Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules 35

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–109333–97]

RIN 1545–AV56

Qualified Long-Term Care Insurance

Contracts

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to

consumer protection with respect to

qualified long-term care insurance

contracts and relating to events that will

be considered material changes with

respect to long-term care insurance

contracts issued prior to January 1,

1997. Changes to the applicable law

were made by the Health Insurance

Portability and Accountability Act of

1996. The regulations affect issuers of

long-term care insurance contracts and

individuals entitled to receive payments

under these contracts. The regulations

are necessary to provide these taxpayers

with guidance needed to comply with

these changes.

DATES: Written comments must be

received by April 2, 1998. Outlines of

topics to be discussed at the public

hearing scheduled for May 13, 1998,

must be received by April 2, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–109333–97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to

CC:DOM:CORP:R (REG–109333–97),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW,

Washington, DC. Alternatively,

taxpayers may also submit comments

electronically via the Internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/prod/

taxlregs/comments.html. The public

hearing will be held in room 2615,

Internal Revenue Building, 1111

Constitution Avenue NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Katherine

A. Hossofsky, (202) 622–3477;

concerning submissions and the

hearing, LaNita VanDyke, (202) 622–

7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Income Tax

Regulations (26 CFR part 1) to provide

rules under section 7702B of the

Internal Revenue Code of 1986 (the

‘‘Code’’). Section 7702B was added by

sections 321 and 325 of the Health

Insurance Portability and

Accountability Act of 1996 (Pub. L.

104–191, 110 Stat. 1936, 2054 and 110

Stat. at 2063) (‘‘HIPAA’’). Notice 97–31,

1997–21 I.R.B. 5 (May 6, 1997), provides

interim guidance on certain provisions

of section 7702B and other provisions of

the Code added or amended by HIPAA.

Explanation of Statutory Provisions

Section 7702B establishes the tax

treatment for qualified long-term care

insurance contracts. Sections 7702B(a)

(1) and (3) provide that a qualified longterm care insurance contract is treated

as an accident and health insurance

contract and that any employer plan

providing coverage under a qualified

long-term care insurance contract is

treated as an accident or health plan

with respect to that coverage.

Section 7702B(a)(2) provides that

amounts (other than policyholder

dividends and premium dividends)

received under a qualified long-term

care insurance contract are generally

excludable from gross income as

amounts received for personal injuries

and sickness.

Section 213(d)(1)(D) was amended by

section 322 of HIPAA to provide that

eligible long-term care premiums as

defined in section 213(d)(10) are

deductible medical expenses.

Under section 7702B(b)(1)(F), a

qualified long-term care insurance

contract must meet the consumer

protection provisions of section

7702B(g). In addition, section 4980C

imposes an excise tax on issuers of

qualified long-term care insurance

contracts that do not provide further

consumer protections.

Section 7702B of the Code applies to

contracts issued after December 31,

1996. Section 321(f)(2) of HIPAA treats

a contract issued before January 1, 1997,

as a qualified long-term care insurance

contract under section 7702B(b) of the

Code, and services provided or

reimbursed under such a contract as

qualified long-term care services under

section 7702B(c) of the Code, provided

the contract met the long-term care

requirements of the State in which the

contract was sitused at the time the

contract was issued. Section 321(f)(2) of

HIPAA also provides that in the case of

an individual covered on December 31,

1996, by a State long-term care plan

under section 7702B(f) of the Code, the

terms of the plan on that date are treated

as a contract meeting the long-term care

insurance requirements of that State.

Section 321(f)(4) of HIPAA provides

that for purposes of applying sections

101(f), 7702, and 7702A of the Code,

neither the issuance of a rider that is

treated as a qualified long-term care

insurance contract nor the addition of

any provision required to conform any

other long-term care rider to the

requirements applicable to a qualified

long-term care insurance contract is

treated as a modification or material

change of the contract.

Explanation of Provisions

The proposed regulations provide

guidance concerning:

• the consumer protection requirements

that apply to qualified long-term care

insurance contracts under sections

7702B(g), 7702B(b)(1)(F), and 4980C

of the Code; and

• the grandfather provisions of section

321(f)(2) of HIPAA under which pre1997 contracts are treated as qualified

long-term care insurance contracts if

certain conditions are met.

The standards in the proposed

regulations are based on safe harbors

that were originally set forth in Notice

97–31. They reflect comments made by

consumer representatives, issuers of

long-term care insurance, independent

sales agents, State regulators of longterm care insurance, and others. The

proposed regulations are intended to

provide clear and workable rules to

assist those who want to ensure that a

contract issued before 1997 retains its

status as a qualified long-term care

insurance contract.

Notice 97–31

Notice 97–31 was issued to provide

interim standards for taxpayers to use in

interpreting the new long-term care

provisions and to facilitate operation of

the insurance market by avoiding the

need to amend contracts. For example,

Notice 97–31 includes interim guidance

on the determination of whether an

individual is a ‘‘chronically ill

individual,’’ including safe harbor

definitions of the terms ‘‘substantial

assistance,’’ ‘‘hands-on assistance,’’

‘‘standby assistance,’’ ‘‘severe cognitive

impairment,’’ and ‘‘substantial

supervision.’’ The standards contained

in Notice 97–31 include interim

guidance on both the consumer

protection provisions and the scope of

the statutory grandfather provisions that

apply to long-term care insurance

contracts issued before 1997.
36 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules

1The definition of material change in Notice 97–

31 is narrower than the definition of material

change for purposes of other sections of the Code.

For example, the exercise of an option in a life

insurance contract results in the loss of

grandfathering under section 7702 if the option

only guarantees terms that are likely to be available

when the option is exercised.

2Thus for example, the only coverage provided

under the rider must be coverage for qualified longterm care services and the purchase must satisfy the

consumer protection requirements of section

7702B(g) of the Code. (This would not include

protections that apply only the first time a contract

is purchased, i.e., subsections (g)(2)(A)(i)(III), (V),

(VII) (other than section 6B of the NAIC model

regulation), and (X), (g)(3), and (g)(4) of section

7702B. Similarly, subsections (c)(1)(A)(i) and (c)(2)

of section 4980C would apply only the first time a

contract is purchased.)

3The exceptions depart from the definition of

material change that would apply for purposes of

other sections of the Code, including sections 7702,

7702A, 101(f), and 264. These exceptions are

consistent with the purpose of section 7702B,

which has the effect of expanding the tax benefits

for certain long-term care insurance contracts. By

contrast, sections 7702, 7702A, 101(f), and 264, for

example, limit the tax benefits associated with

certain insurance products and, unlike pre-1997

long-term care insurance contracts, apply to

contracts with a substantial investment orientation.

Consumer Protection Requirements

Under sections 7702B(b)(1)(F),

7702B(g), and 4980C, qualified longterm care insurance contracts and

issuers of those contracts are required to

satisfy certain provisions of the model

act and model regulation promulgated

by the National Association of Insurance

Commissioners (NAIC) for long-term

care insurance as of January 1993. The

requirements relate to guaranteed

renewability, unintentional lapse,

disclosure, prohibitions against postclaims underwriting, inflation

protection, and prohibitions against preexisting conditions exclusions and

probationary periods. Section 4980C

imposes an excise tax on an issuer of a

qualified long-term care insurance

contract if, after 1996, the issuer fails to

satisfy certain requirements, including

requirements relating to application

forms, reporting, marketing,

appropriateness of recommended

purchase, standard format outline of

coverage, delivery of a shopper’s guide,

right to return, outline of coverage, and

incontestability. Most of these

requirements are based on the NAIC

model act and regulation.

The proposed regulations reflect the

standards that were set forth in Notice

97–31. For example, the consumer

protection requirements will be

considered satisfied if a contract

complies with State law in a State that

has adopted the related NAIC model or

a more stringent version of the model.

Pre-1997 Long-Term Care Insurance

Contracts

Section 321(f)(2) of HIPAA provides

that a contract issued before January 1,

1997, is treated as a qualified long-term

care insurance contract if the contract

met the ‘‘long-term care insurance

requirements of the State’’ in which the

contract was sitused at the time it was

issued. Under the proposed regulations,

the date on which a long-term care

insurance contract other than a group

long-term care insurance contract is

issued is generally the date assigned to

the contract by the insurance company.

In no event is the issue date earlier than

the date on which the policyholder

submitted a signed application for

coverage to the insurance company. In

addition, if the period between the date

of application and the date on which the

long-term care insurance contract

actually becomes effective is

substantially longer than under the

insurance company’s usual business

practice, then the issue date is the date

the contract becomes effective. For

purposes of applying the grandfather

rule of section 321(f)(2) to a group longterm care insurance contract, the issue

date of the contract is the date the group

contract was issued. As a result,

coverage for an individual who joins a

grandfathered group long-term care

insurance contract on or after January 1,

1997, is accorded the same treatment

under section 321(f)(2) as is accorded

coverage for those who joined the group

before that date.

For purposes of applying section

321(f)(2) of HIPAA to long-term care

insurance contracts issued before

January 1, 1997, a material change in the

contract generally is considered the

issuance of a new contract. Notice 97–

31 provides that a material change

includes any change in the terms of the

contract altering the amount or timing of

any item payable by the policyholder (or

certificate holder), the insured, or the

insurance company. Notice 97–31 also

provides that the exercise of an option

or right granted to a policyholder under

a qualified long-term care insurance

contract as in effect on December 31,

1996, does not constitute a material

change.1

After Notice 97–31 was issued,

commentators recommended that

certain common practices should not

cause long-term care insurance contracts

issued before January 1, 1997, to lose

their grandfathered status. In response

to these comments, the proposed

regulations provide additional

exceptions to the general rule that a

material change in a long-term care

insurance contract issued before January

1, 1997, will be considered the issuance

of a new contract.

• The proposed regulations provide

that the exercise of any right provided

to a policyholder (i.e., a right that can

be exercised without the issuer’s

consent and without other conditions,

such as underwriting) or the addition of

any right that is required by State law

to be provided to the policyholder will

not be treated as a material change to a

long-term care insurance contract.

• In addition, the proposed

regulations provide that the following

practices will not be treated as material

changes for purposes of section 7702B:

(1) Any change in the mode of premium

payment, such as a change from paying

premiums monthly to quarterly; (2) any

classwide increase or decrease in

premiums for contracts that have been

issued on a guaranteed renewable basis;

(3) a reduction in premiums due to the

purchase of a long-term care insurance

policy by a member of the

policyholder’s family; (4) any reduction

in coverage (with correspondingly lower

premiums) made at the request of a

policyholder; (5) the addition, without

an increase in premiums, of alternative

forms of benefits that may be selected by

the policyholder; (6) the purchase of a

rider to increase benefits under a pre1997 contract if the rider would

constitute a qualified long-term care

insurance contract if it were a separate

contract; 2 (7) the deletion of a rider or

provision of a contract (called an HHS

rider) that prohibited coordination of

benefits with Medicare; and (8) the

effectuation of a continuation or

conversion of coverage right under a

group contract following an individual’s

ineligibility for continued coverage

under the group contract.

The proposed regulations include

examples illustrating certain of these

standards. The exceptions to the general

rule that a material change results in the

issuance of a new contract apply solely

for purposes of determining whether a

pre-1997 insurance contract is treated as

a qualified long-term care insurance

contract under section 7702B.3

Comments are requested on these

standards, including (1) whether the

material change rules in the proposed

regulations should be limited to pre1997 long-term care insurance contracts

that cannot have cash surrender value;

(2) whether there are any conditions

under which the expansion of coverage

under a group long-term care insurance

contract in connection with a corporate

merger, acquisition or similar

transaction should not constitute a

material change; and (3) whether the

extension of a group long-term care

contract to a collective bargaining unit

is a material change in all cases. For
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules 37

example, should the extension of a

group long-term care contract to a

bargaining unit after 1997 be treated as

a material change if the bargaining

agreement for the unit has not been

renewed since before the group contract

was first adopted?

Comments also are requested on what

the effective date of the final regulations

should be. It is intended that the

regulations will not be effective until

after the end of a specified period

following adoption of the final

regulations. Taxpayers may rely on

these proposed regulations for guidance

pending the issuance of final

regulations. If, and to the extent, future

guidance is more restrictive than the

guidance in these proposed regulations,

the future guidance will be applied

without retroactive effect. In addition,

until further notice, taxpayers may

continue to rely on Notice 97–31.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 12866. Therefore, a regulatory

assessment is not required. It has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these

regulations, and because the regulations

do not impose a collection of

information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

comments that are submitted timely to

the IRS (a signed original and eight (8)

copies). All comments will be available

for public inspection and copying.

A public hearing has been scheduled

for May 13, 1998, at 10 a.m., in room

2615, Internal Revenue Building, 1111

Constitution Avenue NW, Washington,

DC. Because of access restrictions,

visitors will not be admitted beyond the

Internal Revenue Building lobby more

than 15 minutes before the hearing

starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by April 2, 1998 and

submit an outline of the topics to be

discussed and the time to be devoted to

each topic by April 2, 1998.

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.

Drafting Information

The principal author of these

regulations is Katherine A. Hossofsky,

Office of Assistant Chief Counsel

(Financial Institutions & Products).

However, other personnel from the IRS

and Treasury Department participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. Sections 1.7702B–1 through

1.7702B–2 are added to read as follows:

§ 1.7702B–1 Consumer protection

provisions.

(a) In general. Under sections

7702B(b)(1)(F), 7702B(g), and 4980C,

qualified long-term care insurance

contracts and issuers of those contracts

are required to satisfy certain provisions

of the Long-Term Care Insurance Model

Act (Model Act) and Long-Term Care

Insurance Model Regulation (Model

Regulation) promulgated by the

National Association of Insurance

Commissioners (NAIC), as adopted as of

January 1993. The requirements for

qualified long-term care insurance

contracts under sections 7702B(b)(1)(F)

and 7702B(g) relate to guaranteed

renewal or noncancellability,

prohibitions on limitations and

exclusions, extension of benefits,

continuation or conversion of coverage,

discontinuance and replacement of

policies, unintentional lapse, disclosure,

prohibitions against post-claims

underwriting, minimum standards,

inflation protection, prohibitions against

pre-existing conditions exclusions and

probationary periods, and prior

hospitalization. The requirements for

qualified long-term care insurance

contracts under section 4980C relate to

application forms and replacement

coverage, reporting requirements, filing

requirements for marketing, standards

for marketing, appropriateness of

recommended purchase, standard

format outline of coverage, delivery of a

shopper’s guide, right to return, outline

of coverage, certificates under group

plans, policy summary, monthly reports

on accelerated death benefits, and

incontestability period.

(b) Coordination with State

requirements—(1) Contracts issued in a

State that imposes more stringent

requirements. If a State imposes a

requirement that is more stringent than

the analogous requirement imposed by

section 7702B(g) or 4980C, then, under

section 4980C(f), compliance with the

more stringent requirement of State law

is considered compliance with the

parallel requirement of section 7702B(g)

or 4980C. The principles of paragraph

(b)(3) of this section apply to any case

in which a State imposes a requirement

that is more stringent than the

analogous requirement imposed by

section 7702B(g) or 4980C (as described

in this paragraph (b)(1)), but in which

there has been a failure to comply with

that State requirement.

(2) Contracts issued in a State that

has adopted the model provisions. If a

State imposes a requirement that is the

same as the parallel requirement

imposed by section 7702B(g) or 4980C,

compliance with that requirement of

State law is considered compliance with

the parallel requirement of section

7702B(g) or 4980C, and failure to

comply with that requirement of State

law is considered failure to comply with

the parallel requirement of section

7702B(g) or 4980C.

(3) Contracts issued in a State that

has not adopted the model provisions or

more stringent requirements. If a State

has not adopted the Model Act, the

Model Regulation, or a requirement that

is the same as or more stringent than the

analogous requirement imposed by

section 7702B(g) or 4980C, then the

language, caption, format, and content

requirements imposed by sections

7702B(g) and 4980C with respect to

contracts, applications, outlines of

coverage, policy summaries, and notices

will be considered satisfied for a

contract subject to the law of that State

if the language, caption, format, and

content are substantially similar to those

required under the parallel provision of

the Model Act or Model Regulation.

Only nonsubstantive deviations are

permitted in order for language, caption,

format, and content to be considered

substantially similar to the requirements

of the Model Act or Model Regulation.
38 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules

§ 1.7702B–2 Special rules for pre-1997

long-term care insurance contracts.

(a) Scope. The definitions and special

provisions of this section apply solely

for purposes of determining whether an

insurance contract (other than a

qualified long-term care insurance

contract described in section 7702B(b)

and any regulations issued thereunder)

is treated as a qualified long-term care

insurance contract for purposes of the

Internal Revenue Code.

(b) Pre-1997 long-term care insurance

contracts.—(1) In general. A pre-1997

long-term care insurance contract is

treated as a qualified long-term care

insurance contract, regardless of

whether the contract satisfies section

7702B(b) and any regulations issued

thereunder.

(2) Pre-1997 long-term care insurance

contract defined. A pre-1997 long-term

care insurance contract is any insurance

contract with an issue date before

January 1, 1997, that met the long-term

care insurance requirements of the State

in which the contract was sitused on the

issue date. For this purpose, the longterm care insurance requirements of the

State are the State laws (including

statutory and administrative law) that

are intended to regulate insurance

coverage that constitutes ‘‘long-term

care insurance’’ (as defined in section 4

of the National Association of Insurance

Commissioners (NAIC) Long-Term Care

Insurance Model Act, as in effect on

August 21, 1996), regardless of the

terminology used by the State in

describing the insurance coverage.

(3) Issue date of a contract. (i) In

general. The issue date of a contract is

the issue date assigned to the contract

by the insurance company, but in no

event is the issue date earlier than the

date the policyholder submitted a

signed application for coverage to the

insurance company. However, if the

period between the date the signed

application is submitted to the

insurance company and the date

coverage under the contract actually

becomes effective is substantially longer

than under the insurance company’s

usual business practice, then the issue

date is the date coverage under the

contract becomes effective (if this is

later than the issue date assigned to the

contract by the insurance company). A

policyholder’s right to return a contract

within a ‘‘free-look’’ period following

delivery for a full refund of any

premiums paid is not taken into account

in determining the contract’s issue date.

(ii) Special rule for group contracts.

The issue date of a group contract

(including any certificate issued

thereunder) is the date on which

coverage under the group contract

becomes effective.

(iii) Exchange of contract or material

change in a contract treated as a new

issuance. For purposes of this paragraph

(b)(3)—

(A) A contract issued in exchange for

an existing contract after December 31,

1996, is considered a contract issued

after that date;

(B) Any material change (as defined in

paragraph (b)(4) of this section) in a

contract is treated as the issuance of a

new contract with an issue date no

earlier than the date the material change

goes into effect; and

(C) If a material change occurs with

regard to one or more, but fewer than

all, of the certificates evidencing

coverage under a group contract, then

the insurance coverage under the

changed certificates is treated as

coverage under a newly issued group

contract (and the insurance coverage

provided by any unchanged certificate

continues to be treated as coverage

under the original group contract).

(4) Material change. (i) In general. For

purposes of paragraph (b)(3) of this

section, except as provided in paragraph

(b)(4)(ii) of this section, a material

change means—

(A) A change in the terms of a

contract that alters the amount or timing

of an item payable by the policyholder

(or certificate holder), the insured, or

the insurance company;

(B) A substitution of the insured

under an individual contract; or

(C) A change (other than an

immaterial change) in the eligibility for

membership in the group covered under

a group contract.

(ii) Exceptions. For purposes of this

paragraph (b)(4), the following changes

are not treated as a material change:

(A) A policyholder’s exercise of any

right provided under the terms of the

contract as in effect on December 31,

1996, or a right required by applicable

State law to be provided to the

policyholder;

(B) A change in the mode of premium

payment (for example, a change from

monthly to quarterly premiums);

(C) In the case of a policy that is

guaranteed renewable or

noncancellable, a classwide increase or

decrease in premiums;

(D) A reduction in premiums due to

the purchase of a long-term care

insurance contract by a family member

of the policyholder;

(E) A reduction in coverage (with a

corresponding reduction in premiums)

made at the request of a policyholder;

(F) The addition, without an increase

in premiums, of alternative forms of

benefits that may be selected by the

policyholder;

(G) The addition of a rider (including

any similarly identifiable amendment)

to a pre-1997 long-term care insurance

contract in any case in which the rider,

if issued as a separate contract of

insurance, would itself be a qualified

long-term care insurance contract under

section 7702B and any regulations

issued thereunder (including the

consumer protection provisions in

section 7702B(g) to the extent applicable

to the addition of a rider);

(H) The deletion of a rider or

provision of a contract (often referred to

as an HHS rider) that prohibited

coordination of benefits with Medicare;

and

(I) The effectuation of a continuation

or conversion of coverage right provided

under a group contract following an

individual’s ineligibility for continued

coverage under the group contract.

(5) Examples. The following examples

illustrate the principles of this

paragraph (b):

Example 1. (i) On December 3, 1996, A, an

individual, submits a signed application to

an insurance company to purchase a nursing

home contract that meets the long-term care

insurance requirements of the State in which

the contract is sitused. The insurance

company decides on December 20, 1996, that

it will issue the contract, and assigns

December 20, 1996, as the issue date for the

contract. Under the terms of the contract, A’s

insurance coverage becomes effective on

January 1, 1997. The company delivers the

contract to A on January 3, 1997. A has the

right to return the contract within 15 days

following delivery for a refund of all

premiums paid.

(ii) Under paragraph (b)(3)(i) of this

section, the issue date of the contract is

December 20, 1996. Thus, the contract is a

pre-1997 long-term care insurance contract

that is treated as a qualified long-term care

insurance contract.

Example 2. (i) The facts are the same as in

Example 1, except that the insurance

coverage under the contract does not become

effective until March 1, 1997. Under the

insurance company’s usual business practice,

the period between the date of the

application and the date the contract

becomes effective is 30 days or less.

(ii) Under paragraph (b)(3)(i) of this

section, the issue date of the contract is

March 1, 1997. Thus, the contract is not a

pre-1997 long-term care insurance contract,

and, accordingly, the contract must meet the

requirements of section 7702B(b) and any

regulations issued thereunder to be a

qualified long-term care insurance contract.

Example 3. (i) B, an individual, is the

policyholder under a long-term care

insurance contract purchased in 1995. On

June 15, 2000, the insurance coverage and

premiums under the contract are increased

by agreement between B and the insurance

company.
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules 39

(ii) Under paragraph (b)(4)(i)(A) of this

section, a change in the terms of a contract

that alters the amount or timing of an item

payable by the policyholder or the insurance

company is a material change in the contract.

Thus, B’s coverage is treated as coverage

under a contract issued on June 15, 2000,

and, accordingly, the contract must meet the

requirements of section 7702B(b) and any

regulations issued thereunder in order to be

a qualified long-term care insurance contract.

Example 4. (i) C, an individual, is the

policyholder under a long-term care

insurance contract purchased in 1994. At that

time and through December 31, 1996, the

contract met the long-term care insurance

requirements of the State in which the

contract was sitused. In 1996, the policy was

amended to add a provision requiring the

policyholder to be offered the right to

increase dollar limits for inflation every three

years (without the policyholder being

required to pass a physical or satisfy any

other underwriting requirements). During

2002, C elects to increase the amount of

insurance coverage (with a resulting

premium increase) pursuant to the inflation

protection provision.

(ii) Under paragraph (b)(4)(ii)(A) of this

section, an increase in the amount of

insurance coverage at the election of the

policyholder (without the insurance

company’s consent and without underwriting

or other limitations on the policyholder’s

rights) pursuant to a pre-1997 inflation

protection provision does not constitute a

material change in the contract. Thus, C’s

contract continues to be a pre-1997 long-term

care insurance contract that is treated as a

qualified long-term care insurance contract.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 97–33986 Filed 12–31–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–115795–97]

RIN 1545–AV39

General Rules for Making and

Maintaining Qualified Electing Fund

Elections

AGENCY: Internal Revenue Service (IRS),

Treasury

ACTION: Notice of proposed rulemaking

by cross-reference to temporary

regulations and notice of public hearing.

SUMMARY: In the Rules and Regulations

section of this issue of the Federal

Register, the IRS is issuing temporary

regulations that provide guidance to a

passive foreign investment company

(PFIC) shareholder that makes the

election under section 1295 (section

1295 election) to treat the PFIC as a

qualified electing fund (QEF). The

temporary regulations also provide

guidance for shareholders that wish to

make a section 1295 election that will

apply on a retroactive basis (retroactive

election). The temporary regulations

also include a rule concerning the

taxation under section 1291 of an

exempt organization that is a

shareholder of a PFIC that is not a

pedigreed QEF. This rule was originally

proposed in 1992. The text of the

temporary regulations also serves as the

text of these proposed regulations. In

addition, this document proposes

amendments to proposed regulation

§ 1.1296–4(e), concerning the treatment

of interbank deposits as loans for

purposes of the exception to passive

income characterization of income

derived in the active conduct of a

banking business. This document also

provides notice of a public hearing on

these proposed regulations.

DATES: Written comments must be

received by April 2, 1998. Requests to

speak and outlines of oral comments to

be discussed at the public hearing

scheduled for April 16, 1998, must be

received by March 26, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–115795–97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–115795–97),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue, NW,

Washington, DC. Alternatively,

taxpayers may submit comments

electronically via the Internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/prod/

taxlllregs/comments.html. The

public hearing will be held in Room

3313, Internal Revenue Service, 1111

Constitution Avenue, NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Gayle

Novig, (202) 622–3840; concerning

submissions and the hearing,

Evangelista Lee, (202) 622–7190 (not

toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review 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, T:FP, Washington, DC

20224. Comments on the collection of

information should be received by

March 3, 1998. Comments are

specifically requested concerning:

Whether the proposed collection of

information is necessary for the proper

performance of the functions of the

Internal Revenue Service, including

whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection

of information (see below);

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 this

proposed regulation is in proposed

regulation §§ 1.1295–1(f), 1.1295–1(g),

1.1295–3(c), and 1.1295–3(g). The

information required in § 1.1295–1 (f)

and (g) will notify the Internal Revenue

Service that certain shareholders have

made the section 1295 election, and will

enable the Internal Revenue Service to

determine if a shareholder is satisfying

the election and annual reporting

requirements and is reporting income as

required under section 1293.

The information required in proposed

regulation § 1.1295–3(c) will notify the

IRS that certain shareholders of foreign

corporations have filed a Protective

Statement to preserve their ability to

make a retroactive section 1295 election,

and that those shareholders have

extended the periods of limitations for

their taxable years to which the

Protective Statement will apply. The

information will enable the IRS to verify

that the shareholders filing the

Protective Statement had the requisite

reasonable belief at the time they filed

the statement. The information required

in proposed regulation § 1.1295–3(g)

will notify the IRS that a shareholder

has made the retroactive election and, in

the case of a shareholder that filed a

Protective Statement, that the

shareholder’s waiver of the periods of