Revenue Procedure 2004-38

Part Ill. Administrative, Procedural, and Miscellaneous
Health Savings

~ccounts- rans sit ion Relief
for State Mandates
Notice 2004-43
PURPOSE

This notice provides transition rclief for
individnals in stares where high deductible
health plans IHDHPs) as described in scction 223(c)(1) are not available because
stak laws require health plans tu provide
ccrlain benefits withou! regard to d detluctihle or below the minimum annual dzductible of section 113(c)(2)(A)(i). The
transi~ionrelief covers monlhs before January I, 2006. for stare requirements in effect on January 1,2004.

Sevcral states curtently requirc that
health plans provide ceflain benefits
without regard to a deductible or with
a deductible below lhe mintmum annual deductible requircments of section
223(c)(2) 1e.x.. first-dollar coverage or
coverage with a low deductiblc). These
health plans are not HDHPs undrr sccrion
223(c)(2) and individuals covered under
lhese health plans are nu1 eligible to contribute to HSAs. Bczause of the short
period between thc enactment of HSAs
and the effective date of section 223. these
states havz had insufficient timc to mudify
their laws tu conform to the standards of
section 223. Thus. it i s appropriate 10provide transition relief that treats HDHPs as
qualifying under section 223(c)(2) when
thc bole reason the plans are not HDHPs
is bccause of state-mandated bene firs.
Dunng the transition period. utherwise
eligi blc t ndividuals covered undcr these
plans will be treated as eligtblc individuals
for purposes of seclion 223(c)(l) and may
contribute lo an HSA.

26 CFR 601,105. Exornrnnrirm 01 returrrs arrd r turr~rr
credrr. o r ~~burummr:
determmarrur~ of
r r w w c l M I trab~lrts.
IAIFP Purr I, 3 42; 1.42-5.)

.for refund,

Rev. Proc. 2004-38
SECTION I . PURPOSE
This revenue procedure informs owners
of qualified low-income housing projects

how to obtain the waiver from the Internal Revenue Servicc of the annual reccrtification of tenant incclrne (waiver) provided in 5 47(g)(g)(B) of h e Internal Rcvenue Code.
SECTION 2. BACKGROUND

Section 1.42-5 of the Incomc Tax
Regulations
providcs the minlmum
BACKGROUND
requirements that a housing crrdit
Scction 120 1 01 the Medicarc Prcicripagency's (Agency's) compliance tnontion Drug, Improvement, and Modrrnizai~oring procedure must conlaln to sat110n Acl o i 2003, Pub. L. 108-173, added
isfy its coinpliance monitoring duscctlun 223 lo the Internal Rcvcnuc Codc
ties under 5 42(1n)(l)(B)(iii). Section
to pcrmit eligible individuals to cstab1.42-5(b)(l)( vi) provides that an Agency
lish hcalrh savings accounts (HSAs) for
must require an owner to keep records
For monlhs before January I . 2006, a for each qualified low-income building in
taxable years beginning aftcr Dcccmber
31, 2003. An "eligible individual" under l~ealthplan which would othcrwisc qual- the project that show for each yrdr in the
scction 2 2 3 ( c ) ( \ ) must be covcrcd by a ify as an HDHP under section 223(c)(2), compliance period the annual income cer"high deducrible health plan" (HDHP). except t h a ~ i t umrnplies with state law tificiitiuns of each low-~ncomctenant per
An tlDHP under section 223(c)(2) must requircmcnls that certain benefits bc pro- unit. Section 1.42-5(b)( l )(vii) provides
sa~isrycertain requlrcmcntb with respect vided w ~ t h o u ta deductible or bcluw the that an Agency inust rcquire an owner to
to nunimum annual dcductibies and max- miniinurn annual deductible of scction keep documents for each qualiried lowinimum out-of-pockct chpcnres. However, 223(c)(2)(A)(i), will be treated as an come building in its project for each year
section 2 1 3 ( c ) ( 2 ) ( C )permit< a safe har- HDtIP for purposes of scction 223(c)(2). in the compliance pcriod that upp port each
bor for thc absence of a prevenlive care i f the disqualify inp: hcncfits lire required low-incomc tcnanr's income certification.
by state law in effcct on January I , 2004
deductihlc. An cligible individual may
Section 1.42-5(c)ll l(lii)provides that nn
also have certain permitted it~surancc
Agency must rcquirc an owner to certify
and permitted cnvcragc under scction DRAFTING [NFORMATION
at least annually chst, for thc preceding
223(c)( 1)(B).
The princ~pal author of ihis notice 12-month period. the owncr has receibed
Nutice 2004-13. 2004-1 5 1.R B. 725. i s Shoshanna Tanner of the Office of an annual lncomc certification frclm each
describes a ~ a f harbor
e
for preventive cars
nc
and documentatiun
Divisiun Coun~ellAssociatcChicf Coun- l o w - ~ ~ c o ~tenant
bellctlir that may be providrd by an HDHP
bupporling
that
certificat
!on.
sel (Tax Exempt and Guvcrnment Enliwithuut J. deductible or w1111 a deductiblc
Section
42(p)(8)tB)
provides
that on
tieq). For furthcr information regarding
below rhz minimum annual dzductible for
by
~
h
c
taxpayer,
the
Secrelnry
application
this nolice, contact Ms. h n n e r at (202)
an HDHP. In addition. [tie rlorice indicates
may waive ally annual rccertlficalinn o f
622-6080 (not a toll-free call)
that whcther health care required by qtate
tcnanl lnsome for purposes of § 42(g) ifche
law without rcpard to a deductible i~ "preentirc building is occupled by Iow-income
vcntivc" w~Ilbe ha5ed on the standards set
tenant5 ( a 100 percenl lou-~ncomcbuildlorlh I n Not~ce2004-23 and othcr g u ~ d ing). Low-~ncometenants arc individuals
ancz issued by the IRS, rnthcr than u n how
occupying 3 rcni-~cstrictedunit in a qualrhe benefits are characterized by state law.
ified low-income housing projcct whose

July 6 , 2004

combined incurtic sat~sfiesthe 5 42(p)(l)
incomc limital on elected by the owner of
the projcct.

had thcir annual Incorne verified, docurncnlcd, and c c r ~ ~ l ~(2)
e d maintain
;
documcnlation to support that recerrifi~ation:
or (3) certify to the Agency rrsponsihle
SECTlON 3 . SCOPE
k ~ rmonitoring the building Cor cnmplinrlse with 5 42 that i t has rcccived this
This revenuc procedure npplies to information.
Agencies and owners of qualifted low -in.02 The waiver takes effect on the dale
come housing projects that conalst cnt~rcly thc Service approves the waiver. Once
at' 100 percent low-income building$.
the waiver takes effect. it remains in effect ur,til the end of the IS-year compliSECTION 4. PROCEDURE FOR
ance
period (dcfincd i n 8 Jl(i)(l)), unless
OBTAINING A WAIVER UNDER
thc waivcr is revoked, in which case the
9 42(g1(8)(B)
waiver ceases lo be in effect on the date of
revocation
See sections 5 04 and 5.05 of
An owncr applying for the waiver for
rcvcnuc
procedure regarding revocathis
its 100 prrcenl low-incomr building musi
( I ) complere and sign thc applicable por- tions.
.03 Obiaining the waiver will not pretions of the Form 8877. Req~trrrfor Waiver
vent
an owncr from having to produce docof Annuul Hrcerrifirarron Requir~mentfur
umentation
to vcrify the owner's complirhe h w - l n c o m c Housing Credit, ( 2 ) have
ance
with
42
upon an examination of the
the Agency responsible for n~onitoringthe
owncr's
Federal
incomc tax return. Thus.
building for compliance with fi 42 slgn the
lor
cxnmplc,
the
owner must keep records
appltciible portion of the form, and ( 3 ) filc
rhc lorn) with the Service pursuant iu thc and docutnentation that show the income
instructions accompanying the form. A of tenants upon initial occupancy of any
copy of thc 2004 version of Form 8877 rcsiden~ialunit in the building In addiis lncludcd in the appendix to this rev- tion, except as prov~dedi n scction 5.01
cnuc proccdure. The Service will notify of this revenue proccdurc, obtaining the
thc owncr whether the request for waiver waiver will not prcvcnt an owrwr from
has bccn approved crr denied. Scc scctian having to satisfy thc rcrlulrrrnznrs of the
5.02 of this revenw procedurc fur the pe- compliance moniloring proccdurz adopted
by the Agency rcsponsiblc for mnnltoring
riod the waiver ls in rffccl
the building for cornpliance w ~ t h 42.
.04 The Scrvicc may revoke the waiver
SECTION 5. EFFECT OF OBTAINING
if
the
building ceases to be a 100 percent
A WAIVER UNDER b 42(g)(8)(B1
\ow-incumc building or if the Service de.01 I f an owner of a 100 percent termines thdt an owncr has violated Q: 42 in
low-income building obtains a waiver 3 manncrthat IS sufficiently serious to warof the annual income recertification rant rcvoc3tiot1. In any case, the Service
I'rom the Service, thc owncr will be ex- will rcvoke thc waiver if the Agency reempt l r o n ~ the recertification rcquirc- quests, in actorclanuc with the instructions
mcnts of d 1.42-5(b)(l)(vi) and (vii) and to Form 8877, that the Scrvicc rcvokc the
4: 1.42-5(c)f l)(iii). As a rcsult. the owner waivcr.
15 no1 required mder those scctions to ( I )
.05 A waivcr will bc outomat~callyrskeep rccords that show an annual incotnc voked if there i s a change in the owrwrrecertification of all t hc low-~nccrmcten- ship for federal tax purptjses c ~ fthc 100
ants in the building whu havc prcv~oujly percent low-incon~cbuilding (~nclud~ng
a

change resulting from a terniinat~onuC a
purtncrship under $ 708). In this case, the
owncr that received the waiver musi notify
thc Scrvice of the revocation in avcordancc
wilh the instructions to Form 8877. The
tlew owner may apply for a waiver.
.06 An Agency's compliance monitoring procedure will not fail to satisfy # 42(m)(1 )(B)(iii) solely becausc
the 100 percent low-income buildings
to which the waiver applies have bccn
exempted from rhe reccrtitication requiremcnts 01' 9 1.42-5(b)( l )(vi) and
(vii) and 9: 1 A3-5(c)I I )(iii). Nonetheless, thc Agency'q compliance rnoniloring proccdure must continue lo require that an owner satisfy the requirementh in $ I .42-S(b)(l)(vi) and (vii) and
3 1 42-5(c)(l)(iii) upon a tenant's inilial
occupancy of any residential rental u n i ~in
thz building.
.07 h 100 pcrccnt low-income buildlng
to which thc waiver applies continues to
bc subjccl 10 the review requirements of
3 1.42-5(c)(2).
SECTION 6. EFFECT ON OTHER

DOCUMENTS
Rev. Proc. 94-64. 1994-2 C.B. 7g7,is
superseded. Waivcrs obtained under Rev.
Proc. 94-64 arc not affected by this revenue proccdurc
SECTION 7 EFFECTIVE DATE

T h ~ revenue
s
procedure is effective for
applications f ~ l e don or after July 6, 2004.
DRAFTING INFORMATION
The principal author of this revenue
procedure is David Sclig o l [he 01'lice of the Associate Chief Counsel
(Passthroughs and Special Indusirics).
For further information regardinp l h i q revenue procedure, contact Mr. Selig at ( 2 0 2 )
622-3040 (not a toll-free call).

APPENDIX
?MI4 Versl~lnut' Form 8877

July 6, 2004