Notice 2009-26, Build America Bonds and Direct Payment Subsidy Implementation

Secondary Ranking Factors:

•
•
•

Greenhouse gas capture capability.
Increased by-product utilization.
Research partnership with an eligible educational institution as defined in §48A(e)(3)(B)(iii).

Tertiary Ranking Factors:

•
•
•
•
•

Presentation of other environmental, economic, or performance benefits
Higher plant efficiency.
Geographic distribution of potential markets.
The ratio of total nameplate generating capacity (as defined in section 3.02 of Notice 2009–24) to requested tax credit.
Diversity of technology approaches and methods.

G. Supplemental Technical and Financial Guidance for Project Information Memorandum
Technology and Technical Information
It is important that the applicant select a specific gasification system for the project. Without that decision, it is difficult to
provide the necessary specific design information needed for DOE to evaluate the project feasibility with respect to performance,
emissions, outputs of major streams as well as capital and operating costs.
The Applicant’s capability to meet the legislated heat rate and/or environmental targets should be supported with design information, and or vendor guarantees which are project, site and coal specific.
Project Economics
Applicants should demonstrate the project’s economic feasibility and financial viability by providing a clear statement and explanation of the economic and financial assumptions made by the applicant, and a financial forecast for the project. The financial
forecast should flow logically from the applicant’s assumptions and be consistent with them. Applicants should include assumptions regarding financial and economic issues that may not be included in the project costs but have a direct impact on the project.
The examples given in the “Site Control and Ownership” section are relevant here and their impact on the project economics should
be discussed here.
Project Development and Financial Plan
The information provided by the applicant in this section should demonstrate that the applicant’s financial plan for developing
the project is feasible and that the applicant will have access to necessary financing. The applicant should explain the source and
timing for obtaining all financing, including the project development costs. It is important that the applicant explain and provide
evidence that it has the capacity to fund the pre-construction project development costs, together with a budget for and description
of those costs. Note that financial information is required for the applicant and for any other funding source.
Project Contract Structure
This section requires that the applicant demonstrate an understanding of the commercial contracting process and show progress in
establishing the framework of contracts and agreements that a project typically requires. Applicants should show that their intended
contract structure is reasonable and that their assumptions relative to price, terms, and conditions are consistent with current market
conditions. Evidence of final agreements, agreements in principle, or summaries of terms and conditions between the applicant and
contract counterparties should be provided, if available.

Build America Bonds and
Direct Payment Subsidy
Implementation
Notice 2009–26
SECTION 1. PURPOSE
This notice provides guidance on the
new Build America Bonds under § 54AA
of the Internal Revenue Code (“Code”)
and the implementation plans for the re-

2009–16 I.R.B.

fundable credit payment procedures for
these bonds. This notice includes guidance on the modified Build America Bond
program for Recovery Zone Economic
Development Bonds under § 1400U–2 of
the Code. This notice provides guidance
on the initial refundable credit payment
procedures, required elections, and information reporting. This notice solicits
public comments on the refundable credit
payment procedures for these bonds. This
notice is intended to facilitate prompt implementation of the Build America Bond
program and to enable state and local gov-

833

ernments to begin issuing these bonds for
authorized purposes to promote economic
recovery and job creation.
SECTION 2. RELEVANT
PROVISIONS
2.1 Introduction.
Section 1531 of Title I of Division B
of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111–5,
123 Stat. 115 (2009) (enacted February
17, 2009) (“ARRA”), added § 54AA to the
Code, authorizing state and local govern-

April 20, 2009

ments, at their option, to issue two general
types of Build America Bonds as taxable
governmental bonds with Federal subsidies for a portion of their borrowing costs.
The subsidies take the form of either tax
credits provided to holders of the bonds
or refundable tax credits paid to state and
local governmental issuers of the bonds.
Build America Bonds have different levels
of Federal subsidies and program requirements depending on the particular type of
bond.
The first type of Build America Bond
provides a Federal subsidy through Federal tax credits to investors in the bonds in
an amount equal to 35 percent of the total coupon interest payable by the issuer
on taxable governmental bonds (net of the
tax credit), which represents a Federal subsidy to the state or local governmental issuer equal to approximately 25 percent of
the total return to the investor (including
the coupon interest paid by the issuer and
the tax credit). This type of Build America Bond will be referred to in this notice
as “Build America Bonds (Tax Credit).”
The second type of Build America
Bond provides a Federal subsidy through a
refundable tax credit paid to state or local
governmental issuers by the Treasury Department and the Internal Revenue Service
(“IRS”) in an amount equal to 35 percent
of the total coupon interest payable to investors in these taxable bonds. This type
of Build America Bond will be referred
to in this notice as “Build America Bonds
(Direct Payment).” The level of the 35
percent Federal interest subsidy on Build
America Bonds (Direct Payment) is deeper
than the corresponding approximately 25
percent Federal interest subsidy on Build
America Bonds (Tax Credit).
In addition, § 1401 of ARRA, which
added § 1400U–2 of the Code, provides for
a third type of Build America Bond (Direct
Payment) known as “Recovery Zone Economic Development Bonds,” which provides for a deeper Federal subsidy through
a refundable tax credit paid to state or local
governmental issuers in an amount equal
to 45 percent of the total coupon interest payable to investors in these taxable
bonds. This type of Build America Bond
will be referred to in this notice as “Recovery Zone Economic Development Bonds
(Direct Payment).”

April 20, 2009

2.2 Build America Bonds (Tax Credit).
Section 54AA(d) defines the term Build
America Bond to mean any taxable state or
local governmental bond (excluding a private activity bond under § 141) that meets
the following requirements: (1) the interest on such bond would (but for § 54AA)
be excludable from gross income under
§ 103; (2) the bond is issued before January 1, 2011; and (3) the issuer makes an
irrevocable election to have § 54AA apply.
In general, Build America Bonds (Tax
Credit) may be issued to finance any governmental purpose for which tax-exempt
governmental bonds (excluding private activity bonds under § 141) could be issued
under § 103 (“tax-exempt governmental
bonds”) and must comply with all requirements applicable to the issuance of tax-exempt governmental bonds. Accordingly,
Build America Bonds (Tax Credit) may
be issued to finance the same kinds of expenditures (e.g., capital expenditures and
working capital expenditures) and may
involve the same kinds of financings (e.g.,
original new money financings, current
refundings, and one advance refunding)
as tax-exempt governmental bonds. Similarly, Build America Bonds (Tax Credit)
may not be issued for any purposes for
which tax-exempt governmental bonds
could not be issued under § 103 (e.g., prohibited second advance refunding issues
or pension annuity issues).
Section 54AA(a) provides that if a
taxpayer holds a Build America Bond on
one or more interest payment dates of the
bond during any taxable year, there shall
be allowed as a credit against the tax imposed by chapter 1 for the taxable year an
amount equal to the sum of the credits determined under § 54AA(b) with respect to
such dates. Section 54AA(b) provides that
the amount of the credit determined with
respect to any interest payment date for a
Build America Bond is 35 percent of the
amount of interest payable by the issuer
with respect to such date. Section 54AA(e)
provides that the term “interest payment
date” means any date on which the holder
of record of the Build America Bond is entitled to a payment of interest under such
bond. Accordingly, the tax credit that a
taxpayer may claim with respect to a Build
America Bond (Tax Credit) is determined
by multiplying the interest payment that a
bondholder is entitled to receive from the

834

issuer (i.e., the bond coupon interest payment) by 35 percent. See H. R. Conf. Rep.
111–16, 111th Cong., 1st Sess. (February
12, 2009) (“ARRA Conference Report”)
at 594; see also id. at 593, n. 146 (original
issue discount is not treated as a payment
of interest for purposes of determining the
credit).
Section 54AA(c)(1) provides that the
credit allowed under § 54AA(a) for any
taxable year shall not exceed the excess
of (1) the sum of the regular tax liability
(as defined in § 26(b)) plus the tax imposed by § 55, over (2) the sum of the
credits allowable under part IV of subchapter A of chapter 1 (other than subpart C and subpart J). Section 54AA(c)(2)
provides that if the credit allowable under
§ 54AA(a) exceeds the limitation imposed
by § 54AA(c)(1) for such taxable year,
such excess shall be carried to the succeeding taxable year and added to the credit
allowable under § 54AA(a) for such taxable year (determined before the application of § 54AA(c)(1) for such succeeding
taxable year). Unused credit may be carried forward to succeeding taxable years.
See ARRA Conference Report at 593.
Section 54AA(d)(2)(A) provides that,
for purposes of the restrictions against
Federal guarantees of tax-exempt bonds
under § 149(b), a Build America Bond
is not treated as Federally guaranteed by
reason of the credit under §§ 54AA(a) or
§ 6431.
Section 54AA(d)(2)(B) provides that,
for purposes of applying the arbitrage
restrictions under § 148, the yield on a
Build America Bond shall be determined
without regard to the credit allowed under § 54AA(a). Accordingly, issuers
should calculate the yield on Build America Bonds (Tax Credit) for purposes of
the arbitrage rules by applying the rules
contained in § 148 and the regulations
thereunder without an adjustment for the
tax credit taken by bondholders. See
ARRA Conference Report at 593.
Section 54AA(d)(2)(C) provides that a
bond shall not be treated as a Build America Bond if the issue price has more than
a de minimis amount (determined under
rules similar to the rules of § 1273(a)(3)) of
premium over the stated principal amount
of the bond. See ARRA Conference Report at 593. This restriction applies to
both Build America Bonds (Tax Credit)

2009–16 I.R.B.

and Build America Bonds (Direct Payment).
Section 54AA(f)(1) provides that, for
purposes of the Code, interest on any Build
America Bond shall be includible in gross
income. Under § 54AA(f)(2), rules similar to the rules of § 54A(f), (g), (h), and
(i) shall apply for purposes of the credit allowed under § 54AA(a). Briefly, the referenced provisions under § 54A treat credits
as interest includable in gross income, provide special rules for S corporations and
partnerships, provide special rules for regulated investment companies and real estate investment trusts, and authorize the
Department of the Treasury to promulgate
regulations to allow for “stripping” (which
is the separation of the ownership of these
bonds and the associated tax credits under
principles based on § 1286).
Section 54AA(h) grants to the Department of the Treasury broad regulatory authority to prescribe such regulations and
other guidance as may be necessary or appropriate to carry out the provisions for
Build America Bonds under § 54AA and
the refundable credit provisions for these
bonds under § 6431.
2.3 Build America Bonds (Direct
Payment).
Section 54AA(g) authorizes Build
America Bonds (Direct Payment) that
meet the definition of “qualified bonds” to
receive a refundable credit under § 6431
in lieu of tax credits under § 54AA and
imposes different program requirements.
Section 54AA(g)(2) defines the term
“qualified bond” to mean a bond that is
issued as part of an issue that meets the
following requirements: (1) the bond is
a Build America Bond; (2) the bond is
issued before January 1, 2011; (3) 100
percent of the excess of (i) the available
project proceeds (as defined in § 54A to
mean sale proceeds of such issue less not
more than two percent of such proceeds
used to pay issuance costs plus investment
proceeds thereon), over (ii) the amounts in
a reasonably required reserve fund (within
the meaning of § 150(a)(3)) with respect
to such issue, are to be used for capital
expenditures; and (4) the issuer makes an
irrevocable election to have this subsection apply.
In determining a reasonably required
reserve fund for purposes of this provision,

2009–16 I.R.B.

the rules under § 148(d)(2) apply. Accordingly, a Build America Bond (Direct
Payment) will be an arbitrage bond if the
amount of the sale proceeds of such an issue that is part of any reserve or replacement fund exceeds 10 percent of the proceeds. As such, the interest on such bond
would not be tax-exempt under § 103 and
thus would not be a qualified bond for purposes of this provision. ARRA Conference Report at 596, n. 150.
The eligible uses of proceeds and types
of financing for Build America Bonds
(Direct Payment) are more limited than
for Build America Bonds (Tax Credit).
In general, Build America Bonds (Direct
Payment) may be issued to finance governmental purposes for which tax-exempt
governmental bonds (excluding private
activity bonds under § 141) could be issued under § 103, but — pursuant to
§ 54AA(g)(2)(A) — the excess of available project proceeds over amounts in a
reasonably required reserve fund may be
used to finance only capital expenditures
(as defined in Treas. Reg. § 1.150–1(b)),
as contrasted with working capital expenditures. See ARRA Conference Report at
594, n. 147. For this purpose, an eligible
financing of capital expenditures includes
a reimbursement of capital expenditures
under the reimbursement rules contained
in Treas. Reg. § 1.150–2. By contrast,
Build America Bonds (Direct Payment)
generally may not be issued to refinance
capital expenditures in “refunding issues”
(as defined in Treas. Reg. § 1.150–1).
Further, for this purpose, Build America
Bonds (Direct Payment) may be used to
reimburse otherwise-eligible capital expenditures under Treas. Reg. § 1.150–2
that were paid or incurred after the effective date of ARRA and that were financed
originally with temporary short-term financing issued after the effective date of
ARRA, and such reimbursement will not
be treated as a refunding issue under Treas.
Reg. §§ 1.150–1(d) or 1.150–2(g).
Section 6431(a) provides that, for Build
America Bonds (Direct Payment) issued
before January 1, 2011, the issuer of such
bond shall be allowed a credit with respect to each interest payment under such
bond which shall be payable by the Secretary. Section § 6431(b) provides that
the Department of the Treasury shall pay
(contemporaneously with each interest
payment date under such bond) to the is-

835

suer of such bond (or to any person who
makes such interest payments on behalf
of the issuer) 35 percent of the interest
payable under such bond on such date.
Section 6431(d) provides that the term
“interest payment date” means each date
on which interest is payable by the issuer
under the terms of bonds. The ARRA
Conference Report indicates that the payment by the Secretary is to be made either
in advance or as reimbursement. ARRA
Conference Report at 595.
The amount of refundable credit that
a state or local governmental issuer may
claim with respect to a Build America
Bond (Direct Payment) is determined by
multiplying the interest payment that is
payable by the issuer on an interest payment date (i.e., the bond coupon interest
payment) by 35 percent (or 45 percent in
the case of Recovery Zone Economic Development Bonds (Direct Payment)). See
ARRA Conference Report at 594 and n.
148 (original issue discount is not treated
as a payment of interest for purposes of
calculating the refundable credit under this
provision).
Section 6431(c) states that for purposes
of the arbitrage investment restrictions under § 148, the yield on Build America
Bonds (Direct Payment) is reduced by the
credit allowed under this section. Accordingly, issuers should calculate the yield
on Build America Bonds (Direct Payment)
for purposes of the arbitrage rules by applying the rules contained in § 148 and the
regulations thereunder, but by reducing the
amount of interest paid on the bond by the
amount of credit payments received pursuant to § 6431. See ARRA Conference
Report at 595.
2.4 Recovery Zone Economic
Development Bonds (Direct Payment).
Section 1401 of ARRA added
§ 1400U–2 to the Code to authorize state
and local governments to issue Recovery
Zone Economic Development Bonds (Direct Payment). These bonds are treated
as qualified bonds for purposes of § 6431
and they have a deeper refundable credit
subsidy than Build America Bonds (Direct
Payment) equal to 45 percent of the total
coupon interest payable to investors in
these taxable bonds.
In particular, § 1400U–2(b) defines the
term “recovery zone economic develop-

April 20, 2009

ment bond” to mean a bond that is issued
as part of an issue that meets the following requirements: (1) the bond is a Build
America Bond; (2) the bond is issued before January 1, 2011; (3) 100 percent of the
excess of (i) the available project proceeds
(as defined in § 54A to mean sale proceeds
of such issue less not more than two percent of such proceeds used to pay issuance
costs plus investment proceeds thereon),
over (ii) the amounts in a reasonably required reserve fund (within the meaning of
§ 150(a)(3)) with respect to such issue, are
to be used for one or more “qualified economic development purposes” (as defined
in § 1400U–2(c)); and (4) the issuer designates such bond for this purpose.
The Treasury Department and the IRS
expect to issue separate guidance on Recovery Zone Economic Development
Bonds (Direct Payment), including guidance on the allocation of the $10 billion
national bond volume cap for these bonds
under § 1400U–1.
SECTION 3. SCOPE AND
APPLICATION OF REFUNDABLE
CREDIT PROCEDURES FOR BUILD
AMERICA BONDS
3.1 Refundable Credit Implementation
Plans for 2009.
(a) In General. The IRS and the Treasury Department plan to implement the initial refundable credit payment procedures
for 2009 for Build America Bonds (Direct
Payment) and Recovery Zone Economic
Development Bonds (Direct Payment) as
promptly as possible to enable state and
local governments to begin issuing these
bonds for authorized purposes to promote
economic recovery and job creation. The
IRS and the Treasury Department expect
that an IRS form for requesting the Federal
share of interest on these bonds, new IRS
“Form 8038–CP, Return for Credit Payments to Issuers of Qualified Bonds,” will
be available on the IRS website on or about
the date of release of this notice. The IRS
will be prepared to accept such forms for
processing by May 1, 2009, and the IRS
and Treasury Department will be prepared
to make timely payments with respect to
interest payment dates beginning on or after July 1, 2009, as further described below.

April 20, 2009

In particular, the initial refundable
credit procedures will require an issuer to
submit a Form 8038–CP to request payment of the amount of the credit within a
prescribed time before or after each applicable interest payment date, depending on
whether the bonds are fixed rate bonds or
variable rate bonds, as described below.
Issuers should expect to receive requested
payments within 45 days of the date that
a processible Form 8038–CP is filed with
the IRS. See § 6611(g).
When credit payments are made, the
IRS will send the payments to the requested recipient’s “last known address,”
as that phrase is defined and determined
under Treas. Reg. § 301.6212–2 and Rev.
Proc. 2001–18, 2001–1 C.B. 722, or any
successor guidance. In the case of credit
payments sent to a person other than the
issuer, the last known address may not
be the address the issuer provided on the
Form 8038–CP. The instructions to the
Form 8038–CP will provide instructions
on how an issuer or trustee can verify and
update the address of record.
(b) Fixed Rate Bonds. In general, for
fixed rate bonds, upon receipt of a timely
filed Form 8038–CP requesting payment
of the credit, such amount will be paid on
a contemporaneous basis by the applicable interest payment date. For fixed rate
bonds, the due date for an issuer to file
a Form 8038–CP, Return for Credit Payments to Issuers of Qualified Bonds, is the
45th day before the applicable interest payment date with respect to the bonds. This
return, however, may not be filed earlier
than the 90th day before the relevant interest payment date.
(c) Variable Rate Bonds. In general,
for variable rate bonds, upon receipt of
a timely filed Form 8038–CP requesting
payment of the credit, such amount will
be paid quarterly on a reimbursement basis for interest paid by the issuer during
the quarter, including the interest payment
date with respect to which the return requesting payment relates. For variable rate
bonds, the due date for an issuer to file
a Form 8038–CP, Return for Credit Payments to Issuers of Qualified Bonds, is the
45th day after the last interest payment date
within the quarterly period for which reimbursement is requested.

836

3.2 Future Development and Refinement
of Refundable Credit Payment Procedures.
The IRS and the Treasury Department
plan to actively pursue refining the refundable credit payment procedures for
Build America Bonds (Direct Payment)
and Recovery Zone Economic Development Bonds (Direct Payment) for 2010
and thereafter to achieve as workable and
efficient a system as possible that is consistent with all necessary and appropriate
compliance safeguards. In this regard, the
IRS and the Treasury Department plan to
study the feasibility of moving these direct
payment procedures to an electronic platform similar to that used by the Bureau of
Public Debt to make recurring electronic
payments on U.S. Treasury securities, such
as U.S. Treasury Securities of the State
and Local Government Series (“SLGs”)
with which state and local governments
are familiar. The IRS and the Treasury
Department expect that any development
or usage of an electronic platform for
these direct payment procedures will include ongoing compliance safeguards that
involve periodic information returns on
these bonds at least annually.
3.3 Tax Character and Procedural
Framework for the Refundable Credit.
In general, the refundable credits for
Build America Bonds under § 6431 are
payments that are treated as overpayments
of tax. In this regard, § 1531(c)(5) of
ARRA adds a reference to Build America
Bond provisions under § 6431 as a conforming amendment to § 6401(b)(1) regarding amounts treated as overpayments.
Similarly, § 1531(c)(4) of ARRA adds a
reference to the provisions under § 6431
to § 6211(b)(4)(A) regarding treatment of
erroneous payments of credits as negative
amounts of tax or deficiencies. Accordingly, rules relating to overpayments of
tax, such as credits against liabilities in respect of an internal revenue tax and offsets
under § 6402, interest on overpayments of
tax under § 6611, and limitations on credits or refunds of overpayments of tax under
§ 6511 also apply to credit payments with
respect to Build America Bonds under
§ 6431. Pursuant to the broad legislative
regulatory authority under § 54AA(h) to
prescribe such regulations and other guidance as may be necessary or appropriate

2009–16 I.R.B.

to carry out the Build America Bond provisions under § 54AA and the refundable
credit provisions under § 6431, the IRS
and the Treasury Department will consider the potential need to develop any
special rules to adapt or tailor the procedural framework implementing these
provisions.
SECTION 4. ELECTIONS TO ISSUE
BUILD AMERICA BONDS
Subject to updated IRS reporting forms
or procedures, an issuer of Build America Bonds (Tax Credit), Build America
Bonds (Direct Payment), and Recovery
Zone Economic Development Bonds (Direct Payment) should make the elections
required by §§ 54AA(d) or (g) to issue the
applicable bonds on its books and records
on or before the issue date of such bonds.
SECTION 5. INFORMATION
REPORTING FOR BUILD AMERICA
BONDS
5.1 Build America Bonds (Tax Credit).
Subject to updated IRS information
reporting forms or procedures, an issuer
of Build America Bonds (Tax Credit)
must report the issuance of the bonds on
IRS Form 8038–G, Information Return
for Tax-Exempt Governmental Obligations. Issuers of these bonds with an issue
price of less than $100,000 should file
a Form 8038–G in accordance with the
instructions contained in this notice instead of filing an IRS Form 8038–GC,
Information Return for Small Tax-Exempt
Governmental Bond Issues, Leases, and
Installment Sales. Issuers should check
Line 18, “Other”, on the form and insert
“Build America Bond (tax credit)” on the
line provided. Issuers must attach a separate schedule that indicates the type of
bond issue that would normally be entered
on Lines 11 to 18, i.e., education, health
and hospital, transportation, public safety,
environment (including sewage bonds),
housing, utilities or other (with description
for “other” category).
5.2 Build America Bonds (Direct
Payment) and Recovery Zone Economic
Development Bonds (Direct Payment).
Subject to updated IRS information reporting forms or procedures, an issuer of

2009–16 I.R.B.

Build America Bonds (Direct Payment)
or Recovery Zone Economic Development
Bonds (Direct Payment) must report the issuance of the bonds on IRS Form 8038–G,
Information Return for Tax-Exempt Governmental Obligations. The Form 8038–G
with respect to an issue must be filed with
the IRS at least 30 days before the first
Form 8038–CP is filed to request payment
with respect to an interest payment date for
that issue, except that, for bonds issued before July 1, 2009 only, such Form 8038–G
may be filed less than 30 days before the
filing of the first Form 8038–CP provided
the form 8038–G is filed separately from
and prior to the filing of Form 8038–CP. Issuers should not attach a Form 8038–G to a
Form 8038–CP. Issuers of these bonds with
an issue price of less than $100,000 should
file a Form 8038–G in accordance with
the instructions contained in this notice instead of filing a Form 8038–GC, Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales.
An issuer of Build America Bonds
(Direct Payment) must check Line 18,
“Other”, on the form and insert “Build
America Bond (payment option)” on the
line provided. An issuer of Recovery Zone
Economic Development Bonds (Direct
Payment) must check Line 18, “Other”,
on the form and insert “Recovery Zone
Economic Development Bond (payment
option)” on the line provided. Issuers must
attach a separate schedule that indicates
the type of bond issue that would normally be entered on Lines 11 to 18, i.e.,
education, health and hospital, transportation, public safety, environment (including
sewage bonds), housing, utilities or other
(with description for “other” category).
In addition, issuers of these bonds must
attach a schedule to the Form 8038–G
which contains the information described
below for the bond issue.
(1) For fixed-rate bonds, attach a
complete debt service schedule, titled
“Fixed Rate Bond — Debt Service
Schedule,” that provides a list of each
interest payment date, the total interest
payable on such date, the total principal amount of bonds expected to be
outstanding on such date, the credit
payment expected to be requested from
the IRS on such date, and the earliest
date that bonds can be called.

837

(2) For variable rate bonds, attach a
debt service schedule, titled “Variable
Rate Bond — Debt Service Schedule,”
that provides a list of each interest payment date, the total principal amount
of bonds expected to be outstanding on
such date, and a description of how interest on the bonds is computed.
SECTION 6. REQUEST FOR
COMMENTS
The IRS and the Treasury Department
solicit public comment on all aspects of
the direct payment procedures for Build
America Bonds, including, without limitation, comments regarding efficient
methods to make such direct payments,
workability and ease of usage for state and
local governments, ongoing compliance
safeguards, and the tax procedural framework for these payments. The IRS and
the Treasury Department solicit specific
public comment on the following aspects
of these direct payment procedures: (1)
whether consideration should be given
to employing an electronic platform to
make these payments similar to that used
for SLGs and what particular features
would be important to making such a platform workable; (2) whether consideration
should be given to a different frequency
or approach to the payment of variable
rate bonds; (3) whether consideration
should be given to making these direct
payments solely to issuers, rather than including third parties designated by issuers,
to simplify the process; and (4) whether
consideration should be given to imposing uniform interest payment dates (e.g.,
quarterly on January 1, April 1, July 1,
and October 1) to improve the efficiency
of the program.
Comments should be submitted
in writing and can be emailed to
[email protected]
(include “Notice 2009–26” in the
subject line) or mailed to Office of
Associate Chief Counsel (Financial
Institutions and Products), Re: Notice
2009–26, CC:FIP:B5, Room 3547, 1111
Constitution Avenue, NW, Washington
DC 20224. Comments that are submitted
will be made available to the public.
SECTION 7. EFFECTIVE DATE
The effective date of this notice is April
3, 2009. This notice provides interim guid-

April 20, 2009

ance. This notice applies to Build America Bonds, including Recovery Zone Economic Development Bonds, issued after
February 17, 2009.
SECTION 8. PAPERWORK
REDUCTION ACT
The information collection contained in
this notice has been approved by the Office of Management and Budget (OMB) in
accordance with the Paperwork Reduction
Act (44 U.S.C. chapter 35) under control
number 1545–2143. Under the Paperwork
Reduction Act, an agency may not conduct
or sponsor and a person is not required to
respond to a collection of information unless it displays a valid OMB control number.
The collections of information in this
notice are in Section 5. The information
is required in order to inform the Treasury Department and the IRS of expected
future direct payments on Build America
Bonds. This information will be used to
determine the expected amount of future
direct payments on Build America Bonds.
The collections of information are mandatory. The likely respondents are state or local governmental issuers of Build America
Bonds.
We estimate the total number of respondents to be 1,000 and the total annual responses to be 5,000. We estimate it will
take 3 hours to comply. Estimates of the
annualized cost to respondents for the hour
burdens shown are not available at this
time.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and return information are confidential, as required by
26 U.S.C. 6103.
SECTION 9. DRAFTING
INFORMATION
The principal authors of this notice are
Carla Young and Timothy Jones of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this notice, con-

tact Ms. Young or Mr. Jones at (202)
622–3980.

Premium Assistance for
COBRA Benefits
Notice 2009–27
This notice provides guidance relating
to section 3001 of the American Recovery
and Reinvestment Act of 2009 (ARRA),
Public Law 111–5, enacted February 17,
2009, relating to premium assistance for
COBRA continuation coverage.
BACKGROUND
Section 3001 of ARRA provides for
a 65 percent reduction in the premium
otherwise payable by certain involuntarily
terminated individuals and their families
who elect COBRA continuation health
coverage under the provisions of the Internal Revenue Code (Code), the Employee
Retirement Income Security Act of 1974
(ERISA), and the Public Health Service
Act (PHS Act). (COBRA continuation
coverage under the Code, ERISA, and
the PHS Act is also referred to in this
notice as “Federal COBRA.”) The premium reduction also applies to temporary
continuation coverage elected under the
Federal Employees Health Benefits Program (FEHBP) and to continuation health
coverage under State programs that provide for coverage comparable to COBRA
continuation coverage. For purposes of
ARRA, continuation health coverage under all of these provisions is referred to as
“COBRA continuation coverage.”
Under the new provision, an assistance
eligible individual is generally an individual (1) who is a qualified beneficiary as the
result of an involuntary termination during the period from September 1, 2008,
through December 31, 2009, (2) who is eligible for COBRA continuation coverage
at any time during that period, and (3) who
elects the coverage. Group health plans
must generally treat assistance eligible individuals who pay 35 percent of the premium otherwise payable for COBRA continuation coverage as having paid the full

amount of the premium. The employer
(or, in certain circumstances, the multiemployer health plan or the insurer) is reimbursed for the other 65 percent of the premium that is not paid by the assistance eligible individual through a credit against its
payroll taxes.
The premium reduction applies as of the
first period of coverage beginning on or
after February 17, 2009 (the date of enactment of ARRA). An assistance eligible individual is eligible for the premium
reduction for up to nine months from the
first month the premium reduction provisions of section 3001 of ARRA apply to
the individual. The premium reduction period ends if the individual becomes eligible
for coverage under any other group health
plan1 or for Medicare benefits.
The premium reduction does not extend beyond the period of COBRA continuation coverage. An individual receiving
the premium reduction who becomes eligible for coverage under any other group
health plan or Medicare is required to notify the group health plan of eligibility for
that other coverage. If the individual fails
to notify the group health plan, the individual is subject to a tax penalty of 110 percent of the premium reduction improperly
received after eligibility for the other coverage.
Under ARRA, an employer may allow
an assistance eligible individual to elect
coverage different from the coverage under the plan in which such individual was
enrolled prior to the involuntary termination, and the premium reduction will apply with respect to such different coverage. (This does not change the basic requirement under Federal COBRA that a
group health plan must allow a qualified
beneficiary to elect to continue the coverage in which the individual is enrolled as
of the qualifying event.) If offered, the assistance eligible individual has 90 days after receiving notice of the option to elect
the other coverage. The premium for coverage offered under this option cannot exceed the premium for the coverage the individual had prior to the involuntary termination. In addition, the coverage offered under this option must be coverage
offered to active employees and cannot be

1 Eligibility for coverage under any other group health plan does not terminate eligibility for the premium reduction if the other group health plan provides only dental, vision, counseling, or
referral services (or a combination of these), is a health flexible spending arrangement or health reimbursement arrangement, or is coverage for treatment that is furnished in an on-site medical
facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination of such care). This exception is implicit
throughout this notice whenever reference is made to the end of eligibility for the premium reduction due to eligibility for coverage under any other group health plan.

April 20, 2009

838

2009–16 I.R.B.