Bulletin No. 2016 –21

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HIGHLIGHTS

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Bulletin No. 2016 –21

May 23, 2016

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

REG–127199 –15, page 1007.

Proposed regulations would treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner for the limited purposes of the

reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic

corporations under section 6038A of the Code.

Rev. Proc. 2016 –29, page 880.

This revenue procedure provides the List of Automatic

Changes to which the automatic change procedures in Rev.

Proc. 2015–13, 2015–5 I.R.B. 419, as clarified and modified

by Rev. Proc. 2015–33, 2015–24 I.R.B. 1067, and as modified by Rev. Proc. 2016 –1, 2016 –1 I.R.B. 1, (or successor)

apply. The definitions in section 3 of Rev. Proc. 2015–13 apply

to this revenue procedure. Rev. Proc. 2015–14 is superseded

in part.

Rev. Proc. 2016 –30, page 981.

This document revises Rev. Proc. 2009 –14, which outlines the

procedures to resolve issues through a pre-filing agreement

(PFA). The Rev. Proc. (1) expands the scope of a PFA to include

issues relating to changes in methods of accounting requested

pursuant to the automatic consent procedures; (2) reflects

LBI’s new structure; (3) clarifies or updates procedures for fling

PFA requests; and (4) increases the user fee for PFAs from

$50,000 to $134,300 for requests submitted on or after the

date that is 30 days after the Rev. Proc. is released, to

$218,600 for requests submitted on or after January 1, 2017.

Finding Lists begin on page ii.

Rev. Proc. 2016 –31, page 988.

The revenue procedure provides that certain contributions that

money market funds receive from sponsors may be excluded

from the distribution requirements of § 852(a) of the Internal

Revenue Code but are included in investment company taxable

income for purposes of § 852(b).

Notice 2016 –32, page 878.

The notice provides alternative diversification requirements

under section 817(h) of the Internal Revenue Code for a segregated asset account that invests in a money market fund

(MMF) that is a government MMF.

T.D. 9767, page 857.

Final regulations providing guidance under section 432(e)(9)(D)(vii)

on an additional limitation on a benefit suspension with respect

to certain multiemployer defined benefit pension plans in critical and declining funded status.

EMPLOYEE PLANS

T.D. 9767, page 857.

Final regulations providing guidance under section 432(e)(9)(D)(vii)

on an additional limitation on a benefit suspension with respect

to certain multiemployer defined benefit pension plans in critical and declining funded status.

(Continued on the next page)

EXEMPT ORGANIZATIONS

Announcement 2016 –20, page 991.

Serves notice to potential donors of organizations that have

recently filed a timely declaratory judgment suit under section

7428 of the Code, challenging revocation of its status as an

eligible donee under section 170(c)(2).

EMPLOYMENT TAX

REG–114307–15, page 1006.

Generally, for federal income tax purposes, a business entity

that has a single owner and is not a corporation is disregarded

as an entity separate from its owner (a disregarded entity).

However, for purposes of employment taxes, a disregarded

entity is treated as a corporation, except that the owner of a

disregarded entity who is treated as a sole proprietor for

income tax purposes remains subject to self-employment

taxes. The current regulations do not explicitly address situations in which the owner of a disregarded entity is a partnership. These proposed regulations address this issue by clarifying that the rule that a disregarded entity is treated as a

corporation for employment tax purposes does not alter the

self-employment tax treatment of any individuals who are partners in the partnership that owns a disregarded entity.

REG–127561–15, page 991.

The Stephen Beck, Jr., Achieving a Better Life Experience Act

of 2014 requires the establishment of a voluntary certification

program for professional employer organizations. A professional employer organization, sometimes referred to as an

employee leasing company, is an organization that enters into

an agreement with a client to perform some or all of the federal

employment tax withholding, reporting, and payment functions

related to workers performing services for the client. Being

certified by the IRS as a certified professional employer organization (CPEO) has certain federal employment tax consequences for both the CPEO and its customers and clients.

These proposed regulations set forth the federal employment

tax liabilities and other obligations of persons certified by the

IRS as CPEOs.

T.D. 9766, page 855.

Generally, for federal income tax purposes, a business entity

that has a single owner and is not a corporation is disregarded

as an entity separate from its owner (a disregarded entity).

However, for purposes of employment taxes, a disregarded

entity is treated as a corporation, except that the owner of a

disregarded entity who is treated as a sole proprietor for

income tax purposes remains subject to self-employment

taxes. The current regulations do not explicitly address situations in which the owner of a disregarded entity is a partnership. These temporary regulations address this issue by clarifying that the rule that a disregarded entity is treated as a

corporation for employment tax purposes does not alter the

self-employment tax treatment of any individuals who are partners in the partnership that owns a disregarded entity.

T.D. 9768, page 862.

The Stephen Beck, Jr., Achieving a Better Life Experience Act of

2014 requires the establishment of a voluntary certification program for professional employer organizations. A professional

employer organization, sometimes referred to as an employee

leasing company, is an organization that enters into an agreement

with a client to perform some or all of the federal employment tax

withholding, reporting, and payment functions related to workers

performing services for the client. Being certified by the IRS as a

certified professional employer organization (CPEO) has certain

federal employment tax consequences for both the CPEO and its

customers and clients. These final and temporary regulations

describe the requirements a person must satisfy in order to

become and remain a CPEO.

SELF–EMPLOYMENT TAX

REG–114307–15, 1006.

Generally, for federal income tax purposes, a business entity

that has a single owner and is not a corporation is disregarded

as an entity separate from its owner (a disregarded entity).

However, for purposes of employment taxes, a disregarded

entity is treated as a corporation, except that the owner of a

disregarded entity who is treated as a sole proprietor for

income tax purposes remains subject to self-employment

corporation for employment tax purposes does not alter the

self-employment tax treatment of any individuals who are partners in the partnership that owns a disregarded entity.

(Continued on the next page)

T.D. 9766, page 855.

Generally, for federal income tax purposes, a business entity

that has a single owner and is not a corporation is disregarded

as an entity separate from its owner (a disregarded entity).

However, for purposes of employment taxes, a disregarded

entity is treated as a corporation, except that the owner of a

disregarded entity who is treated as a sole proprietor for

income tax purposes remains subject to self-employment

corporation for employment tax purposes does not alter the

self-employment tax treatment of any individuals who are partners in the partnership that owns a disregarded entity.

ADMINISTRATIVE

REG–127199 –15, page 1007

Proposed regulations would treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner for the limited purposes of the

reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic

corporations under section 6038A of the Code.

Rev. Proc. 2016 –30, page 981.

This document revises Rev. Proc. 2009 –14, which outlines the

procedures to resolve issues through a pre-filing agreement

(PFA). The Rev. Proc. (1) expands the scope of a PFA to include

issues relating to changes in methods of accounting requested

pursuant to the automatic consent procedures; (2) reflects

LBI’s new structure; (3) clarifies or updates procedures for fling

PFA requests; and (4) increases the user fee for PFAs from

$50,000 to $134,300 for requests submitted on or after the

date that is 30 days after the Rev. Proc. is released, to

$218,600 for requests submitted on or after January 1, 2017.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument of

the Commissioner of Internal Revenue for announcing official

rulings and procedures of the Internal Revenue Service and for

publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general

interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all

substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal

management are not published; however, statements of internal practices and procedures that affect the rights and duties

of taxpayers are published.

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings to

taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted

to prevent unwarranted invasions of privacy and to comply with

statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions of

the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax

Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by

the Department of the Treasury’s Office of the Assistant Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for

the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

May 23, 2016

Bulletin No. 2016 –21

Part I. Rulings and Decisions Under the Internal Revenue Code

of 1986

§ 301.7701–2T: Business entities; definitions (temporary)

T.D. 9766

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 301

Self-employment Tax

Treatment of Partners in a

Partnership that Owns a

Disregarded Entity

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations that clarify

the employment tax treatment of partners

in a partnership that owns a disregarded

entity. These regulations affect partners in

a partnership that owns a disregarded entity. The text of these temporary regulations serves as the text of proposed regulations (REG–114307–15) published in

the Proposed Rules section in this issue of

the Internal Revenue Bulletin.

DATES: Effective date: These regulations

are effective on May 4, 2016.

Applicability date: For date of applicability, see § 301–7701–2T(e)(8).

FOR FUTHER INFORMATION

CONTACT:

Andrew K. Holubeck at (202) 3174774 (not a toll-free number).

SUPPLEMENTARY INFORMATION

Background

Section 301.7701–2(c)(2)(i) states that,

except as otherwise provided, a business

entity that has a single owner and is not a

corporation under § 301.7701–2(b) is disregarded as an entity separate from its

owner (a disregarded entity). However,

§ 301.7701–2(c)(2)(iv)(B) provides that

an entity that is a disregarded entity is

treated as a corporation for purposes of

employment taxes imposed under subtitle

Bulletin No. 2016 –21

C of the Internal Revenue Code (Code).

Therefore, the disregarded entity, rather

than the owner, is considered to be the

employer of the entity’s employees for

purposes of employment taxes imposed

by subtitle C.

While § 301.7701–2(c)(2)(iv)(B) treats

a disregarded entity as a corporation for

employment tax purposes, this rule does

not apply for self-employment tax purposes.

Specifically, § 301.7701–2(c)(2)(iv)(C)(2)

provides that the general rule of

§ 301.7701–2(c)(2)(i) applies for selfemployment tax purposes. After setting

forth this general rule, the regulation applies this rule in the context of a single

individual owner by stating that the owner

of an entity that is treated in the same

manner as a sole proprietorship is subject

to tax on self-employment income. The

regulation, at § 301.7701–2(c)(2)(iv)(D),

also includes an example that specifically

illustrates the mechanics of the rule. In the

example, the disregarded entity is subject

to employment tax with respect to employees of the disregarded entity. The individual owner, however, is subject to

self-employment tax on the net earnings

from self-employment resulting from the

disregarded entity’s activities. The regulations do not include a separate example in

which the disregarded entity is owned by

a partnership.

It has come to the attention of the Treasury Department and the IRS that even

though the regulations set forth a general

rule that an entity is disregarded as a separate entity from the owner for selfemployment tax purposes, some taxpayers

may have read the current regulations to

permit the treatment of individual partners

in a partnership that owns a disregarded

entity as employees of the disregarded

entity because the regulations did not include a specific example applying the general rule in the partnership context. Under

this reading, which was not intended,

some taxpayers have permitted partners to

participate in certain tax-favored employee benefit plans. The Treasury Department and the IRS note that the regulations did not create a distinction

between a disregarded entity owned by an

855

individual (that is, a sole proprietorship)

and a disregarded entity owned by a partnership in the application of the selfemployment tax rule. Rather, § 301.7701–

2(c)(2)(iv)(C)(2) provides that the general

rule of § 301.7701–2(c)(2)(i) applies for

self-employment tax purposes for any

owner of a disregarded entity without

carving out an exception regarding a partnership that owns such a disregarded entity. In addition, the Treasury Department

and the IRS do not believe that the regulations alter the holding of Rev. Rul. 69 –

184, 1969 –1 CB 256, which provides

that: (1) bona fide members of a partnership are not employees of the partnership

within the meaning of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection

of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle

C, Internal Revenue Code of 1954), and

(2) such a partner who devotes time and

energy in the conduct of the trade or business of the partnership, or in providing

services to the partnership as an independent contractor, is, in either event, a selfemployed individual rather than an individual who, under the usual common law

rules applicable in determining the

employer-employee relationship, has the

status of an employee.

To address this issue, the Treasury Department and the IRS clarify in these temporary regulations that the rule that a disregarded entity is treated as a corporation

for employment tax purposes does not apply to the self-employment tax treatment

of any individuals who are partners in a

partnership that owns a disregarded entity.

The rule that the entity is disregarded for

self-employment tax purposes applies to

partners in the same way that it applies to

a sole proprietor owner. Accordingly, the

partners are subject to the same selfemployment tax rules as partners in a partnership that does not own a disregarded

entity.

Explanation of Provisions

This document contains amendments

to the Procedure and Administration Regulations (26 CFR part 301) under section

May 23, 2016

7701 of the Code to clarify that a disregarded entity that is treated as a corporation for purposes of employment taxes

imposed under subtitle C of the Code is

not treated as a corporation for purposes

of employing its individual owner, who is

treated as a sole proprietor, or employing

an individual that is a partner in a partnership that owns the disregarded entity.

Rather, the entity is disregarded as an entity separate from its owner for this purpose. Existing regulations already provide that the entity is disregarded for

self-employment tax purposes and specifically note that the owner of an entity

treated in the same manner as a sole

proprietorship under § 301.7701–2(a) is

subject to tax on self-employment income. These temporary regulations apply this existing general rule to illustrate

that, if a partnership is the owner of a

disregarded entity, the partners in the

partnership are subject to the same selfemployment tax rules as partners in a

partnership that does not own a disregarded entity.

While these temporary regulations provide that a disregarded entity owned by a

partnership is not treated as a corporation

for purposes of employing any partner of

the partnership, these regulations do not

address the application of Rev. Rul. 69 –

184 in tiered partnership situations. Several commenters have requested that the

IRS provide additional guidance on the

application of Rev. Rul. 69 –184 to tiered

partnership situations, and have also suggested modifying the holding of Rev. Rul.

69 –184 to allow partnerships to treat partners as employees in certain circumstances, such as, for example, employees

in a partnership who obtain a small ownership interest in the partnership as an

employee compensatory award or incentive. However, these commenters have not

provided detailed analyses and suggestions as to how the employee benefit and

employment tax rules would apply in such

situations. The Treasury Department and

the IRS request comments on the appropriate application of the principles of Rev.

Rul. 69 –184 to tiered partnership situations, the circumstances in which it may

be appropriate to permit partners to also

be employees of the partnership, and the

impact on employee benefit plans (including, but not limited to, qualified retirement

May 23, 2016

plans, health and welfare plans, and fringe

benefit plans) and on employment taxes if

Rev. Rul. 69 –184 were to be modified to

permit partners to also be employees in

certain circumstances.

In order to allow adequate time for

partnerships to make necessary payroll

and benefit plan adjustments, these temporary regulations will apply on the later

of: (1) August 1, 2016, or (2) the first

day of the latest-starting plan year following May 4, 2016, of an affected plan

(based on the plans adopted before, and

the plan years in effect as of, May 4,

2016) sponsored by an entity that is

disregarded as an entity separate from

its owner for any purpose under

§ 301.7701–2. For these purposes, an

affected plan includes any qualified

plan, health plan, or section 125 cafeteria plan if the plan benefits participants

whose employment status is affected by

these regulations. For rules that apply

before the applicability date of these

regulations, see 26 CFR part 301 revised

as of April 1, 2016.

Special Analysis

Certain IRS regulations, including this

one, are exempt from the requirements of

Executive Order 12866, as supplemented

and reaffirmed by Executive Order 13563.

Therefore, a regulatory impact assessment

is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter

5) does not apply to these regulations. For

applicability of the Regulatory Flexibility

Act (5 U.S.C. chapter 6), please refer to

the Special Analysis section in the preamble to the cross-referenced notice of proposed rulemaking in the Proposed Rules

section of this issue of the Internal Revenue Bulletin. Pursuant to section 7805(f)

of the Code, these regulations were submitted to the Chief Counsel for Advocacy

of the Small Business Administration for

comment on its impact on small business.

Drafting Information

The principal author of these regulations is Andrew Holubeck of the Office of

the Division Counsel/Associate Chief

Counsel (Tax Exempt and Government

Entities). However, other personnel from

856

the IRS and the Treasury Department participated in their development.

*****

Amendments to the Regulations

Accordingly, 26 CFR part 301 is

amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 continues to read in part as follows:

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

Par. 2. Section 301.7701–2 is amended

by:

1. Revising paragraph (c)(2)(iv)(C)(2).

2. Adding paragraph (e)(8).

The revision and addition reads as follows:

§ 301.7701–2 Business entities;

definitions.

*****

(2) * * *

(iv) * * *

(2) [Reserved]. For further guidance,

see § 301.7701–2T(c)(2)(iv)(C)(2).

*****

(e)(8) [Reserved]. For further guidance, see § 301.7701–2T(e)(8).

Par. 3. Section 301.7701–2T is added

to read as follows:

§ 301.7701–2T Business entities;

definitions (temporary).

(a) through (c)(2)(iv)(C)(1) [Reserved]. For further guidance, see

§ 301.7701–2(a) through (c)(2)(iv)(C)(1).

(2) Section 301.7701–2(c)(2)(i) applies

to taxes imposed under subtitle A, including Chapter 2—Tax on Self-Employment

Income. Thus, an entity that is treated in

the same manner as a sole proprietorship

under § 301.7701–2(a) is not treated as a

corporation for purposes of employing its

owner; instead, the entity is disregarded as

an entity separate from its owner for this

purpose and is not the employer of its

owner. The owner will be subject to selfemployment tax on self-employment income with respect to the entity’s activities. Also, if a partnership is the owner of

Bulletin No. 2016 –21

an entity that is disregarded as an entity

separate from its owner for any purpose

under § 301.7701–2, the entity is not

treated as a corporation for purposes of

employing a partner of the partnership

that owns the entity; instead, the entity is

disregarded as an entity separate from the

partnership for this purpose and is not the

employer of any partner of the partnership that owns the entity. A partner of a

partnership that owns an entity that is

disregarded as an entity separate from

its owner for any purpose under

§ 301.7701–2 is subject to the same

self-employment tax rules as a partner

of a partnership that does not own an

entity that is disregarded as an entity

separate from its owner for any purpose

under § 301.7701–2.

(c)(2)(iv)(D) through (e)(7) [Reserved].

For further guidance, see § 301.7701–

2(c)(2)(iv)(D) through (e)(7).

(8)(i) Effective/applicability date. Paragraph (c)(2)(iv)(C)(2) of this section applies on the later of–

(A) August 1, 2016, or

(B) The first day of the latest-starting

plan year following May 4, 2016, of an

affected plan (based on the plans adopted

before, and the plan years in effect as of,

May 4, 2016) sponsored by an entity

that is disregarded as an entity separate

from its owner for any purpose under

§ 301.7701–2. For rules that apply before the applicability date of these regulations, see 26 CFR part 301 revised as

of April 1, 2016. For these purposes—

(1) An affected plan includes any qualified plan, health plan, or section 125 cafeteria plan if the plan benefits participants

whose employment status is affected by

paragraph (c)(2)(iv)(C)(2),

(2) A qualified plan means a plan, contract, pension, or trust described in paragraph (A) or (B) of section 219(g)(5)

(other than paragraph (A)(iii)), and

(3) A health plan means an arrangement described under § 1.105–5 of this

chapter.

(ii) Expiration date. The applicability

of paragraph (c)(2)(iv)(C)(2) of this section expires on or before May 3, 2019 or

such earlier date as may be determined

under amendments to the regulations issued after May 3, 2016.

John M. Dalrymple

Deputy Commissioner for

Services and Enforcement.

Approved: April 20, 2016.

Mark J. Mazur

Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 3, 2016,

8:45 a.m., and published in the issue of the Federal Register

for May 4, 2016, 81 F.R. 26693)

26 CFR 1.432(e)(9)–1

T.D. 9767

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Additional Limitation on

Suspension of Benefits

Applicable to Certain Pension

Plans Under the

Multiemployer Pension

Reform Act of 2014

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: The Multiemployer Pension

Reform Act of 2014 (“MPRA”), which

was enacted by Congress as part of the

Consolidated and Further Continuing Appropriations Act of 2015, relates to multiemployer defined benefit pension plans

that are projected to have insufficient

funds, within a specified timeframe, to

pay the full plan benefits to which individuals will be entitled (referred to as

plans in “critical and declining status”).

Under MPRA, the sponsor of such a plan

is permitted to reduce the pension benefits

payable to plan participants and beneficiaries if certain conditions and limitations

are satisfied (referred to in MPRA as a

“suspension of benefits”). One specific

limitation governs the application of a

suspension of benefits under any plan that

includes benefits directly attributable to a

participant’s service with any employer

that has withdrawn from the plan in a

complete withdrawal, paid its full withdrawal liability, and, pursuant to a collective bargaining agreement, assumed liability for providing benefits to participants

and beneficiaries equal to any benefits for

such participants and beneficiaries reduced as a result of the financial status of

the plan. This document contains final

regulations that provide guidance relating

to this specific limitation. These regulations affect active, retired, and deferred

vested participants and beneficiaries under

any such multiemployer plan in critical

and declining status as well as employers

contributing to, and sponsors and administrators of, those plans.

DATES: Effective Date: These regulations are effective on May 5, 2016.

Applicability Date: These regulations

apply to suspensions for which the approval or denial is issued on or after April

26, 2016. In the case of a systemically

important plan, the final regulations apply

with respect to any modified suspension

implemented on or after April 26, 2016.

FOR FURTHER INFORMATION

CONTACT: The Department of the Treasury MPRA guidance information line at

(202) 622-1559 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments

to the Income Tax Regulations (26 CFR

part 1) under section 432(e)(9) of the Internal Revenue Code (Code), as amended

by section 201 of the Multiemployer Pension Reform Act of 2014, Division O of

the Consolidated and Further Continuing

Appropriations Act, 2015, Public Law No.

113–235 (128 Stat. 2130 (2014))

(MPRA).1 As amended, section 432(e)(9)

permits plan sponsors of certain multiemployer plans to reduce the plan benefits

payable to participants and beneficiaries

by plan amendment (referred to in the

Section 201 of MPRA makes parallel amendments to section 305 of the Employee Retirement Income Security Act of 1974, Public Law 93– 406 (88 Stat. 829 (1974)), as amended (ERISA).

The Treasury Department has interpretive jurisdiction over the subject matter of these provisions under ERISA as well as the Code. See also section 101 of Reorganization Plan No. 4 of

1978 (43 FR 47713). Thus, these final Treasury regulations issued under section 432 of the Code apply as well for purposes of section 305 of ERISA.

Bulletin No. 2016 –21

857

May 23, 2016

statute as a “suspension of benefits”) if

specified conditions are satisfied. A plan

sponsor that seeks to implement a suspension of benefits must submit an application for approval of that suspension to the

Secretary of the Treasury. The Secretary

of the Treasury, in consultation with the

Pension Benefit Guaranty Corporation

and the Secretary of Labor (generally referred to in this preamble as the Treasury

Department, PBGC, and Labor Department, respectively), is required by the

statute to approve the application upon

finding that certain specified conditions

are satisfied.

One condition, set forth in section

432(e)(9)(D)(vii), is a specific limitation

on how a suspension of benefits must be

applied under a plan that includes benefits

that are directly attributable to a participant’s service with any employer described in section 432(e)(9)(D)(vii)(III).

An employer is described in section

432(e)(9)(D)(vii)(III) if the employer has,

prior to the date MPRA was enacted (December 16, 2014): (1) withdrawn from the

plan in a complete withdrawal under section 4203 of ERISA; (2) paid the full

amount of the employer’s withdrawal liability under section 4201(b)(1) of ERISA

or an agreement with the plan; and (3)

pursuant to a collective bargaining agreement, assumed liability for providing benefits to participants and beneficiaries of

the plan under a separate, single-employer

plan sponsored by the employer, in an

amount equal to any amount of benefits

for these participants and beneficiaries reduced as a result of the financial status of

the plan. Such an employer is referred to

in this preamble as a “subclause III employer,” and a collective bargaining agreement under which the employer assumes

liability for those benefits is referred to as

a “make-whole agreement.”

If section 432(e)(9)(D)(vii) applies to a

plan then, under section 432(e)(9)(D)(vii)(I),

the suspension of benefits must first be

applied to the maximum extent permissible to benefits attributable to a participant’s service with an employer that withdrew from the plan and failed to pay (or is

delinquent with respect to paying) the full

amount of its withdrawal liability under

section 4201(b)(1) of ERISA or an agreement with the plan. Such an employer is

referred to in this preamble as a “subclause I employer.” Second, under section

432(e)(9)(D)(vii)(II), except as provided

in section 432(e)(9)(D)(vii)(III), a suspension of benefits must be applied to all

other benefits under the plan that may

be suspended. Third, under section

432(e)(9)(D)(vii)(III), a suspension must

be applied to benefits under the plan that

are directly attributable to a participant’s

service with a subclause III employer. An

employer under the plan is referred to in

this preamble as a “subclause II employer” if it is neither a subclause I employer nor a subclause III employer.

On October 23, 2015, the Treasury Department published a notice in the Federal

which represented that the plan is of the type

to which section 432(e)(9)(D)(vii) applies.

The notice requested public comments on

all aspects of the application, including with

respect to the interpretation of section

432(e)(9)(D)(vii) that is reflected in the application.

On February 11, 2016, the Treasury

Department and the IRS published proposed regulations (REG–101701–16) regarding the specific limitation on a suspension of benefits under section

432(e)(9)(D)(vii) in the Federal Register

at 81 FR 7253. Comments were received

on the proposed regulations and a public

hearing was held on March 22, 2016.

After consideration of the written comments received and the oral comments

presented at the public hearing, the provisions of the proposed regulations are adopted as revised by this Treasury decision.

The Treasury Department consulted with

PBGC and the Labor Department in developing these regulations.2

vice with a subclause III employer. In

determining how a suspension should be

allocated consistent with MPRA’s framework and purpose, the Treasury Department and the IRS analyzed the statute and

applied well-established principles of statutory construction to interpret section

432(e)(9)(D)(vii). In so doing, the Treasury Department and the IRS interpreted

section 432(e)(9)(D)(vii) in the context of

section 432(e)(9) as a whole, which requires, among other things, that any suspension be subject to certain limitations,

including that the suspension be equitably

distributed across the participant and beneficiary population.

Explanation of Provisions

II. Relationship Between Subclause II

Benefits and Subclause III Benefits

These regulations amend the Income

Tax Regulations (26 CFR part 1) to provide

guidance regarding section 432(e)(9)(D)(vii).

Section 432(e)(9)(D)(vii) sets forth a rule that

limits how a suspension may be applied

under a plan that includes benefits that are

directly attributable to a participant’s ser-

I. Application of a Suspension of

Benefits to Subclause I Benefits to the

Maximum Extent Permissible

Subclause (I) of section 432(e)(9)(D)(vii)

provides that the suspension of benefits

must first be applied “to the maximum

extent permissible” to benefits attributable

to service with a subclause I employer

(referred to in this preamble as “subclause

I benefits”). Accordingly, the proposed

regulations provided that, for a plan that is

subject to section 432(e)(9)(D)(vii), a suspension of benefits must be applied to the

maximum extent permissible to subclause

I benefits before reductions are permitted

to be applied to any other benefits. Under

the proposed regulations, only if such a

suspension is not reasonably estimated to

achieve the level that is necessary to enable the plan to avoid insolvency may a

suspension then be applied to other benefits that are permitted to be suspended and

that are attributable to a participant’s service with other employers. No commenters

objected to this provision of the proposed

regulations, and these final regulations

adopt this provision as proposed.

In contrast to subclause (I) of section

432(e)(9)(D)(vii), subclause (II) does not

include the phrase “to the maximum extent permissible.” Accordingly, the Treasury Department and the IRS developed

the rules in the proposed regulations based

TheTreasury Department and the IRS have published final regulations providing general guidance regarding section 432(e)(9). See § 1.432(e)(9)–1 (TD 9765), published in the Federal

May 23, 2016

858

Bulletin No. 2016 –21

on the interpretation that a suspension need

not be applied to the maximum extent permissible to benefits described in subclause

(II) before any suspension is applied to benefits described in subclause (III).

A number of commenters expressed

views regarding the rules under the proposed regulations describing how the suspension of benefits is permitted to apply to

benefits attributable to service with a subclause II employer (referred to in this preamble as “subclause II benefits”) and benefits directly attributable to service with a

subclause III employer (referred to in this

preamble as “subclause III benefits”).

Many of these commenters agreed with

the analysis set forth in the preamble to

the proposed regulations and supported an

interpretation of the statute that subclause

II benefits are not required to be reduced

to the maximum extent permissible before

any subclause III benefits can be reduced.

Two commenters advocated that the

statute be interpreted to require that subclause II benefits be suspended to the maximum extent permissible before a suspension is permitted to apply to any subclause

III benefits. These commenters maintained

that this result is required by the ordinal

numbering of the three subclauses and asserted that Congress intended to favor any

withdrawing employer that not only paid the

full amount of its withdrawal liability but

also entered into a make-whole agreement.

If such an approach were applied under section 432(e)(9)(D)(vii), then the benefits described in each of the first two subclauses

would be required to be suspended to the

maximum extent permissible before any

suspension could apply to benefits described

in the successive subclause. Under that approach, subclause III benefits would be permitted to be suspended only if all benefits

attributable to participants’ service with all

subclause I and subclause II employers were

suspended to the maximum extent permissible. In support of this position, one commenter asserted that the Treasury Department and the IRS misinterpreted the import

of the absence of the phrase “to the maximum extent permissible” in subclause (II).

This commenter asserted that the combined

use in subclause (II) of “second,” “except as

provided by subclause (III),” and “all other

benefits” has the same effect with respect to

subclause II benefits as the use in subclause

(I) of “to the maximum extent permissible”

has with respect to subclause I benefits. This

commenter argued that the difference in language between subclause (I) and subclause

(II) does not prevent the two rules from

having the same effect, and cited to Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S.

___, 133 S. Ct. 1351, 1364 (2013) in support of this argument.

After carefully considering this argument and applicable authorities, the Treasury Department and the IRS have concluded that this interpretation is incorrect;

the statute does not require subclause II

benefits to be suspended to the maximum

extent permissible before any subclause

III benefits are permitted to be suspended,

and the rule set forth in the proposed

regulations is the correct interpretation of

the statute. Applicable case law establishes that a difference in language between one statutory provision and the next

immediately following provision should

be given meaning. See Loughrin v. United

States, 573 U.S. ___,134 S. Ct. 2384,

2390 (2014) (“We have often noted that

when ‘Congress includes particular language in one section of a statute but omits

it in another’—let alone in the very next

provision—this Court ‘presume[s]’ that

Congress intended a difference in meaning.” (quoting Russello v. United States,

464 U.S. 16, 23 (1983)). To read subclause (II) to require that subclause II benefits be suspended “to the maximum extent permissible” even though that

language does not appear in subclause (II)

would effectively rewrite the statute either

by moving the phrase the “to the maximum extent permissible” from subclause

(I) to the introductory language of section

432(e)(9)(D)(vii) or by adding it to subclause (II).3 The interpretation in the proposed regulations is also consistent with

the language in subclause (II) (“except as

provided in subclause (III)”), which con-

templates a coordinated application of two

provisions that are to be applied “second”

and “third;” this language in subclause (II)

is not consistent with an interpretation that

requires application of a suspension to

subclause II benefits that is independent of

(and entirely preceding) the application of

the suspension to subclause III benefits.

Kirtsaeng, which the one commenter

cited to contest this interpretation in the

proposed regulations, involved two

phrases that “mean roughly the same

thing.” Id. at 1358 –59, 1364 (“The language of [the relevant statute] read literally favors [petitioner’s] interpretation,

namely, that ‘lawfully made under this

title’ means made ‘in accordance with’ or

‘in compliance with’ the Copyright

Act.”). There are no “roughly” similar

phrases across subclauses (I) and (II).

Kirtsaeng is therefore inapposite.4

The Treasury Department and the IRS

recognize that the language of section

432(e)(9)(D)(vii) bears some similarity to

other statutory provisions that establish

priority categories requiring claims to be

fully satisfied under each earlier category

before any claims are permitted to be satisfied under any subsequent category—for

example, section 4044(a) of ERISA and

sections 507(a) and 726(a) and (c) of the

Bankruptcy Code, which in each instance

prescribes ordering rules relating to the

distribution of limited assets. However, in

contrast to the language in section

432(e)(9)(D)(vii), these other statutory

provisions do not include language in one

category instructing that the category

must be fully exhausted before reaching

the next category, while omitting that

language in other categories. Furthermore, if the ordinal numbering of section 432(e)(9)(D)(vii) were to be interpreted to require that each category be

fully exhausted before reaching the next

category, then the phrase “to the maximum extent permissible” in subclause

(I) would not serve any purpose and

would be superfluous.5

The broad scope of benefits included in

subclause (III) further supports the con-

See Hall v. United States, 566 U.S. ___, 132 S. Ct. 1882, 1893 (2012) (“[I]t is not for us to rewrite the statute.”)

Kirtsaeng is further inapposite because the statutory provisions of the Copyright Act that were compared to each other in that case (i.e., 17 U.S.C. § 109 and § 602) were not in immediate

proximity to each other unlike the subclauses at issue here.

See Marx v. General Revenue Corp., 568 U.S. ___, 133 S. Ct. 1166, 1178 (2013) (“[T]he canon against surplusage is strongest when an interpretation would render superfluous another

part of the same statutory scheme.”).

Bulletin No. 2016 –21

859

May 23, 2016

clusion that a suspension need not be applied to the maximum extent permissible

to subclause II benefits before any suspension is applied to subclause III benefits.

As explained in Section D of this preamble, subclause III benefits include all benefits that are directly attributable to service with a subclause III employer,

without regard to whether those benefits

are subject to a make-whole agreement. If

subclause II benefits were required to be

reduced to the maximum extent permissible before any subclause III benefits could

be reduced (including subclause III benefits not subject to a make-whole agreement), then participants with subclause III

benefits who are not subject to the makewhole agreement could experience significantly smaller reductions than participants with subclause II benefits (including

benefits attributable to service with employers that never withdrew from the

plan), without regard to whether that difference is consistent with the equitable

distribution requirement.

For these reasons, these final regulations adopt the rule under the proposed

regulations that subclause II benefits are

not required to be suspended “to the maximum extent permissible” before any suspension is permitted to be applied to subclause III benefits.

III. Standard for Application of

Suspension to Subclause III Benefits

Relative to Subclause II Benefits

In order to give effect to the requirement that a suspension of benefits be applied “second” to subclause II benefits and

“third” to subclause III benefits, the proposed regulations provided that a suspension would not be permitted to reduce

subclause III benefits unless subclause II

benefits were reduced to at least the same

extent as subclause III benefits were reduced. Under the proposed regulations,

this limitation would be satisfied if no

participant’s benefits that are directly attributable to service with a subclause III

employer were reduced more than that

participant’s benefits would have been reduced if, holding constant the benefit formula, work history, and all relevant fac-

tors used to compute benefits, those

benefits were attributable to service with

any other employer. The effect of the proposed rule is to protect a subclause III

employer from the possibility that the suspension would be expressly designed to

take advantage of the employer’s commitment to make participants and beneficiaries whole for the reductions.

Most commenters agreed with the

analysis set forth in the preamble to

the proposed regulations and supported

the rule that a suspension would not be

permitted to reduce subclause III benefits

unless subclause II benefits are reduced to

at least the same extent. However, one

commenter maintained that, if the Treasury Department and the IRS were to

adopt the rule set forth in the proposed

regulations intended to protect a subclause

III employer, then the rule should be modified to prohibit facially neutral suspension provisions that have a disparate impact on subclause III benefits or that are

intentionally designed to produce such an

impact. Under such a rule, a suspension of

benefits that disproportionally reduces

subclause III benefits in the aggregate relative to subclause II benefits in the aggregate would be prohibited under section

432(e)(9)(D)(vii) even if the suspension

does not by its terms treat individuals with

subclause III benefits in a less favorable

manner than similarly situated individuals

with subclause II benefits.

Nothing in the statute or preexisting

case law requires the application of a disparate impact standard. Both Congress

and the Supreme Court have required such

a standard only in the unique context in

which “barriers operate invidiously to discriminate on the basis of racial or other

impermissible classification,” Griggs v.

Duke Power Co., 401 U.S. 424, 431

(1971); see, e.g., 42 U.S.C. § 2000e–

2(k)(1)(A)(i) (prohibiting “a particular

employment practice that causes a disparate impact on the basis of race, color,

religion, sex, or national origin”); see also

Texas Department of Housing and Community Affairs, et al., v. Inclusive Communities Project, Inc., et al., 576 U. S. ___ ,

135 S. Ct. 2507, 2513 (2015) (“a disparate-

impact claim challenges practices that have

a ‘disproportionately adverse effect on minorities’ and are otherwise unjustified by a

legitimate rationale”). Those unique circumstances are not present here.

After considering the public comments, the Treasury Department and the

IRS have determined that the rule set forth

in the proposed regulations appropriately

protects a subclause III employer from the

possibility that the suspension would be

expressly designed to take advantage of

the employer’s commitment to make participants and beneficiaries whole for the

reductions in a manner that is most consistent with all of the statutory language.6

However, in response to comments identifying potential ambiguities in the proposed regulations, the application of this

rule in the final regulations has been clarified. Accordingly, these final regulations

provide that a suspension does not violate

the required relationship between subclause III benefits and subclause II benefits if no individual’s benefits that are subclause III benefits are reduced more than

that individual’s benefits would have been

reduced if, holding constant the benefit

formula, work history, and all other relevant factors used to determine the individual’s benefits, those benefits were attributable to service with any other employer.

IV. Treatment of Participants with

Service for a Subclause III Employer

Who Are Not Covered by a Make-Whole

Agreement

The proposed regulations provided

that the benefits described in section

432(e)(9)(D)(vii)(III) are any benefits that

are directly attributable to a participant’s

service with a subclause III employer,

without regard to whether the employer

has assumed liability for providing benefits to the participant or beneficiary that

were reduced as a result of the financial

status of the plan. For example, if, before

the date a subclause III employer entered

into a make-whole agreement, a participant commenced receiving retirement

benefits under a plan that are directly attributable to service with that employer,

then the participant’s benefits would be

The preamble to the proposed regulations requested comments on an alternative interpretation of section 432(e)(9)(vii) that would require that any suspension of benefits be applied to

provide for a lesser reduction in benefits that are directly attributable to service with a subclause III employer than to benefits that are attributable to any other service. No commenters

recommended adopting the alternative interpretation.

May 23, 2016

860

Bulletin No. 2016 –21

described in section 432(e)(9)(D)(vii)(III)

even if those benefits were not covered by

the make-whole agreement. This interpretation is based on the statutory language in

section 432(e)(9)(D)(vii)(III), which defines the benefits to which that subclause

applies as those benefits that are directly

attributable to service with an employer

that has met the conditions set forth in

section 432(e)(9)(D)(vii)(III)(aa) and

(bb). In other words, the statutory provision refers to benefits directly attributable

to service with an employer described in

subclause (III) and not only to benefits

covered by the make-whole agreement.

Some of the commenters on the proposed regulations expressed views regarding whether subclause III benefits should

include benefits that are not covered by a

make-whole agreement. Two commenters

supported the rule set forth in the proposed regulations, under which subclause

III benefits include all benefits directly

attributable to service with a subclause III

employer. Two other commenters expressed the view that subclause III benefits include only benefits that are covered

by a make-whole agreement. The latter

two commenters asserted that Congress

included this provision in order to prevent

a suspension from unreasonably shifting

costs onto an employer that had entered

into a make-whole agreement, and that

this Congressional intent suggests that

only benefits subject to the make-whole

agreement were intended to be protected.

They also noted that interpreting this provision to include benefits that are not covered by a make-whole agreement could

result in benefits for many participants

being covered under subclause III even if

an employer entered into a make-whole

agreement covering only a few participants, and argued that Congress did not

intend such a result.

After considering the public comments, the Treasury Department and the

IRS remain convinced that the rule set

forth in the proposed regulations reflects

the plain language of the statute. The statute defines subclause III benefits as benefits attributable to service with a subclause

III employer, not benefits covered by a

make-whole agreement. Furthermore, the

ability of an employer to take advantage

of this interpretation by entering into a

make-whole agreement that covers only a

Bulletin No. 2016 –21

few participants is limited by the fact that

subclause (III) applies only if all the conditions of subclause (III) (including the

condition that the employer enter into a

make-whole agreement) were satisfied

prior to December 16, 2014 (the date of

enactment of MPRA). Because this date

has passed, there is no cause for concern

that an employer could plan to become a

subclause (III) employer. Accordingly,

these regulations adopt the rule set forth in

the proposed regulations under which subclause III benefits include all benefits attributable to a participant’s service with a

subclause III employer without regard to

whether the participant or beneficiary is

covered by a make-whole agreement.

Effective/Applicability Dates

These regulations apply to suspensions

for which the approval or denial is issued

on or after April 26, 2016. In the case of a

systemically important plan, these regulations apply with respect to any modified

suspension implemented on or after April

26, 2016.

Special Analyses

Certain IRS regulations, including this

one, are exempt from the requirements of

Executive Order 12866, as supplemented

and reaffirmed by Executive Order 13563.

Therefore, a regulatory impact assessment

is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter

5) does not apply to these regulations.

The Regulatory Flexibility Act (RFA)

(5 U.S.C. chapter 6) requires an agency to

consider whether the rules it proposes will

have a significant economic impact on a

substantial number of small entities. In

this case, the IRS and the Treasury Department believe that the regulations

likely would not have a “significant economic impact on a substantial number of

small entities.” 5 U.S.C. 605. This certification is based on the fact that the number

of small entities affected by this rule is

unlikely to be substantial because it is

unlikely that a substantial number of small

multiemployer plans in critical and declining status are subject to the limitation contained in section 432(e)(9)(D)(vii). Pursuant to section 7805(f) of the Code, the

notice of proposed rulemaking preceding

861

these regulations was submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment on

its impact on small business.

Contact Information

For general questions regarding these

regulations, please contact the Department of the Treasury MPRA guidance information line at (202) 622-1559 (not a

toll-free number). For information regarding a specific application for a suspension

of benefits, please contact the Treasury

Department at (202) 622-1534 (not a tollfree number).

*****

Amendments to the Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.432(e)(9)–1 is

amended by revising paragraph (d)(8) to

read as follows:

§ 1.432(e)(9)–1 Benefit suspensions for

multiemployer plans in critical and

declining status.

*****

(d) Limitations on suspension. * * *

(8) Additional rules for plans described in section 432(e)(9)(D)(vii)—(i)

In general. In the case of a plan that

includes the benefits described in paragraph (d)(8)(i)(C) of this section, any suspension of benefits under this section

shall—

(A) First, be applied to the maximum

extent permissible to benefits attributable

to a participant’s service for an employer

that withdrew from the plan and failed to

pay (or is delinquent with respect to paying) the full amount of its withdrawal liability under section 4201(b)(1) of ERISA

or an agreement with the plan;

(B) Second, except as provided by

paragraph (d)(8)(i)(C) of this section, be

applied to all other benefits that may be

suspended under this section; and

a plan that are directly attributable to a

May 23, 2016

participant’s service with any employer

that has, prior to December 16, 2014 —

(1) Withdrawn from the plan in a complete withdrawal under section 4203 of

ERISA and paid the full amount of the

employer’s withdrawal liability under section 4201(b)(1) of ERISA or an agreement

with the plan; and

(2) Pursuant to a collective bargaining

agreement, assumed liability for providing benefits to participants and beneficiaries of the plan under a separate, singleemployer plan sponsored by the employer,

in an amount equal to any amount of

benefits for such participants and beneficiaries reduced as a result of the financial

status of the plan.

(ii) Application of suspensions to benefits that are directly attributable to a

participant’s service with certain employers—(A) Greater reduction in certain

benefits not permitted. A suspension of

benefits under this section must not be

applied to provide for a greater reduction

in benefits described in paragraph

(d)(8)(i)(C) of this section than the reduction that is applied to benefits described in

paragraph (d)(8)(i)(B) of this section. The

requirement in the preceding sentence is

satisfied if no individual’s benefits that are

directly attributable to service with an employer described in paragraph (d)(8)(i)(C)

of this section are reduced more than that

individual’s benefits would have been reduced if, holding the benefit formula,

work history, and all other relevant factors

used to compute benefits constant, those

benefits were attributable to service with

an employer that is not described in paragraph (d)(8)(i)(C) of this section.

(B) Application of limitation to benefits

of participants with respect to which the

employer has not assumed liability. Benefits described in paragraph (d)(8)(i)(C) of

this section include all benefits of a participant or beneficiary that are directly attributable to service with an employer described in paragraph (d)(8)(i)(C) of this

section without regard to whether the employer has assumed liability for providing

benefits to that participant or beneficiary

that are reduced as a result of the financial

status of the plan as described in paragraph (d)(8)(i)(C)(2) of this section. Thus,

the rule of paragraph (d)(8)(ii)(A) of this

section limits the amount by which a suspension of benefits is permitted to reduce

May 23, 2016

benefits under a plan that are directly attributable to a participant’s service with

such an employer, even if the employer

has not, pursuant to a collective bargaining agreement that satisfies the requirements of paragraph (d)(8)(i)(C)(2) of this

section, assumed liability with respect to

that participant’s benefits.

John Dalrymple,

Deputy Commissioner for

Services and Enforcement.

Approved: April 29, 2016.

Mark J. Mazur,

Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 3, 2016,

4:15 p.m., and published in the issue of the Federal Register

for May 5, 2016, 81 F.R. 27011)

26 CFR 301.7705–1T: Certified professional employer organization; 26 CFR 301.7705–2T: CPEO

certification requirements.

T.D. 9768

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Parts 301 and 602

Certified Professional

Employer Organizations;

Final and Temporary

Regulations

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations relating to

certified professional employer organizations (CPEOs). The Stephen Beck, Jr.,

Achieving a Better Life Experience Act of

2014 requires the IRS to establish a voluntary certification program for professional employer organizations. These final

and temporary regulations contain the requirements a person must satisfy in order

to become and remain a CPEO. The final

and temporary regulations will affect persons that apply to be CPEOs and are certified by the IRS as meeting the applicable

requirements. The text of these final and

862

temporary regulations also serves, in part,

as the text of the proposed regulations

(REG–127561–15) set forth in the notice

of proposed rulemaking on this subject in

the Proposed Rules section of this issue of

the Internal Revenue Bulletin.

DATES: Effective Date: These final and

temporary regulations are effective on

May 6, 2016.

Applicability Date: For date of applicability, see § 301.7705–2T(o).

FOR FURTHER INFORMATION

CONTACT: Melissa L. Duce at (202)

317-6798 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these regulations have been reviewed and, pending receipt and evaluation of public comments, approved by the

Office of Management and Budget under

control number 1545-2266.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays

a valid control number.

For further information concerning this

collection of information, where to submit

comments on the collection of information and the accuracy of the estimated

burden, and suggestions for reducing this

burden, please refer to the preamble to the

cross-referenced notice of proposed rulemaking on this subject in the Proposed

Rules section in this issue of the Internal

Revenue Bulletin.

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

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

Overview

The Stephen Beck, Jr., Achieving a

Better Life Experience (ABLE) Act of

2014, enacted on December 19, 2014, as

part of The Tax Increase Prevention Act

of 2014 (Pub. L. 113–295), added new

Bulletin No. 2016 –21

sections 3511 and 7705 to the Internal

Revenue Code (Code) relating to the federal employment tax1 consequences and

certification requirements, respectively, of

a certified professional employer organization (CPEO). The ABLE Act requires

the IRS to establish a voluntary program

for persons to apply to become certified as

a CPEO. This document contains temporary regulations under section 7705 that,

together with a forthcoming revenue procedure that will be published in the Internal Revenue Bulletin, describe the application process and certification requirements

necessary for a person to become and remain a CPEO.

The temporary regulations in this document apply on and after July 1, 2016, the

date the IRS will begin accepting applications for CPEO certification. These temporary regulations, along with the forthcoming revenue procedure and the

application forms and instructions that the

IRS plans to release before July 1, 2016,

provide guidance to enable persons that

wish to apply to become CPEOs to prepare and submit applications on and after

July 1, 2016, and to enable the IRS to

begin processing these applications and

make determinations as to whether to approve or deny certification.

Proposed regulations published elsewhere in this issue of the Internal Revenue Bulletin provide general guidance regarding the federal employment tax

consequences under section 3511 for persons certified as CPEOs and their customers, as well as certain definitions under

section 7705 that are necessary to implement section 3511. The proposed regulations also propose to adopt the temporary

regulations in this document by crossreference.

The regulations have been divided, as

described, into temporary regulations and

proposed regulations in order to balance

the interest in considering public comments on rules before they apply with the

desire to provide guidance on application

procedures that is effective early enough

to open the application process and implement the statutory provisions.

The forthcoming revenue procedure

will prescribe the specifics of the application process for a person to become a

CPEO. In the future, the IRS intends to

release another revenue procedure that

prescribes the ongoing requirements that

CPEOs must meet to maintain certification and describes the consequences of the

failure to meet the ongoing requirements.

Professional Employer Organizations

A professional employer organization

(PEO), sometimes referred to as an employee leasing company, enters into an

agreement with a client to perform some

or all of the federal employment tax withholding, reporting, and payment functions

related to workers performing services for

the client. The terms of a PEO arrangement typically provide that the PEO is the

employer (or “co-employer”) of the client’s employees and is responsible for

paying the employees and for the related

federal employment tax compliance. A

PEO also may manage human resources,

employee benefits, workers compensation

claims, and unemployment insurance

claims for the client. The client typically

pays the PEO a fee based on payroll costs

plus an additional amount. In most cases,

however, the employees working in the

client’s business are the common law employees of the client for federal tax purposes, and the client is therefore legally

responsible for federal employment tax

compliance.

The ABLE Act of 2014

The ABLE Act requires the IRS to

establish a voluntary certification program

for persons to become CPEOs. Section

7705 provides a framework for the IRS to

establish such a program. Section 7705(a)

defines a CPEO as a person who applies to

be treated as a CPEO for purposes of

section 3511 and has been certified by the

Secretary as meeting the requirements of

section 7705(b). Being certified as a

CPEO has certain federal employment tax

consequences under section 3511 that are

described in the proposed regulations under that section published in the Proposed

Rules section in this issue of the Internal

Revenue Bulletin.

Section 7705(b) sets forth the certification requirements that a person must sat-

isfy in order to become a CPEO. Under

the statute, a person meets the requirements of section 7705(b) if: (1) the person

(and any owner, officer, and other person

as may be specified in regulations) demonstrates that it meets such requirements

as the Secretary shall establish, including

requirements relating to tax status, background, experience, business location, and

annual financial audits; (2) agrees to satisfy certain bond and financial review requirements; (3) agrees to satisfy reporting

requirements imposed by the Secretary;

(4) computes its taxable income using an

accrual method of accounting unless the

Secretary approves another method; (5)

agrees to verify on such periodic basis as

the Secretary may prescribe that it continues to meet the certification requirements;

and (6) agrees to notify the Secretary in

writing (within such time as the Secretary

may prescribe) of any change that materially affects the continuing accuracy of

any agreement or information that was

previously made or provided to the IRS in

order to meet the certification requirements.

Section 7705(c) prescribes bond and

independent financial review requirements that a person must satisfy in order

to become and remain a CPEO. To meet

these requirements, section 7705(c)(2)

provides that a CPEO must post a bond

for the payment of federal employment

taxes (in a form acceptable to the Secretary) that is in an amount at least equal to

a specified amount. This specified amount

is, for the period beginning on April 1 of

any calendar year through March 31 of the

following calendar year, the greater of five

percent of the CPEO’s liability under section 3511 in the preceding calendar year

(but not more than $1,000,000) or

$50,000.

Under section 7705(c)(3)(A), a CPEO

must, as of the most recent audit date,

cause to be prepared and provided to the

Secretary (in such manner as the Secretary

may prescribe) an opinion of an independent certified public accountant (CPA) as

to whether the CPEO’s financial statements are presented fairly in accordance

with generally accepted accounting principles (GAAP). Section 7705(c)(6) states

that the audit date for these purposes is six

For purposes of this preamble, “federal employment taxes” refers to taxes imposed under subtitle C of the Code.

Bulletin No. 2016 –21

863

May 23, 2016

months after the completion of the

CPEO’s fiscal year.

Section 7705(c)(3)(B) requires a

CPEO to provide to the Secretary, by the

last day of the second month beginning

after the end of each calendar quarter, an

assertion that the CPEO has withheld and

made deposits of all federal employment

taxes (other than Federal Unemployment

Tax Act (FUTA) taxes under chapter 23

of the Code) and an examination level

attestation from an independent CPA that

states this assertion is fairly stated in all

material respects.

Section 7705(d) gives the Secretary the

authority to suspend or revoke the certification of any person for purposes of section 3511 if the Secretary determines that

such person is not satisfying the agreements or requirements of sections 7705(b)

or (c), or fails to satisfy applicable accounting, reporting, payment, or deposit

requirements. Section 7705(f) provides

that the Secretary shall make available to

the public the name and address of each

person certified as a CPEO and each person whose certification is suspended or

revoked.

November 2015 IRS Request for

Information on PEO Industry Practices

In an effort to streamline the implementation of a new federal CPEO program and better understand the potential

impact of such a program on the PEO

industry, on November 17, 2015, the IRS

requested information from the public regarding certain PEO industry practices.

See IRS News Release IR–2015–127. In

particular, the IRS requested information

on current PEO industry practices relating

to financial audits, verification of payroll

tax obligations, working capital and net

worth requirements, and covered employees. In response to the IRS request for

information, the IRS received comments

from seven taxpayers, which were considered in developing the temporary regulations.

Explanation of Provisions

1. Applicable Definitions

The temporary regulations define a

CPEO as a person that applies to be certified as a CPEO in accordance with the

May 23, 2016

temporary regulations and has been certified by the IRS as meeting the requirements under those regulations. Consistent

with section 7705(b), most of the requirements in these temporary regulations apply both to persons that have been certified as CPEOs and to any person that has

applied to be certified and whose application for certification is pending with the

IRS (referred to in the temporary regulations as “CPEO applicants”).

Section 7705(b)(1) provides that the

Secretary may establish requirements for

certification that apply not only to the

CPEO applicant or CPEO, but also to

“any owner, officer, and other persons as

may be specified in regulations.” Accordingly, the temporary regulations contain a

number of requirements that apply to certain owners, officers, and other individuals (referred to in the regulations as “responsible individuals”), as well as certain

persons that are related to the CPEO (referred to as “related entities” and “precursor entities”). The remainder of this section 1 of the preamble explains the

definitions of these categories of persons.

a. Responsible individual

The temporary regulations generally

define a responsible individual as an individual in any of the following categories

with respect to the CPEO applicant or

CPEO: (1) certain owners; (2) directors

and officers; (3) individuals with ultimate

responsibility for implementing the decisions of the organization’s governing

body; (4) individuals with ultimate responsibility for the organization’s management and operations; (5) individuals

with ultimate responsibility for managing

the organization’s finances; (6) managing

members or general partners; (7) the sole

proprietor of a sole proprietorship; and (8)

any other individuals with primary responsibility for federal employment tax

compliance of the organization.

With respect to determining whether

an individual is a responsible individual

by reason of ownership, the temporary

regulations specify that, in the case of a

CPEO applicant or CPEO that is a corporation, a responsible individual includes

any individual who owns 33 percent or

more of the total combined voting power

of all classes of stock of the corporation

864

entitled to vote or the total value of shares

of all classes of stock of the corporation.

In the case of a CPEO applicant or CPEO

that is a partnership (defined in the temporary regulations as a business entity that

is classified as a partnership for federal tax

purposes

under

§§

301.7701–1,

301.7701–2, and 301.7701–3), a responsible individual includes any individual

who owns 33 percent or more of the profits interest or capital interest in the partnership. In both cases, ownership may be

direct or indirect and is determined by

applying the constructive ownership rules

of section 1563(e) with respect to stock

ownership and by substituting the term

“interest” for the term “stock” and the

term “partnership” for the term “corporation” used in that section, as appropriate

for purposes of determining whether an

interest in a partnership is indirectly

owned by any person. The Department of

the Treasury (Treasury Department) and

the IRS request comments regarding the

administrability of applying the definition

of responsible individual with respect to

ownership of profits interests in a partnership, the value of which may fluctuate

over time.

With respect to directors and officers

of the CPEO applicant or CPEO, the temporary regulations provide that a director

is any voting member of the governing

body (such as the board of directors). An

officer is determined by reference to the

organization’s organizing document, bylaws, or resolutions, or is otherwise designated consistent with state law (and often includes an organization’s president,

vice-president, treasurer, and secretary).

The temporary regulations also provide

that a responsible individual includes any

individual who, regardless of title, has ultimate responsibility for: (1) implementing the decisions of the organization’s

governing body (typically, the chief executive officer (CEO), executive director, or

president); (2) supervising the management, administration, or operation of the

organization (typically, the chief operating officer (COO)); or (3) managing the

organization’s finances (typically, the

chief financial officer (CFO) or treasurer).

Any individual who serves with the titles

of executive director, president, CEO,

COO, CFO, or treasurer will be considered to have the ultimate responsibilities

Bulletin No. 2016 –21

that are consistent with that title. The temporary regulations also provide that an

individual with this ultimate responsibility

may include an individual who is not

treated as an employee of the CPEO applicant or CPEO.

vices. Finally, a related entity includes

any provider of employment-related services with an owner who is a responsible

individual of both the provider of

employment-related services and the

CPEO applicant or CPEO by virtue of the

individual’s ownership percentage.

b. Related entity

c. Precursor entity

The temporary regulations define a related entity of a CPEO applicant or CPEO

as including any person that is a member

of a controlled group (within the meaning

of sections 414(b) and (c) and the regulations thereunder, with two adjustments) of

which the CPEO is also a member. Section 414(b) incorporates by reference the

controlled group definitions in section

1563. Likewise, the regulations prescribed

under section 414(c) — §§ 1.414(c)–2 and

1.414(c)–3 — rely on principles that are

substantially similar to the controlled

group definitions in section 1563. However, with respect to persons that are not

providers of employment-related services,

the temporary regulations substitute

“more than 50 percent” for “at least 80

percent” in each place the term appears in

section 1563(a) and § 1.414(c)–2. For persons that are providers of employmentrelated services, the temporary regulations

substitute “more than 5 percent” for “at

least 80 percent” in each place the term

appears in section 1563(a) and

§ 1.414(c)–2. The temporary regulations

define a provider of employment-related

services as a person that provides payroll

or other employment tax administration

and compliance services to clients, including, but not limited to, collecting, reporting, and paying employment taxes with

respect to wages or compensation paid by

the provider of employment-related services to individuals performing services

for the clients. A provider of employmentrelated services includes, but is not limited

to, a PEO and a CPEO.

A related entity of a CPEO applicant or

CPEO also includes any provider of

employment-related services if a majority

of the directors or a majority of the officers of the CPEO applicant or CPEO are

also directors or officers, respectively, of

the provider of employment-related ser-

The temporary regulations generally

define a precursor entity as including any

related entity of a CPEO applicant that is

or was a provider of employment-related

services and has ceased operations, dissolved, or made a substantial asset transfer

to the CPEO applicant during the calendar

year that the CPEO applicant applies for

certification or any of the three preceding

calendar years. A precursor entity also

includes

provider

employment-related services that plans to

make a substantial asset transfer to the

CPEO applicant while the application for

certification is pending or in the 12-month

period following the date of the CPEO

applicant’s application.

For this purpose, the temporary regulations define a substantial asset transfer

as any transfer of 35 percent or more of

the value of the transferor’s operating assets, whether through one or a series of

transactions and whether accomplished

through sale, lease, gift, assignment, succession, merger, consolidation, corporate

separation, or any other means. The temporary regulations further provide that operating assets include both tangible and

intangible resources related to the conduct

of the transferor’s trade or business, including but not limited to such intangible

assets as contracts, agreements, receivables, employees, and goodwill (which includes the value of a trade or business

based on expected continued customer patronage due to its name, reputation, or any

other factors). In the case of a contract

described in section 7705(e)(2) or service

agreement described in § 31.3504 –

2(b)(2)2 with a provider of employmentrelated services, even if the contract or

agreement is not sold, gifted, assigned, or

otherwise formally transferred to a CPEO

applicant, it will be considered transferred

from a person to the CPEO applicant if the

person entered into the contract or agreement but the CPEO applicant reports,

withholds, or pays, under its employer

identification number (EIN), any applicable federal employment taxes with respect

to the wages of any individuals covered

by the contract or agreement.

Finally, the temporary regulations contain a rule for purposes of determining

whether a provider of employment-related

services that has ceased operations, dissolved, or made a substantial asset transfer

to a CPEO applicant is a related entity of

the CPEO applicant. Specifically, the provider of employment-related services is a

related entity of a CPEO applicant if it

would be or would have been a related

entity of the CPEO applicant as described

in section 1.b of the preamble at the time

of the provider’s ceasing of operations,

dissolution, or substantial asset transfer,

as applicable. This determination is based

on the provider’s ownership and responsible individuals at the time of its ceasing

of operations, dissolution, or substantial

asset transfer, as applicable, and the ownership and responsible individuals of the

CPEO applicant at the time of its application.

2. Application Process and Effective

Date of Certification

The temporary regulations provide that

in order to be certified, a CPEO applicant

must submit a properly completed and

executed application to the IRS. In addition, the CPEO applicant’s responsible individuals must also submit the information required by the regulations and in

further guidance.

The IRS will notify the CPEO applicant as to whether its application for certification has been approved or denied and

the effective date of its certification. If the

IRS denies the application, the IRS will

inform the CPEO applicant of the reason(s) for denial. The temporary regulations also state that if the IRS approves a

CPEO applicant’s application for certification, the IRS will make available to the

public the name and address of the CPEO,

A service agreement described in § 31.3504 –2(b)(2) is a written or oral agreement pursuant to which the payor: (1) asserts it is the employer (or “co-employer”) of individuals performing

services for the client; (2) pays wages or compensation to the individuals for services the individuals perform for the client; and (3) assumes responsibility to collect, report, and pay, or

assumes liability for, any employment taxes with respect to the wages or compensation paid by the payor to the individuals performing services for the client.

Bulletin No. 2016 –21

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May 23, 2016

as well as the effective date of its certification.

3. Requirements for Certification

Section 7705(b)(1) provides that, to become and remain certified as a CPEO,3 a

person, as well as any owner, officer, or

other person specified in regulations

(which, in the temporary regulations, is

any responsible individual, related entity,

or precursor entity), must meet such requirements as the Secretary shall establish

in order for the person to be certified,

including requirements with respect to tax

status, background, experience, business

location, and annual financial audits. The

temporary regulations elaborate upon the

requirements that a CPEO applicant and

CPEO must meet in each of these categories to become and remain certified.

The temporary regulations provide that

the IRS may deny a CPEO applicant’s

application for certification or revoke or

suspend a CPEO’s certification if a CPEO

applicant or CPEO, or any of the precursor entities, related entities, or responsible

individuals of the CPEO applicant or

CPEO, fails to meet any applicable requirement described in the regulations or

other applicable guidance. The temporary

regulations also provide that the IRS will

deny a CPEO applicant’s application for

certification or revoke or suspend a

CPEO’s certification if the IRS determines, in its sole discretion, that such failure presents a material risk to the IRS’s

collection of federal employment taxes. In

determining whether one or more failures

to meet the requirements described in the

regulations presents a material risk to the

IRS’s collection of federal employment

taxes, the IRS will generally consider all

relevant facts and circumstances, including the size, scope, nature, significance,

recurrence, and timing of and reason for

the failure(s), and, in the case of a CPEO,

any prior failures of the CPEO to meet the

requirements of this section.

a. Suitability

The Treasury Department and the IRS

view tax compliance of the CPEO applicant or CPEO, and of its responsible individuals, related entities, and precursor

entities, as an important factor in determining whether the CPEO applicant’s or

the CPEO’s certification presents a material risk to the IRS’s collection of federal

employment taxes. Therefore, the temporary regulations provide that the IRS may

deny an application for certification, or

suspend or revoke a CPEO’s certification,

if the CPEO applicant or CPEO, or any of

its precursor entities, related entities, or

responsible individuals, has failed to pay

any applicable federal, state, or local taxes

or file any required federal, state, or local

tax or information returns in a timely and

accurate manner, unless the failure to file

or failure to pay is determined to be due to

reasonable cause and not to willful neglect. In addition, the temporary regulations provide that a CPEO must be a business entity described in § 301.7701–2(a)

except that it may not be a disregarded

entity for federal tax purposes under

§§ 301.7701–2 and 301.7701–3 (without

regard to the special rule in § 301.7701–

2(c)(2)(iv) that provides that such entities

are corporations for federal employment

tax purposes). Under § 301.7701–2(a), a

business entity is any entity recognized

for federal tax purposes that is not properly classified as a trust under

§ 301.7701– 4 or otherwise subject to special treatment under the Code.

The Treasury Department and the IRS

consider the criminal background of a

CPEO applicant or CPEO and its responsible individuals to present a material risk

to tax compliance and, therefore, the absence of such criminal background is another important requirement for certification. Consistent with section 7705(b)(1),

which includes background as a category

with respect to which the IRS may establish requirements for certification, the

temporary regulations state that the IRS

may deny an application for certification,

or suspend or revoke a CPEO’s certification, if the CPEO applicant or CPEO, or

any of its precursor entities, related entities, or responsible individuals, has been

charged or convicted of any criminal offense under the laws of the United States

or of a state or political subdivision

thereof, or is the subject of an active IRS

criminal investigation. This is also consistent with suggestions made by the Joint

Committee on Taxation, which noted that

the regulations under section 7705(b)(1)

could include requirements for favorable

criminal background checks. See Staff of

the Joint Committee on Taxation (JCS),

General Explanation of Tax Legislation

Enacted in the 113th Congress, JCS–1–

15, at 233 (March 2015) (General Explanation). Additionally, the IRS may consider whether the CPEO applicant or

CPEO, or any precursor entities, related

entities, or responsible individuals of the

CPEO applicant or CPEO, is listed on any

sanctions list compiled by the Office of

Foreign Assets Control (OFAC) within

the Department of Treasury, including but

not limited to the OFAC Consolidated

Sanctions List and the OFAC Specially

Designated Nationals (SDN) List.

The temporary regulations further

state, consistent with section 7705(b)(1),

that the IRS may deny a CPEO applicant’s

application for certification, or suspend or

revoke a CPEO’s certification, if the

CPEO applicant or CPEO, or any of its

precursor entities, related entities, or responsible individuals, has been sanctioned

or had a license, registration, or accreditation (including a license, registration, or

accreditation relating to its status or ability to operate as a PEO) denied, suspended, or revoked by a court of competent jurisdiction, licensing board,

assurance or other professional organization, or federal or state agency, court,

body, board, or other authority for any

misconduct that bears upon the suitability

of the CPEO applicant or CPEO to perform its professional functions. Such misconduct may relate to dishonesty, fraud,

or breach of trust and would include any

criminal or civil penalties for violating

any state laws prohibiting the transfer or

acquisition of a business solely or primarily for the purpose of obtaining a lower

Section 7705(a)(1) provides that a person must be certified by the Secretary as meeting the requirements of section 7705(b) to become certified as a CPEO, and section 7705(b)(5) provides

that the person must agree to verify that it continues to meet the requirements of section 7705(b) on such periodic basis as the Secretary may prescribe. In addition, section 7705(d) provides

that the Secretary may suspend or revoke a certification of any person if the Secretary determines that such person is not satisfying the agreements or requirements of section 7705(b)

(including the CPEO’s agreement to verify that it continues to meet the requirements of section 7705(b) that it makes pursuant to section 7705(b)(5)).

May 23, 2016

866

Bulletin No. 2016 –21

unemployment tax rate or avoiding a

higher unemployment tax rate.

In addition, the temporary regulations

provide that the IRS may deny a CPEO

applicant’s application for certification, or

revoke or suspend a CPEO’s certification,

if the CPEO applicant or CPEO, or any of

its precursor entities, related entities, or

responsible individuals, fails to demonstrate a history of financial responsibility,

which the IRS may assess through checks

on credit history and other similar indicators.

With respect to the requirements relating to experience referred to in section

7705(b)(1), the Treasury Department and

the IRS consider it important that a CPEO

applicant or CPEO be managed by individuals with knowledge or experience regarding federal and state employment tax

compliance and business practices relating to those compliance requirements.

This is consistent with the suggestions

made by the Joint Committee on Taxation.

See General Explanation at 233. The temporary regulations provide that the IRS

may deny a CPEO applicant’s application

for certification or revoke or suspend a

CPEO’s certification if the CPEO applicant or CPEO and its responsible individuals fail to demonstrate adequate collective knowledge or experience with respect

to federal or state employment tax reporting, depositing, and withholding requirements; handling and accounting of payroll, tax payments, and other funds on

behalf of others; effective recordkeeping

systems; retention of qualified personnel

and legal advisors; and general business

and risk management.

The temporary regulations provide that

the IRS may deny a CPEO applicant’s

application for certification, or revoke or

suspend a CPEO’s certification, if the

CPEO applicant or CPEO, or any of its

responsible individuals, gives false or

misleading information (including by intentionally omitting relevant information)

or participates in any way in the giving of

false or misleading information, to the

IRS, knowing, or having reason to know,

the information to be false or misleading.

For these purposes, the term “information” includes: facts or other matters con-

tained in testimony, federal tax returns,

and financial statements and opinions regarding such statements; applications for

certification (and all accompanying documentation); affidavits, declarations, assertions, attestations, statements, and agreements; periodic verifications that the

requirements of this section continue to be

met; and any other information that is

required to be provided by these temporary regulations, section 3511 and the regulations thereunder, or further guidance.

In order to confirm the accuracy of

information provided to the IRS with respect to these requirements, the temporary

regulations require the CPEO applicant or

CPEO, and each of its responsible individuals, to take such actions as are necessary to authorize the IRS to investigate the

accuracy of statements and submissions

made by the CPEO applicant or CPEO,

including waiving confidentiality and

privilege when necessary, and to conduct

comprehensive background checks, including, but not limited to, checks on tax

compliance, criminal background, professional experience (including through the

contact of third-party references), credit

history, and professional sanctions. In addition, each responsible individual of a

CPEO applicant or CPEO must submit

fingerprints in the time and manner and

under the circumstances prescribed by the

Commissioner in further guidance. The

IRS is considering whether to expand the

category of individuals who must authorize the IRS to conduct comprehensive

background checks and submit fingerprint

cards to include certain directors, officers,

and owners of a CPEO applicant’s or

CPEO’s related entities. Treasury and the

IRS request comments regarding such

possible expansion, including how any

such expansion could be as administrable

as possible. To submit comments, please

follow the instructions in the “Comments

and Requests for Public Hearing” section

in the notice of proposed rulemaking on

this subject in the Proposed Rules section

of this issue of the Internal Revenue Bulletin.

b. Business location

Section 7705(b)(1) specifically lists

business location as one of the categories

of certification requirements that the Secretary may establish. The temporary regulations require a CPEO applicant or

CPEO to have one or more established

physical business locations in the United

States at which regular operations that

constitute a trade or business within the

United States (within the meaning of section 864(b)) take place and at which a

significant portion of its CPEO-related

functions are carried on and the administrative records relating to those functions

are kept.4 The temporary regulations also

require the CPEO applicant or CPEO to

be created or organized in the United

States or under the law of the United

States or of any state. The temporary regulations further require that a majority of

the CPEO applicant’s or CPEO’s responsible individuals be citizens or residents of

the United States. Finally, a CPEO applicant or CPEO must use only financial

institutions described in section 265(b)(5)

to hold its cash and cash equivalents, receive payments from customers, and pay

wages and federal employment taxes. Under section 265(b)(5), a financial institution is, among other requirements, a person who is subject to federal or state

supervision as a financial institution or a

bank or trust company that is subject to

supervision and examination by state or

federal authority having supervision over

banking institutions.

c. Financial statements

In addition to the specific requirements

with respect to financial statements in section 7705(c), section 7705(b)(1) provides

that the Secretary may establish requirements with respect to annual financial audits. Pursuant to these provisions, the temporary regulations require a CPEO

applicant to provide to the IRS, with its

application, a copy of its annual audited

financial statements for the most recently

completed fiscal year as of the date it

applies for certification. If a CPEO applicant applies for certification before the

This requirement is consistent with the General Explanation, which provides that “the existence of an established business location within the United States at which significant operations

regularly take place” is a business location requirement that the Secretary could impose. General Explanation, at 234.

Bulletin No. 2016 –21

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May 23, 2016

last day of the sixth month following its

most recently completed fiscal year, and

the audit of the financial statements for

this fiscal year has not yet been completed

at the time of application, a CPEO applicant must also provide to the IRS a copy

of its audited financial statements for the

immediately preceding fiscal year, if any.

The temporary regulations provide that

the CPEO applicant must subsequently

provide to the IRS the financial statements

for the most recently completed fiscal year

by the last day of the sixth month after

such fiscal year ends. In addition, for any

fiscal year that ends after the CPEO applicant applies for certification and on or

before the effective date of certification, if

applicable, the CPEO applicant must provide the audited financial statements by

the last day of the sixth month after such

fiscal year ends. The obligation to provide

the audited financial statements described

in the preceding sentence continues to apply after the CPEO applicant is certified as

a CPEO. Once certified, pursuant to section 7705(b)(1), a CPEO is required by the

temporary regulations to provide a copy

of its annual audited financial statements

to the IRS within six months of the end of

each fiscal year (beginning with the first

fiscal year that ends after the CPEO’s effective date of certification). For these

purposes, a CPEO applicant’s or CPEO’s

fiscal year will be considered completed

once the last day of that fiscal year has

ended, even if the CPEO was not operating or certified for the full fiscal year or

the fiscal year was a short year consisting

of fewer than 12 months.

Additionally, the Treasury Department

and the IRS believe a CPEO with annual

audited financial statements that reflect

positive working capital (as determined in

accordance with GAAP) presents a materially lower risk to the IRS’s collection of

federal employment taxes than a CPEO

without such financial statements. Accordingly, pursuant to section 7705(b)(1)

and consistent with several state PEO certification and registration laws, the temporary regulations require a CPEO applicant

or CPEO to cause to be prepared and

provided to the IRS, by the same date it

must provide a copy of its annual audited

financial statements, an opinion of an independent CPA that such financial statements reflect positive working capital for

May 23, 2016

the fiscal year, unless the exception described in the next paragraph applies. In

addition, the temporary regulations require this opinion to set forth in detail a

calculation of the CPEO applicant’s or

CPEO’s working capital. Consistent with

section 7705(c)(3)(A), this CPA opinion

must also generally state that the financial

statements are presented fairly in accordance with GAAP.

The Treasury Department and the IRS

recognize that working capital may fluctuate over the course of a CPEO’s fiscal

year due to normal business operations.

To allow for some fluctuation in working

capital, the temporary regulations contain

an exception to the positive working capital requirement. Under this exception, a

CPEO applicant or CPEO will not fail to

meet the positive working capital requirement if three requirements are satisfied.

First, the CPEO applicant or CPEO must

have negative working capital for no more

than two consecutive fiscal quarters of

that fiscal year (as demonstrated by the

financial statements for the final fiscal

quarter of the fiscal year or the quarterly

statements described in this section 3.c of

the preamble for any other fiscal quarter).

Second, the CPEO applicant or CPEO or

its CPA must provide an explanation to

the IRS describing the reason for the failure in such time and manner as the Commissioner may prescribe in further guidance. Third, the IRS must determine, in its

sole discretion, that the failure does not

present a material risk to the IRS’s collection of federal employment taxes.

The temporary regulations provide

special rules for newly established CPEO

applicants. A CPEO applicant that was not

operating as a provider of employmentrelated services for all or part of the most

recently completed fiscal year as of the

date it applies for certification must also

provide a copy of the audited financial

statements of any precursor entity for the

precursor entity’s most recently completed fiscal year as of the date of the

application for certification, as well as a

CPA opinion that these financial statements demonstrate positive working capital and are presented fairly in accordance

with GAAP. The financial statements and

CPA opinion for a precursor entity must

be provided in such time and manner as

868

the Commissioner may prescribe in further guidance.

In accordance with section 7705(c)(3)(A),

the temporary regulations require the

opinion regarding a CPEO’s financial

statements to be provided by a CPA who

is independent of the CPEO. For this purpose, the temporary regulations require a

CPA to be independent as prescribed by

the American Institute of Certified Public

Accountants’ Professional Standards,

Code of Professional Conduct, and its interpretations and rulings. The Treasury

Department and the IRS request comments regarding whether the CPA independence guidelines or requirements of

other governmental agencies or departments or industry self-regulatory bodies,

as adapted for a CPA of a CPEO, would

better ensure the impartiality of CPAs

providing opinions on CPEO’s financial

statements, such as: (1) the Department of

Labor’s guidelines on the independence of

CPAs retained by employee benefit plans

under 29 CFR 2509.75–9; (2) the Securities and Exchange Commission’s (SEC)

independence guidelines for auditors reporting on financial statements included in

SEC filings; and (3) the Government Accountability Office’s auditor independence requirements under Government

Auditing Standards that cover federal entities and organizations receiving federal

funds.

As previously noted, section 7705(b)(5)

requires a CPEO to verify on a periodic

basis that it meets certification requirements.

In accordance with this requirement and

pursuant to the Secretary’s general authority

under section 7705(b)(1) to establish requirements for CPEOs to become and remain certified, the temporary regulations

further require a responsible individual of

the CPEO applicant or the CPEO to provide, by the last day of the second month

after the end of each calendar quarter and

beginning with the most recently completed

quarter as of the date of the application for

certification, a statement verifying under

penalties of perjury that the CPEO applicant

or the CPEO has positive working capital

with respect to the most recently completed

fiscal quarter. However, as with the requirement that annual financial statements reflect

positive working capital, the temporary regulations also contain an exception to this

requirement. The exception applies only if

Bulletin No. 2016 –21

the CPEO does not have negative working

capital at the end of the two fiscal quarters

immediately preceding the fiscal quarter to

which the statement relates. As with the

exception provided with respect to annual

financial statements that reflect negative

working capital, the CPEO must also provide an explanation to the IRS describing

the reason for the failure in such time and

manner as the Commissioner may prescribe

in further guidance, and the IRS must determine, in its sole discretion, that the failure

does not present a material risk to the IRS’s

collection of federal employment taxes.

d. Quarterly assertion and attestation

Section 7705(c)(3)(B) requires a

CPEO to provide to the Secretary an assertion and examination level attestation

regarding its compliance with federal employment tax withholding and depositing

requirements. In accordance with this provision, the temporary regulations state that

a CPEO must provide, on a quarterly basis

and beginning with the first calendar quarter that ends after the CPEO’s effective

date of certification, an assertion signed

by a responsible individual under penalties of perjury stating that the CPEO has

withheld and made deposits of all federal

employment taxes (other than taxes imposed by chapter 23 of the Code) as required for the quarter.5 In addition, the

CPEO must provide an examination level

attestation from a CPA stating that this

assertion is fairly stated. The assertion and

attestation must be provided by the last

day of the second month after the end of

each calendar quarter. These quarterly assertion and attestation requirements also

apply to a CPEO applicant, who must

provide the required assertion and attestation for the most recently completed calendar quarter as of the date of its application for certification and each subsequent

calendar quarter while its application is

pending. A CPEO applicant that was not

operating as a provider of employmentrelated services during the most recently

completed calendar quarter as of the date

of its application for certification or dur-

ing any quarter that ends while its application for certification is pending must

provide an assertion and attestation for

any precursor entity in such time and

manner as the Commissioner may prescribe in further guidance.

The temporary regulations provide that

a CPEO applicant or CPEO will not fail to

meet the quarterly assertion and attestation requirements if the CPA examination

level attestation indicates that the CPEO

applicant or CPEO has failed to withhold

or make deposits in certain immaterial

respects, provided that the attestation includes a summary of the immaterial failures that were found and states that the

failures were immaterial and isolated and

do not reflect a meaningful lapse in compliance with federal employment tax withholding and deposit requirements. Furthermore, in order for this exception for

immaterial failures to apply, the IRS must

determine, in its sole discretion, that the

isolated and immaterial failures identified

by the CPA do not present a material risk

to the IRS’s collection of federal employment taxes.

during the calendar year preceding the

bond period, but not more than

$1,000,000; or (2) $50,000. The proposed

regulations require the bond to be issued

by a surety company that holds a certificate of authority from the Secretary as an

acceptable surety on federal bonds and

meets such other requirements as the

Commissioner may prescribe in further

guidance.

One benefit of the bond requirement in

section 7705(c) is that the CPEO must

submit to the bonding surety’s financial

underwriting process to obtain the bond,

which provides the IRS with a certain

level of assurance concerning the financial

condition of the CPEO. The Treasury Department and the IRS believe that this

benefit is substantially diminished if the

CPEO obtains the bond by posting collateral in the amount of the bond. For this

reason, the temporary regulations provide

that the CPEO must meet the bond requirements without posting collateral.

e. Bond requirements

In calculating five percent of its liability under section 3511 (or, if applicable,

the liability described in the subsequent

paragraph) during the preceding calendar

year, the temporary regulations require

that a CPEO base its calculation on the

amount of applicable federal employment

taxes6 it reported and paid in the preceding calendar year. However, if the CPEO

or the IRS subsequently determines that

the applicable federal employment tax liability for the preceding calendar year was

higher than the amount reported and paid

(and makes an adjustment or assessment,

respectively, reflecting that determination), and if the bond that the CPEO had

posted was less than $1,000,000, the

CPEO must post a strengthening bond

that, together with the initially-posted

bond, equals a total amount that reflects

the adjusted applicable federal employment tax liability up to $1,000,000. Alternatively, the CPEO could post a superseding bond in such an adjusted amount.

Section 7705(c)(2) sets forth the bond

requirements that a person must satisfy in

order to become and remain a CPEO. The

provisions of section 7101 and its accompanying regulations apply to bonds required by section 7705(c)(2), except to the

extent modified in the temporary regulations. The temporary regulations provide

that a CPEO must post a bond for the

payment of federal employment taxes in a

specified amount. This specified amount

is, for each period beginning on April 1 of

any calendar year (or, in the case of a

newly certified CPEO, on the effective

date of certification) and ending on March

31 of the following calendar year (the

bond period), an amount that is at least

equal to the greater of: (1) five percent of

the CPEO’s liability under section 3511

(or, if applicable, the liability as determined for newly certified CPEOs, discussed in section 3.e.i of this preamble)

i. Calculating Five Percent of Liability

under Section 3511

Although the temporary regulations (and section 7705(c)(3)(B)) do not require the assertion to include a statement with respect to taxes imposed by chapter 23 of the Code, the IRS expects

to evaluate compliance with deposit requirements with respect to taxes imposed by chapter 23 through tax compliance checks.

As noted in the Background section of this preamble, the term “federal employment taxes” includes all taxes imposed under Subtitle C of the Code, including income tax withholding and

FICA, RRTA, and FUTA taxes. As such, the liability described in this paragraph is based on an amount that includes both the employee and employer shares of FICA and RRTA, as well

as income tax withholding and FUTA.

Bulletin No. 2016 –21

869

May 23, 2016

A newly certified CPEO will not have

any liability under section 3511 for the

calendar year preceding its certification on

which to base its calculation of the required bond amount. In such cases, the

temporary regulations provide that, in calculating the bond amount, the liability

used for the preceding calendar year (or

portion thereof7) when the CPEO was not

certified is the federal employment tax

liability of the CPEO8 and of any precursor entity of the CPEO that made a substantial asset transfer to the CPEO, that

results from one or more service agreements described in § 31.3504 –2(b)(2). In

determining the federal employment tax

liability of a precursor entity of a CPEO

for a preceding year, only liability

amounts that resulted from service agreements that were transferred or are intended to be transferred to the CPEO (at

the time that the amount of the bond is

determined) are included. If no such precursor entity exists and the CPEO otherwise had no federal employment tax liability during the preceding calendar year,

the amount of the bond will be $50,000.

ii. Cancellation

The temporary regulations provide that

the bond posted by a CPEO must provide

that it may be cancelled by the surety only

after the surety gives written notice to the

IRS and the CPEO. (See Form 14751,

“Certified Professional Employer Organization Surety Bond,” for details on the

time and manner in which such written

notice must be provided.) The bond must

also provide that, if the surety cancels the

bond without issuing a superseding bond

to the CPEO, the surety will remain liable

for all federal employment tax liability

accrued by the CPEO during the period

beginning with the effective date of the

first bond issued by the surety to the

CPEO in any consecutive series of bonds

issued by that surety prior to cancellation

and ending with the cancellation (the total

bond period), up to the penal amount of

the bond at the time of cancellation. The

temporary regulations provide that a cancelling surety will remain liable for fed-

eral employment tax liability accrued during the total bond period up to the penal

amount of the bond for as long as the

Commissioner may assess and collect

taxes for such period under sections 6501

and 6502.

4. Controlled Groups

The temporary regulations provide that

CPEO applicants and CPEOs that are

members of a controlled group, within the

meaning of sections 414(b) and (c), will

be treated as a single CPEO applicant or

CPEO for purposes of the financial statement, quarterly assertion and attestation,

and bond requirements described in this

preamble, except that the annual and quarterly requirements imposed under the

scope of sections 7705(b)(1) and

7705(b)(5) with respect to positive working capital apply to each CPEO applicant

or CPEO on a separate basis.

5. Consents to Disclose

In order to receive and maintain certification, the temporary regulations state

that a CPEO applicant or CPEO must provide such consents for the IRS to disclose

confidential tax information to its customers, and to other persons as necessary to

carry out the purposes of these regulations, that relates to its certification and

obligations to report, deposit, and pay federal employment taxes as the Commissioner may require in further guidance.

6. Periodic Verification and Notification

of Material Changes

Consistent with section 7705(b)(5), the

temporary regulations require a CPEO to

verify periodically that it continues to

meet the certification requirements in such

time and manner as the Commissioner

may prescribe in further guidance. Consistent with section 7705(b)(6), the temporary regulations provide that a CPEO

applicant or CPEO must notify the IRS, in

the time and manner prescribed by the

Commissioner in further guidance, of any

change that materially affects the continu-

ing accuracy of any agreement or information that was previously made or provided to the IRS. The Treasury

Department and the IRS expect to provide

further details regarding these requirements in a future revenue procedure that

will prescribe the ongoing requirements

that CPEOs must meet to maintain certification.

7. Accrual Method of Accounting

Consistent with section 7705(b)(4), the

temporary regulations require a CPEO to

compute its taxable income using an accrual method of accounting or, if applicable, another method that the Commissioner prescribes in further guidance.

8. Compliance with Reporting

Obligations

The temporary regulations provide that

a CPEO must make reports to the IRS and

to its clients as provided in section

3511(g) and regulations issued thereunder. This includes the filing of all federal

employment tax and information returns.

The temporary regulations also require a

CPEO to file all returns, schedules, reports, and other forms and documents on

magnetic media when required to do so by

section 3511(g) and regulations issued

thereunder, or by other Treasury regulations. With respect specifically to the requirement that CPEOs file Form 940,

“Employer’s Annual Federal Unemployment (FUTA) Tax Return,” and Form

941, “Employer’s QUARTERLY Federal

Tax Return,” on magnetic media, compliance with this requirement is a condition

of certification. The CPEO program is a

voluntary certification regime; a person

that does not wish to file Forms 940 and

941 on magnetic media is not obligated to

apply for or obtain certification as a

CPEO.

9. Suspension and Revocation

The temporary regulations provide that

the IRS may suspend or revoke the certification of any CPEO as a result of a

Unless the CPEO is certified effective January 1, the CPEO will not have liability under section 3511 for the portion of the calendar year in which it was certified that preceded its

certification.

For purposes of this paragraph, the term “CPEO” is intended to include the CPEO before it applied for certification and while its application for certification was pending.

May 23, 2016

870

Bulletin No. 2016 –21

failure to meet any of the requirements for

CPEOs, and the IRS will suspend or revoke certification if the IRS determines, in

its sole discretion, that such failure presents a material risk to the IRS’s collection

of federal employment taxes. If a CPEO’s

certification is suspended, section 3511

will not apply to any contract described in

section 7705(e)(2) into which the CPEO

enters during the suspension period. If a

CPEO’s certification is revoked, the organization will not be considered a CPEO

for purposes of section 3511 after the effective date of such revocation unless and

until it again applies and is again certified

as a CPEO. However, an organization

whose certification as a CPEO has been

revoked may not re-apply to be certified

as a CPEO until one year has passed since

the effective date of its revocation. Neither the suspension nor the revocation of

an organization’s status as a CPEO will

affect its potential liability under

§ 31.3504 –2.

The temporary regulations provide that

an organization whose certification as a

CPEO has been suspended or revoked

must notify its customers of the suspension or revocation (in the time and manner

provided in further guidance). In addition,

the IRS will make public a CPEO’s suspension or revocation and may also individually notify the CPEO’s customers of

such suspension or revocation.

Special Analyses

Effective/Applicability Date

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

The IRS has announced that it plans to

begin accepting applications for CPEO

certification on July 1, 2016. Accordingly,

the temporary regulations apply on and

after July 1, 2016. Pursuant to section

7805(e)(2), the temporary regulations expire on or before May 3, 2019.

Statement of Availability of IRS

Documents

IRS revenue procedures, revenue rulings, notices, and other guidance cited in

this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government

Printing Office, Washington, DC 20402,

or by visiting the IRS Web site at http://

www.irs.gov.

Bulletin No. 2016 –21

Certain IRS regulations, including this

one, are exempt from the requirements of

Executive Order 12866, as supplemented

and reaffirmed by Executive Order 13563.

Therefore, a regulatory impact assessment

is not required. For the applicability of the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) please refer to the Special

Analyses section of the preamble to the

cross-referenced notice of proposed rulemaking published in the Proposed Rules

section in this issue of the Internal Revenue Bulletin. Pursuant to section 7805(f)

of the Code, these regulations have been

submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small

business.

Drafting Information

The principal authors of these regulations are Melissa Duce, Andrew Holubeck, and Neil Shepherd of the Office of

Associate Chief Counsel (Tax Exempt

and Government Entities). However,

other personnel from the IRS and the

Treasury Department participated in the

development of these regulations.

List of Subjects

26 CFR Part 301

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 301 and

602 are amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 is amended by adding entries in

numerical order to read in part as follows:

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

871

Section 301.7705–1T also issued under

26 U.S.C. 7705(h).

Section 301.7705–2T also issued under

26 U.S.C. 7705(h).

*****

Par. 2. Sections 301.7705–1T and

301.7705–2T are added to read as follows:

§ 301.7705–1T Certified professional

employer organization.

(a) Application. The definitions set

forth in this section apply for purposes of

this section, § 301.7705–2T and sections

3302(h), 3303(a)(4), 3511, 6053(c)(8),

and 7528(b)(4).

(b) Definitions—(1) Certified professional employer organization (CPEO)

means a person that applies to be certified

as a CPEO in accordance with

§ 301.7705–2T(a) and has been certified

by the Internal Revenue Service (IRS) as

meeting the requirements of § 301.7705–

2T. For purposes of § 301.7705–2T(g)(2),

the term CPEO also includes the person

before it applied for certification and

while its application is pending with the

IRS. For all other purposes, a person is a

CPEO as of the effective date of its certification (as specified in the certification

notice described in § 301.7705–2T(a)(2))

and until its certification is revoked by the

IRS (as described in § 301.7705–2T(n))

or, if earlier and applicable, until the

CPEO voluntarily terminates its certification in the time and manner prescribed by

the Commissioner in further guidance.

(2) CPEO applicant means a person

that has applied to be certified as a CPEO

in accordance with § 301.7705–2T(a) and

whose application is pending with the

IRS.

(3) CPEO contract. [Reserved]

(4) Certified public accountant (CPA)

means a certified public accountant

who—

(i) With respect to a CPEO applicant or

CPEO, is independent of the CPEO applicant or CPEO (as prescribed by the American Institute of Certified Public Accountants’ Professional Standards, Code of

Professional Conduct, and its interpretations and rulings);

(ii) Is not currently under suspension or

disbarment from practice before the IRS;

(iii) Is duly qualified to practice in any

state;

May 23, 2016

(iv) Files with the IRS a written declaration that he or she is currently qualified

as a CPA and authorized to represent the

CPEO applicant or CPEO before the IRS;

and

(v) Meets such other requirements as

the Commissioner may prescribe in further guidance.

(5) Covered employee. [Reserved]

(6) Customer. [Reserved]

(7) Federal employment taxes means

the taxes imposed by subtitle C of the

Internal Revenue Code.

(8) Guidance includes guidance published in the Federal Register or Internal

Revenue Bulletin, as well as administrative guidance such as forms, instructions,

publications, or other guidance on the

IRS.gov Web site.

(9) Partnership means a business entity (as described in § 301.7701–2(a)) that

is classified as a partnership for federal tax

purposes under §§ 301.7701–1, 301.7701–2,

and 301.7701–3. Accordingly, any references to a managing member or general

partner of a partnership mean a managing

member or general partner of an entity

that is classified as a partnership for federal tax purposes.

(10) Precursor entity—(i) In general.

A precursor entity means, with respect to

a CPEO applicant, any related entity of

the CPEO applicant that is or was a

provider of employment-related services

that—

(A) Has made a substantial asset transfer to the CPEO applicant during the calendar year that the CPEO applicant applies for certification or any of the three

preceding calendar years or plans to make

such a substantial asset transfer while the

application for certification is pending or

in the 12-month period following the date

of the CPEO applicant’s application for

certification; or

(B) Has ceased operations or dissolved

during the calendar year that the CPEO

applicant applied for certification or any

of the three preceding calendar years.

(ii) Related. For purposes of this paragraph (b)(10), a provider of employmentrelated services is considered a related

entity of a CPEO applicant if it is a related

entity within the meaning of paragraph

(b)(12) of this section or if it would be or

would have been such a related entity

based on the ownership and responsible in-

May 23, 2016

dividuals of the provider of employmentrelated services at the time of its substantial

asset transfer, ceasing of operations, or dissolution, as applicable, and the ownership

and responsible individuals of the CPEO

applicant at the time of its application.

(11) Provider of employment-related

services means a person that provides employment tax administration, payroll services, or other employment-related compliance services to clients, including, but

not limited to, collecting, reporting, and

paying employment taxes with respect to

wages or compensation paid by the person

to individuals performing services for the

clients. A provider of employment-related

services includes, but is not limited to, a

CPEO.

(12) Related entity means, with respect

to a CPEO applicant or CPEO, any person

that meets one or more of the following

criteria:

(i) The person is a member of a controlled group of which the CPEO applicant or CPEO is also a member. For purposes of this paragraph (b)(12)(i),

controlled group has the meaning given to

such term by sections 414(b) and (c) and

the regulations thereunder, except that—

(A) With respect to a person that is not

a provider of employment-related services

“more than 50 percent” will be substituted

for “at least 80 percent” each place it

appears in section 1563(a) (which is

cross-referenced in section 414(b)) and

§ 1.414(c)–2 of this chapter); and

(B) With respect to a person that is a

provider of employment-related services,

“more than 5 percent” will be substituted

for “at least 80 percent” each place it appears in section 1563(a) and § 1.414(c)–2 of

this chapter; or

(ii) The person is a provider of

employment-related services and—

(A) A majority of the directors or a

majority of the officers (as described in

paragraph (b)(13)(ii) of this section) of the

CPEO applicant or CPEO are directors or

officers (as described in paragraph

(b)(13)(ii) of this section), respectively, of

the provider of employment-related services; or

(B) An individual is a responsible individual of both the provider of

employment-related services and the

CPEO applicant or CPEO by reason of

paragraph (b)(13)(i) of this section.

872

(13) Responsible individual means,

with respect to a CPEO applicant or

CPEO, (or, for purposes of paragraphs

(b)(10)(ii) or (b)(12)(ii) of this section, a

provider of employment-related services),

the following individuals:

(i) Any individual who owns, directly

or indirectly and applying the constructive

ownership rules of section 1563(e) with

respect to stock ownership and by substituting the term “interest” for the term

“stock” and the term “partnership” for the

term “corporation” used in that section, as

appropriate for purposes of determining

whether an interest in a partnership is indirectly owned by any person, 33 percent

or more of—

(A) In the case of a corporation, the

total combined voting power of all classes

of stock entitled to vote of such corporation or of the total value of shares of all

classes of stock of such corporation; or

(B) In the case of a partnership, the

capital interest or profits interest of such

partnership.

(ii) Any individual who is a director or

an officer. For purposes of this paragraph

(b)(13)(ii), a director is a voting member

of the governing body (that is, the board

of directors or equivalent controlling body

authorized under state law to make governance decisions on behalf of the organization), and the officers are determined by

reference to the organizing document, bylaws, or resolutions of the governing

body, or otherwise designated consistent

with state law. Officers may include a

president, vice-president, secretary, and

treasurer.

(iii) Any individual who, regardless of

title, has ultimate responsibility for implementing the decisions of the organization’s governing body. An individual who

serves with the title of chief executive

officer, executive director, and/or president has this ultimate responsibility. An

individual with this ultimate responsibility

may include an individual who is not

treated as an employee of the organization. If this ultimate responsibility resides

with two or more individuals (for example, co-presidents), who may exercise

such responsibility in concert or individually, then each individual is a responsible

individual.

(iv) Any individual who, regardless of

title, has ultimate responsibility for super-

Bulletin No. 2016 –21

vising the management, administration, or

operation of the organization. An individual who serves with the title of chief operating officer has this ultimate responsibility. An individual with this ultimate

responsibility may include an individual

who is not treated as an employee of the

organization. If this ultimate responsibility resides with two or more individuals,

who may exercise such responsibility in

concert or individually, then each individual is a responsible individual.

(v) Any individual who, regardless of

title, has ultimate responsibility for managing the organization’s finances. An individual who serves with the title of chief

financial officer or treasurer has this ultimate responsibility. An individual with

this ultimate responsibility may include an

individual who is not treated as an employee of the organization. If this ultimate

responsibility resides with two or more

individuals who may exercise the responsibility in concert or individually, then each

individual is a responsible individual.

(vi) In the case of a partnership, any

individual who is a managing member or

general partner.

(vii) In the case of a sole proprietorship, the sole proprietor.

(viii) Any other individual with primary responsibility for the organization’s

federal employment tax compliance.

(14) Self-employed individual. [Reserved]

(15) Substantial asset transfer means

any transfer of 35 percent or more of the

value of the operating assets of the person

making the transfer, whether through one

or a series of transactions and whether

accomplished through sale, lease, gift, assignment, succession, merger, consolidation, corporate separation, or any other

means. For purposes of this paragraph

(b)(15), operating assets include both tangible and intangible resources related to

the conduct of the person’s trade or business, including but not limited to such

intangible assets as contracts, agreements,

receivables, employees, and goodwill

(which includes the value of a trade or

business based on expected continued

customer patronage due to its name, reputation, or any other factors). In the case

of a contract described in section

7705(e)(2) or a service agreement described in § 31.3504 –2(b)(2) of this chap-

Bulletin No. 2016 –21

ter entered into by a provider of

employment-related services, even if the

contract or agreement is not sold, gifted,

assigned, or otherwise formally transferred to a CPEO applicant, it will be

considered transferred from the provider

of employment-related services to the

CPEO applicant if the CPEO applicant

reports, withholds, or pays, under its employer identification number (EIN), any

applicable federal employment taxes with

respect to the wages of any individuals

covered by the contract or agreement.

general. Except as provided in paragraph

(c)(2) of this section, this section applies

on and after July 1, 2016.

(2) Definitions related to section 3511.

[Reserved]

(3) Expiration date. The applicability

of this section expires on or before May 3,

2019.

§ 301.7705–2T CPEO certification

requirements.

(a) Application requirement and certification—(1) Application. To be certified

as a certified professional employer organization (CPEO), a person must submit a

properly completed and executed application for certification as a CPEO in the time

and manner prescribed by, and providing

such information as required by, this section and any further guidance issued by

the Commissioner. In addition, the applicant’s responsible individuals must submit such information as is specified in this

section and further guidance.

(2) Notice. A CPEO applicant will be

notified by the Internal Revenue Service

(IRS) whether its application for certification has been approved or denied, and, if

approved, the effective date of certification. If the IRS denies the application, the

IRS will inform the CPEO applicant of the

reason(s) for denial.

(3) Public disclosure of certification. If

the IRS approves a CPEO applicant’s application for certification, the IRS will

make available to the public the name and

address of the CPEO, as well as the effective date of its certification, in the time

and manner described in further guidance.

(4) Effective date of certification. A

CPEO’s certification will be effective as

of the effective date of certification spec-

873

ified in the notice described in paragraph

(a)(2) of this section and in the public

disclosure described in paragraph (a)(3) of

this section and will continue in effect

until the effective date of the revocation of

the CPEO’s certification, if any, as described in paragraph (n) of this section or,

if earlier, the date that the CPEO voluntarily terminates its certification in the

time and manner prescribed by the Commissioner in further guidance.

(b) Requirements for certification. To

receive and maintain certification, a

CPEO applicant or CPEO must meet the

requirements described in this section, as

well as any additional requirements the

Commissioner may prescribe in further

guidance. In addition, any precursor entities, related entities, and responsible individuals (as defined in §§ 301.7705–

1T(b)(10), (12), and (13), respectively) of

the CPEO applicant or CPEO must meet

any requirements applicable to them described in this section and in further guidance. The IRS may deny an application

for certification or revoke or suspend a

CPEO’s certification if a CPEO applicant

or CPEO, or one or more of its precursor

entities, related entities, or responsible individuals, fails to meet any applicable requirement described in this section or

other applicable guidance, and the IRS

will do so if the IRS determines, in its sole

discretion, that such failure presents a material risk to the IRS’s collection of federal employment taxes. In determining

whether one or more failures to meet the

requirements described in this section

presents a material risk to the IRS’s collection of federal employment taxes, the

IRS generally will consider all relevant

facts and circumstances, including the

size, scope, nature, significance, recurrence, and timing of and reason for the

failure and, in the case of a CPEO, any

prior failures of the CPEO to meet the

requirements of this section.

IRS may deny an application for certification or revoke or suspend a CPEO’s

certification for any of the following reasons:

(i) The CPEO applicant or CPEO, or

any of its precursor entities, related entities, or responsible individuals, has failed

to pay any applicable federal, state, or

local taxes or file any required federal,

May 23, 2016

state, or local tax or information returns in

a timely and accurate manner, unless the

failure is determined to be due to reasonable cause and not due to willful neglect.

(ii) The CPEO applicant or CPEO, or

any of its precursor entities, related entities, or responsible individuals, has been

charged or convicted of any criminal offense under the laws of the United States

or of a state or political subdivision

thereof, or is the subject of an active IRS

criminal investigation.

(iii) The CPEO applicant or CPEO, or

any of its precursor entities, related entities, or responsible individuals, has been

sanctioned, or had a license, registration,

or accreditation (including a license, registration, or accreditation relating to its

status or ability to operate as a professional employer organization) denied,

suspended, or revoked, by a court of competent jurisdiction, licensing board, assurance or other professional organization, or

federal or state agency, court, body,

board, or other authority for any misconduct that involves dishonesty, fraud, or

breach of trust or that otherwise bears

upon the suitability of the CPEO applicant

or CPEO to perform its professional functions (including, but not limited to, any

civil or criminal penalty described in 42

U.S.C. 503(k)(1)(D) imposed by state

law).

(iv) The CPEO applicant or CPEO, or

any of its precursor entities, related entities, or responsible individuals, is listed on

any sanctions list compiled by the Office

of Foreign Assets Control (OFAC) within

the Department of Treasury, including,

but not limited to the OFAC Consolidated

Sanctions List and the OFAC Specially

Designated Nationals (SDN) List.

(v) The CPEO applicant or CPEO, or

any of its precursor entities, related entities, or responsible individuals, fails to

demonstrate a history of financial responsibility, which the IRS may assess by

checks on credit history and other similar

indicators.

(vi) The CPEO applicant or CPEO and

the responsible individuals of the CPEO

applicant or CPEO fail to demonstrate adequate collective knowledge or experience with respect to:

(A) Federal or state employment tax

reporting, depositing, and withholding requirements;

May 23, 2016

(B) Handling and accounting of payroll, tax payments, and other funds on

behalf of others;

(D) Retention of qualified personnel

and legal advisors as needed; and

(E) General business and risk management.

(vii) The CPEO applicant or CPEO, or

any of its responsible individuals, gives

false or misleading information (including

by intentionally omitting relevant information), or participates in any way in the

giving of false or misleading information,

to the IRS, knowing, or having reason to

know, that the information is false or misleading. For the purpose of this subsection, “information” includes (but is not

limited to) facts or other matters contained

in testimony, federal tax returns, and financial statements and opinions regarding

such statements; applications for certification (and all accompanying documentation); affidavits, declarations, assertions,

attestations, statements, and agreements;

and periodic verifications that the requirements of this section continue to be met;

and any other information that is required

to be provided by this section, section

3511(g) and regulations thereunder, or

further guidance.

(2) Must be a business entity that is not

a disregarded entity. A CPEO must be a

business entity described in § 301.7701–

2(a), except that a CPEO may not be a

business entity that is disregarded as an

entity separate from its owner for federal

tax purposes under §§ 301.7701–2 and

301.7701–3 (without regard to the special

rule in § 301.7701–2(c)(2)(iv) that provides that such entities are corporations

for federal employment tax purposes). Accordingly, a CPEO may not be an individual or an entity classified as a trust under

§ 301.7701– 4.

(3) Authorization to investigate suitability. A CPEO applicant or CPEO, and

each of its responsible individuals, must

take such actions as are necessary to authorize the IRS to investigate the accuracy

of statements and submissions, including

waiving confidentiality and privilege

when necessary, and to conduct comprehensive background checks, including,

but not limited to, checks on tax compliance, criminal background, professional

experience (including through the contact

874

of third-party references), credit history,

and professional sanctions. In addition, a

CPEO applicant or CPEO, and any of its

responsible individuals, must provide the

IRS with such additional information as

the IRS may request to facilitate such

background investigations. Each responsible individual of a CPEO applicant or

CPEO must also submit fingerprints in the

time and manner and under the circumstances prescribed by the Commissioner

in further guidance.

(d) Business location—(1) State of organization. A CPEO applicant or CPEO

must be created or organized in the United

States or under the law of the United

States or of any state.

(2) Business location in the United

States. A CPEO applicant or CPEO must

have one or more established, physical

business locations in the United States at

which regular operations that constitute a

trade or business within the United States

(within the meaning of section 864(b))

take place and at which a significant portion of its CPEO-related functions are carried on and administrative records are

kept.

(3) United States responsible individuals. A majority of the CPEO applicant’s or

CPEO’s responsible individuals must be

citizens or residents of the United States.

(4) Use of financial institution. A

CPEO applicant or CPEO must use only

financial institutions described in section

265(b)(5) to hold its cash and cash equivalents, receive payments from customers,

and pay wages and federal employment

taxes.

(e) Financial statements—(1) CPEOs.

By the last day of the sixth month after the

end of each fiscal year, and beginning

with the first fiscal year that ends after the

CPEO’s effective date of certification, a

CPEO must cause to be prepared and provided to the IRS a copy of its annual

audited financial statements for the fiscal

year and an opinion of a certified public

accountant (CPA) that such financial

statements—

(i) Are presented fairly in accordance

with GAAP; and

(ii) Reflect positive working capital or,

only if the CPEO satisfies the requirements of paragraph (e)(3) of this section,

reflect negative working capital, with such

opinion in either case setting forth in de-

Bulletin No. 2016 –21

tail a calculation of the CPEO’s working

capital as reflected in the financial statements.

(2) CPEO applicants—(i) In general.

A CPEO applicant must cause to be prepared and provided to the IRS, with its

application, a copy of its annual audited

financial statements and an opinion with

respect to such financial statements (as

described in paragraph (e)(1) of this section) for the most recently completed fiscal year as of the date it applies for certification. Notwithstanding the preceding

sentence, if a CPEO applicant applies for

certification before the last day of the

sixth month following its most recently

completed fiscal year, and the audit of the

financial statements for this fiscal year has

not yet been completed at the time of

application, a CPEO applicant must provide to the IRS, with its application, the

financial statements and opinion described

in paragraph (e)(1) of this section for the

immediately preceding fiscal year, if any,

and must subsequently provide to the IRS

the financial statements and opinion described in paragraph (e)(1) of this section

for the most recently completed fiscal year

by the last day of the sixth month after

such fiscal year ends. In addition, for any

fiscal year that ends after the CPEO applicant applies for certification and on or

before the effective date of certification, if

applicable, the CPEO applicant must provide the audited financial statements and

opinion described in paragraph (e)(1) of

this section by the last day of the sixth

month after such fiscal year ends. The

obligation to provide the audited financial

statements described in the preceding sentence continues to apply even if the CPEO

applicant is certified as a CPEO prior to

the date the audited financial statements

are provided.

(ii) Newly established CPEO applicants. In addition to the requirements in

paragraph (e)(2)(i) of this section, a CPEO

applicant that was not operating as a provider of employment-related services for

all or part of the most recently completed

fiscal year as of the date it applies for

certification must provide a copy of the

audited financial statements of any precursor entity, if one exists, and an opinion

with respect to such financial statements

(as described in paragraph (e)(1) of this

section) for the precursor entity’s most

Bulletin No. 2016 –21

recently completed fiscal year as of the

date of the application for certification in

such time and manner as the Commissioner may prescribe in further guidance,

as well as such additional information as

the Commissioner may prescribe in further guidance.

(3) Exception to positive working capital requirement. A CPEO applicant or

CPEO with annual audited financial statements for a fiscal year that do not reflect

positive working capital will not fail to

meet the requirements of paragraph

(e)(1)(ii) of this section if—

(i) The CPEO applicant or CPEO has

negative working capital for no more than

two consecutive fiscal quarters of that fiscal year, as demonstrated by the financial

statements (for the final fiscal quarter in

the fiscal year) and the statements described in paragraph (f)(1)(ii) of this section (for any other fiscal quarter);

(ii) The CPEO applicant or CPEO, or

its CPA, provides, in such time and manner as the Commissioner may prescribe in

further guidance, an explanation to the

IRS describing the reason for the failure;

and

(iii) The IRS determines, in its sole

discretion, that the failure does not present

a material risk to the IRS’s collection of

federal employment taxes.

(4) Completed fiscal year. For purposes

of this paragraph (e), a fiscal year will be

considered completed once the last day of

that fiscal year has ended, regardless of

whether the CPEO applicant or CPEO

was in operation or certified for all 12

months of the fiscal year or the fiscal year

consisted of fewer than 12 months.

(f) Quarterly assertions and attestations—(1) CPEOs. By the last day of the

second month after the end of each calendar quarter, and beginning with the first

calendar quarter, that ends after the

CPEO’s effective date of certification, a

CPEO must provide the following to the

IRS:

(i) An assertion, signed by a responsible individual under penalties of perjury,

stating that the CPEO has withheld and

made deposits of all federal employment

taxes (other than taxes imposed by chapter

23 of the Code) as required by subtitle C

for such calendar quarter and an examination level attestation from a CPA stating

875

that such assertion is fairly stated in all

material respects.

(ii) A statement signed by a responsible individual under penalties of perjury

verifying that the CPEO has positive

working capital (as determined in accordance with GAAP) at the end of the most

recently completed fiscal quarter, as well

as such additional financial information

that the Commissioner may specify in further guidance.

(2) Exceptions—(i) Immaterial failures. A CPEO will not fail to meet the

requirements of paragraph (f)(1)(i) of this

section if the CPA examination level attestation indicates that the CPEO has

failed to withhold or make deposits in

certain immaterial respects, provided

that—

(A) The attestation provides a summary of the immaterial failures that were

found;

(B) The attestation states that the failures were immaterial and isolated and do

not reflect a meaningful lapse in compliance with federal employment tax withholding and deposit requirements; and

discretion, that the isolated and immaterial

failures identified by the CPA do not present a material risk to the IRS’s collection

of federal employment taxes.

(ii) Negative working capital. A CPEO

with negative working capital at the end

of a fiscal quarter will not fail to meet the

requirements of paragraph (f)(1)(ii) of this

section if—

(A) The CPEO does not have negative

working capital at the end of the two fiscal

quarters immediately preceding such fiscal quarter, as demonstrated by the financial statements described in paragraph

(e)(1) of this section, if available, or the

statements described in paragraph (f)(1)(ii)

of this section;

(B) The CPEO provides an explanation

to the IRS describing the reason for such

negative working capital in such time and

manner as the Commissioner may prescribe in further guidance; and

discretion, that the negative working capital does not present a material risk to the

IRS’s collection of federal employment

taxes.

(3) CPEO applicants—(i) In general.

By the last day of the second month after

May 23, 2016

the end of each calendar quarter, beginning with the most recently completed

calendar quarter as of the date of a CPEO

applicant’s application for certification

and ending with the most recently completed calendar quarter as of the effective

date of certification (if applicable), a

CPEO applicant must provide to the IRS

the assertion, examination level attestation, and working capital statement described in paragraph (f)(1) of this section,

subject to the exceptions described in paragraph (f)(2) of this section (though substituting “CPEO applicant” for “CPEO”).

(ii) Newly established CPEO applicants. A CPEO applicant that was not

operating as a provider of employmentrelated services during the most recently

completed calendar quarter as of the date

of its application for certification or during any calendar quarter that ends while

its application for certification is pending

must provide to the IRS the assertion,

examination level attestation, and working capital statement described in paragraph (f)(1) of this section with respect to

any precursor entity, if applicable, in such

time and manner as the Commissioner

may prescribe in further guidance, as well

as such additional information as the

Commissioner may prescribe in further

guidance.

(g) Bond—(1) In general. A CPEO

must post a bond for the payment of federal employment taxes issued in the form

and containing the terms prescribed by the

Commissioner in further guidance and in

an amount described in paragraph (g)(2)

of this section.

(2) Bond amount—(i) In general. The

amount of the bond described in paragraph (g)(1) of this section must be, for

each period beginning on April 1 of any

calendar year and ending on March 31 of

the following calendar year (or, in the case

of a newly certified CPEO, beginning with

the effective date of certification and ending on the subsequent March 31) (the

bond period), at least equal to the greater

of—

(A) Five percent of the CPEO’s liability under section 3511 (or, if applicable,

the liability described in paragraph

(g)(2)(ii) of this section) during the calendar year preceding the beginning of the

bond period, but not more than

$1,000,000; or

May 23, 2016

(B) $50,000.

(ii) Amount of bond in first and second

year as a CPEO. If a CPEO does not have

any liability under section 3511 for all or

a portion of a preceding calendar year

because the CPEO was not certified as a

CPEO for all or a portion of that preceding calendar year, the liability applied for

purposes of paragraph (g)(2)(i)(A) of this

section for the entirety or portion of the

preceding calendar year during which the

CPEO was not certified will be the federal

employment tax liability of the CPEO,

and of any precursor entity of the CPEO

described in § 301.7705–1T(b)(10)(i)(A),

that results from one or more service

agreements described in § 31.3504 –

2(b)(2) of this chapter. With respect to the

federal employment tax liability of such

precursor entity during a preceding calendar year, the liability will only be applied

for purposes of paragraph (g)(2)(i)(A) of

this section to the extent it results from

service agreements that have been transferred or are intended to be transferred by

the precursor entity to the CPEO at the

time the bond amount is determined. For

purposes of this paragraph (g)(2)(ii), an

entity is considered a precursor entity of a

CPEO described in § 301.7705–

1T(b)(10)(i)(A) if it was determined to be

its precursor entity under that section at

the time it was a CPEO applicant.

(3) Cancellation—(i) Notice. A bond

required under this paragraph (g) must

provide that it may be cancelled by the

surety only after the surety gives written

notice of such cancellation to the IRS and

the CPEO in such time and manner as the

Commissioner may prescribe in further

guidance.

(ii) Ongoing liability. A bond required

under this paragraph (g) must provide

that, if a surety cancels the bond without

issuing a superseding bond to the CPEO,

the surety will, notwithstanding the cancellation, remain liable for all federal employment tax liability accrued by the

CPEO during the period beginning with

the effective date of the first bond issued

by the surety to the CPEO in any consecutive series of bonds issued by that surety

prior to cancellation and ending with the

cancellation of the bond (the total bond

period), up to the penal amount of the

bond at the time of the cancellation. A

cancelling surety will remain liable as de-

876

scribed in this paragraph (g)(3)(ii) for federal employment tax liability accrued during the total bond period up to the penal

amount of the bond for as long as the

Commissioner may assess and collect

taxes for such period under sections 6501

and 6502.

(4) Strengthening bonds to reflect

CPEO adjustment or IRS assessment. In

calculating five percent of its liability under section 3511 (or other applicable federal employment tax liability) for a preceding calendar year for purposes of

determining a bond amount, a CPEO must

base its calculation on the amount of applicable federal employment taxes that it

reported and paid for that preceding calendar year. However, if the CPEO or the

IRS subsequently determines during the

period for which the bond amount applies

that the applicable federal employment

tax liability for the preceding calendar

year was higher than the amount reported

and paid (and makes an adjustment or

assessment, respectively, reflecting such

determination) and if the bond that the

CPEO had posted was less than

$1,000,000, the CPEO must post a

strengthening bond that, together with the

initially-posted bond, equals a total

amount that reflects the adjusted applicable federal employment tax liability up to

$1,000,000. Alternatively, such a CPEO

could post a superseding bond in such

adjusted amount.

(5) No posting of collateral. A CPEO

must meet the bond requirements of this

paragraph (g) without posting collateral.

(6) Requirements for surety. Any

surety that issues a bond required by this

paragraph (g) to a CPEO must be a surety

company that holds a certificate of authority from the Secretary as an acceptable

surety on federal bonds and meets such

other requirements as the Commissioner

may prescribe in further guidance.

(h) Controlled group. All CPEO applicants and CPEOs that are members of a

controlled group within the meaning of

sections 414(b) and (c) will be treated as a

single CPEO applicant or CPEO for purposes of paragraphs (e) (other than

(e)(1)(ii)), (f) (other than (f)(1)(ii)), and

(g) of this section.

(i) Consents to disclose. To receive and

maintain certification, a CPEO applicant

or CPEO must provide such consents for

Bulletin No. 2016 –21

the IRS to disclose confidential tax information to its customers, and to other persons as necessary to carry out the purposes of these regulations, that relates to

its certification and obligations to report,

deposit, and pay federal employment

taxes as the Commissioner may require in

further guidance.

(j) Periodic verification. A CPEO must

periodically verify that it continues to

meet the requirements of this section in

the time and manner prescribed by the

Commissioner in further guidance.

(k) Notification of material changes. A

CPEO applicant or CPEO must notify the

IRS, in the time and manner prescribed by

the Commissioner in further guidance, of

any change that materially affects the continuing accuracy of any agreement or information that was previously made or

provided to the IRS.

(l) Accrual method of accounting. A

CPEO must compute its taxable income

using an accrual method of accounting or,

if applicable, another method that the

Commissioner provides for in further

guidance.

(m) Compliance with reporting obligations—(1) In general. A CPEO must

agree to make reports to the IRS and to its

clients as provided in section 3511(g) and

the regulations thereunder, including filing all federal employment tax returns and

information returns as required.

(2) Filing on magnetic media. A CPEO

must file all returns, schedules, reports,

and other forms and documents on magnetic media when required by section

3511(g) and the regulations thereunder or

other Treasury regulations.

(n) Suspension and revocation—(1) In

general. The IRS may suspend or revoke

the certification of any CPEO, in the time

and manner and under the circumstances

prescribed by the Commissioner in further

guidance, as a result of one or more failures to meet any of the requirements for

Bulletin No. 2016 –21

CPEOs described in this section, section

3511(g) and the regulations thereunder,

and any further guidance and will suspend

or revoke certification if the IRS determines, in its sole discretion, that such failure(s) present a material risk to the IRS’s

collection of federal employment taxes.

See paragraph (b) of this section for the

factors the IRS will consider in determining whether one or more failures to meet

any of the requirements described in this

section presents a material risk to the

IRS’s collection of federal employment

taxes.

(2) Suspension. Section 3511 will not

apply to any contract described in section

7705(e)(2) into which the CPEO enters

while its certification is suspended.

(3) Revocation. If an organization’s

certification as a CPEO is revoked, the

organization will not be considered a

CPEO for purposes of section 3511 unless

and until it again applies to be certified as

a CPEO in accordance with paragraph (a)

of this section and is again certified by the

IRS as meeting the requirements of this

section. An organization whose certification as a CPEO has been revoked may not

re-apply to be certified as a CPEO until

one year has passed since the effective

date of its revocation.

(4) Disclosure of suspension and revocation—(i) Notification by the CPEO. An

organization whose certification as a

CPEO has been suspended or revoked

must notify its customers of such suspension or revocation in the time and manner

prescribed by the Commissioner in further

guidance.

(ii) Disclosure by the IRS. If the IRS

suspends or revokes an organization’s certification as a CPEO, the IRS will make

available to the public the fact of such

suspension or revocation in the time and

manner described in further guidance. The

IRS may also individually notify the or-

877

ganization’s customers of such suspension

or revocation.

(o) Effective/applicability date—(1) In

general. This section applies on and after

July 1, 2016.

(2) Expiration date. The applicability

of this section expires on or before May 3,

2019.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part

602 continues to read in part as follows:

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

Par. 4. In § 602.101, paragraph (b) is

amended by adding the following entries

in numerical order to the table to read as

follows:

§ 602.101 OMB Control numbers.

*****

(b) * * *

CFR part or

section where

identified and

Current OMB

described

control no.

*******

301.7705–1T....................1545–2266

301.7705–2T....................1545–2266

*******

Kirsten B. Wielobob,

Acting Deputy Commissioner for

Services and Enforcement.

Approved: April 28, 2016.

Mark J. Mazur,

Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 4, 2016,

4:15 p.m., and published in the issue of the Federal Register

for May 6, 2016, 81 F.R. 27315)

May 23, 2016

Part III. Administrative, Procedural, and Miscellaneous

Diversification

Requirements for Variable

Annuity, Endowment, and

Life Insurance Contracts

under Section 817(h)

Notice 2016 –32

This notice provides guidance to taxpayers regarding the diversification requirements under section 817(h) of the

Internal Revenue Code (Code) for a segregated asset account that invests in a

money market fund (MMF) that is a government MMF. An MMF is a type of

investment company registered under the

Investment Company Act of 1940 (1940

Act) and regulated as an MMF under

Rule 2a–7 under the 1940 Act (17 CFR

270.2a–7).

pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing.”

15 USC 80a–2(a)(16). As with certain

other 1940 Act definitions, this definition

of government security also applies for

purposes of section 851(b)(3) of the Code,

which generally applies to MMFs. See

section 851(c)(6).

Rule 2a–7 as amended requires an

MMF other than a government MMF to

be prepared to impose a liquidity fee, and,

in certain circumstances, to impose such a

fee unless the MMF’s board of directors

determines that such a fee is not in the

best interests of the fund. In contrast, Rule

2a–7 permits, but does not require, government MMFs to impose liquidity fees. It

is expected that some existing MMFs will

convert to government MMFs.

b. Variable contracts

I. BACKGROUND

a. Money market funds

In 2014, the Securities and Exchange

Commission (SEC) amended Rule 2a–7

and other rules governing MMFs. See

Money Market Fund Reform; Amendments to Form PF (79 FR 47736). Rule

2a–7 as amended identifies circumstances

under which an MMF is permitted or required to impose a liquidity fee or is permitted to impose a redemption gate. When

an MMF has a liquidity fee in effect, the

liquidity fee reduces the

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