Treasury Archives - The National Law Forum

Mental Health Parity and Addiction Equity Act Final Rules (“Final Rules”) Are Released: Plans and Issuers Must Prepare for January 1, 2025 Effective Date (US)

The long-awaited Final Rules amending the Mental Health Parity and Addiction Equity Act (“MHPAEA”) were released on September 9, 2024, with the bulk of the requirements going into effect on January 1, 2025. As we previously reported here, in August 2023, the Departments of Labor, Health and Human Services (“HHS”) and Treasury (together, the “Departments”) published proposed rules further regulating insurance coverage for treatment for mental health and substance use disorders. Although the Final Rules appear less burdensome than the proposed rules, they do impose significant changes to the obligations of group health plans and health insurance issuers with a short time to achieve compliance. The key provisions are summarized below.

Key Changes in the Final Rules

The Final Rules’ stated intent is to “strengthen consumer protections consistent with MHPAEA’s fundamental purpose,” which includes reducing burdens on access to benefits for individuals in group health plans or with group or individual health insurance coverage seeking treatment for mental health and substance use disorders (“MH/SUD”) as compared to accessing benefits for the treatment of medical/surgical (“M/S”) conditions.

The Final Rules purport to achieve that goal through four key changes to the MHPAEA:

Mandating content requirements for performing a comparative analysis of the design and application of each non-quantitative treatment limitation (“NQTL”) applicable to MH/SUD benefits.
Setting forth design and application requirements and relevant data evaluation requirements to ensure compliance with NQTL rules.
Increasing scrutiny of network adequacy for MH/SUD benefits.
Introducing core treatment coverage requirements to the meaningful benefit standard.

Comparative Analysis Content Requirements

Since 2021, insurance plans and issuers offering plans that cover both M/S and MH/SUD benefits and impose NQTLs on MH/SUD benefits must have a written comparative analysis demonstrating that the factors used to apply an NQTL to MH/SUD benefits are comparable to and applied no more stringently than those used to apply that same NQTL to M/S benefits, as set forth in the 2021 Consolidated Appropriations Act (“CAA”). The Final Rules expand upon the NQTL analysis required by the CAA and include six specific content elements:

a description of the NQTL;
identification and definition of the factors and evidentiary standards used to design or apply the NQTL;
a description of how factors are used in the design or application of the NQTL;
a demonstration of comparability and stringency, as written;
a demonstration of comparability and stringency, in operation, including the required data, evaluation of that data, explanation of any material differences in access, and description of reasonable actions taken to address such differences; and
findings and conclusions.

Upon request, plans and issuers must provide written comparative analyses to U.S. regulators, plan beneficiaries, participants, or enrollees who have received an adverse benefit determination related to MH/SUD benefits, and participants and beneficiaries in plans governed by ERISA at any time. Plans and issuers only have 10 business days to respond to a request from the relevant Secretary to review its comparative analyses and, if an initial determination of noncompliance is made, the plan or issuer only has 45 calendar days to respond with specific actions it will take to bring the plan into compliance and provide additional comparative analyses that demonstrate compliance. Upon a final determination of noncompliance, notice must be given to all participants, beneficiaries, and enrollees within seven business days after the relevant Secretary’s determination.

Demonstrating Compliance with NQTL Rules

The Final Rules also require that a NQTL applicable to MH/SUD benefits in a classification is no more restrictive than the predominant NQTL applied to M/S benefits in the same classification. In order to ensure compliance with NQTL rules, plans and issuers must satisfy two sets of requirements: (1) the design and application requirements, and (2) the relevant data evaluation requirements. For example, under the design and application requirements, a plan cannot reimburse non-physician providers of MH/SUD services by reducing the rates for physician providers of MH/SUD services unless it applies the same reduction to non-physician providers of M/S services from the rate for physician providers of such services. Under the relevant data evaluation requirements, to compare the impact of NQTLs related to network composition on access to MH/SUD versus M/S benefits, a plan should evaluate metrics relating to the time and distance from plan participants and beneficiaries to network providers, the number of network providers accepting new patients, provider reimbursement rates, and in-network and out-of-network utilization rates.

Design and Application

Plans and issuers must examine the factors used to design and apply an NQTL to MH/SUD benefits to ensure such factors are comparable to those used with respect to M/S benefits in the same classification. The Final Rules also prohibit using information that discriminates against MH/SUD benefits as compared to M/S benefits, meaning information that systematically disfavors or was specifically designed to disfavor access to MH/SUD benefits. Appropriate information and other factors to use in designing and applying an NQTL to MH/SUD benefits include generally recognized independent professional medical or clinical standards.

Relevant Data Evaluation

The relevant data evaluation requirement means plans and issuers must collect and evaluate data to ensure, in operation, that an NQTL applicable to MH/SUD benefits is not more restrictive than the NQTL applied to M/S benefits in the same classification. The Final Rules anticipate that the relevant data for any given NQTL will depend on the facts and circumstances and provide flexibility for plans to determine what should be collected and evaluated. Examples of relevant data provided in the Final Rules include the number and percentage of claim denials, utilization rates, and network adequacy rates.

Network Adequacy

The Final Rules demonstrate the Departments’ increased scrutiny of network adequacy issues for MH/SUD benefits. For NQTLs related to network composition standards, a plan or issuer must collect data to assess the NQTLs’ aggregate impact on access to MH/SUD benefits and M/S benefits. By way of example, suppose the evaluated data suggests that an NQTL contributes to a material difference in access to MH/SUD benefits compared to M/S benefits. In that case, plans and issuers must act to address any material differences in access. The Final Rules provide examples of reasonable compliance actions, including increased recruiting efforts for MH/SUD providers, expanding telehealth options under the plan, and ensuring that provider directories are accurate and reliable. A plan must document the actions that it takes to address differences in access to in-network MH/SUD providers as compared to in-network M/S providers.

Meaningful Benefit Standard

The Final Rules require plans to provide “meaningful” benefits for MH/SUD disorders in every classification in which the plan provides M/S benefits. Benefits are “meaningful,” for MHPAEA purposes, when they cover core treatments for that condition, meaning a standard treatment or course of treatment, therapy, service, or intervention indicated by generally recognized independent standards of current medical practice.

The Final Rules provide examples to demonstrate the application of the meaningful benefits standard. In one example, a plan covers the full range of outpatient treatments (including core treatments) and treatment settings for M/S benefits when provided on an out-of-network basis. The same plan covers outpatient, out-of-network developmental screenings for a mental health condition but excludes all other benefits, such as therapeutic intervention, for outpatient treatment when provided on an out-of-network basis. The Departments view therapeutic intervention, however, as a core treatment for the mental health condition under generally recognized independent standards of current medical practice. Per the Final Rules, the Departments interpret such exclusion as a violation because the plan does not cover a core treatment for the mental health disorder in the outpatient, out-of-network classification. Since the plan’s coverage for M/S benefits includes a core treatment in the classification, the Final Rules opine that the plan fails to provide meaningful benefits for treatment of the mental health disorder.

Effective Dates

The new requirements of the Final Rules will go into effect on different dates. Plans and issuers have until January 1, 2026, to comply with the meaningful benefits standard, the prohibition on discriminatory factors and evidentiary standards, the relevant data evaluation requirements, and the related requirements in the provisions for comparative analyses. During this time, plans and issuers should assess whether their mental health provider networks are adequate, and also consider expanding the scope of MH/SUD benefits across classifications to meet new parity requirements.

The other requirements, including most of the new requirements affecting comparative analyses, go into effect on January 1, 2025. Accordingly, plans and issuers should the time remaining this year to develop a plan to prepare NQTL comparative analyses within the three-month compliance period, and have processes in place to quickly address any material changes to benefit design in the future.

Application of New Mental Health Parity Rules to Provider Network Composition and Reimbursement: Perspective and Analysis

On September 23, 2024, the U.S. Departments of Labor, the Treasury, and Health and Human Services (collectively, the “Departments”) released final rules (the “Final Rules”) that implement requirements under the Mental Health Parity and Addiction Equity Act (MHPAEA).

The primary focus of the Final Rules is to implement new statutory requirements under the Consolidated Appropriations Act of 2021, which amended MHPAEA to require health plans and issuers to develop comparative analyses to determine whether nonquantitative treatment limitations (NQTLs)—which are non-financial restrictions on health care benefits that can limit the length or scope of treatment—for mental health and substance use disorder (MH/SUD) benefits are comparable to and applied no more stringently than NQTLs for medical/surgical (M/S) benefits.

Last month, Epstein Becker Green published an Insight entitled “Mental Health Parity: Federal Departments of Labor, Treasury, and Health Release Landmark Regulations,” which provides an overview of the Final Rules. This Insight takes a closer look at the application of the Final Rules to NQTLs related to provider network composition and reimbursement rates.

Provider Network Composition and Reimbursement NQTL Types

A key focus of the Final Rules is to ensure that NQTLs related to provider network composition and reimbursement rates do not impose greater restrictions on access to MH/SUD benefits than they do for M/S benefits.

In the Final Rules, the Departments decline to specify which strategies and functions they expect to be analyzed as separate NQTL types, instead requiring health plans and issuers to identify, define, and analyze the NQTL types that they apply to MH/SUD benefits. However, the Final Rules set out that the general category of “provider network composition” NQTL types includes, but is not limited to, “standards for provider and facility admission to participate in a network or for continued network participation, including methods for determining reimbursement rates, credentialing standards, and procedures for ensuring the network includes an adequate number of each category of provider and facility to provide services under the plan or coverage.”[1]

For NQTLs related to out-of-network rates, the Departments note that NQTLs would include “[p]lan or issuer methods for determining out-of-network rates, such as allowed amounts; usual, customary, and reasonable charges; or application of other external benchmarks for out-of-network rates.”[2]

Requirements for Comparative Analyses and Outcomes Data Evaluation

For each NQTL type, plans must perform and document a six-step comparative analysis that must be provided to federal and state regulators, members, and authorized representatives upon request. The Final Rules divide the NQTL test into two parts: (1) the “design and application” requirement and (2) the “relevant data evaluation” requirement.

The “design and application” requirement, which builds directly on existing guidance, requires the “processes, strategies, evidentiary standards, or other factors” used in designing and applying an NQTL to MH/SUD benefits to be comparable to, and applied no more stringently than, those used for M/S benefits. Although these aspects of the comparative analysis should be generally familiar, the Final Rules and accompanying preamble provide extensive new guidance about how to interpret and implement these requirements.

The Final Rules also set out a second prong to the analysis: the requirement to collect and evaluate “relevant data” for each NQTL. If such analysis shows a “material difference” in access, then the Final Rules also require the plan to take “reasonable” action to remedy the disparity.

The Final Rules provide that relevant data measures for network composition NQTLs may include, but are not limited to:

in-network and out-of-network utilization rates, including data related to provider claim submissions;
network adequacy metrics, including time and distance data, data on providers accepting new patients, and the proportions of available MH/SUD and M/S providers that participate in the plan’s network; and
provider reimbursement rates for comparable services and as benchmarked to a reference standard, such as Medicare fee schedules.

Although the Final Rules do not describe relevant data for out-of-network rates, these data measures may parallel measures to evaluate in-network rates, including measures that benchmark MH/SUD and M/S rates against a common standard, such as Medicare fee schedule rates.

Under the current guidance, plans have broad flexibility to determine what measures must be used, though the plan must ensure that the metrics that are selected reasonably measure the actual stringency of design and application of the NQTL with regard to the impact on member access to MH/SUD and M/S benefits. However, additional guidance is expected to further clarify the data evaluation requirements that may require the use of specific measures, likely in the form of additional frequently asked questions as well as updates to the Self-Compliance Tool published by the Departments to help plans and issuers assess whether their NQTLs satisfy parity requirements.

The Final Rules require plans to look at relevant data for network composition NQTLs in the aggregate—meaning that the same relevant data must be used for all NQTL types (however defined). As such, the in-operation data component of the comparative analysis for network composition NQTLs will be aggregated.

If the relevant data indicates a “material difference,” the threshold for which the plan must establish and define reasonably, the plan must take “reasonable actions” to address the difference in access and document those actions.

Examples of a “reasonable action” that plans can take to comply with network composition requirements “include, but are not limited to:

Strengthening efforts to recruit and encourage a broad range of available mental health and substance use disorder providers and facilities to join the plan’s or issuer’s network of providers, including taking actions to increase compensation or other inducements, streamline credentialing processes, or contact providers reimbursed for items and services provided on an out-of-network basis to offer participation in the network;
Expanding the availability of telehealth arrangements to mitigate any overall mental health and substance use disorder provider shortages in a geographic area;
Providing additional outreach and assistance to participants and beneficiaries enrolled in the plan or coverage to assist them in finding available in-network mental health and substance use disorder providers and facilities; and
Ensuring that provider directories are accurate and reliable.”

These examples of potential corrective actions and related discussion in the Final Rules provide an ambitious vision for a robust suite of strategies that the Departments believe that plans should undertake to address material disparities in access as defined in the relevant data. However, the Final Rules put the onus on the plan to design the strategy that it will use to define “material differences” and remedy any identified disparity in access. Future guidance and enforcement may provide examples of how this qualitative assessment will play out in practice and establish both what the Departments will expect with regard to the definition of “material differences” and what remedial actions they consider to be sufficient. In the interim, it is highly uncertain what the practical impact of these new requirements will be.

Examples of Network Analyses Included in the Final Rules

The Final Rules include several examples to clarify the application of the new requirements to provider network composition NQTLs. Unfortunately, the value of these examples for understanding how the Final Rules will impact MH/SUD provider networks in practice may be limited. As a result, given the lack of detail regarding the complexity of analyzing these requirements for actual provider networks, as well as the fact that the examples fail to engage in any meaningful discussion of where to identify the threshold for compliance with these requirements, it remains to be seen how regulators will interpret and enforce these requirements in practice.

Example 1 demonstrates that it would violate the NQTL requirements to apply a percentage discount to physician fee schedule rates for non-physician MH/SUD providers if the same reduction is not applied for non-physician M/S providers. Our takeaways from this example include the following:
- This example is comparable to the facts that were alleged by the U.S. Department of Labor in Walsh v. United Behavioral Health, E.D.N.Y., No. 1:21-cv-04519 (8/11/21).
- Example 1 is useful to the extent that it clarifies that a reimbursement strategy that specifically reduces MH/SUD provider rates in ways that do not apply to M/S provider rates would violate MHPAEA. However, such cut-and-dried examples may be rare in practice, and a full review of the strategies for developing provider reimbursement rates is necessary.
Example 4 demonstrates that plans may not simply rely on periodic historic fee schedules as the sole basis for their current fee schedules. Here are some key takeaways from this example:
- Even though this methodology may be neutral and non-discriminatory on its face, given that the historic fee schedules are not themselves a non-biased source of evidence, to meet the new requirements for evidentiary standards and sources, the plan would have to demonstrate that these historic fee schedules were based on sources that were objective and not biased against MH/SUD providers.
- If the plan cannot demonstrate that the evidentiary standard used to develop its fee schedule does not systematically disfavor access to MH/SUD benefits, it can still pass the NQTL test if it takes steps to cure the discriminatory factor.
- Example 4 loosely describes a scenario where a plan supplements a historic fee schedule that is found to discriminate against MH/SUD access by accounting for the current demand for MH/SUD services and attracting “sufficient” MH/SUD providers to the network. Unfortunately, however, the facts provided do not clarify what steps were taken to achieve this enhanced access or how the plan or regulator determined that access had become “sufficient” following the implementation of the corrective actions.
Example 10 provides that if a plan’s data measures indicate a “material difference” in access to MH/SUD benefits relative to M/S benefits that are attributable to these NQTLs, the plan can still achieve compliance by taking corrective actions. Our takeaways from this example include the following:
- The facts in this example stipulate that the plan evaluates all of the measure types that are identified above as examples. Example 10 also states that a “material difference” exists but does not identify the measure or measures for which a difference exists or what facts lead to the conclusion that the difference was “material.” To remedy the material difference, this example states that the plan undertakes all of the corrective actions to strengthen its MH/SUD provider network that are identified above as examples and, therefore, achieves compliance. However, this example fails to clarify how potentially inconsistent outcomes across the robust suite of identified measures were balanced to determine that the “material difference” standard was ultimately met. Example 10 also does not provide any details about what specific corrective actions the plan takes or what changes result from these actions.

Epstein Becker Green’s Perspective

The new requirements of the Final Rules will significantly increase the focus of the comparative analyses on the outcomes of the provider network NQTLs. For many years, the focus of the comparative analyses was primarily on determining whether any definable aspect of the plan’s provider contracting and reimbursement rate-setting strategies could be demonstrated to discriminate against MH/SUD providers. The Final Rules retain those requirements but now put greater emphasis on the results of network composition activities with regard to member access and require plans to pursue corrective actions to remediate any material disparities in that data. This focus on a robust “disparate impact” form of anti-discrimination analysis may lead to a meaningful increase in reimbursement for MH/SUD providers or other actions to more aggressively recruit them to participate in commercial health plan networks.

However, at present, it remains unclear which measures the Departments will ultimately require for reporting. Concurrent with the release of their Notice of Proposed Rulemaking on July 23, 2023, the Departments published Technical Release 2023-01P to solicit comments on key approaches to evaluating comparability and stringency for provider network access and reimbursement rates (including some that are referenced as examples in the Final Rules). Comments to the Technical Release highlighted significant concerns with nearly all of the proposed measures. For example, proposals to require analysis of MH/SUD and M/S provider reimbursement rates for commercial markets that are benchmarked to Medicare fee schedules in a simplistic way may fail to account for differences in population health and utilization, value-based reimbursement strategies, and a range of other factors with significant implications for financial and clinical models for both M/S and MH/SUD providers. Requirements to analyze the numbers or proportions of MH/SUD and M/S providers that are accepting new patients may be onerous for providers to report on and for plans to collect and may obscure significant nuances with regard to wait times, the urgency of the service, and the match between the provider’s training and service offerings to the patient’s need. Time and mileage standards highlighted by the Departments not only often fail to capture important access challenges experienced by patients who need MH/SUD care from sub-specialty providers or facilities but also fail to account for evolving service delivery models that may include options such as mobile units, school-based services, home visits, and telehealth. Among the measures identified in the Technical Release, minor differences in measure definitions and specifications can have significant impacts on the data outcomes, and few (if any) of the proposed measures have undergone any form of testing for reliability and validity.

Also, it is still not clear where the Departments will draw the lines for making final determinations of noncompliance with the Final Rules. For example, where a range of different data measures is evaluated, how will the Departments resolve data outcomes that are noisy, conflicting, or inconclusive? Similarly, where regulators do conclude that the data that are provided suggest a disparity in access, the Final Rules identify a highly robust set of potential corrective actions. However, it remains to be seen what scope of actions the Departments will determine to be “good enough” in practice.

Finally, we are interested in seeing what role private litigation will play in driving health plan compliance efforts and practical impacts for providers. To date, plaintiffs have found it challenging to pursue litigation on the basis of claims under MHPAEA, due in part to the highly complex arguments that must be made to evaluate MHPAEA compliance and in part to the challenge for plaintiffs to have adequate insight into plan policies, operations, and data across MH/SUD and M/S benefits to adequately assert a complaint under MHPAEA. Very few class action lawsuits or large settlements have occurred to date. These challenges for potential litigants may continue to limit the volume of litigation. However, to the extent that the additional guidance in the Final Rules does give rise to an uptick in successful litigation, it is possible that the courts may end up having a greater impact on health plan compliance strategies than regulators.

ENDNOTES

[1] 26 CFR 54.9812- 1(c)(4)(ii)(D), 29 CFR 2590.712(c)(4)(ii)(D), and 45 CFR 146.136(c)(4)(ii)(D).

[2] 26 CFR 54.9812- 1(c)(4)(ii)(E), 29 CFR 2590.712(c)(4)(ii)(E), and 45 CFR 146.136(c)(4)(ii)(E).

Corporate Transparency Act Requires Disclosure of Information Regarding Beneficial Owners to FinCEN

The new year brings the most expansive disclosure requirements for U.S. business entities since the Depression. Starting January 1, 2024, U.S. companies and foreign companies operating in the United States will be required to report their beneficial owners and principal officers to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) pursuant to the Corporate Transparency Act (CTA) adopted as part of the 2021 National Defense Authorization Act, unless subject to specific exemptions.

Who Is Required to Report?
The CTA’s filing requirements (31 CFR 1010.380(c)(1)) apply to both domestic reporting companies and foreign reporting companies.

Domestic reporting companies are corporations, limited liability companies and any other entity registered to do business in any state or tribal jurisdiction by the filing of a document with the secretary of state or similar official.
Foreign reporting companies are business entities formed under the law of a foreign country that are registered to do business in any state or tribal jurisdiction by the filing of a document with the secretary of state or similar official

The CTA provides 23 categories of exemption. The following types of entities are not required to file reports with FinCEN:

Large Operating Companies
This exemption applies to entities that (1) have 20 people or more full time employees in the United States, (2) have gross revenue (or sales) in excess of $5 million on their prior year’s tax return and (3) have a physical office in the United States.
Securities Reporting Issuers
Governmental Authorities
Banks
Credit Unions
Depository Institution Holding Companies
Money Services Businesses
Brokers and Dealers in Securities
Securities Exchanges and Clearing Agencies
Other Exchange Act Registered Entities

Investment Companies and Investment Advisers
Venture Capital Fund Advisers
Insurance Companies
State-Licensed Insurance Producers
Commodity Exchange Act Registered Entities
Accounting Firms
Public Utilities
Financial Market Utilities
Pooled Investment Vehicles
Tax-Exempt Entities
Entities Assisting a Tax-Exempt Entity
Subsidiaries of Certain Exempt Entities
Inactive Entities

It is worth noting that the definition of reporting companies is not limited to corporations and limited liability companies. Limited partnerships, professional service entities and other entities may qualify as reporting companies and, if so, are required to comply with the CTA’s reporting requirements.

How Does a Company Comply?
FinCEN requires affected companies to file beneficial ownership information reports (BOI Reports) using an electronic filing system. See the BOI E-Filing System.

What Information Should Be Reported?
Reporting companies must identify beneficial owners in their BOI Reports.

Beneficial owners are defined as individuals who directly or indirectly (1) exercise substantial control over a reporting company or (2) own or control at least 25 percent of ownership interests of a reporting company. Ownership interests covered by the CTA may include profits interests, convertible instruments, options and contractual arrangements as well as equity securities. In addition, owners who hold their ownership interests jointly or through a trust, agent or other intermediary are also required to be identified – although minors are generally exempted from reporting obligations.

Senior officers (typically, the president, CEO, CFO, COO and officers who perform similar functions); individuals with the ability to appoint senior officers or a majority of the board of directors or a similar body; and anyone else who directs, determines or has substantial input to other important decisions of a reporting company also need to be identified in BOI Reports as individuals exercising substantial control over reporting companies.

Reporting companies created on or after January 1, 2024, also must identify “company applicants” in their BOI Reports. Company applicants are the individuals who filed the documents creating the reporting company and individuals primarily responsible for directing or controlling the filing of documents creating a reporting company.

BOI Reports must contain the following information regarding the reporting company:

Legal name
Any trade name or d/b/a name
Address of the company’s principal place of business in the United States
Jurisdiction of formation
Taxpayer Identification Number.

BOI Reports must contain the following information regarding each beneficial owner and company applicant:

Full legal name
Date of birth
Current address
Copy of a passport, driver’s license or other identification document.

Every person who files a BOI Report must certify the information contained is true, correct and complete.

Information contained in BOI Reports will not be available to the public. However, FinCEN is authorized to disclose such information to:

U.S. federal agencies engaged in national security, intelligence or law enforcement activity
With court approval, to certain other state or local law enforcement agencies
Non-U.S. law enforcement agencies at the request of a U.S. federal law enforcement agency, prosecutor or judge
With the consent of the reporting company, financial institutions and their regulators
Federal regulators in assessing financial institutions compliance with customer due diligence requirements
The U.S. Department of the Treasury for purposes including tax administration.

Is There a Fee?
No fee is required in connection with filing of BOI Reports.

When Do Companies Need to File?
U.S. and foreign reporting companies that were formed or registered to do business in the United States prior to January 1, 2024, must file their initial BOI Reports no later than January 1, 2025. U.S. and foreign reporting companies formed on or after January 1, 2024, must file their initial BOI Reports within 90 days of receipt of notice of formation.

Reporting companies are required to file updated reports with FinCEN within 30 days of occurrence of a change in any of the information contained in their BOI Reports.

What If There Are Changes or Inaccuracies in the Reported Information?
Inaccuracies in BOI Reports must be corrected within 30 days of the date a reporting company becomes aware of or had reason to know of such inaccuracy. FinCEN has indicated that there will be no penalties for filing inaccurate BOI Reports if such reports are corrected within 90 days of their filing.

What If a Company Fails to File?
The willful failure to report the information required by the CTA or filing fraudulent information under the CTA may result in civil or criminal penalties, including penalties of up to $500 per day as long as a violation continues, imprisonment for up to two years and a fine of up to $10,000. Senior officers of an entity that fails to file a required report may be held accountable for such failure.

If you have questions regarding the provisions of the CTA or its applicability to your company, you may go to the FinCEN website.

Renewable Energy Tax Credit Transfer Guidance Provides Both Clarity And Pitfalls

Highlights

The renewable tax credit transfer market will accelerate with new government guidance; public hearing and comments deadlines are scheduled for August

Risk allocation puts the usual premium on sponsors with a balance sheet and/or recapture insurance coverage

While the guidelines provide clear rules and examples, many foot faults are present

On June 14, 2023, the Treasury Department and Internal Revenue Service issued long-awaited guidance on the transferability of certain renewable energy-related federal tax credits. The guidance takes the form of a notice of proposed rulemaking, proposed regulations, and an online Q&A, with a public hearing to follow in August.

Under new Code Section 6418, eligible taxpayers can elect to transfer all or any specified portion of eligible tax credits to one or more unrelated buyers for cash consideration. While the tax credits can be sold to more than one buyer, subsequent transfers by the buyer are prohibited.

This alert highlights several practical issues raised by the guidance, which should allow participants waiting for more clarity to proceed.

Individual Buyers Left Out

The guidance applies the Code Section 49 at risk rules and Section 50(b) tax-exempt use rules, generally restricting sellers in calculating the amount of tax credits for sale, and Code Section 469 passive activity rules, generally restricting buyer’s use of such tax credits, in various contexts. On the buyer side, these rules appear to be more restrictive than the limitations that would apply to identical tax credits in an allocation, rather than sale, context. Suffice to say, this will prohibit individuals from taking part in the transfer market for practical purposes outside of fact patterns of very limited application.
While this result may not be surprising since such rules currently severely restrict individuals from participating in traditional federal tax credit equity structures, there was some hope for a different outcome due to the stated policy goal of increasing renewable energy investment (not to mention the Inflation Reduction Act’s general departure from decades of case law precedent and IRS enforcement action prohibiting sales of federal tax credits with the enactment of Section 6418).

Lessees Cannot Sell the Tax Credits

A lessee cannot transfer the credit. With the prevalence of the master lease (inverted lease) structure in tax equity transactions, this prohibition created an unexpected roadblock for deal participants who have been structuring tax equity transactions with backstop type sale provisions for almost a year now. This presents developers, at least in the inverted lease context, with a choice of utilizing a traditional tax equity structure for the purpose of obtaining a tax-free step up in basis to fair market value, or forgoing the step up for less financing but also less structure complexity. The standard partnership flip project sale into a tax equity type of holding company structure could still remain a viable alternative.
As the transfer is generally made on a property-by-property basis by election, creative structuring, in theory, could allow for a lessor to retain certain property and sell the related tax credits (e.g., on portfolios with more than one solar installation/project, or even with large projects that go online on a block-by-block basis assuming the “energy project” election is not made – a term that future guidance will need to provide more clarity on).
However, this seems to be an ivory tower conclusion currently, and the practical reality is that too many unknown issues could be raised by such out of the box structuring, including the fact that conservative institutional investors may refuse to participate in such a structure until clear objective guidance is published addressing the same.

Bonus Credits Cannot Be Sold Separately

Bonus credits cannot be sold separately from the underlying base credit. This is more problematic for certain adders – for example, the energy community adder rules are now out and amount to simply checking a location on a website. Others (e.g., the low-income community or domestic content adder) require more extensive and subjective application and qualification procedures which makes when and how such adders can be transferred difficult to ascertain. Projects hoping to transfer such credits may need to be creative in compensating buyers for such uncertainty and qualification risk. Tax equity transactions that closed prior to the guidance’s issuance may also need to be revisited, as provisions in such transaction documents commonly attempted to bifurcate the bonus credit away from the base credit in order to allow the sponsor to separately sell such adders.

Buyers Bear Recapture Risk and Due Diligence Emphasis

While the Joint Committee on Taxation Bluebook indicated the buyer is responsible for recapture, industry participants were still hoping such risk would remain with the seller. Outside of the limited situation of indirect partnership dispositions (which still results in a recapture event to the transferring partner if triggered), the recapture risk is borne by the buyer, using the rationale that the buyer is the “taxpayer” for purposes of the transferred tax credits. While this is familiar territory for tax equity investors, whose allocated tax credits would be reduced in a recapture scenario, tax credit purchase transactions are now burdened with what amounts to the standard tax equity type of due diligence, including negotiation of transaction documents outside of a basic purchase agreement.
The guidance provides that indemnity protections between the seller and buyer are permitted. Tax equity transactions historically have had robust indemnification provisions, which should remain the case even more so in purchase/sale transactions. Tax equity investors traditionally bear “structure risk” dealing with whether the investor is a partner for tax purposes – such risk is eliminated in the purchase scenario as the purchasing investor no longer needs to be a partner (subject to the caveat of a buyer partnership discussed below).
If the buyer claims a larger credit amount than the seller could have, such “excessive credit transfer” will subject the buyer to a 20 percent penalty on the excess amount (in addition to the regular tax owed). All buyers are aggregated and treated as one for this purpose – if the seller retains any tax credits, the disallowance is first applied to the seller’s retained tax credits. A facts and circumstances reasonable cause exception to avoid this penalty is provided, further emphasizing the need for robust due diligence.
Specific non-exclusive examples that may demonstrate reasonable cause include reviewing the seller’s records with respect to determining the tax credit amount, and reasonable reliance on third-party expert reports and representations from the seller. While not unique to this new tax credit transfer regime, the subjective and circular nature of such a standard is complex – for example, when is it not “reasonable” for buyers or other professionals to rely on other board certified and licensed professionals, such as an appraiser or independent engineer with specialized knowledge?
Buyers thus need to remain vigilant about potential recapture causing events. For example, tax equity investors will not generally allow project level debt on investment tax credit transactions without some sort of lender forbearance agreement that provides that the lender will not cause a tax credit recapture event (such as foreclosing and taking direct ownership of the project). Buyers remain responsible for such a direct project level recapture event, which again aligns the tax credit transfer regime with tax equity due diligence and third-party negotiation requirements. The guidance is more lenient for the common back-leverage debt scenario.
While similar interparty agreements between back leverage lenders and the tax equity investor are required for non-project level debt facilities to address tax credit recapture among other issues, the guidance provides that a partner disposing of its indirect interest in the project (e.g., the lender foreclosing and taking ownership of a partner’s partnership interest) will remain subject to the recapture liability rather than the buyer provided that other tax-exempt use rules are not otherwise implicated. However, the need to negotiate such lender related agreements is still implicated as not all recapture risk in even this scenario was eliminated to the buyer.
While the recapture risk could place a premium on production tax credit deals (that are technically not subject to recapture or subjective basis risk), the burdensome process of needing to buy such tax credits on a yearly basis in line with sales of output may make such transactions more tedious.
The insurance industry already has products in place to alleviate buyer concerns, but this is just another transaction cost in what may be a tight pricing market. Not unlike tax equity transactions, sponsor sellers with a balance sheet to backstop indemnities may be able to demand a pricing premium; other sponsors may need to compensate buyers with lower credit pricing to reward such risk and or/to allow the purchase of recapture insurance. While this seems logical, the guidance also includes anti-abuse type rules whereby low credit pricing could be questioned in terms of whether some sort of impermissible transfer by way of other than cash occurred (e.g., a barter for some sort of other service). What the IRS subjectively views as “below market” pricing could trigger some sort of audit review based on this factor alone which further stresses the importance of appropriate due diligence.

Partnerships and Syndications

The guidance provides very clear rules with helpful examples, which should allow partnership sellers and buyers to proceed with very objective parameters. For example, the rules allow a partnership seller to specify which partner’s otherwise allocable share of tax credits is being sold and how to then allocate the tax-exempt income generated. The cash generated from sales can be used or distributed however the partnership chooses.
Similar objective rules and examples are provided for a buyer partnership. Subsequent direct and indirect allocations of a purchased tax credit do not violate the one-time transfer prohibition. Purchased tax credits are treated as “extraordinary items” that must be allocated among the partners of the buyer partnership as of the time of the transfer, which is generally deemed to occur on the first date a cash payment is made. Thus, all partners need to be in the partnership on such date to avoid an issue. Purchased tax credits are then allocated to the partners in accordance with their share of the nondeductible expenditures used to fund the purchase price.
What level of end-user comfort is needed in such a syndicated buyer partnership is an open question. While the rules provide objective guidelines in terms of when and how such purchased credits are allocated, subjective questions that are present in (and focused on) traditional tax equity partnerships are implicated. For example, could a syndication partnership set up for the business purpose of what amounts to selling the tax credits somehow run afoul of the subjective business purpose and disguised sale rules in tax credit case precedent, such as the Virginia Historic Tax Credit Fund state tax credit line of precedent? Will the market require a robust tax opinion in such scenario, thereby driving up transaction costs?
An example in the proposed regulations speaks to this sort of partnership formed for the specific purpose of buying tax credits, but leaves out of the fact pattern a syndicator partner. The example itself should go a long way towards blessing such arrangements, but the IRS taking a contrary position when dealing with such issues would not be a new situation. For example, the IRS challenged allocations of federal historic tax credits as prohibited sales of federal tax credits to the point of freezing the entire tax equity market with its positions in Historic Boardwalk Hall, which was only rectified with the release of a subsequent safe harbor revenue procedure.
Moreover, the guidance provides that tax credit brokers are allowed to participate in the market so long as the tax credits are not transferred to such brokers as an initial first step in the transfer process (as the subsequent transfer to an end user would violate the one-time transfer rule). Specifically, at no point can the federal “income tax ownership” be transferred to a broker. It is an open question if further distinction will be made at where this ownership line should be drawn. For example, can a third party enter into a purchase agreement with a seller and then transfer such rights prior to the transfer election being made? Does it matter under such analysis if 1) purchase price installments have been paid (which implicates rules in the buyer partnership context as noted above) and/or 2) the tax credit generating eligible property has been placed in service (which is when the investment tax credit vests for an allocated tax credit analysis; a production tax credit generally arises as electricity or the applicable source is sold)?
Indirectly implicated is what effect the new transfer rules will have on established case law precedent and IRS enforcement action in traditional tax equity structures. The Inflation Reduction Act and guidance dances around certain of these issues by creating a fiction where the buyer is treated as the “taxpayer” – this avoids the issue of turning a federal tax credit into “property” that can be sold similar to a certificated state tax credit. This also provides a more logical explanation as to why the buyer of these federal tax credits does not need to report any price discount as income when utilized, unlike the well-established federal tax treatment of certificated state tax credits that provides the exact opposite (e.g., a buyer of a certificated state tax credit at $0.90 has to report $0.10 of income on use of such tax credit).

Other Administrative and Foot-Fault Issues

The purchase price can only be paid in cash during the period commencing with the beginning of the seller’s tax year during which the applicable tax credit is generated and ending on the due date for filing the seller’s tax return with extensions. Thus, such period could be as long as 21.5 months or more (e.g., a calendar year partnership seller extending its return to Sept. 15). Tax equity transactions generally have pricing timing adjusters for failure to meet placement in service deadlines. Such mechanism will not work if advanced payments were made and then the project’s projected placement in service year changes. Tax credit purchase agreements executed prior to the June 14 guidance may require amendments or complete unwinds to line up with the rules to avoid foot faults (e.g., purchase agreements executed in 2022 where a portion of the purchase price was paid in 2022 for anticipated 2023 tax credits would not fall within the “paid in cash” safe harbor period). Advanced commitments, so long as cash is not transferred outside of the period outlined above, are permitted.
The typical solar equity contribution schedule of 20 percent at a project’s mechanical completion makes purchase price schedules approximating the same a reasonable adjustment for most investment tax credit energy deals in terms of the timing of financing. In addition, the advance commitment blessing of the guidance will give lender parties the comfort necessary similar to having executed tax equity documents in place. Thus, typical project construction financing mechanisms should be similar in the tax equity versus purchase agreement scenario, with projects that allow for a more delayed funding mechanism possibly obtaining a tax credit pricing premium. Production tax credit deals, for which tax credits can only be paid for on a yearly basis within the cash paid safe harbor timing window, may have more significant project financing hurdles without further tax credit transfer rule modifications.
Sellers can only make the transfer election on an original return, which includes extensions. Buyers, by contrast, may claim the purchased tax credit on an amended return.
Buyers need to be aware that usage of the purchased tax credits is tied to the tax year of the seller. For example, a fiscal year seller could cause the tax credits to be available a year later than an uninformed buyer anticipated, regardless of when the tax credit was generated using a traditional placement in service analysis. For example, a solar project placed in service during November 2023 by an August fiscal year seller would generate credits first able to be used in a calendar year buyer’s 2024, instead of 2023, tax year. A buyer can use the tax credits it intends to purchase against its estimated tax liability.
The pre-registration requirements, which are expansive and open-ended, are also tied to the taxable year the tax credits are generated and generally must be made on a property-by-property basis. For example, 50 rooftop installations could require 50 separate registration numbers outside of the “energy project” election. When such registration information needs updated is also not entirely clear – for example, a project is often sold into a tax equity partnership syndication structure on or before mechanical completion. Needing to update registration information could delay transactions and implicates unknown audit risk.

While these rules provide much-needed clarity, failure to adhere may be catastrophic and will require sellers and buyers to put proper administrative procedures in place to avoid foot faults. The new transfer regime will expand the market to new buyers who may have viewed tax equity as either too complex or had other reasons to avoid these transactions, such as the accounting treatment of energy tax credit structures. However, it would be prudent for such buyers to approach such transactions with eyes wide open.

For more Tax Legal News, click here to visit the National Law Review.

Russian Sanctions Create Patent Risks

While multi-national sanctions recently imposed on Russia were intended to punish Russia for its aggression in Ukraine, the effects of the sanctions have led to a need for tough decisions for U.S. entities with patent interests in Russia. The prohibitions on financial exchanges with certain Russian banks will essentially prevent any payment of fees to Rospatent (the Russian patent office), and although a general license from the Department of the Treasury provides a short window for winding down certain administrative transactions, U.S. entities engaged in patent transactions with Rospatent only have a short time to make decisions about current and future patent activities in Russia.

Prohibited Activities

On February 28, 2022, the Department of the Treasury initiated prohibitions related to transactions involving certain financial institutions in Russia, including the Central Bank of the Russian Federation.¹ The directive specifically prohibits a United States person (unless otherwise excepted or licensed) from engaging in any transaction involving the listed financial institutions, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities. Under the directive, the prohibitions are specifically worded to include: (1) any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions of the directive; and (2) any conspiracy formed to violate any of the prohibitions of the directive.

Notably, the prohibited activities do not expressly prevent any transactions of a U.S. person with Rospatent. And although the United States Patent and Trademark Office (USPTO) has cut off direct engagement with Rospatent for carrying out activities such as use of the Global Patent Prosecution Highway (GPPH) program², Rospatent is not currently a sanctioned entity under the directive. This, however, is essentially a distinction without a difference. Moreover, since the USPTO (and also the European Patent Office) has already cut ties with Rospatent, there still remains the possibility that Rospatent itself will be added to the sanctions at a future date and thus completely eliminate any pursuits by U.S. persons with Rospatent.

The current sanctions directly affect entities seeking patent protection in Russia since payments of required fees related to patent applications and granted patents in Russia are processed through the Central Bank of the Russian Federation. This includes a number of financial transactions, such as payment of government filings fees for directly filing a patent application in Russia or filing a national phase of an international PCT application in Russia, as well as incidental fees incurred during prosecution of pending Russian patent applications and payment of yearly maintenance fees for issued Russian patents. This would also include payment of yearly maintenance fees for patents obtained through the Eurasian Patent Organization (EAPO) and maintained in Russia since such fees paid to the EAPO must be forwarded to Rospatent. Because of the intertwining of Rospatent with the Central Bank of the Russian Federation, any fees paid to Rospatent must be considered equivalent to making a transaction through said bank.

Patent prosecution in Rospatent requires engagement with a Russian patent practitioner. While U.S. entities pursuing patent interests in Russia are unlikely to directly engage Rospatent and pay fees that are ultimately processed through the prohibited bank, it is clear from the directive that strategies, such as routing payments through countries that are neutral in relation to sanctions, are prohibited. As noted above, the directive prohibits any transaction that actually “evades or avoids” the other prohibitions of the directive, as wells as any transaction that “has the purpose of evading or avoiding” the other prohibitions. This language appears to have the potential to ensnare purposeful non-adherence as well as actions that unwittingly end in non-adherence (e.g., forgetting to discontinue an automated payment of a patent maintenance fee to Rospatent).

Deadline for Administrative Transactions

U.S. entities still have time to complete administrative transactions with Rospatent despite the February implementation of the directive. On March 2, 2022, the Department of the Treasury issued a general license authorizing certain transactions that are otherwise prohibited by the directive.³ The license authorizes U.S. persons to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registrations or certifications to the extent such transactions are prohibited under the directive, provided such transactions are ordinarily incident and necessary to such persons’ day-to-day operations in the Russian Federation. For at least U.S. entities whose day-to-day operations include securing and maintaining intellectual property, including in Russia, this license provides a window to complete activities and avoid violation of the directive. Currently, the transaction window provided under the license runs through 12:01 a.m. eastern daylight time on June 24, 2022.

Forming a Russian Patent Strategy

The incursion of Russia into Ukraine has been underway for shortly more than one month, but there is no way to know when hostilities may cease. Moreover, even when peace is achieved, it is impossible to know how long the current sanctions against Russia may continue. Those familiar with patent law know that the business of obtaining patents is a deadline-driven venture, and uncertainty of time quickly breaks apart the paradigm. A “wait and see” approach thus has the potential to result in a loss of patent rights as well as possible liability for knowingly or unknowingly engaging in activities that are prohibited under the directive. Anyone engaged in patent activities in Russia thus would be advised to undertake a portfolio review and utilize the time remaining under the General License to form a plan that ensures compliance with the current sanctions. This can include at least the following items.

Anyone engaged in patent activities in Russia thus would be advised to undertake a portfolio review and utilize the time remaining under the General License to form a plan that ensures compliance with the current sanctions.

Proceeding with Grant of Presently Allowed Applications – For Applicants that have received a Notice of Allowance with a due date after expiration of the General License, one may consider early payment of the fees. This should only be done, however, to the extent that it is possible to confirm that payment will be processed through Rospatent and the Central Bank of the Russian Federation prior to the expiration of the General License on June 24, 2022.
Annuities on Granted Patents – Any patent annuity paid to Rospatent after the General License expires should be assumed to be in violation of the current sanctions. Patent holders that engage a patent annuity service should contact their provider to confirm that they have a plan in place for compliance with the sanctions. Some annuity services have, in fact, already announced that they will no longer make payments to the Rospatent until further notice. Presumably, for Russian patents with annuities due in 2022, early payment could be made in the hope that normalcy will ensure prior to the deadline in 2023, but such action should only be taken to the extent one can ensure that payment is processed through Rospatent and the Central Bank of the Russian Federation before the deadline. Even then, it may be advisable to consider whether “early” payment of patent annuities would be considered to be “ordinarily incident” to day-to-day operations of a person’s patent pursuits. In the alternative, a patent owner should confirm that any Russian patents are under a “do not pay” order with their annuity provider to avoid an unintentional, automated payment in violation of the sanctions.
Filing a Direct or National Phase Patent Application – If a new patent application in Russia is planned, or if the deadline for national phase entry of a PCT application is approaching, one may consider early filing prior to the expiration of the General License. This could be done in the hope that a deadline for payment of future fees to Rospatent do not arise before the time that sanctions are lifted. This is seen to be a risky proposition since it is unknown how quickly Rospatent processes paid fees through the Central Bank of the Russian Federation, and it is likewise unknown to what extent a fee paid to Rospatent before expiration of the General License but only processed through the Central Bank of the Russian Federation after expiration would be viewed as being in violation of the sanctions. Moreover, if Rospatent itself is later added to the sanctions, any early filings would be at significant risk for abandonment due to an inability to continue transactions with Rospatent.
Filing Through EAPO as an Alternative to Russia – Russia is one of several countries where patent protection can be secured based on a granted patent from the EAPO. As of this writing, the banks utilized for processing financial transactions for the EAPO (AO UniCredit Bank and AO Raiffeisenbank) are not included in the U.S. sanctions. As such, direct filing or national stage entry with the EAPO can provide an alternate pathway for patent protection in Russia. The cessation of interaction between the USPTO and the EAPO would not have a bearing on this option, but care would need to be taken to ensure that all documents otherwise transferrable directly between the offices are handled by other routes. Once a patent is granted by the EAPO and Russia is elected as a country for maintenance of the patent, annuities paid to the EAPO are forwarded to Rospatent. As such, this alternative pathway is only effective for patents where annuities in Russia would not become due until after lifting of sanctions. As the average length of time for completion of patent prosecution with the EAPO is generally two or more years, one would hope that the current situation in Russia would be resolved within that timeframe. Again, however, uncertainty remains.
Using Russia as an International Search Authority – Rospatent is one of the limited number of patent offices available for use as the ISA in a PCT application, and Rospatent may be preferred because of the relatively low cost relative to other ISA options. Search fees paid to the World Intellectual Proper Organization (WIPO) are forwarded to Rospatent when chosen as the ISA, and it is not possible to ensure that such fees paid to WIPO will be forwarded to Rospatent, and then to the Central Bank of the Russian Federation before the expiration of the General License deadline. As such, it is recommended to not use Rospatent as the ISA in any PCT application from now until sanctions are lifted.
Enforcement of Granted Russian Patents – A comprehensive patent strategy in Russia must now also consider the relative value of any Russian patents in light of the recent decree on patent enforceability in Russia.⁴ Therein, any holder of a Russian Patent from a so-called “unfriendly” foreign state is required to give a mandatory license with no compensation to anyone in Russia wishing to exercise the right of use without consent of the patent owner. As with the entire situation, uncertainty reigns with this decree, and it is impossible to know when (if ever) rights of Russian patent holders from “unfriendly” states will be returned. Accordingly, a Russian patent strategy must consider not only options for proceeding in the near term to secure rights to the extent possible but must also consider the reality that any “rights” that are secured with a Russian patent are of no effect and will be for the foreseeable future.

Next Steps

For anyone with significant patent interests in Russia, time is of the essence for cementing a strategy for moving forward. For some, the most expeditious approach could be to simply close your file on any Russian patents and patent applications. If such approach is taken, careful attention must be made, as noted above, to ensure that any possibility of a fee being paid to Rospatent after June 24, 2022, is eliminated. For others, investments in Russia may not allow for a complete abandonment of possible future patent enforcement rights in Russia. If actions as noted above are taken to “batten down the hatches” of the Russian patent portfolio prior to the deadline in order to weather this storm, timing is again crucial in order to avoid unintentional engagement in sanctioned activities. Also, moving to patent filings through the EAPO as a starting point for Russia can be an effective workaround so long as Russian sanctions get lifted before any patent annuities through an EAPO patent would become due in Russia. Finally, in forming a strategy, one also must consider that even before its recent decree on patent enforceability, Russia was already one of nine countries on the United States Trade Representative (USTR) “Special 301 Report” of trading partners presenting the most significant concerns regarding insufficient IP protection or enforcement or actions that otherwise limited market access for persons relying on intellectual property protection.

¹ Directive 4 Under Executive Order 14024, “Prohibitions Related to Transactions Involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation,” February 28, 2022, Office of Foreign Assets Control, Department of the Treasury. See, https://home.treasury.gov/system/files/126/eo14024_directive_4_02282022….
² USPTO Statement on Engagement with Russia, the Eurasian Patent Organization, and Belarus, March 22, 2022. See, https://www.uspto.gov/about-us/news-updates/uspto-statement-engagement-r….
³ General License No. 13, “Authorizing Certain Administrative Transactions Prohibited by Directive 4 Under Executive Order 14024, Office of Foreign Assets Control, Department of the Treasury, March 2, 2022. See, https://home.treasury.gov/system/files/126/russia_gl13.pdf.
⁴ Decree of the Government of the Russian Federation of 06.03.2022 No. 299 “On Amendments to Clause 2 of the Methodology for Determining the Amount of Compensation Paid to a Patent Owner When Deciding to Use an Invention, Utility Model or Industrial Design without His Consent, and the Procedure for its Payment.” See, http://publication.pravo.gov.ru/Document/View/0001202203070005?index=0&r…

Article By Ryan Cagle of Womble Bond Dickinson (US) LLP

For more intellectual property legal news, click here to visit the National Law Review.

Financial Crimes Enforcement Network (FinCEN) Proposes Anti-Money Laundering Rules

On July 23, 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking that would amend existing Bank Secrecy Act regulations with respect to customer due diligence (CDD) requirements for certain covered financial institutions, including mutual funds, brokers or dealers in securities and futures commission merchants and introducing brokers in commodities. The proposed rules would formalize certain CDD requirements and also require that covered financial institutions “identify and verify the beneficial owners of legal entity customers.” FinCEN’s proposal includes a standard certification form that covered financial institutions would be required to use for documenting the beneficial ownership of their legal entity customers. An individual may qualify as a “beneficial owner” of a legal entity customer if the individual either (1) owns 25% or more of the equity interests of the entity, or (2) has significant management responsibilities within the entity. As proposed, covered financial institutions would be exempted from identifying the beneficial owners of an intermediary’s underlying clients if the covered financial institution has no customer identification program obligation with respect to those underlying clients.

Comments on the Notice of Proposed Rulemaking are due by October 3, 2014.

ARTICLE BY

Investment Services Group

Vedder Price

Treasury and IRS Provide Thanksgiving Surprise: Proposed 501(c)(4) Political Activity Rules

As most of America travelled over the river and through the woods to Grandma’s house before the Thanksgiving holiday, the Treasury Department and the IRS delivered their own holiday gift. On Tuesday, November 26, they released proposed guidance aimed at clarifying which conduct by tax-exempt social welfare organizations – 501(c)(4) entities – qualifies as political campaign activity.

Under existing IRS regulations, the promotion of social welfare does not include direct or indirect participation in political campaigns on behalf of or in opposition to any candidate. Over the years, the IRS has used a wide-ranging facts and circumstances test to determine whether an organization is engaged in an impermissible level of political campaign activity. In the aftermath of the recent IRS scandal regarding the review of 501(c)(4) applications, Treasury and the IRS believe that more definitive political activity rules would reduce the need to conduct fact-intensive inquiries when applying the rules for qualification as a social welfare organization.

To accomplish this objective, Treasury and the IRS have coined a new term, “candidate-related political activity.” This term encompasses existing definitions of political campaign activity from federal tax and campaign finance laws, and includes the following:

Express advocacy communications;
Public communications made within 60 days before a general election or 30 days before a primary election that clearly identify a candidate for public office, as well as any other communications that have to be reported to the FEC (including independent expenditures and electioneering communications);
Monetary and in-kind contributions to or the solicitation of contributions on behalf of campaign, party and other political committees, and other tax-exempt organizations that engage in political activity; and
Other election related activities such as voter registration and get-out-the-vote drives, distribution of candidate or political committee materials, and the preparation and distribution of voter guides.

The proposed rules raise many serious concerns. For example, candidate-related political activity could include conducting nonpartisan voter registration drives and distributing nonpartisan voter guides. Moreover, the proposed rules attribute to 501(c)(4) organizations, among other things, political activities conducted by their officers, directors or employees acting in that capacity.

Unfortunately, the draft rules do not elaborate on the possible differences between conduct taken in an official capacity and personal political conduct by an officer, director or employee. Finally, many contributions from a 501(c)(4) to another tax-exempt organization would appear to qualify as candidate-related activity unless the contributor receives a written confirmation that the recipient does not engage in such activity and the contributor restricts the use of the contribution.

The proposed political activity rules also leave many important issues unaddressed. Under existing rules, 501(c)(4) entities must be “primarily” engaged in activities that promote the common good or social welfare. The proposed rules provide no guidance on what proportion of an organization’s activities must be dedicated to this purpose to qualify under section 501(c)(4). The proposed regulations also do not apply to entities that qualify under Section 501(c)(3) (charitable organizations), Section 501(c)(5) (labor unions), Section 501(c)(6) (trade associations), or Section 527 (political organizations). Treasury and the IRS are, however, accepting comments on the advisability of making changes in each of these areas. Interested persons may submit comments to the IRS by February 27, 2014.

Article by:

James A. Kahl

Ranlet S. Bell

Megan R. Wilson

Of:

Womble Carlyle Sandridge & Rice, PLLC

Tag: Treasury

Mental Health Parity and Addiction Equity Act Final Rules (“Final Rules”) Are Released: Plans and Issuers Must Prepare for January 1, 2025 Effective Date (US)

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