Notice 2005-50

belief, the document contains all the relevant facts relating to the document, and
such facts are true, correct, and complete.”
INFORMATION REPORTING
An issuer of qualified green building
and sustainable design project bonds must
complete Form 8038, Information Return
for Tax-Exempt Private Activity Bond Issues, in accordance with the instructions
and complete Part II by checking the box
on Line 11m (Other), writing “qualified
green building and sustainable design
project bonds” in the space provided for
the bond description, and entering the
amount of the bonds in the Issue Price
column.
DRAFTING INFORMATION
The principal author of this notice
is Timothy L. Jones of the Office of Associate Chief Counsel (Tax Exempt &
Government Entities). However, other
personnel from the IRS, the Treasury Department, the Environmental Protection
Agency, and the Energy Department participated in its development. For further
information regarding this notice, contact Timothy L. Jones at (202) 622–3980
(not a toll-free call).

Qualification of Certain
Arrangements as Insurance
Notice 2005–49
This notice requests comments on additional guidance concerning the standards
for determining whether an arrangement
constitutes insurance for federal income
tax purposes.
In Rev. Rul. 2001–31, 2001–1 C.B.
1348, the Internal Revenue Service announced that it would no longer raise the
“economic family theory” set forth in Rev.
Rul. 77–316, 1977–2 C.B. 53, in addressing whether captive insurance transactions
constitute insurance for federal income tax
purposes. Since 2001, the Service and
the Treasury Department have published
four revenue rulings providing guidance
on the standards to be used to determine
whether a particular arrangement constitutes insurance. Most recently, Rev. Rul.

July 5, 2005

2005–40, page 4, this Bulletin, explains
that (1) in order for an arrangement to qualify as insurance, both risk shifting and risk
distribution must be present, and (2) the
risk distribution requirement is not satisfied if the issuer of an “insurance” contract enters into such a contract with only
one policyholder. See also Rev. Rul.
2002–89, 2002–2 C.B. 984 (setting forth
circumstances under which arrangements
between a domestic parent corporation and
its wholly owned subsidiary constitute insurance); Rev. Rul. 2002–90, 2002–2
C.B. 985 (setting forth circumstances under which payments for professional liability coverage by a number of operating
subsidiaries to an insurance subsidiary of a
common parent constitute insurance); Rev.
Rul. 2002–91, 2002–2 C.B. 991 (setting
forth circumstances under which amounts
paid to a group captive of unrelated insureds are deductible as insurance premiums and in which the group captive qualifies as an insurance company).
The Service and the Treasury Department are aware that further guidance is
needed in this area and request comments
on issues that should be addressed. In
particular, comments are requested regarding (1) the factors to be taken into account in determining whether a cell captive
arrangement constitutes insurance and, if
so, the mechanics of any applicable federal tax elections; (2) circumstances under
which the qualification of an arrangement
between related parties as insurance may
be affected by a loan back of amounts paid
as “premiums;” (3) the relevance of homogeneity in determining whether risks are
adequately distributed for an arrangement
to qualify as insurance, and (4) federal income tax issues raised by transactions involving finite risk.
Comments should be submitted in
writing on or before October 3, 2005,
and should include a reference to Notice
2005–49. Comments may be submitted
to CC:PA:LPD:PR (Notice 2005–49),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Alternatively,
comments may be submitted electronically via the following e-mail address:
[email protected].
Please include “Notice 2005–49” in the
subject line of any electronic communications.

14

Submissions may be hand-delivered
Monday through Friday between the hours
of 8 a.m. and 4 p.m. to CC:PA:LPD:PR
(Notice 2005–49), Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC 20224.
All comments will be available for public
inspection and copying.
DRAFTING INFORMATION
For further information regarding
this notice, contact William Sullivan or
Thomas Preston of the Office of Associate Chief Counsel (Financial Institutions
& Products) at (202) 622–3970 (not a
toll-free call).

Miscellaneous Issues Arising
in Connection With the Health
Coverage Tax Credit
Notice 2005–50
This notice provides guidance on miscellaneous issues that have arisen under
section 35 of the Internal Revenue Code
(added by the Trade Act of 2002, Public
Law 107–210). Section 35 provides a 65%
tax credit for amounts certain individuals
spend on certain kinds of health coverage
for themselves and certain family members. This credit is referred to as the Health
Coverage Tax Credit (HCTC).
INTRODUCTION
The HCTC may be claimed for eligible
coverage months by eligible individuals.
There are three categories of eligible individuals: (1) eligible TAA recipients (individuals eligible for trade adjustment assistance under a program administered by the
Employment and Training Administration
of the U.S. Department of Labor); (2) eligible ATAA recipients (individuals eligible for alternative trade adjustment assistance under a program administered by the
Employment and Training Administration
of the U.S. Department of Labor); and (3)
eligible PBGC pension recipients (individuals who are at least age 55 and who are
receiving a benefit any portion of which is
paid by the Pension Benefit Guaranty Corporation). An eligible individual is entitled
to claim the HCTC with respect to qualifying family members. Qualifying family

2005–27 I.R.B.

members include the eligible individual’s
spouse and any person the eligible individual can claim as a dependent on the eligible
individual’s federal income tax return.
An eligible individual can claim the
HCTC only for qualified health coverage. There are ten categories of qualified
health coverage. Seven of the categories
are qualified coverage only if a state government elects them to be qualified. These
are referred to as state-based coverage.
The other three categories are COBRA
coverage, coverage under a group health
plan that is available through the employment of an eligible individual’s spouse
(spousal coverage), and certain individual
insurance coverage.
An eligible individual who pays for
qualified health coverage for a month is
nevertheless not entitled to the HCTC for
that month if the eligible individual has
other specified coverage on the first day
of the month. Other specified coverage
generally includes health coverage 50
percent or more of the cost of which is
paid or incurred by an employer or former
employer of the eligible individual or of
the eligible individual’s spouse. For this
purpose, the cost of coverage is treated
as paid or incurred by an employer to the
extent the coverage is in lieu of a right to
receive cash or other qualified benefits under a cafeteria plan (as defined in section
125(d) of the Code). (For ATAA recipients, other specified coverage includes
health coverage if the employer pays or
incurs any portion of the cost of coverage.)
Coverage under the following programs
is also other specified coverage: Medicare, Medicaid, State Children’s Health
Insurance Program (S-CHIP), TRICARE
coverage (for members of the military and
their families), and FEHBP coverage (for
federal civil employees).
Eligible individuals and their qualifying family members have certain rights
with respect to state-based coverage if
the eligible individual has at least three
months of creditable coverage, does not
have other specified coverage, and is not
imprisoned under federal, state, or local
authority. Such an eligible individual and
the eligible individual’s qualifying family
members are referred to as qualifying individuals. They have guaranteed issue rights
to state-based coverage, their state-based
coverage cannot be subject to a preexisting condition exclusion, they cannot be

2005–27 I.R.B.

charged more for state-based coverage
than similarly situated individuals, and
they must be entitled to the same benefits
under state-based coverage as similarly
situated individuals.
The HCTC can be claimed on the eligible individual’s federal tax return. However, individuals can also claim the HCTC
under an advance payment program authorized by section 7527 of the Code. Eligible individuals registering with the advance payment program can send the IRS
35% of the cost of qualified health coverage on a monthly basis and the IRS will
pay the health coverage provider 100%
of the cost of qualified health coverage.
Amounts paid through the advance payment program cannot be claimed for the
HCTC on the eligible individual’s tax return.
QUESTIONS AND ANSWERS
Q–1. Is an individual who receives a
lump sum payment from the Pension Benefit Guaranty Corporation (PBGC) on or
after August 6, 2002, considered to be receiving monthly benefits from the PBGC?
A–1. Yes. An individual who receives
a lump sum payment from the PBGC on
or after August 6, 2002 (the date of enactment of the Trade Act of 2002), is considered to be receiving monthly benefits from
the PBGC for as long as the individual
would have received a PBGC annuity had
the PBGC not paid the individual a lump
sum of their PBGC benefit. Consequently,
if such an individual is at least age 55 as
of the first day of a month, the individual
is an eligible individual for purposes of the
Health Coverage Tax Credit (HCTC).
Q–2. Can an eligible individual claim
the HCTC with respect to amounts paid
for qualified health coverage of a qualifying family member if that qualified health
coverage does not cover the eligible individual?
A–2. Yes, but only if the eligible individual has qualified health coverage for
the month. However, that qualified health
coverage need not be the same as that covering a qualifying family member in order
for the eligible individual to be entitled to
claim the HCTC with respect to amounts
paid for the qualifying family member’s
qualified health coverage for that month.
For example, if an eligible individual is enrolled in qualified state-based health cov-

15

erage in a month and a qualifying family
member of the eligible individual is enrolled in COBRA coverage in that month,
the eligible individual is entitled to claim
the HCTC for that month with respect to
amounts paid both for the eligible individual’s enrollment in the state-based coverage and for the qualifying family member’s enrollment in the COBRA coverage.
Q–3. If qualified health coverage of an
eligible individual or a qualifying family
member also covers someone who is neither an eligible individual nor a qualifying family member (a nonqualifying beneficiary), how is the amount paid by the eligible individual for qualified coverage allocated between, on the one hand, the eligible individual and any qualifying family
members, and, on the other hand, nonqualifying beneficiaries?
A–3. Amounts paid by an eligible individual for qualified health coverage covering one or more nonqualifying beneficiaries are allocated on an incremental basis,
attributing those amounts first to the cost
of covering the eligible individual and any
qualifying family members and then to the
cost of covering nonqualifying beneficiaries. Thus, if the cost of covering a nonqualifying beneficiary does not add to the
cost of covering the eligible individual or
any qualifying family members, then the
cost of covering the nonqualifying beneficiary is zero. If the cost of covering a nonqualifying beneficiary adds to the cost of
covering an eligible individual or any qualifying family member, it is the incremental
cost that is ineligible for the HCTC. This
incremental allocation rule for nonqualifying beneficiaries is illustrated by the following examples:
Example 1. Facts. Qualified health coverage
of an eligible individual covers an eligible individual and the eligible individual’s spouse and two children. The two children satisfy the conditions for being qualifying family members (that is, they do not
have other specified coverage and the eligible individual is entitled to claim them as dependents on the
eligible individual’s federal income tax return). The
spouse, however, is not a qualifying family member (because the spouse has other specified coverage). The eligible individual pays $800 per month
for self-plus-two-or-more-dependents under the qualified coverage.
Conclusion. The amount the eligible individual
pays for covering the eligible individual and the two
children (the qualifying family members) under the
qualified health coverage is $800 per month. The
amount the eligible individual pays for the spouse
(the nonqualifying beneficiary) is $0 per month. The

July 5, 2005

eligible individual is entitled to claim the HCTC with
respect to $800 per month.
Example 2. Facts. The facts are the same as in
Example 1 of this Q&A–3 except that the eligible individual has only one child. Although the eligible individual pays $800 per month for self-plus-two-ormore-dependents under the qualified coverage, the eligible individual would be required to pay $600 per
month for self-plus-one-dependent under the coverage.
Conclusion. The amount the eligible individual
pays for covering the eligible individual and the child
(the one qualifying family member) under the qualified health coverage is $600 per month. The amount
the eligible individual pays for the spouse (the nonqualifying beneficiary) is $200 per month. The eligible individual is entitled to claim the HCTC with
respect to $600 per month.

Q–4. Is entitlement to or receipt of
benefits from the Veterans Administration
other specified coverage?
A–4. No. The statute lists various
forms of health coverage — including the
entitlement to receive benefits under chapter 55 of title 10 of the United States Code
(TRICARE) — as other specified coverage. Entitlement to or receipt of benefits
from the Veterans Administration, however, comes under title 38 of the United
States Code and does not fit any of the categories of other specified coverage.
Q–5. How is a determination made
whether an employer pays or incurs at least
50% of the cost of coverage or any portion
of the cost of coverage?
A–5. (a) The rules of this Q&A–5 are
used to determine whether an employer
pays or incurs at least 50% of the cost
of coverage or any portion of the cost of
coverage. The factors for making such
a determination consist of (1) the basis
for determining the dollar amount of the
cost (described in paragraph (b) of this
Q&A–5); (2) the effect of cafeteria plan
contributions under section 125 of the
Code (described in paragraph (c) of this
Q&A–5); and (3) the category of coverage (described in paragraph (d) of this
Q&A–5).
(b) The dollar amount of cost is determined in accordance with the rules in
section 4980B(f)(4) of the Code (used in
determining the applicable premium for
COBRA continuation coverage).
(c) Any portion of the cost of coverage
of an individual paid or incurred in lieu of a
right to receive cash or other qualified benefits under a cafeteria plan under section
125 is considered to be paid or incurred by
an employer.

July 5, 2005

(d) If the proportion of the cost of coverage paid or incurred by an employer varies
with the category of coverage, the amount
paid or incurred by the employer for each
category is determined on an aggregate basis. Thus, for example, in a plan that makes
coverage available in self-only and family
categories, the portion of the cost of family coverage paid or incurred by the employer is determined by dividing the total
cost of such coverage by the total amount
the employer pays or incurs for such coverage. This rule is further illustrated in the
following example:
Example. Facts. Employees participating in
a group health plan maintained by an employer
may choose among three categories of coverage:
(1) self-only, (2) self-plus-one-dependent, and (3)
self-plus-two-or-more-dependents. The total cost of
the coverage, as determined under the rules of section 4980B(f)(4), is (1) $300 per month for self-only
coverage, (2) $600 per month for self-plus-one-dependent coverage, and (3) $800 per month for
self-plus-two-or-more-dependents coverage.
No
portion of the cost of coverage is paid or incurred under a cafeteria plan under section 125. The employer
pays or incurs (1) $225 per month for self-only
coverage, (2) $325 per month for self-plus-one-dependent coverage, and (3) $350 per month for
self-plus-two-or-more-dependents coverage.
Conclusion. The portion of the cost of coverage that the employer pays for each category is (1)
75% for self-only coverage ($225/$300), (2) 54%
for self-plus-one-dependent coverage ($325/$600,
rounded to the nearest whole percentage), and (3)
44% for self-plus-two-or-more-dependents coverage
($350/$800, rounded to nearest whole percentage).
Thus, for any eligible individual or qualifying family member receiving coverage under the plan, the
categories self-only and self-plus-one-dependent
are other specified coverage (and thus the eligible
individual cannot claim the HCTC); the category
self-plus-two-or-more-dependents is not other specified coverage (except in connection with the special
rules that apply for ATAA recipients).

Q–6. May a plan providing COBRA
coverage to an eligible individual or a
qualifying family member reject payment
from the HCTC advance payment program
because it does not come directly from a
COBRA qualified beneficiary?
A–6. No. Under the COBRA continuation coverage requirements of section
4980B of the Code, payment is merely required to be made; there is no requirement that it be made by the qualified beneficiary. If full payment by a third party
(such as the HCTC advance payment program) is tendered timely to a plan for the
COBRA coverage of a qualified beneficiary and the plan terminates the coverage of the qualified beneficiary for failure
to make timely payment, the plan is not

16

in compliance with the COBRA continuation coverage requirements and is subject
to the excise tax of section 4980B (generally, $100 per day per beneficiary for each
day that the plan is not in compliance with
respect to that beneficiary).
Q–7. To be qualified health coverage,
must a state-based plan allow qualifying individuals to pay for their coverage
through the HCTC advance payment program?
A–7. Yes. Part of the guaranteed issue requirement for any state-based plan
is that the plan allow qualifying individuals to pay for their coverage through the
HCTC advance payment program.
Q–8. How is it determined if a qualifying family member of an eligible individual is a qualifying individual?
A–8. If the family member has met the
requirements for being a qualifying family
member (relationship to eligible individual
and no other specified coverage) and the
eligible individual is a qualifying individual, then the family member is a qualifying individual. There are no additional requirements for the family member to satisfy (such as having a certain amount of
creditable coverage).
Q–9. How is it determined whether
an eligible individual has three months or
more of creditable coverage?
A–9. The rules of section 9801 of the
Code and the regulations thereunder (including those rules describing what constitutes a significant break in coverage and
tolling rules for significant breaks in coverage) apply in determining if an eligible individual has three months or more of creditable coverage as of any date. Those rules
prescribe that creditable coverage is determined on the basis of days rather than
months. In applying those rules under section 35, an individual who has at least 89
days of creditable coverage as of a certain
date is considered to have three months or
more of creditable coverage as of that date.
Q–10. Must a state-based plan restrict
eligibility for enrollment among eligible
individuals and qualifying family members to those who are also qualifying individuals in order for the state-based plan
to be qualified health coverage?
A–10. No. A state-based plan does not
fail to satisfy the requirements for qualified health coverage merely because it allows eligible individuals and qualifying

2005–27 I.R.B.

family members who are not qualifying individuals to enroll in the plan.
Q–11. Does a state-based plan fail to
satisfy the guaranteed issue requirement
merely because it restricts eligibility under
the plan to residents of the state?
A–11. No. Moreover, if a state has
a system of plans covering distinct geographic regions in the state, each plan may
restrict eligibility to residents of that region as long as any qualifying individual
in the state is eligible for at least one plan
in the system.
Q–12. Are there other restrictions that a
state-based plan can impose on the enrollment of qualifying individuals?
A–12. Yes. State-based plans can
require qualifying individuals to enroll

2005–27 I.R.B.

within a reasonable period after becoming
qualifying individuals or during limited
regular enrollment periods thereafter (such
as annual enrollment periods), can deny
enrollment to qualifying individuals for
fraud or misrepresentation of material
facts, and can deny enrollment for failure
to make timely payment.
Q–13. Can state-based coverage (including a high risk pool) condition enrollment of a qualifying individual on being
rejected for coverage in the individual or
group health insurance market?
A–13. No. Any coverage elected by a
state to be qualified health coverage must
be made available to a qualifying individual if the qualifying individual pays for enrollment (or enrolls in the advance pay-

17

ment program and the IRS pays for enrollment on behalf of the qualifying individual) and cannot be subject to any condition
other than those described in Q&A–11 and
Q&A–12 of this notice.
DRAFTING INFORMATION
The principal author of this notice is
Russ Weinheimer of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information about this notice, contact
Mr. Weinheimer at (202) 622–6080 (not a
toll-free call).

July 5, 2005