption will provide information as a part of the eligibility process, and section 1411(c)(1) of the Affordable Care Act specifies that the Exchange will verify this information. Section 1411(d) of the Affordable Care Act provides flexibility to the Secretary to define verification processes for those data elements for which a process is not otherwise defined in section 1411 of the Affordable Care Act. In this section, we propose language regarding the verification process related to eligibility for exemptions. Similar to the verification process outlined in § 155.315 governing the verification process related to eligibility for enrollment in a qualified health plan through the Exchange, the Exchange will undertake a series of steps designed to assemble the information needed to determine an applicant's eligibility for the exemption for which he or she applied. These processes are designed not only to minimize the burden on applicants, but also to serve a valuable program integrity function in order to assure that applicants are only deemed eligible for exemptions if they meet the standards specified in § 155.605.

First, in paragraph (a) of § 155.615, we propose that unless HHS grants a request for modification under paragraph (i) of this section, the Exchange will verify or obtain information as provided in this section in order to determine that the applicant is eligible for an exemption.

In paragraph (b), we propose the verification process concerning the exemption for religious conscience. We specify that for any applicant requesting this exemption, the Exchange will verify that he or she meets the standards as outlined in § 155.605(c). First, in paragraph (b)(1) of § 155.615, we propose that except as specified in paragraph (b)(2) of this section, the Exchange will accept a form that reflects that an applicant has been approved under section 1402(g)(1) of the Code by the Internal Revenue Service (IRS). This is to accommodate those situations in which an applicant has already received approval from IRS for an exemption from Social Security and Medicare taxes, which use an identical standard to that used for the purposes of the religious conscience exemption. Second, in paragraph (b)(2), we propose that except as specified in paragraphs (b)(3) and (4) of this section, the Exchange will accept an applicant's attestation that he or she is a member of a recognized religious sect or division described in section 1402(g)(1) of the Code, and an adherent of established tenets or teachings of such sect or division. Next, the Exchange will verify that the religious sect or division to which the applicant attests membership is recognized by the Social Security Administration (SSA) as a religious sect or division under section 1402(g)(1) of the Code. We expect that this verification will involve comparing the religious sect or division to which an applicant attests membership to a list maintained by SSA that is available for this purpose.

Third, in paragraph (b)(3) of § 155.615, we propose that if the information provided by an applicant regarding his or her membership in a recognized religious sect or division is not reasonably compatible with other information provided by the individual or the records of the Exchange, the Exchange will follow the procedures specified in paragraph (g) of this section concerning situations in which the Exchange is unable to verify information. These procedures are used throughout this section and described in the preamble associated with paragraph (g) of this section.

Fourth, in paragraph (b)(4), we propose that if an applicant attests to membership in a religious sect or division that is not recognized by SSA as a religious sect or division under section 1402(g)(1) of the Code, the Exchange will determine an applicant ineligible for this exemption. Because SSA has an established process for religious sects and divisions to follow in order to become recognized, sects or divisions that are not currently recognized but are interested in pursuing such status will follow the existing SSA process. With that said, we note that our understanding is that there are few, if any, religious sects or divisions that could be approved under section 1402(g)(1) of the Code that have yet to be approved, as this provision of the Code requires that a sect or division to have been in existence at all times since December 31, 1950.

In paragraph (c) of § 155.615, we propose the verification process concerning the exemption for membership in a health care sharing ministry. We specify that for any applicant requesting this exemption, the Exchange will verify whether he or she meets the standards in § 155.605(d). First, in paragraph (c)(1) of § 155.615, we propose that except as specified in paragraphs (c)(2) and (3) of this section, the Exchange will first accept an attestation from an applicant that he or she is a member of a health care sharing ministry. Next, the Exchange will verify that the health care sharing ministry to which the applicant attests membership is known to the Exchange as a health care sharing ministry. We expect that this verification will involve comparing the health care sharing ministry to which an applicant attests membership with a list of health care sharing ministries that will be developed by HHS based on outreach to heath care sharing ministries, which HHS will then make available to Exchanges.

In paragraph (c)(2), we propose that if the information provided by an applicant regarding his or her membership in a health care sharing ministry is not reasonably compatible with other information provided by the individual or the records of the Exchange, the Exchange will follow the procedures specified in paragraph (g) of this section concerning situations in which the Exchange is unable to verify information. These procedures are used throughout this section and described in the preamble associated with paragraph (g) of this section.

In paragraph (c)(3), we propose that if an applicant attests to membership in a health care sharing ministry that is unknown to the Exchange as a health care sharing ministry according to the standards in § 155.605(d), the Exchange will then notify HHS and not determine an applicant eligible or ineligible for this exemption until HHS informs the Exchange regarding the attested health care sharing ministry's status with respect to the standards specified in 26 CFR 1.5000A-3(b) of the Treasury proposed rule, published elsewhere in this issue of the Federal Register . This process allows an applicant who is a member of a health care sharing ministry that meets the standards specified in § 155.605(d), but is previously unknown to the Exchange, to have the opportunity to receive this exemption. We have conducted preliminary outreach regarding health care sharing ministries that meet the requirements specified in the statute, and note that this provision of the Code normally requires a health care sharing ministry to have been in existence at all times since December 31, 1999, although a new organization can meet the criteria based on the history of its predecessor, and some existing health care sharing ministries may not currently meet all the statutory requirements, but can later perfect their status by, for example, obtaining 501(c)(3) status.

In paragraph (d), we propose the verification process concerning the exemption for incarceration. We specify that for any applicant requesting this exemption, the Exchange will verify, through the process described in 45 CFR 155.315(e), that he or she was incarcerated, which means that there is no additional burden associated with developing a process to support this verification for purposes of the incarceration exemption.

As with other verifications, we also specify in paragraph (d)(2) of § 155.615 that if the Exchange is unable to verify an applicant's incarceration status through the verification process outlined, the Exchange will follow the procedures in paragraph (g) of this section concerning situations in which the Exchange is unable to verify information.

In paragraph (e), we propose the verification process concerning the exemption for members of Indian tribes. We specify in paragraph (e)(1) that for any applicant requesting this exemption, the Exchange will verify his or her membership in an Indian tribe through the process outlined in 45 CFR 155.350(c), which means that there is no additional burden associated with developing a process to support this verification for purposes of this exemption. In paragraph (e)(2) of § 155.615, we also propose that the Exchange follow the procedures specified in paragraph (g) of this section if it is unable to verify an applicant's tribal membership.

In paragraph (f), we propose the verification process concerning exemptions for hardship. In paragraph (f)(2), we propose that for an applicant applying for a hardship exemption prospectively based on an inability to afford coverage, as described in § 155.605(g)(2), the Exchange use procedures established under subpart D of this part to verify the availability of affordable coverage through the Exchange based on projected income, and the procedures described in § 155.320(e) to verify eligibility for qualifying coverage in an eligible employer-sponsored plan. As noted in the preamble to § 155.605(g)(2), we propose that this exemption is not available for a calendar year for an application that is submitted after the last date on which an applicant could enroll in a QHP through the Exchange for the calendar year for which the exemption is requested. We anticipate providing additional guidance regarding procedures for the Exchange to verify whether an applicant has experienced other categories of hardship; we expect that these will likely include some amount of paper documentation, but solicit comments regarding appropriate verification procedures that will ensure a high degree of program integrity while minimizing administrative burden.

Paragraph (g) provides procedures for the Exchange to follow in the event the Exchange is unable to verify information necessary to make an eligibility determination for an exemption, including situations in which an applicant's attestation is not reasonably compatible with information in electronic data sources or other information in the records of the Exchange, or when electronic data is required but unavailable. These procedures mirror those provided in § 155.315(f), with modifications to preclude eligibility pending the outcome of the verification process, made in accordance with the Secretary's authority under section 1411 of the Affordable Care Act. These modifications are based on the fact that individuals need to account for exemptions when they file income tax returns after the coverage year is over, which means that delaying the granting of a certificate until information can be verified does not create significant issues for an applicant. We also note that given that the process in this paragraph may be applied to more than one piece of information and applicants can apply for more than one exemption at a time, it is possible for the process in paragraph (g) to run simultaneously for multiple pieces of information that are relevant to eligibility for a single exemption, or across multiple exemptions.

First, under paragraph (g)(1) of § 155.615, the Exchange will make a reasonable effort to identify and address the causes of the issue, including through typographical or other clerical errors, by contacting the application filer to confirm the accuracy of the information submitted by the application filer. We anticipate that when an applicant applies via an internet Web site or the telephone, this process will occur during the application session. Second, in paragraph (g)(2)(i), we propose that if the Exchange is unable to resolve the issue, the Exchange will notify the applicant of the issue. After providing this notice, in paragraph (g)(2)(ii), the Exchange will provide 30 days from the date on which the notice is sent for the applicant to present satisfactory documentary evidence via the channels available for the submission of an application, except by telephone, or otherwise resolve the issues. We note that, following the same approach in the Exchange final rule, all listed timelines refer to calendar days. In paragraph (g)(3), we propose that the Exchange may extend the period for an applicant to resolve the issue if the applicant can provide evidence that a good faith effort has been made to obtain the necessary documentation. And in paragraph (g)(4), we propose that the Exchange will not grant a certificate of exemption during this period based on the information that is the subject of the request under this paragraph. This is distinct from the approach taken for the eligibility process for enrollment in a QHP and for advance payments of the premium tax credit and cost-sharing reductions, since, while there is a strong benefit associated with providing access to health insurance pending the outcome of a verification process, there is no apparent health benefit to an applicant in receiving an exemption pending the outcome of such a process.

In paragraph (g)(5), we propose that, if after the conclusion of the period described in paragraph (g)(2)(ii) of this section, the Exchange is unable to verify the applicant's attestation, the Exchange will determine the applicant's eligibility based on the information available from the data sources specified in this subpart, as applicable, unless such applicant qualifies for the exception provided under paragraph (h), and notify the applicant in accordance with the procedures described under § 155.610(i), including the inability to verify the applicant's attestation.

In paragraph (h) of § 155.615, we propose a provision under which the Exchange would provide a case-by-case exception for applicants for whom documentation does not exist or is not reasonably available. We proposed this language to account for situations in which documentation cannot be obtained. This standard is consistent with the standard in subpart D at 45 CFR 155.315(g); examples of individuals for whom this provision may apply include homeless individuals, and victims of domestic violence or natural disasters.

Section 1411(c)(4)(B) of the Affordable Care Act provides that the Secretary may modify the methods used under the Secretary's program under section 1411 for the verification of information. In paragraph (i) of § 155.615, we propose to codify this flexibility, as we did in 45 CFR 155.315(h). Specifically, we propose that HHS may approve an Exchange Blueprint or a significant change to an Exchange Blueprint to modify the methods for the collection and verification of information as described in this subpart, as well as the specific information to be collected, based on a finding by HHS that the requested modification would reduce the administrative costs and burdens on individuals while maintaining accuracy and minimizing delay, and that any applicable requirements under 45 CFR 155.260, 45 CFR 155.270, paragraph (j) of this section, and section 6103 of the Code with respect to the confidentiality, disclosure, maintenance, or use of information will be met. We also note that all information exchanges specified in this section will comply with 45 CFR 155.260 and 155.270.

In paragraph (j) of § 155.615, we propose that the Exchange will not require an applicant to provide information beyond what is necessary to support the process of the Exchange for eligibility determinations for exemptions, including the process for resolving inconsistencies described in § 155.615(g).

Section 1411(f)(1) of the Affordable Care Act provides that the Secretary shall establish procedures for periodic redeterminations of eligibility. In § 155.620, we propose to codify this by providing that the Exchange will redetermine an individual's eligibility for an exemption if the Exchange receives and verifies new information as reported by an individual. Similar to the standards in 45 CFR 155.330, in paragraph (b) of § 155.620, we propose that the Exchange will require an individual with a certificate of exemption to report any changes related to the eligibility standards described in § 155.605.

In 45 CFR 155.330(b)(3), which relates to the redetermination process for eligibility for enrollment in a QHP and for insurance affordability programs, we provide that the Exchange may establish a reasonable threshold for changes in income, such that an individual who experiences a change in income that is below the threshold is not required to report such change. We also note, however, that the Exchange will always allow an individual to report a change of any size. The intent of this provision was to limit the burden associated with reporting very small changes in income, with the understanding that the reconciliation process for advance payments of the premium tax credit would ultimately resolve these differences. We considered proposing similar flexibility for the purpose of eligibility for exemptions, but chose not to due to the absence of a reconciliation process. We solicit comment as to whether we should establish such flexibility in this section.

Also, in paragraph (b)(2) of § 155.620, we propose that the Exchange would allow an individual to report changes by the channels acceptable for the submission of an exemption application.

In paragraph (c), we propose that the Exchange use the verification processes used at the point of initial application, as described in § 155.615, in order to verify any changes reported by an individual prior to using the self-reported information in an eligibility determination for an exemption. In paragraph (c)(2), we propose that the Exchange notify an individual in accordance with § 155.610(i) after re-determining his or her eligibility based on a reported change. Lastly, in paragraph (c)(3), similar to standards established in 45 CFR 155.330(c), we propose that the Exchange will provide periodic electronic notifications regarding the requirements for reporting changes and an individual's opportunity to report any changes, to an individual who has a certificate of exemption and who has elected to receive electronic notifications, unless he or she has declined to receive such notifications.

We also note that unlike 45 CFR 155.330, we do not propose that the Exchange conduct periodic data matching regarding an individual's eligibility for an exemption. The data matches that are established in 45 CFR 155.330(d), which were established based on a combination of relevance to eligibility for insurance affordability programs and the availability of electronic data sources, relate to data that is not significant in determining eligibility for exemptions: Death, and whether an individual has been determined eligible for Medicare, Medicaid, CHIP, or the Basic Health Program (BHP), where applicable. Further, with the exception of income, we are unaware of electronic data sources with which it would be useful to conduct data matching for purposes of eligibility for exemptions, particularly given the fact that generally, exemptions that are provided by the Exchange will be provided for prior months based on actual information. And while income data are available, we do not believe that the administrative complexity associated with implementing these matches, which are not required under 45 CFR 155.330, produces sufficient benefit. We solicit comments as to whether we should establish similar data matching provisions, and if so, whether we should specify that the Exchange should handle changes identified through the matching process in a similar manner as to that specified in 45 CFR 155.330, or take a different approach.

Lastly, also unlike the eligibility process for enrollment in a QHP and for insurance affordability programs, we do not propose an annual Exchange redetermination process for exemptions. We believe that an individual's exemption status may change significantly from year to year, and have proposed in § 155.605 that certain exemptions for which information is unlikely to change (i.e., the exemptions for members of an Indian tribe, and for members of recognized religious sects) remain in effect unless an individual reports that his or her status has changed. For all other exemptions, we propose that an individual who has a certificate of exemption will submit an application for any subsequent calendar year for which he or she requests the same exemption. We do anticipate, however, that the Exchange can expedite and streamline this process significantly through the use of online accounts and other administrative tools, and welcome comment regarding how this can occur, including whether it should be reflected explicitly in regulation.

As previously noted, section 1411 of the Affordable Care Act provides that the Secretary will establish a program for eligibility determinations for exemptions. As described above, in general, we propose that the Exchange conduct the eligibility process for exemptions. However, as noted in the State Exchange Implementation Questions and Answers released by HHS on November 29, 2011  1 and the Frequently Asked Questions on Exchanges, Market Reforms, and Medicaid released by HHS on December 10, 2012, 2 based on significant comments and feedback from states, a state-based Exchange can be approved if it uses a federally-managed service to make eligibility determinations for exemptions. As such, in § 155.625, we propose this option, and we solicit comment regarding the specific configuration of a service that would be useful for states and also feasible within the time remaining for implementation.

First, in § 155.625(a), we propose that the Exchange may satisfy the requirements of this subpart by either executing all eligibility functions, directly or through contracting arrangements described in 45 CFR 155.110(a), or through the use of a federally-managed service, which is described in paragraph (b) of § 155.625.

Second, in § 155.625(b), we specify that the Exchange may implement an eligibility determination for an exemption made by HHS, provided that the Exchange accepts the application, as specified in § 155.610(d), and issues the eligibility notice, as specified in § 155.610(i), and that verifications and other activities required in connection with eligibility determinations for exemptions are performed by the Exchange in accordance with the standards identified in this subpart or by HHS in accordance with the agreement described in paragraph (b)(4) of § 155.625. We also propose that under this option, the Exchange will transmit all applicant information and other information obtained by the Exchange to HHS, and adhere to HHS's determination. Lastly, in paragraph (b)(4), we propose that the Exchange and HHS enter into an agreement specifying their respective responsibilities in connection with eligibility determinations for exemptions.

We considered establishing a process under which HHS would accept the application for an exemption certificate and provide the notice under § 155.610(i), but did not propose this for two reasons. First, we believe that it is more straightforward, and also not administratively burdensome, for the Exchange to provide and accept the application, since the exemption application process shares similar features with the coverage application process, and the Exchange will be identified to applicants through outreach campaigns and other means as a primary contact point for many activities regarding the Affordable Care Act in a particular state. Further, it facilitates the provision of exemptions that originate through applications for eligibility for enrollment in a QHP and for insurance affordability programs, which will be accepted by the Exchange. Second, we propose that the Exchange issue the notice, and the certificate, as section 1311(d)(4)(H) of the Affordable Care Act specifies that the Exchange must, “* * * grant a certification attesting that * * * an individual is exempt * * *” Consequently, we see issuing the notice and any certificate as a necessary activity of the Exchange. We also believe that this does not present a significant administrative burden to the Exchange, since the contents of the notice can be standardized and provided by HHS. We solicit comments regarding maintaining these responsibilities at the Exchange, whether there are other responsibilities that should be specifically attributed to the Exchange or to HHS, and how this service can be implemented most efficiently, including with a focus on the first year of operations.

In § 155.625(c), we outline the standards to which the Exchange will adhere when eligibility determinations are made in accordance with paragraph (b). Such standards include that the arrangement does not increase administrative costs and burdens on individuals, or increase delay, and that applicable requirements under 45 CFR 155.260, 155.270, and 155.315(i), and section 6103 of the Code are met with respect to the confidentiality, disclosure, maintenance or use of information. These are the same standards that are used in 45 CFR 155.302(d) regarding advance payments of the premium tax credit and cost-sharing reductions.

In § 155.630, we propose to codify the provisions specified in section 1311(d)(4)(I)(i) of the Affordable Care Act regarding reporting by the Exchange to IRS regarding eligibility determinations for exemptions. If the Exchange grants an individual a certificate of exemption in accordance with § 155.610(i), we propose that the Exchange will transmit to IRS the individual's name and SSN, exemption certificate number, and any additional information specified in additional guidance published by IRS in accordance with 26 CFR 601.601(d)(2). We solicit comment as to how this interaction can work as smoothly as possible.

In § 155.635, we propose that the Exchange will include notice of the right to appeal and instructions for how to appeal in any notification issued in accordance with § 155.610(i) and § 155.625(b)(1). We propose that an individual may appeal any eligibility determination or redetermination made by the Exchange in relation to an exemption. Additional detail about the appeal process is described in subpart F of the proposed rule titled, “Medicaid, Children's Health Insurance Programs, and Exchanges: Essential Health Benefits in Alternative Benefit Plans, Eligibility Notices, Fair Hearing and Appeal Processes for Medicaid and Exchange Eligibility Appeals and Other Provisions Related to Eligibility and Enrollment for Exchanges, Medicaid and CHIP, and Medicaid Premiums and Cost Sharing” (78 FR 4719).

Some individuals are currently enrolled in health coverage that is not statutorily designated as minimum essential coverage. Under section 5000A(f)(1)(E), the Secretary of Health and Human Services, in coordination with the Secretary of the Treasury, may designate other health benefits coverage as minimum essential coverage. This proposed rule would allow these individuals to keep their current coverage without incurring the shared responsibility payment for not maintaining minimum essential coverage, and would ensure that such coverage includes consumer protections.

This proposed rule proposes to designate certain types of existing coverage, not specified under section 5000A, as minimum essential coverage. Additionally, other types of coverage that are neither statutorily nor regulatory designated as minimum essential coverage in this regulation, may be recognized as minimum essential coverage if certain substantive and procedural requirements are met as proposed in this rule. These types of coverage, both those designated per se and those recognized by application are neither group health insurance coverage nor individual health insurance. Consumers with coverage recognized as minimum essential coverage in accordance with this regulation would be determined to have minimum essential coverage for purposes of the requirement to maintain minimum essential coverage.

Under section 36B of the Code, individuals eligible to enroll in minimum essential coverage other than coverage in the individual market are generally not eligible for the premium tax credit. Recognizing that some of the categories of coverage designated by the Secretary may be widely available, the Treasury Department will consider providing appropriate rules in guidance under Code section 36B to address when individuals are treated as eligible to enroll in various types of coverage designated by the Secretary.

This proposed rule cross references the Treasury regulation under section 5000A of the Code for the definition of minimum essential coverage.

Prior to the Affordable Care Act, many people did not have access to employer-sponsored health coverage and could not qualify for, or otherwise seek alternatives to, individual health insurance coverage. Some individuals turned to other types of health coverage, such as self-funded student health coverage or state high risk pools.

We propose to specifically recognize certain types of coverage that have not been designated in the statute, as minimum essential coverage. HHS is familiar with the scope of coverage under these plans and they are comparable to other coverage that is designated as minimum essential coverage under the statute. The following types of coverage would be designated per se as minimum essential coverage for purposes of the minimum essential coverage requirement:

1. Self-funded student health insurance plans. Some institutions of higher education (as defined in the Higher Education Act of 1965) offer student health coverage to students with their own funds, assuming the risk for payment of claims. These plans are neither group health insurance nor individual insurance in most states.

2. Foreign health coverage. Many foreign nationals reside in this country and many of these individuals are covered by health coverage from their country of citizenship.

3. Refugee medical assistance supported by the Administration for Children and Families (45 CFR 400.90 through 400.107) This is a federally-funded program that provides up to eight months of coverage to certain non-citizens who are considered refugees under the Immigration and Naturalization Act.

4. Medicare advantage plans. The Medicare program under part C of title XVIII of the Social Security Act, which provides Medicare parts A and B benefits through a private insurer. While these plans provide the same coverage as that described in part A of Title XVIII of the Social Security Act, section 5000A(f)(1)(a)(i) specifically designated only Medicare coverage under Part A of Title XVIII as minimum essential coverage.

5. AmeriCorps coverage (45 CFR 2522.250(b)). Coverage offered to AmeriCorps volunteers, which is the domestic counterpart to the Peace Corps.

The types of coverage enumerated above have been in existence for a significant period of time. Although they vary in scope, they each provide a meaningful level of coverage that meets certain fundamental health needs for the people who are enrolled and protect against catastrophic losses. Three of the five are public programs, and even though student health plans are not individual or group market coverage, they are subject to certain consumer protections. Accordingly, individuals who wish to remain in these plans should not be subject to the shared responsibility payment under section 5000A of the Code. We welcome comments on these and whether there are other existing categories of coverage that should be recognized as minimum essential coverage. We also solicit comments regarding whether self-funded student health coverage should be limited to institutions of higher education, as defined by the Higher Education Act of 1965, or if coverage offered by other institutions, such as primary or secondary educational institution, or unaccredited educational institutions, should be included. Lastly, we included coverage for AmeriCorps volunteers in the list of types of coverage designated as minimum essential coverage. Coverage for Peace Corps volunteers is statutorily designated as minimum essential coverage, and since AmeriCorps is a similar organization, coverage offered to volunteers under AmeriCorp should be provided the same status as minimum essential coverage. We welcome comments on the inclusion of AmeriCorps coverage in the designated list.

State high risk pools are specifically noted in section 5000A(f)(1)(E) of the Code as coverage that could be designated by the Secretary as minimum essential coverage. This rule proposes that state high risk pools be designated as minimum essential coverage for a period of time to be determined by the Secretary. State high risk pools across the country vary in their coverage and benefits and some high risk pools may not substantially comply with the requirements of the Affordable Care Act, as specified in this proposed rule. Accordingly, while we are proposing that state high risk pools will initially be designated minimum essential coverage, we reserve the right to review and monitor the extent and quality of coverage, and in the future to reassess whether they should be designated minimum essential coverage or should be required to go through the process outlined in § 156.604 this proposed rule. We solicit comments on whether state high risk pools should automatically be designated as minimum essential coverage or whether they should be required to follow the process outlined in § 156.604 of this proposed rule.

In addition to the types of coverage recognized above, there may be other types of individual coverage that provide important coverage to enrollees comparable to the statutorily designated types of minimum essential coverage. Accordingly, the proposed rule outlines a process in which other types of coverage could seek to be recognized as minimum essential coverage. Such recognition would apply only to the particular plan sponsored by the submitting organization seeking recognition.

Employment-based coverage would not be recognized as minimum essential coverage through this proposed process. This is because employment-based group coverage is generally subject to the provisions of either ERISA, the Code and/or the PHS Act, and there is a separate statutory category of minimum essential coverage under the Department of Treasury's authority that addresses eligible employer-sponsored plans.

Coverage recognized as minimum essential coverage through this process would need to offer substantially the same consumer protections as those enumerated in the Title I of Affordable Care Act relating to non-grandfathered, individual coverage to ensure consumers are receiving the protections of the Affordable Care Act. Furthermore, setting standards for other coverage qualifying as minimum essential coverage creates a disincentive for the creation of coverage that is designed to circumvent the important consumer protections of the Affordable Care Act. We solicit comments on the proposed “substantially comply” standard as it applies to other types of individual coverage. We also solicit comments on the process for recognizing other coverage as minimum essential coverage.

We propose that sponsors of minimum essential coverage also meet other criteria specified by the Secretary. We anticipate that there may be organizational standards that could disqualify a type of coverage from being recognized as minimum essential coverage, such as if individuals are prohibited from membership in the organization based on a health factor. We seek comment on the types of criteria the Secretary should consider in this process as well as whether they should be added to the final rule.

We propose that sponsors of a plan that seeks to have such coverage recognized as minimum essential coverage adhere to certain procedures. Sponsors would submit to HHS electronically the following information: (1) Name of the organization sponsoring the plan; (2) name and title of the individual who is authorized to make, and makes, this certification on behalf of the organization; (3) address of the individual named above; (4) phone number of the individual named above; (5) number of enrollees; (6) eligibility criteria; (7) cost sharing requirements, including deductible and out-of-pocket maximum; (8) essential health benefits covered (as defined in § 1302(b) of the Affordable Care Act and its implementing regulations); and (9) a certification that the plan substantially complies with the provisions of Title I of the Affordable Care Act as applicable to non-grandfathered individual health insurance coverage. Once HHS receives a submission from a sponsor, it will review the information. If HHS determines that the coverage meets the necessary criteria to be recognized by the Secretary as minimum essential coverage, HHS would then inform the sponsor of the minimum essential coverage status of its coverage. This coverage would then be placed in a public list the types of coverage that have submitted information and have been determined by the Secretary to meet the eligibility requirements to be recognized as minimum essential coverage. The proposed rule also provides the Secretary the authority to revoke the minimum essential coverage status of a type of coverage that had previously been recognized minimum essential coverage if it has been determined that the coverage no longer meets the requirements to be minimum essential coverage. We solicit comments on whether there should be an appeal process for sponsors of coverage that had the minimum essential coverage status revoked by the Secretary. Such an appeal process could be internal within HHS, where the initial decision to revoke would be reviewed by an HHS staff person other than the one who made the initial decision. Comments are also welcome on whether this appeal process should be available to sponsors whose initial request for recognition of minimal essential coverage status for their coverage was denied by HHS.

Under this proposed rule, HHS would have the ability to audit plans to ensure the accuracy of the certification either randomly or when triggered by certain information. For example, errors in the submission, complaints from enrollees, communications with state insurance regulators, media reports, etc., may result in an audit of a sponsoring organization.

We believe this process strikes the appropriate balance between efficiency and ensuring compliance. Comments are solicited on the proposed procedures and if and when audits should be conducted. Comments are also welcome on whether sponsors of the types of coverage that have been designated as minimum essential coverage in the proposed rule should also submit the above information required to CMS.

Once recognized as minimum essential coverage, a plan would have to provide notice to its enrollees, specifying that the plan has been recognized as minimum essential coverage for the purposes of the individual coverage requirement. This notice could be included in existing enrollment materials and in other plan documents. The sponsor of any plan recognized as minimum essential coverage would also be required to provide the annual information reporting to the IRS specified in section 6055 of the Code and furnish statements to individuals enrolled in such coverage to assist them in establishing that they are not subject to the shared responsibility payment of section 5000A of the Code. We request comments on whether all plans and programs designated as minimum essential coverage under this regulation must provide notice to enrollees, or only plans recognized through the process in § 156.604 of this regulation.

Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency.

• The accuracy of our estimate of the information collection burden.

• The quality, utility, and clarity of the information to be collected.

• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

The proposed rule entitled “Exchange Functions: Eligibility for Exemptions” proposes standards with regard to the minimum function of an Exchange to perform eligibility determinations and issue certificates of exemption from the shared responsibility payment. The rule proposes standards related to eligibility for exemptions, including the verification and eligibility determination process, eligibility redeterminations, options for conducting eligibility determinations, and reporting related to exemptions. The rule also proposes to designate certain types of coverage as minimum essential coverage and outlines substantive and procedural requirements that other types of coverage must fulfill in order to be recognized as minimum essential coverage under section 5000A(f)(5) of the Code, as added by the Affordable Care Act.

This section outlines the information collection requirements in the proposed regulation that will be addressed through this notice and comment process under the Paperwork Reduction Act (PRA). We are soliciting public comment on each of these issues for the following sections of the proposed rule that contain information collection requirements (ICRs). We used data from the Bureau of Labor Statistics to derive average costs for all estimates of salary in establishing the information collection requirements. Salary estimates include the cost of fringe benefits, calculated at 30.4 percent of salary, which is based on the June 2012 Employer Costs for Employee Compensation report by the U.S. Bureau of Labor Statistics. Additionally, we used estimates from the Congressional Budget Office to derive estimates of the number of exemption applications we anticipate Exchanges to receive, and the number of exemption eligibility determination notifications we anticipate Exchanges to generate.

Throughout this subpart, we propose that the Exchange collect attestations from applicants for a certificate of exemption. These attestations will be collected using the application described in § 155.610(a). In § 155.610(a), we provide that the Exchange use an application created by HHS to collect the information necessary for determining eligibility for and granting certificates of exemption. The burden associated with this requirement is the time and effort estimated for an applicant to complete an application. The exemption application may be available in both paper and electronic formats. An electronic application process would vary depending on each applicant's circumstances and which exemption an applicant is applying for, such that an applicant is only presented with questions relevant to the exemption for which he or she is applying. The goal is to solicit sufficient information so that in most cases no further inquiry will be needed. We estimate that on average, it will take .27 hours (16 minutes) for an application filer to complete an application, which is based on the estimates created for the single, streamlined application for enrollment in a QHP  3 , with a 90% electronic/10% paper mix (noting that no specific application channel is specified in this proposed rule). While the Congressional Budget Office  4 estimates that 24 million individuals would be exempt from the shared responsibility penalty in 2016, it is unclear how many individuals will seek these exemptions from an Exchange. Some of these individuals will apply for and receive an exemption through the tax filing process, while others will apply for and receive an exemption through the Exchange. Therefore, of the 24 million individuals, we conservatively anticipate that approximately half will apply for an exemption through the Exchange, and half will seek an exemption through the tax filing process and specifically seek comment on this assumption. Accordingly, we estimate that approximately 12 million applications for exemptions will be submitted to the Exchange for calendar year 2016, for a total of 3.2 million burden hours. We also note that some individuals will apply for an exemption but be determined ineligible for an exemption, but it is difficult for us to estimate this number, and that in an unknown number of cases, multiple individuals in a single household may submit a single application.

We do not estimate any cost to the Exchanges of evaluating the exemption applications. For the purposes of this estimate, we expect all applications to be submitted electronically and processed through the system, which would result in no additional labor costs to evaluate and review the exemption applications. We request comment on this assumption.

We estimate that the cost to develop the exemption application will be significantly less than the estimated cost of developing the coverage application because the coverage application takes into account additional factors necessary in order to perform eligibility determinations for insurance affordability programs. We also note that as with the coverage application, HHS will be releasing a model application for use by Exchanges, which will significantly decrease the burden associated with the implementation of the application. On average, we estimate that the implementation of the exemption application will take approximately 1,059 hours of software development at a labor cost of $98.50 per hour, for a total cost of $104,312 per Exchange and a total cost of $5,319,887 for 51 Exchanges.

Several provisions in subpart G outline specific notices that the Exchange will send to individuals during the exemption eligibility determination process, including the notice of eligibility determination described in § 155.610(i). The purpose of these notices is to alert an applicant of his or her eligibility determination for an exemption and related actions taken by the Exchange. To the extent that an applicant is determined eligible for an exemption, the notice of eligibility determination described in § 155.610(i) will serve as the certificate of exemption. Accordingly, we do not provide a separate burden estimate for the certificates of exemption described throughout this subpart. When possible, we anticipate that the Exchange will consolidate notices when multiple members of a household are applying together and receive an eligibility determination at the same time. Consistent with 45 CFR 155.230(d), the notice may be in paper or electronic format, based on the election of an individual, will be in writing, and will be sent after an eligibility determination has been made by the Exchange; these are the same standards that are used for eligibility notices for enrollment in a QHP through the Exchange and for insurance affordability programs, as described in 45 CFR 155.310(g). It is difficult to estimate the number of applicants that will opt for electronic versus paper notices, although we anticipate that a large volume of applicants will request electronic notification. We estimated the associated mailing costs for the time and effort needed to mail notices in bulk to applicants who request paper notices.

We expect that the exemption eligibility determination notice will be dynamic and include information tailored to all possible outcomes of an application throughout the eligibility determination process. A health policy analyst, senior manager, and an attorney would review the notice. HHS is currently developing model notices, which will decrease the burden on Exchanges associated with providing such notices. If a state opts to use the model notices provided by HHS, we estimate that the Exchange effort related to the development and implementation of the exemption eligibility determination notice will necessitate 44 hours from a health policy analyst at an hourly cost of $49.35 to learn exemptions rules and draft notice text; 20 hours from an attorney at an hourly cost of $90.14, and four hours from a senior manager at an hourly cost of $79.08 to review the notice; and 32 hours from a computer programmer at an hourly cost of $52.50 to conduct the necessary development. In total, we estimate that this will take a total of 100 hours for each Exchange, at a cost of approximately $5,971 per Exchange and a total cost of $304,497 for 51 Exchanges. For most notices outlined in subpart G of this proposed rule, we estimate that the notice development as outlined in the paragraph above, including the systems programming, would take each Exchange an estimated 100 hours to complete in the first year.

We expect that the burden on the Exchange to maintain this notice will be significantly lower than to develop it. We estimate that it will take each professional approximately a quarter of the time to maintain the notice as compared to developing the notice. Accordingly, we estimate the maintenance of the eligibility determination notice in subsequent years will necessitate 11 hours from a health policy analyst at an hourly cost of $49.35; 5 hours from an attorney at an hourly cost of $90.14; one hour from a senior manager at an hourly cost of $79.08 and eight hours from a computer programmer at an hourly cost of $52.50. In total, we estimate that this will take a total of 25 hours for each Exchange, at a cost of approximately $1,492 per Exchange and a total cost of $76,092 for 51 Exchanges.

Pursuant to section 5000A of the Code, the Secretary of Treasury must collect the necessary data from QHP issuers to determine the national average bronze monthly premiums in order to assist in the computation of the shared responsibility payment. As such, HHS must request the monthly premium for all bronze level QHP's through all 51 Exchanges from QHP issuers. The burden associated on states and QHP issuers is already included in the information collection request entitled, “Initial Plan Data Collection to Support QHP Certification and other Financial Management and Exchange Operations,” and as such, we do not include a separate burden estimate here. As this information is already being collected for another purpose, there will be no additional burden on QHP issuers or states.

Section 155.615 specifies that the Exchange will utilize applicable procedures established under subpart D of the Exchange final rule in order to obtain data through electronic data sources for purposes of determining eligibility for and granting certificates of exemption. This involves the electronic transmission of data through procedures established under subpart D in order to verify an applicant's incarceration status, to verify eligibility for qualifying coverage in an eligible employer-sponsored plan, and to determine eligibility for advance payments of the premium tax credit. Section 155.615 also includes additional electronic transmissions that are specific to the eligibility process for exemptions, including those related to health care sharing ministries and religious conscience. In section 155.630, we propose that the Exchange will provide relevant information to IRS regarding certificates of exemption for the purposes of tax administration, such as the name and other identifying information for the individual who received the exemption. As we expect that these transmissions of information will all be electronic, and through the same channels used for reporting to IRS established in § 155.340, we do not anticipate for there to be any additional burden other than that which is required to design the overall eligibility and enrollment system. We do not provide a burden estimate for the electronic transmissions, as the cost is incorporated into the development of the IT system for the Exchange eligibility and enrollment system.

The Exchange will use the same verification processes for new applications and for changes that are reported during the year. This includes the process for situations in which the Exchange is unable to verify the information necessary to determine an applicant's eligibility, which is described in section 155.615(g). It is not possible at this time to provide estimates for the number of applicants for whom additional information will be required to complete an eligibility determination, but we anticipate that this number will decrease as applicants become more familiar with the eligibility process for exemptions and as more data become available electronically. As such, for now, we estimate the burden associated with the processing of documentation for one submission from an applicant. We note that the burden associated with this provision is one hour for an individual to collect and submit documentation, and 12 minutes for eligibility support staff at an hourly cost of $28.66 to review the documentation, for a total cost of $6 per document submission.

These provisions propose that an Exchange that decides to utilize the HHS service for making eligibility determinations for exemptions will enter into a written agreement with HHS. These agreements are necessary to ensure that the use of the service will minimize burden on individuals, ensure prompt determinations of eligibility without undue delay, and provide for secure, timely transfers of application information.

The burden associated with these provisions is the time and effort necessary for the Exchange to establish an agreement with HHS. We estimate that the creation of the necessary agreement will necessitate 35 hours from a health policy analyst at an hourly cost of $49.35, and 35 hours from an operations analyst at an hourly cost of $54.45 to develop the agreement; and 30 hours from an attorney at an hourly cost of $90.14 and five hours from a senior manager at an hourly cost of $79.14 to review the agreement. Accordingly, the total burden on the Exchange associated with the creation of the necessary agreement will be approximately 105 hours and $6,733 per Exchange, for a total cost of $343,382 for 51 Exchanges.

Organizations that currently provide health coverage that are not statutorily specified and not designated as minimum essential coverage in this regulation may submit a request to CMS that their coverage be recognized as minimum essential coverage. As described in § 156.604(a)(3), sponsoring organizations would have to electronically submit to CMS information regarding their plans and certify that their plans meet substantially all of the requirements in the Title I of Affordable Care Act, as applicable to non-grandfathered, individual coverage. Because we do not know how many sponsoring organizations would submit a request, we have estimated the burden for one entity. We seek comments on how many organizations are likely to submit such requests. The burden associated with this certification includes the time needed to collect and input the necessary plan information, and maintain a copy for recordkeeping by clerical staff and for a manager and legal counsel to review it and for a senior executive to review and sign it. The certification would be submitted to CMS electronically at minimal cost. We estimate that it would take a combined total of 4.25 hours (3 hours for clerical staff at an hourly cost of 30.64, 0.5 hour for a manager at an hourly cost of $55.22, 0.5 hours for legal counsel at an hourly cost of $83.10 and 0.25 hours for a senior executive at an hourly cost of $112.43) to prepare and submit the information and certification to CMS and to retain a copy for recordkeeping purposes. The total cost for one organization is estimated to be approximately $190.

Section 156.604(c) specifies that sponsoring organizations whose health coverage are recognized as minimum essential coverage would have to provide a notice to enrollees informing them that the plan has been recognized minimum essential coverage for the purposes of the individual coverage requirement. The notice requirement may be satisfied by inserting the model statement provided in this proposed rule into existing plan documents. Plan documents are usually reviewed and updated annually before a new plan year begins. Sponsoring organizations may insert the model language in their plan documents at that time at minimal cost. Once the notice is included in the plan documents the first year, no additional cost will be incurred in future years. Therefore this notice is not subject to the Paperwork Reduction Act of 1995.

The sponsor of any type of coverage recognized as minimum essential coverage would also be required to provide the annual information reporting to the IRS specified in section 6055 of the Code and furnish statements to individuals enrolled in such coverage to assist them in establishing that they are not subject to the shared responsibility payment of section 5000A of the Code. The Department of Treasury plans to publish for public comment, in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the required ICRs in the near future.

We have submitted a copy of this proposed rule to OMB for its review of the rule's information collection and recordkeeping requirements. These requirements are not effective until they have been approved by OMB.

To obtain copies of the supporting statement and any related forms for the proposed paperwork collections referenced above, access the CMS Web site at http://www.cms.hhs.gov/Paperwork@cms.hhs.gov, or call the Reports Clearance Office at 410-786-1326.

We invite public comments on these potential information collection requirements. If you comment on these information collection and recordkeeping requirements, please do either of the following:

1. Submit your comments electronically as specified in the ADDRESSES section of this proposed rule; or

2. Submit your comments to the Office of Information and Regulatory Affairs, Office of Management and Budget, Attention: CMS Desk Officer, (CMS—9958-P) Fax: (202) 395-5806; or Email: OIRA_submission@omb.eop.gov.

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document.

We have examined the impact of this rule as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993) and Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011). Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). This rule has been designated a “significant regulatory action” under Executive Order 12866. Accordingly, this rule has been reviewed by the Office of Management and Budget.

The exemption provisions of this proposed rule set forth how and what exemptions can be received through the Exchange. Given the statute, these rules would generate exemption request activity; the proposed rules could also potentially affect the amount of shared responsibility payments made in a given year and the number of individuals who would enroll in health insurance plans to avoid shared responsibility payments. The impact of the proposed minimum essential coverage provisions would be similar; individuals whose coverage would be designated minimum essential coverage, under the authority of the Secretary of Health and Human Services to designate other health benefit coverage as minimum essential coverage, would, in the absence of the rule, pay shared responsibility payments or switch health insurance coverage so as not to incur those penalties.

As noted in our discussion, above, of information collection requirements, while CBO estimates that 24 million individuals would be exempt from the penalty in 2016, it is unclear how many individuals will seek these exemptions from an Exchange. These submissions would be associated with a variety of effects, including: costs to Exchanges to review the exemption requests; costs to applicants to request exemptions and retain documents; potential effects on enrollment in health coverage and its benefits; and a transfer from the federal government to individuals receiving exemptions in cases in which there is a foregone shared responsibility payment.

We note that the cost to an applicant of submitting a request and retaining documents is bounded above by the expected shared responsibility payment; otherwise, he or she would not necessarily apply for the exemption. Though we currently lack data to precisely characterize the effects of these proposed provisions, we note that the potential number of individuals seeking exemptions through the Exchange could place the overall impact of the proposed rule over the $100 million threshold for economic significance, even at a low economic cost per individual. The minimum essential coverage provisions included in this proposed rule could lead to transfers from the federal government to affected individuals (in this case, individuals whose coverage is designated to be minimum essential coverage) and have effects on health coverage enrollment (e.g., decreased switching between plans). Decreased switching between plans would entail time savings for affected individuals and uncertain effects on premium payments and use of medical services and products. We currently lack data to estimate the number of individuals whose coverage would be designated minimum essential coverage by this proposed rule. In light of our incomplete data and quantification of impacts, we request data and comments on all likely economic effects of the provisions of this proposed rule.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) requires agencies to prepare an initial regulatory flexibility analysis to describe the impact of the proposed rule on small entities, unless the head of the agency can certify that the rule will not have a significant economic impact on a substantial number of small entities. The Act generally defines a “small entity” as (1) a proprietary firm meeting the size standards of the Small Business Administration (SBA); (2) a not-for-profit organization that is not dominant in its field; or (3) a small government jurisdiction with a population of less than 50,000. States and individuals are not included in the definition of “small entity.” HHS uses as its measure of significant economic impact on a substantial number of small entities a change in revenues of more than 3 to 5 percent. As the burden for this proposed regulation falls on either Exchanges or individuals, the proposed regulations will not have a significant economic impact on a substantial number of small entities, and therefore, a regulatory flexibility analysis is not required.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation, by state, local, or tribal governments, in the aggregate, or by the private sector. In 2012, that threshold is approximately $139 million. This final rule does not mandate expenditures by state governments, local governments, tribal governments, in the aggregate, or the private sector, of $136 million. The majority of state, local, and private sector costs related to implementation of the Affordable Care Act were described in the RIA accompanying the March 2012 Medicaid eligibility rule. Furthermore, the proposed rule does not set any mandate on states to set up an Exchange.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule that imposes substantial direct effects on states, preempts state law, or otherwise has federalism implications. We wish to note again that the impact of changes related to implementation of the Affordable Care Act were described in the RIA associated with the Exchange final rule. As discussed in the Exchange final rule RIA, we have consulted with states to receive input on how the various Affordable Care Act provisions codified in this proposed rule would affect states.

Because states have flexibility in designing their Exchange, state decisions will ultimately influence both administrative expenses and overall premiums. However, because states are not required to create an Exchange, these costs are not mandatory. For states electing to create an Exchange, the initial costs of the creation of the Exchange will be funded by Exchange Planning and Establishment Grants. After this time, Exchanges will be financially self-sustaining with revenue sources left to the discretion of the state. In the Department's view, while this proposed rule does not impose substantial direct costs on state and local governments, it has federalism implications due to direct effects on the distribution of power and responsibilities among the state and federal governments relating to determining standards relating to health insurance coverage (that is, for QHPs) that is offered in the individual and small group markets. Each state electing to establish a state-based Exchange must adopt the federal standards contained in the Affordable Care Act and in this proposed rule, or have in effect a state law or regulation that implements these federal standards. However, the Department anticipates that the federalism implications (if any) are substantially mitigated because states have choices regarding the structure and governance of their Exchanges. Additionally, the Affordable Care Act does not require states to establish an Exchange; but if a state elects not to establish an Exchange or the state's Exchange is not approved, HHS, will establish and operate an Exchange in that state. Additionally, states will have the opportunity to participate in state Partnership Exchanges that would allow states to leverage work done by other states and the federal government, and will be able to leverage a federally-managed service for eligibility determination for exemptions.

In compliance with the requirement of Executive Order 13132 that agencies examine closely any policies that may have federalism implications or limit the policy making discretion of the states, the Department has engaged in efforts to consult with and work cooperatively with affected states, including participating in conference calls with and attending conferences of the National Association of Insurance Commissioners, and consulting with state officials on an individual basis.

Pursuant to the requirements set forth in section 8(a) of Executive Order 13132, and by the signatures affixed to this regulation, the Department certifies that CMS has complied with the requirements of Executive Order 13132 for the attached proposed regulation in a meaningful and timely manner.

This proposed rule is subject to the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.), which specifies that before a rule can take effect, the federal agency promulgating the rule shall submit to each House of the Congress and to the Comptroller General a report containing a copy of the rule along with other specified information, and has been transmitted to Congress and the Comptroller General for review.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

In January 2011, NMFS implemented a trawl rationalization program, a type of catch share program, for the Pacific coast groundfish fishery's trawl fleet. The program was adopted through Amendment 20 to the FMP and consists of three sectors: an IFQ program for the shorebased trawl fleet (including whiting and non-whiting fisheries); and cooperative (coop) programs for the at-sea mothership (MS) and catcher/processor (C/P) trawl fleets (whiting only). Allocations to the limited entry trawl fleet for certain species were developed through a parallel process with Amendment 21 to the FMP.

Since implementation, the Pacific Fishery Management Council (Council) and NMFS have been working to address additional regulatory requirements associated with the trawl rationalization program. One such requirement is cost recovery, where NFMS collects fees from the fishing industry to cover part of the costs of management, data collection, and enforcement of the trawl rationalization program. This rule would create a cost recovery program for the trawl rationalization program in compliance with the requirements of the MSA, and based upon a recommended methodology developed in coordination with the Council.

In accordance with the MSA, 16 U.S.C. 1853(c), 1853a(e), 1854(b), 1854(d)(2), 1855(d), the cost recovery program would collect mandatory fees of up to three percent of the ex-vessel value of groundfish by sector (Shorebased IFQ Program, MS Coop Program, and C/P Coop Program). The Council discussed the structure and methodology of the cost recovery program over its April, June, and September 2011 meetings, with final Council recommendations to NMFS during the September 2011 Council meeting. In addition, NMFS received further guidance on these issues from the Council at its September 2012 meeting.

During the April 2011 Council meeting, NMFS presented some general questions that initiated discussion regarding how to structure the cost recovery program. One issue addressed was whether one cost recovery program could be applied to both the trawl rationalization program and the sablefish permit stacking program. The Council recommended and NMFS is proposing to first pursue creation of the cost recovery program for the trawl rationalization program, with the understanding that this cost recovery program could then be used to inform a cost recovery program for the sablefish permit stacking program via a future rulemaking.

A second issue raised during the April 2011 Council meeting was whether the cost recovery fee should be assessed for the trawl rationalization program as a whole, or on a sector-by-sector basis. The Council recommended and NMFS is proposing that the cost recovery program should outline the fee methodology on a sector-by-sector basis. The use of a sector-by-sector approach in determining and assessing the fee was chosen due to the unique characteristics and costs associated with each of the three program sectors.

The Council recommended that NMFS structure the cost recovery program to coordinate with the buyback program (also called the federal fishing capacity reduction program) to reduce the burden on the affected public.

In 2003, NMFS “bought back,” for approximately $46 million, 91 vessels and 239 fishing permits from the groundfish trawl fishery and associated corollary fisheries of Dungeness crab and pink shrimp off the California, Oregon, and Washington coast. This $46 million buyback program included a $36 million loan to the industry that was to be paid by assessing buyback fees on landings (70 FR 40225, July 13, 2005). For the groundfish fishery, fees for repayment of the loan are to be paid on groundfish harvested using Federal trawl permits. Fish sellers are required to pay the fee and all parties making the first ex-vessel purchase of groundfish (“fish buyers”) are required to collect the fee, account for, and forward the fee revenue for the purpose of repaying the loan. Participants in the Shorebased IFQ Program and the MS Coop Program are subject to the repayment of the buyback loan, while the C/P Coop Program is not. Due to similarities in the need to collect and document payment of a fee for both the buyback program and the proposed cost recovery program, the cost recovery program would utilize elements of the buyback program as much as possible.

For example, for the Shorebased IFQ Program and MS Coop Programs only, the cost recovery program would require the payment of fees to NMFS at the same time that buyback fees are paid (i.e., no later than the 14th of each month). Because the C/P Coop Program is not subject to the buyback program, the Council recommended and NMFS is proposing that participants in the C/P Coop Program pay their fees for the cost recovery program in the last quarter of the calendar year and no later than December 31 each year.

Another example of structuring the cost recovery program to coordinate with the buyback program is that the fish buyer would be responsible for payment of the fees to NMFS. For the Shorebased IFQ Program, the first receiver site license holder would be the party responsible for collecting and remitting cost recovery fees to NMFS. For the MS Coop Program, the parties jointly and severally responsible for collecting and remitting the cost recovery fee would be the owner of a vessel registered to an MS permit, the operator of a vessel registered to an MS permit, and the owner of the MS permit registered to that vessel.

While the C/P Coop Program is not subject to buyback, NMFS is proposing to structure the cost recovery program for all sectors similar to buyback. This means there may be cases where regulations are applied to the C/P Coop Program that would not necessarily be applied if the cost recovery program was not coordinating with the buyback program. Using the term “fish buyer” to apply to the C/P Coop Program is one such example. Catcher/processors are not in practice referred to as “fish buyers” because they are vessels that catch and process their own fish ( i.e., they do not buy it from themselves). However, to reduce complexity and keep the regulations as similar as possible for all three sectors, NMFS is proposing to define C/Ps as “fish buyers,” but only for purposes of the cost recovery program. Thus, for the C/P Coop Program, the fish buyer would be the responsible party and would include: the owner of a vessel registered to a C/P-endorsed limited entry trawl permit, the operator of a vessel registered to a C/P-endorsed limited entry trawl permit, and the owner of the C/P-endorsed limited entry trawl permit registered to that vessel. This situation is similar to that for the responsible party in the MS Coop Program. For the MS and C/P Coop Programs, all three parties are jointly and severally responsible for the obligations of a fish buyer.

In an effort to further coordinate the cost recovery program with the buyback program, NMFS intends to use the same online portal for payment as the buyback program, Pay.gov. By using the same portal, users are able to go to one place to make payments, maintain one profile, click on a link to pay buyback fees or click on a link to pay cost recovery fees. The forms submitted with payment for each fee would be contained in each link. If the user has an account with Pay.gov, information from the user's profile ( e.g., name, address, etc.) would auto-populate on both forms, streamlining the reporting and payment process. An example of a similar system is a bank account where you have both a credit card and a mortgage payment. You can go to the bank's one Web site and use your one user profile to make arrangements to pay both your credit card account and your mortgage, but they are separate links on the bank's Web site.

NMFS is exploring using one form to submit two payments, one payment to each program (cost recovery and buyback). While NMFS is exploring using one form for both programs, this rule proposes a separate cost recovery form for two reasons. First, it would delay the cost recovery rule to propose one form. Second, in exploring the use of one combined form for both programs, NMFS has found several drawbacks in addition to the benefits.

Using one combined form for both programs would likely make it easier for the IFQ and MS fish buyers to enter the required information (although they would still be required submit multiple payments directed to different accounts within NMFS). However, the drawbacks to one combined form for both programs include the potential for increased misreporting/mispayment, different consequences for misreporting/mispayment (late fee versus nonrenewal of permit/license), and increased time to correct errors, potentially harming business operations.

The cost recovery program and the buyback program are different programs with different purposes within NMFS. One is temporary and used to pay back a fixed term loan (buyback) while the other is used to recover part of NMFS' ongoing costs to manage the fishery (cost recovery). The cost recovery form would cover three sectors of one fishery (groundfish). The buyback form has fields for six loan payments in six separate fisheries, including state-run crab and shrimp fisheries. The cost recovery and buyback programs also have different consequences for misreporting or mispayment. For buyback, the consequences may result in late fees. For cost recovery, the consequences may result in a limited entry permit or first receiver site license not being renewed or reissued, which may result in lost fishing time or lost ability for first receivers to purchase groundfish. Using the bank account example, mispayment of your credit card online results in late charges (similar to buyback), while mispayment of your mortgage has different potential consequences. It is in the user's interest to keep these payments separate as they have very different consequences for nonpayment, and the user would likely not want to risk delay of their permit renewal because of an entry on the wrong line of the form.

In the first year of the buyback program, there were over 200 cases of misreporting/mispayment largely due to an entry on the wrong line of the fee collection form. Combining reporting for cost recovery payments on the same form as buyback could magnify these misreporting/mispayment issues. Any misreporting/mispayment on a combined form would likely take NMFS longer to correct because two different programs would be coordinating to decipher the error, which program it applies to, and then to pursue correction/payment. Because these two programs have very different misreporting/mispayment consequences, the increased time it would take to correct any misreporting/mispayment could harm the business operations of the fish buyers due to delayed opportunities. Another drawback to a combined form is that any audits of fish buyers by either program would be more complex, would involve both programs, and would take longer. If an audit uncovers mispayment/misreporting and takes a longer time to correct, it could also harm the business operations of the fish buyers.

With this rule, NMFS is proposing to use one online portal, Pay.gov, which would include a link to make payments to both programs (cost recovery and buyback). The cost recovery form that would be on the Pay.gov link would be designed to look very similar to the buyback form, with the addition of a box to fill out the weight (in lbs) and fees paid based on the cost recovery program fee percentage (which is different than the buyback fee percentage). In addition, certain fields on the form would auto-populate for users with an account on Pay.gov. With this system, NMFS expects that the ex-vessel value reported on the cost recovery form should match that reported on the buyback form, because both forms report based on the value of all groundfish species. NMFS is seeking public comment on the benefits and drawbacks of one form versus two. NMFS may implement one form for both programs at the final rule stage depending on the comments received or other considerations, if appropriate.

While NMFS is proposing a cost recovery program structure that is similar to the buyback program, there are some differences. For example, NMFS is not proposing the $100 threshold for payment that is in the buyback program at 50 CFR 600.1102(i)(3). In addition, NMFS is only proposing online payment of fees through Pay.gov ( i.e., NMFS would not accept checks for payment of the cost recovery program fees). This is consistent with Council guidance at its September 2012 meeting.

Because NMFS is proposing to only allow online payment of fees, there is no need to maintain the $100 threshold that is in the buyback program. The buyback program requires fish buyers to remit payment only when the amount due exceeds $100. If the amount due is less than $100, it is carried forward. This reduces transaction costs because the buyback program accepts checks for payment, and processing checks for amounts less than $100 is inefficient. Since NMFS intends to accept only online payment, implementing a similar $100 threshold for the cost recovery program is unnecessary.

The portion of the affected public actually responsible for remitting payment to NMFS is limited to fish buyers. By requiring online payment, the payment process is more streamlined and more secure. In addition, it reduces NMFS' administrative burdens associated with processing fee payments, thereby reducing the costs associated with implementing the cost recovery program. NMFS does not expect this provision to create additional burden for the fleet, since IFQ first receivers are already required to use computers for reporting in the trawl rationalization program and the at-sea whiting fleet is comprised of businesses that are comfortable with online business transactions.

The cost recovery fee amount due would be calculated by multiplying ex-vessel value by the applicable fee percentage, as proposed at § 660.115(c). For the C/P Coop Program, an alternate approach to calculating the fee amount would be to directly bill the sector. While this approach is not included in the regulatory language in this proposed rule, NMFS is soliciting public comment on this approach which is described in more detail in the preamble under “Fee Payment and Collection.”

Ex-vessel value by sector would be used in the cost recovery program in two ways: (1) The fee amount charged in a calendar year would be based on a percentage (not to exceed three percent) of the ex-vessel value of all groundfish, and (2) the percentage used to determine the fee amount would be calculated in part from ex-vessel value over the previous fiscal year.

Because the trawl rationalization program manages all groundfish species, the cost recovery program for each sector (IFQ, MS, and C/P) would be based on the value of all groundfish species. This is consistent with the buyback program, which collects fees from fish buyers in the Shorebased IFQ Program and the MS Coop Program based on the value of all groundfish. Initially, the Council determined that cost recovery should apply to the ex-vessel value of IFQ species for the Shorebased IFQ Program and to the ex-vessel value of Pacific whiting for the at-sea sectors (MS and C/P). However, at its September 2012 meeting, the Council provided NMFS with further guidance on this issue and supported that the ex-vessel value for each sector should be based on the value of all groundfish species.

Ex-vessel value (proposed at § 660.111 for the cost recovery program) would include all compensation (based on an arm's length transaction between a buyer and seller) that a fish buyer pays to a fish seller in exchange for groundfish species, including the value of all in-kind compensation and all other goods or services exchanged in lieu of cash. Ex-vessel value would also be determined before any deductions are made for transferred or leased allocation, or for any goods or services. For the Shorebased IFQ Program, the ex-vessel value would be based on the value of all groundfish species from IFQ landings. For the MS Coop Program, the ex-vessel value would be based on the value of all groundfish species delivered by a catcher vessel to an MS-permitted vessel. For the C/P Coop Program, the ex-vessel value would be based on the value as determined by the aggregate pounds of all groundfish species harvested by the vessel registered to a C/P-endorsed limited entry trawl permit, multiplied by the MS Coop Program average price per pound as announced by NMFS. For the C/P Coop Program, ex-vessel value is not available because there is no payment between a catcher vessel and a processor because the same vessel both catches and processes. Therefore, MS pricing is used as a proxy because it is a similar fishery (both are at-sea whiting fisheries). NMFS will announce the MS pricing that the C/P Coop Program would use in the upcoming calendar year with announcement of the fee percentage. See the preamble discussion under “Notification of the Fee Percentage and MS Pricing” for the notification process and how MS pricing will be calculated for the first year of the program.

In addition to structuring the cost recovery program fee payment to coordinate with the buyback program requirements, NMFS is proposing to structure the fee percentage calculation to be similar to that used by NMFS, Alaska Region for their IFQ programs (halibut/sablefish, rockfish, crab) because these fisheries have experience implementing cost recovery that our Region can utilize. In addition, some participants in the trawl rationalization program either participate in or are familiar with requirements for Alaska fisheries, so use of this formula would provide consistency to the regulated public.

The fee percentage would be calculated using this formula: (DPC/V) × 100, where V is the total ex-vessel value of all groundfish species from the previous fiscal year for each of the three sectors as described above, and DPC (direct program costs) are the direct, recoverable program costs attributable to the sector. The DPC was further defined through the Council process, and was determined to be the incremental costs associated with ongoing management, data collection, and enforcement activities that would not have been incurred but for the implementation of the program ( i.e., incremental costs). Both the V and the DPC variables in the fee percentage equation may change every year, but the resulting percentage may not exceed three percent as required by the MSA.

As described in the Supplemental NMFS Report (Agenda Item H.2.b), available at the September 2012 Council meeting, data from the previous fiscal year can be used to determine the fee percentage to be used and applied to calculate the cost recovery fee amounts for the next calendar year. Once the fiscal year has ended, NMFS plans to calculate the fee percentage in October and/or November each year. Given that the fee percentage to be applied in an upcoming calendar year will be determined based on NMFS' incremental costs and ex-vessel revenues from the previous fiscal year, the actual amount collected in a calendar year could differ from the costs NMFS intended to recover. For example, if the incremental costs from fiscal year 2012 were equal to $100,000, and the ex-vessel value from that sector in fiscal year 2012 was $3.75 million, the fee percent to be applied in calendar year 2013 would be 2.67 percent, as calculated by: (100,000/3,750,000) × 100 = 2.67.

Under this example, in calendar year 2013, fish buyers would determine the fee due by collecting 2.67 percent of the ex-vessel revenue of any given delivery. For calendar year 2013, the total fee amount collected by NMFS will depend on the actual ex-vessel revenues for 2013. To the extent ex-vessel revenues in calendar year 2013 are different from fiscal year 2012; the amount NMFS collects could be slightly over or under NMFS' costs from fiscal year 2012. Accordingly, NMFS will ensure that the aggregate fees being collected are appropriate by making an adjustment to the following calendar year's fee percentage.

For example, assume that NMFS collected $125,000 rather than the $100,000 in calendar year 2013 because ex-vessel revenue increased in 2013 as compared to fiscal year 2012. In that case, if NMFS' incremental costs for fiscal year 2013 remained the same at an amount of $100,000, rather than using $100,000 as the DPC when calculating the fee percentage to be applied in 2014, NMFS would use $75,000. Therefore, the fee percentage in 2014 would be reduced to account for any amount collected in excess.

NMFS proposes the calculation for the fee percentage at § 660.115(b). The process to notify the public of the applicable fee percentage and how the fee percentage will be calculated for the first year of the program are described in this preamble under “Notification of the Fee Percentage and MS Pricing.”

There was extensive discussion between NMFS, industry, and the Council, during the April, June, and September 2011 Council meetings, regarding how best to determine which specific costs associated with ongoing management, data collection and analysis, and enforcement activities were eligible to be recovered. The Council formed a Cost Recovery Committee (CRC) tasked with assisting NMFS to identify specific incremental costs on a sector-by-sector basis, and to identify any opportunities for long-term cost efficiencies within the program. The Council recommended using Appendix B of the CRC Report from the September 2011 Council meeting (Agenda Item G.6.b) as guidance in calculating incremental costs associated with the program. An emphasis was placed on the need for transparency within cost accounting procedures, and ensuring that the Council has an ongoing, periodic role in reviewing fee percentages. NMFS is committed to transparent cost accounting practices, including publishing an annual report detailing recoverable costs. See the “NMFS Annual Report” section of the preamble for more details and the timing of the annual report. In addition, between the proposed and final rule for the cost recovery program, NMFS intends to discuss with the states whether the costs of some state-performed activities resulting from the trawl rationalization program are costs that could be recovered, consistent with the requirements of the MSA. During this time, NMFS will also be determining its DPC from the previous fiscal year (October 1, 2011 through September 30, 2012) to be used for the 2013 fee percentage calculation. The 2013 fee percentage would be announced in the preamble for the final rule.

In the last quarter of the calendar year, NMFS would announce the next year's applicable fee percentage and, for the C/P Coop Program, the applicable MS pricing. Once the fiscal year has ended, NMFS plans to calculate the fee percentage in October and November each year and announce the fee percentage to be applied for the next calendar year in November or December before the fee percentage would apply on January 1. The fee percentage by sector would be announced each year in a Federal Register notice. This notice would also include the MS pricing to be used by the C/P Coop Program in determining their ex-vessel value. The MS pricing will be based on values reported by the MS Coop Program from the previous fiscal year. The notification would also include information on how and where to pay cost recovery fees.

For the first year of the cost recovery program, NMFS proposes publishing the fee percentages for each sector and, for the C/P Coop Program, the MS pricing as a part of the final rule for the cost recovery program. At its September 2011 meeting, the Council indicated that the fee percentages for the first year for each of three sectors (Shorebased IFQ Program, MS Coop Program, and C/P Coop Program) should not exceed three percent, two percent, and one percent, respectively. NMFS will calculate the actual fee percentage by sector between the proposed and final rule using the best available information and following the process explained in the preamble at “Fee Percentage Calculation.” The calculation may result in percentages above the Council recommendation, but would not exceed the MSA 3 percent cap. For the first year of the cost recovery program, NMFS may calculate the ex-vessel value to be used in the fee percentage calculation and the MS pricing using ex-vessel values reported on the buyback form or electronic fish tickets. Cost recovery fee collection would begin when the final rule becomes effective and would not be retroactive. In addition, NMFS will not include retroactive fees that were not collected in 2013, when calculating the fee percentage for 2014.

NMFS proposes the publication and notification process at § 660.115(b)(2).

NMFS intends to publish an annual report on the cost recovery program, likely in the spring of each year. The report would include information such as the fee percentage calculation, program costs, and ex-vessel value by sector. The report would likely be similar to those used by the Alaska Region in their IFQ Cost Recovery Programs ( http://www.fakr.noaa.gov/ram/ifqfees.htm and http://www.fakr.noaa.gov/sustainablefisheries/crab/crfaq.htm ) and may be included in the annual Trawl Rationalization Report. The report would be made available to the public electronically via the NMFS Northwest Region Groundfish Web site http://www.nwr.noaa.gov/Groundfish-Halibut/Groundfish-Fishery-Management/Trawl-Program/index.cfm .

The structure of fee payment and collection for the Shorebased IFQ Program and MS Coop Program is proposed to be different than for the C/P Coop Program. At the end of the calendar year, NMFS would calculate and announce the fee percentage to be applied in the upcoming year for all three sectors. For the Shorebased IFQ Program, the IFQ first receiver (first receiver site license holder), as the fish buyer, would collect the fee from each catcher vessel at the time of landing groundfish in the IFQ fishery (fish seller). The IFQ first receiver would hold those fee amounts in a separate deposit account. Each fish buyer (IFQ first receiver) would be required to maintain a segregated account at a federally insured financial institution for the sole purpose of depositing collected fee revenue and disbursing the fee revenue directly to NMFS. This account is called a “deposit account,” as proposed in regulation at § 660.115(d)(1)(ii)(A). Each fish buyer would also be required to deposit all collected fee revenue not previously deposited that the fish buyer collects through a date not more than two calendar days before the date of deposit. Neither the deposit account nor the principal amount of deposits in the account may be pledged, assigned, or used for any purpose other than aggregating collected fee revenue for disbursement to NMFS. The fish buyer would be entitled, at any time, to withdraw deposit interest, if any, but never deposit principal, from the deposit account for the fish buyer's own use and purposes. The fish buyer would be responsible for remitting payment to NMFS on a monthly basis at the same time the buyback fee is due ( i.e., no later than the 14th of each month, or more frequently if the amount in the account exceeds the account limit for insurance purposes). Payment to NMFS would be the full amount of deposit principal from the deposit account. NMFS is proposing regulatory language for this section that very closely mirrors buyback program regulatory language from § 600.1102(i).

For the MS Coop Program, the structure of fee payment and collection would be the same as for the Shorebased IFQ Program, except that the fish buyer and fish seller would be different and, because the fleet operates at sea, there is no “landing.” For the MS Coop Program, each catcher vessel (fish seller, including vessels registered to an MS/CV-endorsed limited entry trawl permit and any limited entry trawl permits without an MS/CV endorsement while they are participating in the MS Coop Program) would be charged the fee at the time of delivery to the mothership (fish buyer—defined as the owner of a vessel registered to an MS permit, the operator of a vessel registered to an MS permit, and the owner of the MS permit registered to that vessel). The fish buyer would then be responsible for remitting payment to NMFS monthly in coordination with the buyback fee ( i.e., no later than the 14th of each month). For any post-delivery payments by the mothership to the catcher vessel, the mothership shall charge the fee from the catcher vessel at the time of payment and remit that fee to NMFS in the upcoming month's payment.

For the C/P Coop Program, the structure of fee payment and collection would be different than the Shorebased IFQ and MS Coop Programs. At the end of the calendar year, with NMFS' announcement of the fee percentage to be applied in the upcoming year, NMFS would also announce the MS pricing to be used by the C/P Coop Program to calculate their fee amount in the upcoming year. For the C/P Coop Program, the C/P (fish buyer—defined as the owner of a vessel registered to a C/P-endorsed limited entry trawl permit, the operator of a vessel registered to a C/P-endorsed limited entry trawl permit, and the owner of the C/P-endorsed limited entry trawl permit registered to that vessel) would be responsible for paying the full fee in the last quarter of the calendar year and by December 31 each year. The fee would be for the harvests of groundfish for the calendar year by each vessel registered to a C/P-endorsed limited entry trawl permit. For the purposes of the cost recovery program, the C/P would be described as both the fish buyer and fish seller. Unlike the Shorebased IFQ Program and the MS Coop Program, fish buyers in the C/P Coop Program would not be required to maintain segregated deposit accounts because the fish seller and the fish buyer is always the same entity and they only make one payment to NMFS per year.

As mentioned above under “Fee Amount,” for the C/P Coop Program, there could be an alternate approach to calculating the fee amount. Instead of multiplying the ex-vessel value (using MS pricing) by the fee percentage, NMFS could directly bill the sector in the last quarter of the year so long as the value for DPC of the C/P Coop Program in the fee percentage calculation for the previous fiscal year is an amount equal to or less than three percent of the ex-vessel value of the fishery (using MS pricing). Under this alternate approach, NMFS would still calculate the fee percentage using information from the previous fiscal year in order to ensure that the recovery fee would not exceed three percent. NMFS would also still announce the amount due from the C/P Coop Program in the fall before the fishing year in which the fee amount would be applied. This way, the C/P Coop Program would know at the start of the fishing year how much money would be due to NMFS for cost recovery at the end of the year. Under this alternate approach, the C/P Coop would be responsible for figuring out which “fish buyers,” as defined for the cost recovery program, are responsible for which portion of the payment and notifying NMFS. NMFS would then bill each fish buyer accordingly. This alternate approach would result in more accurate payment and less adjustments for over or under payment between years. While this approach is not included in the regulatory language in this proposed rule, NMFS is soliciting public comment on this approach and may implement it in the final rule.

NMFS proposes fee payment and collection regulations at § 660.115(d)(1) for the Shorebased IFQ Program and the MS Coop Program, and at § 660.115(d)(2) for the C/P Coop Program. NMFS proposes to define “fish buyer” and “fish seller” at § 660.111.

Similar to the buyback program requirements at § 600.1102(i)(4), each fish buyer would be required to maintain certain information, in a secure and orderly manner, for a period of at least three years from the date of each transaction involved. The recordkeeping requirements for the cost recovery program vary by sector and are proposed at § 660.113(b)(5)(ii) for the Shorebased IFQ Program, § 660.113(c)(5)(ii) for the MS Coop Program, and § 660.113(d)(5)(ii) for the C/P Coop Program. The fish buyer would be required to maintain records by landing, delivery, or harvest for the IFQ, MS, and C/P sectors, respectively. For the Shorebased IFQ Program, if electronic fish tickets contain some or all of the data that § 660.113(b)(5)(ii) proposes to require, then fish buyers could use such records to meet appropriate portions of this section's recordkeeping requirements. In addition to records by landing, delivery, or harvest, fish buyers would be required to maintain records of all fee collection deposits to and disbursements from the deposit account. For the Shorebased IFQ and MS Coop Programs, this would include the following information: the dates and amounts of deposits, the dates and amounts of disbursements to NMFS, and the dates and amounts of disbursements to the fish buyer or other parties of interest earned on deposits. For the C/P Coop Program, which would not be required to have a separate deposit account, this would include the following information: the date of each fee disbursement and the total amount disbursed.

NMFS proposes reporting requirements that differ by sector. All three sectors would be required to complete a cost recovery form online with fee payment (as described above in the preamble under “Coordinating Cost Recovery with Buyback”). However, the contents of what is reported in the form would vary by sector. In general, each fish buyer would be required to report their name, address, phone number, identifier (state buyer code or USCG vessel documentation number), dates, weight of groundfish, ex-vessel value, and fee collected.

NMFS also proposes additional reporting requirements for the at-sea whiting sectors (MS and C/P) to verify information reported on the cost recovery form. All three sectors require 100 percent monitoring which can be used to verify weights of groundfish. The Shorebased IFQ Program also already requires reporting weight and ex-vessel value through electronic fish tickets. This information can be used by NMFS to verify that fish buyers are making accurate cost recovery payments and reporting accurate information on the cost recovery form. The at-sea sectors do not have a similar way to verify the ex-vessel value they have paid or reported. In order to hold the three sectors to similar standards and to ensure fair and accurate fee payment among the sectors, NMFS proposes to require an annual report from the at-sea sectors. While the buyback program only requires an annual report of fish buyers in the MS Coop Program if requested by NMFS during an audit (as specified at § 600.1102(i)(5)), NMFS proposes for the cost recovery program to require an annual report from fish buyers in the MS and C/P Coop Programs. The report would be due by March 31 of the year following the fishing year (which is January 1—December 31). This would align with the deadline for the coop report to NMFS, streamlining when NMFS receives sector information. However, the cost recovery annual report would be submitted by fish buyers rather than the coop managers. The cost recovery annual report submitted by fish buyers would vary slightly between the at-sea sectors and is proposed at § 660.113(c)(5)(i)(B) for the MS Coop Program and § 660.113(d)(5)(i)(B) for the C/P Coop Program. The annual report submitted by fish buyers generally would include, but is not limited to: total weight, total ex-vessel value, total fee amounts collected, and dates and amounts of disbursement(s) to the Fund. NMFS is proposing an annual report for both of the at-sea sectors for fairness and consistency; however, there are some distinctions between the sectors. Because in the C/P Coop Program the fish buyer and fish seller are the same entity, because they would only pay at end of year, because they would not be required to have a deposit account, and because they are not paying the fee amount based on their own ex-vessel value (they pay based on MS ex-vessel value), NMFS solicits public comment on the need for an annual report in the C/P Coop Program. NMFS considered whether the mandatory economic data collection (EDC) report, required at § 660.114, could be used to verify information reported by the at-sea sectors. However, it would be nearly two years before EDC information would be available for comparison to ex-vessel values reported for cost recovery. If NMFS used that information to pursue any mispayments, it could cause problems for the fish buyers and fish sellers whose business arrangements may have changed over time. Therefore, NMFS is proposing the annual report as a more timely method to verify payment and values reported on the cost recovery form.

NMFS proposes reporting requirements that vary by sector at: § 660.113(b)(5)(i) for the Shorebased IFQ Program, § 660.113(c)(5)(i) for the MS Coop Program, and § 660.113(d)(5)(i) for the C/P Coop Program.

NMFS or its agents may audit the financial records of fish buyers and fish sellers in each sector in order to ensure proper fee payment, collection, deposit, disbursement, accounting, recordkeeping, and reporting. Fish buyers and fish sellers must respond to any inquiry by NMFS or an NMFS agent within 20 calendar days of the date of issuance of the inquiry, unless an extension is granted by NMFS. Fish buyers and fish sellers must make all relevant records available to NMFS or NMFS' agents at reasonable times and places and promptly provide all requested information reasonably related to these records. NMFS may employ a third party agent to conduct the audits. The NMFS auditor may review and request copies of additional data provided by the submitter, including but not limited to: previously audited or reviewed financial statements, worksheets, tax returns, invoices, receipts, and other original documents substantiating the data submitted. NMFS proposes regulations on audits at § 660.115(d)(4)(iii).

If a fish buyer or fish seller is found responsible for failure to pay all or a portion of the cost recovery program fee, NMFS may pursue an enforcement action for violation of the MSA, and/or may forward the issue to the U.S. Department of Treasury for collections. In addition, the Council recommended, and NMFS is proposing, a linkage between failure to pay and non-renewal of a limited entry MS permit, non-renewal of C/P-endorsed limited entry permit, and non-issuance of IFQ first receiver site license. This mechanism is being proposed as an additional means for ensuring payment. Failure to pay would only affect permit renewal and would not affect permit transfers ( i.e., changes in owner of the permit or the vessel registered to the permit).

If NMFS determines a fish buyer, as the party responsible for payment to NMFS, has not submitted a complete cost recovery form and corresponding payment by the due date, NMFS would at any time thereafter notify the fish buyer in writing via an initial administrative determination (IAD) letter.

Fish buyers that receive an IAD letter would have 30 calendar days to pay the specified amount or appeal the IAD. All appeals must be submitted to NMFS in writing and must include any relevant information to support the appeal. If the fish buyer does not appeal and is still out of compliance, NMFS would notify the fish buyer via a final decision letter and would require payment within 30 calendar days of the final decision letter. If payment is still not received, NMFS would forward the case to the appropriate authorities for the purposes of collection. From the date on the final decision, if the fish buyer is determined to be out of compliance, NMFS would not renew any subject MS permit or C/P-endorsed limited entry trawl permit, or reissue an IFQ first receiver site license until all cost recovery fees due have been paid.

NMFS proposes prohibitions at § 660.112(a)(6) and the IAD and appeals process at § 660.115(d)(3)(ii).

NMFS advises the public that NMFS National Appeals Office ( http://www.nmfs.noaa.gov/mb/appeals/mb7.htm ) is expected to publish a final rule that may affect the appeals process for the cost recovery program. The National Appeals Office proposed rule (77 FR 33980, June 8, 2012) would establish procedures for the National Appeals Office to review, and if necessary correct, decisions about certain limited access privilege programs under Section 303A of the MSA, 16 U.S.C. 1853a. If the National Appeals Office rule goes final before the cost recovery program rule and if it would affect the appeals process for cost recovery, the cost recovery program final rule would announce those changes.

NMFS proposes to remove paragraphs at §§ 660.150(d)(5) and 660.160(d)(5) that were previously placeholders for the cost recovery program. These paragraphs had the responsibility for payment falling on the coop permit when it should be on the MS permit and the C/P-endorsed limited entry permit, respectively.

NMFS proposes to remove paragraphs on initial issuance of MS limited entry permits and C/P endorsements on limited entry trawl permits at §§ 660.150(f)(6) and 660.160(e)(6), respectively. These paragraphs are no longer needed because they were for a one-time issuance of these permits and endorsements and the deadline to apply was November 1, 2010. NMFS issued these permits and endorsements to qualifying applicants and they became effective beginning in 2011. NMFS is not proposing to remove the paragraphs on quota share (QS) permits and MS/CV endorsements because these sections of the regulations may be changed as a result of litigation.

Pursuant to section 304(b)(1)(A) of the MSA, the NMFS Assistant Administrator has determined that this proposed rule is consistent with the Pacific Coast Groundfish FMP, other provisions of the MSA, and other applicable law, subject to further consideration after public comment.

The Council prepared a final environmental impact statement (EIS) for Amendment 20 and Amendment 21 to the Pacific Coast Groundfish FMP. The Amendment 20 and 21 EISs are available on the Council's Web site at http://www.pcouncil.org/ or on NMFS' Web site at http://www.nwr.noaa.gov/Groundfish-Halibut/Groundfish-Fishery-Management/Trawl-Program/index.cfm. The regulatory changes in this proposed rule were categorically excluded from the requirement to prepare a NEPA analysis.

Pursuant to the procedures established to implement section 6 of Executive Order 12866, the Office of Management and Budget has determined that this proposed rule is not significant.

An initial regulatory flexibility analysis (IRFA) was prepared, as required by section 603 of the Regulatory Flexibility Act (RFA). The IRFA describes the economic impact this proposed rule, if adopted, would have on small entities. A description of the action, why it is being considered, and the legal basis for this action are contained at the beginning of this section in the preamble and in the SUMMARY section of the preamble. A Regulatory Impact Review (RIR) was also prepared on the action and is included as part of the IRFA. A copy of the IRFA is available from NMFS (see ADDRESSES ) and a summary of the IRFA, per the requirements of 5 U.S.C. 604(a) follows:

The cost recovery program is a regulatory amendment that further implements Amendment 20 to the FMP. While cost recovery is required by the MSA, the Council did consider alternative ways of recovering costs. Cost recovery was analyzed in the Amendment 20 EIS and additional implementation options were discussed over the Council's April, June, and September 2011, and September 2012 meetings.

The regulations proposed in this rule are the basis of the Council and NMFS exploring various options. In the Amendment 20 EIS, Appendix A, Section A-2.3.3.a and b, provides some options for the cost recovery and fee structure in the Shorebased IFQ Program. The Amendment 20 EIS, Appendix A options for the Shorebased IFQ Program included options for fees of up to three percent of the ex-vessel value, consistent with the MSA and full cost recovery. The full cost recovery option would be achieved through landing fees and privatization of elements of the management system (noting that stock assessments and electronic fish tickets would not be privatized). The Council estimated that initially the costs of the Shorebased IFQ Program would exceed the three percent fee, so the Council also considered adjusting the provisions of tracking and monitoring program so that the three percent fee covers the agency costs. Appendix B to the Amendment 20 EIS mentions that cost recovery may apply to the MS and C/P Coop Programs, but does not discuss options.

The Council further discussed the structure and methodology of the cost recovery program over its April, June, and September 2011 meetings, with final Council recommendations to NMFS during the September 2011 Council meeting and further guidance on these issues at its September 2012 meeting. Some of the options considered by the Council over these meetings were: (1) Cost recovery for the trawl rationalization program and the sablefish permit stacking program at the same time; (2) cost recovery shared by all three sectors (1 program), shared by MS and C/P Coop Programs and separate cost recovery for IFQ (2 programs), or a program for each sector (3 programs); (3) what entity should pay the fee in each sector (catcher vessel, fish buyer, coop); (4) how fee collection should be structured (bill entity in last quarter of year, bill at time of landing and collect monthly); (5) link to permitting requirements (no linkage, suspend quota transactions until payment, suspend permit renewal until payment); (6) how agency costs are identified (implement a tracking system, random sampling, yearly projections); (7) how ex-vessel value is calculated (from EDC, from buyback, from electronic fish ticket, from paper fish tickets, use shorebased pricing and at-sea tonnage, require new document); and (8) what groundfish species to include when calculating ex-vessel value.

The administrative costs of this program are mainly associated with groundfish species and bycatch of Pacific halibut as managed under the trawl rationalization program. Human observation and electronic reporting tools account for all catch of these species. Computer programs match the catch against individual species quotas (quota pounds or QP) or coop allocations. All vessels must carry observers who watch and measure the harvests and discards of these groundfish. All shore plants must have catch monitors to watch all vessel offloads and record the species and amounts landed. In the Shorebased IFQ Program, online accounting programs issue and track QS, QP, and catch by species. Computer programs compare fish tickets to catch monitor reports and calculate the QP landed by an individual vessel. Observer reports are used to account for the vessel's discards. An online “banking system” is used to debit landings and discards against the vessel's QP. Quota pounds are deposited to a vessel's account based on a transfer from a QS account or from another vessel account.

The following provides some perspective on the economic dimensions of the fisheries. Over the years 2007 through 2010, according to Council estimates, shorebased ex-vessel revenues have averaged $38 million, the mothership sector $8 million, and the catcher-processor sector $12 million ( http://www.pcouncil.org/groundfish/background/document-library/historical-landings-and-revenue-in-groundfish-fisheries/ , Tables 22 and 28). Based on PacFIN data and on NMFS at-sea whiting data, in 2011 shorebased revenues increased $54 million, the mothership revenues are about $12 million, and the catcher-processor revenues are about $17 million. (Note: Ex-vessel revenues are just one indicator of “revenue.” They understate the wholesale, export, and retail revenues earned from the fishery. Data on these other indicators is either incomplete or unavailable.)

The cost recovery program applies to three groups of trawlers. Some trawlers deliver to shore-based processing plants. Other trawlers deliver to mothership processors. Some trawlers are catcher-processors—vessels that both trawl and process fish. In January 2011, NMFS and the Council set up a new management program called the trawl rationalization program. This program significantly changes how two of these groups work. Shore-based trawlers now fish under their own set of individual species quotas by vessel. In prior years, there were different rules for shore-based trawlers depending on their target catch. Nonwhiting trawlers fished under common trip limits while whiting trawlers fished under a common quota without trip limits. In prior years, the mothership fishery consisted of independent at-sea processors each receiving catch from several trawlers. Now the mothership fishery works as a coop where catcher-vessels and motherships work together collectively. The catcher-processor fleet continues as a single coop, but now has a permit to do so.

Cost recovery for the trawl rationalization program requires the fish sellers to pay the fee and all parties making the first ex-vessel purchase of groundfish (i.e., the fish buyers) to collect the fee, account for, and forward the fee revenue to NMFS (Note: In the C/P Coop Program, a cooperative of vessels that both harvest and process whiting at-sea, the fish seller and the fish buyer are the same entity).

The Small Business Administration has established size criteria for all major industry sectors in the US, including fish harvesting and fish processing businesses. A business involved in fish harvesting is a small business if it is independently owned and operated and not dominant in its field of operation (including its affiliates) and if it has combined annual receipts not in excess of $4.0 million for all its affiliated operations worldwide. A seafood processor is a small business if it is independently owned and operated, not dominant in its field of operation, and employs 500 or fewer persons on a fulltime, part-time, temporary, or other basis, at all its affiliated operations worldwide. A business involved in both the harvesting and processing of seafood products is a small business if it meets the $4.0 million criterion for fish harvesting operations. A wholesale business servicing the fishing industry is a small business if it employs 100 or fewer persons on a full-time, part-time, temporary, or other basis, at all its affiliated operations worldwide. For marinas and charter/party boats, a small business is one with annual receipts not in excess of $7.0 million.

This rule directly affects vessel owners and first receivers who are responsible for the submission of electronic fish tickets, the catcher vessels and processors associated with the mothership coop, and the catcher-processors that are members of the catcher-processor coop. Each account holder, mothership catcher vessel, mothership processor, and catcher-processor must apply to participate in the trawl rationalization program. As part of the application process, applicants were asked if they considered themselves a “small” business. NMFS makes the following conclusions based on these responses. For the few non-respondents, NMFS relied on other information to assess their size. The Shorebased IFQ Program affects 144 vessel account holders (fish sellers) and 51 first receivers (fish buyers). There are 117 “small” vessel account holders and 30 “small” first receivers. The mothership sector involves 36 MS/CV-endorsed permits (fish sellers) and 6 MS permits (fish buyers). (Note that one of the MS/CV-endorsed permits has two endorsements). Twenty-one MS/CV-endorsed permits and two MS permits are considered small businesses. There are 10 C/P permits (fish buyer and seller). Of these, eight indicated they were large businesses and NMFS assumes the other two are also large businesses based on knowledge of operations off Alaska. The sum total of these permits and vessel accounts is 247, with 170 considered small.

The impacts on both small and large entities are the fees being collected—up to three percent of ex-vessel revenues or the mothership and catch processor equivalents discussed above. Because cost recovery is mandatory under the MSA, the “no action” alternative is not a viable alternative. All of the other alternatives would have the same expected effects among each other because the MSA requires fees of up to three percent of the ex-vessel value to be collected. Implementation costs were reduced by adapting the existing buyback fee collection processes and by adjusting these processes to each sector.

Other than raising the costs of operation, the total effects of this program are hard to assess. This program is for the long term while the fishery has yet to adjust in the short term to the program because of the prohibition on QS trading. While the cost recovery fees may be affordable for the average fisherman, for other fishermen the cost recovery fee may not be affordable given the other costs they incur. Many fishermen, particularly shorebased fishermen, have voiced concerns that paying for costs of state landing taxes, the buyback fees, the costs of observers, and cost recovery fees will be challenging. The Northwest Fisheries Science Center (NWFSC) has recently developed estimates of net accounting profits by trawl permits involved in the shoreside fishery including those that operate in at sea fisheries but excluding catcher-processors and mothership catcher vessels that do not also deliver to shoreplants. In the calculation of accounting net revenue, costs include trawl buyback fees and landings taxes. Economic net revenue also considers the opportunity costs incurred by vessel owners who serve as captain but do not pay themselves for their captain services, and the opportunity cost of capital. NWFSC estimates that the average limited entry groundfish trawl fleet member earned accounting net revenue of $115,983 and economic net revenue of $77,381 during 2008 from operations in all fisheries. During 2008, the average limited entry groundfish trawl survey respondent earned $585,048 from all revenue sources and $339,504 from operations in the West Coast groundfish fishery. The 127 vessels in the West Coast limited entry groundfish trawl survey population during 2008 earned accounting net revenue of $14,729,841 and economic net revenue of $9,827,387 from operations in all fisheries.

While NMFS has not yet calculated the actual fee percent for the upcoming year, preliminary estimates show that NMFS expects the Shorebased IFQ Program to be subject to the maximum three percent fee. The MS and C/P Coop Program are expected to cost NMFS less money for management, data collection, and enforcement and, therefore, be subject to less than the three percent fee. Using a fee rate of three percent and 2011 revenues, for the Shorebased IFQ Program, NMFS would collect approximately $1.62 million ($54 million × 0.03). For the MS Coop Program, NMFS would collect approximately $360,000 (($12 million × 0.03). For the C/P Coop Program, NMFS would collect approximately $510,000 (($17 million × 0.03). Using this example, NMFS would recover approximately $2.5 million by implementing cost recovery.

Fishermen have been paying state landing taxes for years. The buyback fees, on the other hand, are associated with a reduction of the fleet that has significantly increased the amount of fish that the post buyback fishermen were able to harvest under the trip limit regime (prior to trawl rationalization) or received as QS that fishermen now receive under trawl rationalization. (Buyback history was equally divided among all shorebased groundfish permits.) Fishermen are now petitioning Congress for a reduction in the interest rate associated with the $36 million buyback loan. While the costs of observers may be high, NMFS and the Council are looking at the feasibility of electronic monitoring to lower administrative and fishermen costs. The costs of paying the cost recovery fees can be reduced by developing a lower cost administrative system or by increased revenues as fishermen develop techniques to reduce bycatch so they can increase their target catch. The effects of all factors on current and future individual and industry profits are hard to assess, particularly as QS trading is not allowed until 2014. When QS trading is initiated, it is expected that the number of participants in the Shorebased IFQ Program will be reduced. A reduction in the number of participants may lower administrative costs while raising average revenues per participant.

We do not believe that this rule will have a significant impact when comparing small versus large businesses in terms of disproportionality and profitability given available information. Nonetheless, NMFS has prepared this IRFA. Through the rulemaking process associated with this action, we are requesting comments on this conclusion.

No Federal rules have been identified that duplicate, overlap, or conflict with the alternatives. Public comment is hereby solicited, identifying such rules. A copy of this analysis is available from NMFS (see ADDRESSES ).

NMFS issued Biological Opinions under the Endangered Species Act (ESA) on August 10, 1990, November 26, 1991, August 28, 1992, September 27, 1993, May 14, 1996, and December 15, 1999 pertaining to the effects of the Groundfish FMP fisheries on Chinook salmon (Puget Sound, Snake River spring/summer, Snake River fall, upper Columbia River spring, lower Columbia River, upper Willamette River, Sacramento River winter, Central Valley spring, California coastal), coho salmon (Central California coastal, southern Oregon/northern California coastal), chum salmon (Hood Canal summer, Columbia River), sockeye salmon (Snake River, Ozette Lake), and steelhead (upper, middle and lower Columbia River, Snake River Basin, upper Willamette River, central California coast, California Central Valley, south/central California, northern California, southern California). These biological opinions have concluded that implementation of the FMP is not expected to jeopardize the continued existence of any endangered or threatened species under the jurisdiction of NMFS, or result in the destruction or adverse modification of critical habitat.

NMFS issued a Supplemental Biological Opinion on March 11, 2006 concluding that neither the higher observed bycatch of Chinook in the 2005 whiting fishery nor new data regarding salmon bycatch in the groundfish bottom trawl fishery required a reconsideration of its prior “no jeopardy” conclusion. NMFS also reaffirmed its prior determination that implementation of the FMP is not likely to jeopardize the continued existence of any of the affected ESUs. Lower Columbia River coho (70 FR 37160, June 28, 2005) and Oregon Coastal coho (73 FR 7816, February 11, 2008) were recently relisted as threatened under the ESA. The 1999 biological opinion concluded that the bycatch of salmonids in the Pacific whiting fishery were almost entirely Chinook salmon, with little or no bycatch of coho, chum, sockeye, and steelhead.

On December 7, 2012, NMFS completed a biological opinion concluding that the groundfish fishery is not likely to jeopardize non-salmonid marine species including listed eulachon, green sturgeon, humpback whales, Steller sea lions, and leatherback sea turtles. The opinion also concludes that the fishery is not likely to adversely modify critical habitat for green sturgeon and leatherback sea turtles. An analysis included in the same document as the opinion concludes that the fishery is not likely to adversely affect green sea turtles, olive ridley sea turtles, loggerhead sea turtles, sei whales, North Pacific right whales, blue whales, fin whales, sperm whales, Southern Resident killer whales, Guadalupe fur seals, or the critical habitat for Steller sea lions.

As Steller sea lions and humpback whales are also protected under the Marine Mammal Protection Act (MMPA), incidental take of these species from the groundfish fishery must be addressed under MMPA section 101(a)(5)(E). West coast pot fisheries for sablefish are considered Category II fisheries under the MMPA's List of Fisheries, indicating occasional interactions. All other west coast groundfish fisheries, including the trawl fishery, are considered Category III fisheries under the MMPA, indicating a remote likelihood of or no known serious injuries or mortalities to marine mammals. On February 27, 2012, NMFS published notice that the incidental taking of Steller sea lions in the West Coast groundfish fisheries is addressed in NMFS' December 29, 2010 Negligible Impact Determination (NID) and this fishery has been added to the list of fisheries authorized to take Steller sea lions. 77 FR 11493 (Feb. 27, 2012). NMFS is currently developing MMPA authorization for the incidental take of humpback whales in the fishery.

On November 21, 2012, the U.S. Fish and Wildlife Service (FWS) issued a biological opinion concluding that the groundfish fishery will not jeopardize the continued existence of the short-tailed albatross. The FWS also concurred that the fishery is not likely to adversely affect the marbled murrelet, California least tern, southern sea otter, bull trout, nor bull trout critical habitat.

This proposed rule contains a collection-of-information requirement subject to review and approval by OMB under the Paperwork Reduction Act (PRA). This requirement has been submitted to OMB for approval. Public reporting burden for the cost recovery form is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Public reporting burden for a failure to pay report is estimated to average 4 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Public reporting burden for the annual report for the at-sea sector is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information.

Public comment is sought regarding: Whether this proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; the accuracy of the burden estimate; ways to enhance the quality, utility, and clarity of the information to be collected; and ways to minimize the burden of the collection of information, including through the use of automated collection techniques or other forms of information technology. Send comments on these or any other aspects of the collection of information to NMFS, Northwest Region at the ADDRESSES above, and email to OIRA_Submission@omb.eop.gov, or fax to (202) 395-7285.

Notwithstanding any other provision of the law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the PRA, unless that collection of information displays a currently valid OMB Control Number.

This proposed rule was developed after meaningful collaboration, through the Council process, with the tribal representative on the Council. The proposed regulations have no direct effect on the tribes; these proposed regulations were deemed by the Council as “necessary or appropriate” to implement the FMP as amended.

For the reasons stated in the preamble, 50 CFR Chapter VI is proposed to be amended as follows:

The Council and NMFS manage fisheries through fishery ecosystem plans for American Samoa, the Mariana Archipelago (Guam and the Commonwealth of the Northern Mariana Islands (CNMI)), the Pacific Remote Islands (PRI), Hawaii, and western Pacific pelagic fisheries.

In 2009, President Bush issued Presidential Proclamations that established three marine national monuments in the central and western Pacific under the authority of the Antiquities Act, as follows:

• Proclamation 8335 of January 6, 2009, “Establishment of the Marianas Trench Marine National Monument” (74 FR 1557, January 12, 2009).

• Proclamation 8336 of January 6, 2009, “Establishment of the Pacific Remote Islands Marine National Monument” (74 FR 1565, January 12, 2009).

• Proclamation 8337 of January 6, 2009, “Establishment of the Rose Atoll Marine National Monument” (74 FR 1577, January 12, 2009).

The proclamations recognize that it is in the public interest to preserve these submerged lands, waters, and marine resources, which are biologically diverse, contain sites of historical and scientific interest, and are essential to the long-term study of tropical marine ecosystems. For more detailed information regarding the marine resources and background for the management of the Monuments, please refer to the Proclamations, available at www.regulations.gov.

Among other things, the Proclamations define the Monuments' boundaries, prohibit commercial fishing, and describe the management of Monument resources. The Proclamations direct the Secretary of Commerce to take action under the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act) to regulate fisheries and ensure proper care and management of the monument, including allowing for traditional indigenous fishing practices.

The Council recommended incorporating the Proclamations' fishery management provisions into its fishery ecosystem plans, and recommended that NMFS establish certain provisions relating to traditional indigenous fishing practices. To manage fisheries in the monuments consistent with the Proclamations, the Council has submitted, for Secretarial review, Amendment 3 to Fishery Ecosystem Plan for the Mariana Archipelago, Amendment 2 to the Fishery Ecosystem Plan for the Pacific Remote Island Areas, Amendment 3 to the Fishery Ecosystem Plan for American Samoa, and Amendment 6 to the Fishery Ecosystem Plan for Pelagic Fisheries of the Western Pacific. The Council recommended amending the four plans to incorporate and establish fishing management provisions consistent with the proclamations, including the following:

• Identify the boundaries of the Monuments and their various management units.

• Prohibit commercial fishing in the Pacific Remote Islands and Rose Atoll Monuments, and in the Islands Unit of the Marianas Trench Monument.

• Establish management measures for non-commercial and recreational charter fishing in the Monuments, including but not limited to the following:

○ Require Federal permits and reporting for non-commercial and recreational charter fishing to aid in the monitoring of fishing activities.

○ Allow customary exchange in non-commercial fisheries in the Marianas Trench and Rose Atoll Marine National Monuments to help preserve traditional, indigenous, and cultural fishing practices.

○ Define customary exchange as the non-market exchange of marine resources between fishermen and community residents, and the residents' families and friends, for goods, services, and/or social support, for cultural, social, or religious reasons, and may include cost recovery through monetary reimbursements and other means for actual trip expenses (e.g., ice, bait, food, or fuel) that may be necessary to participate in fisheries in the western Pacific.

○ Limit the eligibility for non-commercial fishing to residents and businesses of local fishing communities for the Rose Atoll Monument and Marianas Monument Islands Unit.

○ Prohibit all fishing within 12 nm of the Pacific Remote Islands, subject to U.S. Fish & Wildlife Service authority to allow non-commercial fishing in consultation with NOAA and the Council.

○ Prohibit all fishing within 12 nm around Rose Atoll. The Council and NMFS would review this regulation after three years.

• Prohibit the conduct of commercial fishing outside the Monument and non-commercial fishing within the Monument during the same trip.

NMFS must receive any public comments on the proposed amendments by April 2, 2013 to be considered in the Secretary of Commerce's decision to approve, partially approve, or disapprove the amendments. NMFS expects to soon publish and request public comments on a proposed rule that would implement the measures recommended in the amendments.