assignment in gross rule

June 30, 2020

Violation of the assignment-in-gross rule for trademarks.

A recent case that addressed rights in the trademark reign provides a cautionary tale of the consequence of the failure to assign a trademark with its goodwill.

By Scott D. Locke and Jessica J. Kastner | June 30, 2020

Trademark rights are property rights. Like real property and personal property, as well as other intellectual property rights such as patents and copyrights, they can be assigned. However, the transfer of trademarks is unique in that any assignment of a trademark must also transfer the goodwill that is associated with that trademark. The requirement is deeper than a perfunctory recitation in an assignment document. The failure to transfer goodwill can invalidate the assignee’s rights under the agreement. A recent case that addressed rights in the trademark REIGN provides a cautionary tale of the consequence of the failure to assign a trademark with its goodwill.

The Anti-Assignment in Gross Rule

The owner of trademark rights can assign those rights to other persons or entities. The ability to assign trademark rights is significant because between competitors who wish to use the same or a confusingly similar trademark for the same or related goods, the party that began using the trademark first will generally prevail, and with any assignment the purchaser inherits the seller’s date of first use, i.e., the seller’s priority. Carnival Brand Seafood Co. v. Carnival Brands, Inc, 187 F. 3d 1307, 1310 (11th Cir. 1999).

However, any assignment of a trademark, must include an assignment of the goodwill that is associated with the trademark. 15 U.S.C. §1060(a)(1). For this reason, most assignments of trademarks explicitly recite that the assignor assigns specific trademarks and the goodwill associated therewith. However, the mere recitation of this language will not in and of itself render an assignment proper and confer priority. Failure to actually transfer the goodwill associated with a trademark is deemed an “assignment in gross” and renders the assignment invalid.

More than a century ago, in United Drug Co.. Theodore Rectanus Co., 248 U.S. 90 (1918), Justice Pitney explained the theory behind the prohibition against “assignments in gross” for trademarks. As he noted, trademark rights are part of a broad law of unfair competition and the rights in trademarks grow out of the use of them. Consequently, they are not property rights apart from their use in connection with a business. Id. at 97. Thus, unlike the owner of a patent right, the owner of a trademark right cannot park its rights and make use of them merely by enforcing those rights to prevent others from using the same or similar trademarks. Id. at 98.

One of the core components of the anti-assignment in gross rule is that it precludes a purchaser from benefiting from the goodwill of the seller if the purchaser applies the mark to different goods. This sounds similar to the “similarity of goods” factor used in the likelihood of confusion analysis that is used for determining whether there is trademark infringement. However, purchasers of trademarks may be surprised to learn that these standards are quite different. Under a likelihood of confusion analysis, goods may be loosely related and still weigh in favor of holding a trademark to have been infringed.

By contrast, in the context of determining whether an assignment is “in gross,” courts strictly require goods to be very similar in order to uphold an assignment. As such, even if an assignment expressly assigns the goodwill associated with the trademark, the assignment may be ineffective if the assignee’s products are not nearly the same as the assignor’s goods.

‘PepsiCo v. Grapette’

In the seminal case PepsiCo, Inc. v. Grapette Co., 416 F.2d 285 (8th Cir. 1969), the U.S. Court of Appeals for the Eighth Circuit established a framework for considering the proximity that goods must be in order to avoid a finding of an assignment in gross. In that case, a first company, H. Fox and Co., had registered the name PEPPY in connection with the cola syrups in 1926. In 1965, a second company, Grapette Co. bought the trademark PEPPY from H. Fox and Co. in the context of Chapter 11 bankruptcy proceeding. H. Fox and Co. made a formal assignment of its goodwill. Id . at 286. Grapette began to use the trademark in connection with a bottled soft pepper drink. No inventory and no other assets were transferred. Id.

In 1965, PepsiCo warned Grapette about a possible litigation if Grapette did not cease using the mark, and in 1966, PepsiCo initiated suit based on an alleged infringement of its trademark PEPSI. Id. Pepsi’s use predated 1965, Therefore, the issue was whether the assignment from H. Fox and Co. was one in gross and thus invalid. If the assignment were invalid, then Grapette would not receive the benefit of H. Fox and Co.’s priority date and would not be able to assert a defense of laches.

In explaining the contours against the prohibition against an assignment in gross, the court explained that for assignment of a trademark to be effective, it must not be “naked,” meaning that the purpose of the assignment must be consistent with the object of trademark law, i.e. , to indicate the origin of the article by the association of the trademark with it. Id. Consequently, the court held that “any assignment of a trademark and its goodwill (with or without tangible or intangibles assigned) requires the mark itself to be used by the assignee on a product having substantially the same characteristics.” Id. at 288.

Turning to facts before it, the Eighth Circuit determined that H. Fox and Co.’s cola flavored syrup and Grapette’s pepper type bottled beverage were too dissimilar for there to have been an effective assignment of goodwill. Id. The court emphasized that the issue of having substantially the same characteristics was to be viewed through a lens that focuses on the public welfare. Consequently, the fact that the products were related or even in the same international class in the Trademark Office did not matter. Ultimately, the harm of holding otherwise would “condone public deceit” in that “[t]he consumer might buy a product thinking it to be of one quality or having certain characteristics and could find it only too late to be another.” Id.

‘Vital Pharmaceuticals v. Monster Energy’

More recently, another case involving beverages, Vital Pharmaceuticals, Inc. v. Monster Energy, 2020 WL 2091996 (S.D. Fla. 2020), reminds practitioners and assignees for trademarks, that the prohibition against assignments in gross continues to be a problem for litigants. In that that case, the parties disputed whether the assignment of rights to the trademark REIGN was invalid.

In 2015, Dash LLC, not a party to the lawsuit, began using the trademark REIGN and obtained a registration for the dietary supplement drink mixes as well as supplements and other products. One of the drinks that Dash sold was a powdered, fruit flavored, pre-workout supplement that was caffeinated. Id.

By March 25 2019, Monster Energy Company, through a subsidiary, launched energy drinks under the name REIGN. At about the same time, Vital Pharmaceuticals (VPX) entered into a trademark purchase and assignment agreement with Dash for Dash’s trademark rights. VPX did not acquire anything other than the REIGN trademark. Id. at *2. Following the sale, Dash ceased using the REIGN trademark.

On March 28, 2019, three days after Monster launched its product, VPX announced that it would be launching an energy drink under the trademark REIGN. VPX’s REIGN product differed from Dash’s REIGN product in that: (1) VPX’s product was ready to drink while Dash’s product was a powdered supplement; and (2) VPX’s product contained no ingredients in common with Dash’s product. Id.

The court considered four factors.

First, as the court in PepsiCo v. Grapette did, the court in this case focused on whether the assignee was using the mark for a substantially similar product. Id. Emphasizing the need to protect consumers, the court was explicit that even minor difference can be enough to threaten customer deception, and thus harm customers because they would mistakenly rely on a brand that they had come to trust. Id.

Noting that VPX entirely abandoned the product line that Dash had sold, the court concluded that VPX has “left behind any goodwill Dash had earned for its mark.” Id. VPX tried to advance an argument that the products need not be identical and that they were sufficiently similar because both its products and the products of the assignor of the mark were: (i) fruit-flavored, (ii) pre-workout, (iii) dietary supplements that (iv) contain caffeine. Id. However, the court concluded that these similarities were insufficient, particularly because VPX implemented a complete change of ingredients.

Second, the court considered whether VPX acquired any assets from Dash. Although the transfer of tangible assets is not a prerequisite for an assignment to be valid, the court noted that the absence of any tangible acquisition can undermine the public’s legitimate expectation that a mark will go on in real continuity. Id. at *6-7. Thus, the factor weighed in favor of a finding of an invalid assignment of trademark rights.

Third, the court considered whether the assignor continued to capitalize on its goodwill under a new trademark. In this case, the assignor emphasized to its customers that it was replacing its REIGN products with products sold under the trademark SLAY. Id. This course of action suggested that the assignor was retaining its goodwill and not transferring it, despite using a different trademark. Thus, because the assignor retained its customers’ goodwill, even if it used a different trademark, it could not transfer that goodwill.

Fourth, the court considered whether there was a continuity of management between the assignor and the assignee such that the assignee would continue to provide the same quality of services. Id. The absence of this continuity of management also weighed in favor of a finding of an assignment in gross because it suggested a lack of continuity of the quality of the goods.

Because all four of the factors weighed against Grapette and suggested that there was no transfer of goodwill, the court held that the assignment was in gross. Consequently, the court entered an injunction in favor of the plaintiff that precluded VPX from using the REIGN trademark in connection with its beverage products.

Most practitioners who draft assignments that cover trademark rights know that the assignments should include an express transfer of the goodwill that is associated with the subject trademarks. However, this assignment of goodwill must be one of not only form but also of substance. The four factor test that the court in Vital Pharmaceuticals recently applied is a reminder that if the assignee’s products are dissimilar from the products of the assignor, a court may find that the circumstances surrounding the transfer suggest that the parties truly intended only an agreement by the assignor to refrain from future use of its trademark and not to ensure both continuity of type of goods and quality under the assigned trademark. In such cases, then the assignment may be found in gross and thus invalid.

Accordingly, in order to reduce the likelihood of a finding an assignment to be in gross, assignees should consider whether any one or more of the following procedures, which would help to ensure a continuity of quality, would be consistent with their business plans: (1) acquiring physical assets from the assignor; (2) retaining personnel of the assignor or hiring them as consultants; (3) requiring the assignor to abandon selling the same goods; and (4) offering at least some of the same products, even if there is a desire to expand into other goods and services. Although the tag should not wag the dog, failure to be able to demonstrate that goodwill has in fact been transferred, can jeopardize what the assignee thought was a valuable asset.

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An assignment in gross, or not? What happened to the goodwill?

Trademark assignments and the transfer of the goodwill seem, well, oh-so dull, until they are not. ian gill reports on a recent cautionary tale from the uk., this is an expanded version of an article that was written by the author and first published in ipkat in february 2021.

Scott Hallsworth (‘SH’) is a renowned Australian chef who worked his way up to be the Head Chef at the Michelin starred Park Lane restaurant of Nobu . SH created and opened a chain of London based restaurants in 2013 under the mark KUROBUTA. The business floundered and administrators were appointed on 21 April 2017 which eventually resulted in the assignment of the goodwill in the business being assigned to a new entity, Kurobuta Ltd (‘KL’), which had no connection with SH.

On 31 March 2017, shortly before the administrators were appointed, SH filed a UK trade mark application to register the mark KUROBUTA in relation to a wide variety of goods and services, including restaurant services, and a registration was granted on that application on 1 September 2017. This application was not dealt with in the administration process and it is clear from later events that SH had no intention of giving it up. KL therefore applied to invalidate the registration under s.5(4)(a) of the Trade Marks Act 1994, i.e. use of the mark is likely to be prevented by the law of passing off. Given that KL had taken assignment of the goodwill from companies in which SH was a Director and a substantial shareholder this does not seem to be an unreasonable line of attack.

The essence of the case was the question of which party owned the goodwill.

The decision

KL were successful before the UK IPO in relation to the goods and services relating to restaurants or the like. Much is made at first instance of SH’s claim to personally own the goodwill – this was not successful as everything he did was for the benefit of the business, not for him personally, and that finding was not the subject of the appeal to the Appointed Person.

In decision O/590/20 Mr Geoffrey Hobbs QC, sitting as the Appointed Person, distilled the appeal down to three contentions:

Contention A : KL were prevented for contractual reasons from making a claim that SH’s registration was invalid;

Contention B : SH’s application was filed before KL took assignment of the goodwill in the KUBOBUTA mark and therefore they were not the proprietor of a relevant “earlier” right; and

Contention C : The assignment to KL was ineffective for being an “ assignment in gross ”.

Contention A is primarily a contractual issue and is dealt with in paragraphs 25 to 30 of the judgement, with Mr Hobbs concluding that KL was entitled to bring the claim.

Contention B is given short shrift by Mr Hobbs, who did not accept that the word “ earlier ” in the expression “ earlier right ” establishes “ a temporal requirement which the objector must satisfy by having been proprietorially entitled to the cited ‘earlier right’ at the date with effect from which the relevant trade mark application / registration stands to be rejected if the objection succeeds” .

Contention C gave Mr Hobbs an opportunity to stretch his legs and take us on a historic tour of judgements relating to the conditions under which a trade mark can be assigned.

An “ assignment in gross ” can take one of two forms – the owner of goodwill purports to grant to a third party the bare right to use a mark, there being no connection between the two which would justify use by the assignee. Alternatively, an assignor may purport to assign the goodwill without the assignee taking any relevant interest in the business that the goodwill relates to. These categories of transaction are inherently deceptive and therefore ineffective.

It was this second of these two alternatives that SH relied on. Mr Hobb’s summarised the thrust of SH’s arguments as “ the Assignment stopped short of transferring to KL the business interest it needed to acquire in order to invest it with proprietorship of KUROBUTA as a trade mark at common law ”. In support of this position SH refers to Star Industrial Company Ltd v Yap Kwee Kor t/a New Star Industrial Company [1976] FSR 256 where it is stated that “ a purchaser of a mark becomes owner of it only if he becomes at the same time purchaser of the manufactory or the business concerned in the goods to which the mark has been affixed ”. Mr Hobbs traces this proposition back through various cases to Leather Cloth Co. v American Leather Cloth Co. (1865) H.L.C. 523 “ as the leading authority for the proposition that a purchaser of a mark becomes owner of it only if he becomes at the same time purchaser of the manufactory or business concerned in the goods to which the mark has been affixed ”.

Scandecor Developments AB v Scandecor Marketing AB [2001] UKHL 21 takes us through the changes that have taken place over time to the way trade is conducted and hence the changing conditions that have been applied to the sale of trade marks. As modern business practices developed from the early days of the 19 th century, when a trade mark was personal and it was not considered to be something that could be sold, to the position where the trade mark was only a representation that the goods were manufactured by a business without any representation of the person or persons who manufactured them. Customers now realise that the management of a business can change without notice to them or adversely affecting the quality of the goods.

This change was recognised in the UK Trade Marks Act 1938 where it became possible to assign a registered trade mark without the goodwill of the business, although at that time an assignment without the goodwill had to be advertised. This position was further relaxed by the UK Trade Marks Act 1994 which allows the assignment of a trade mark subject to the sanction of the transferred mark being deprived of protection if it becomes a source of deception in the hands of the assignee.

Looking back to the Star Industrial case referred to by SH, the background to which is summarised in paragraphs 58 to 61 of this decision, Mr Hobbs concludes that the claim in that case failed not because of an unallowable “ assignment in gross ” but because the business associated with the goodwill had been abandoned and that did not apply in this case.

Turning to the wording of the assignment from SH to KL, this defined the goodwill as: “ the goodwill, custom and connection of the KUROBUTA trade name in relation to the Kurobuta business and the right to represent itself as carrying on the Kurobuta business” . Absent any definition of the “ Kurobuta business ”, that was taken to mean the “ business ” which had been conducted under and by reference to the name KUROBUTA before the assignment.

Nevertheless SH maintained that the assignment had not transferred the business itself and did not involve an assignment of the business as a going concern. Mr Hobbs comments in paragraph 76 that he did not understand SH as suggesting that the assignments were a sham, and there is no evidence of deliberate forethought on SH’s part at the time of the assignment to engineer a position that could be attacked later. Instead SH was asking the Tribunal to look behind the assignment to find its true effect. However, Mr Hobbs saw no reason why the assignment should not be held to do what it purported to do and transfer the goodwill in the KUROBUTA trade name to KL. The assignment left SH with no right, title or interest in the goodwill and the associated business and it was not an “ assignment in gross ”. The appeal therefore failed.

It seems doubtful that many people would have contested this case as fiercely as SH given that, from the outset, it must have been understood that the chances of success were slim. The more expansive discussion of the background in the original decision of the Hearing Officer ( O/259/19 ) includes SH’s evidence that he did not know the goodwill was being sold and that if he had known he would have objected – the administration process was dealt with primarily by his business partner – but this position is hard to square with SH’s filing of a trade mark application shortly before the administrator was appointed, and as a Director and substantial shareholder he could not later rely on his own lack of engagement in the administration process.

Ultimately, but unsurprisingly, the conclusion was that even a celebrity chef cannot have his cake and eat it.

If you’d like to discuss this topic on, you can contact the writer , or a member of our top tier trade mark team .

Category: Latest Insights | Author: Ian Gill | Published: March 2021 | Read more

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EXPERT OPINION

Violation of the Assignment-In-Gross Rule for Trademarks

A recent case that addressed rights in the trademark reign provides a cautionary tale of the consequence of the failure to assign a trademark with its goodwill.

June 30, 2020 at 10:35 AM

1 minute read

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The Anti-Assignment in Gross Rule

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Related Practices & Jurisdictions

Intellectual Property
Litigation Trial Practice
Federal Circuit / U.S. Court of Spec. Jurisdiction

After a trademark achieves federal registration, ownership of the mark may change hands for a variety of reasons. When a trademark owner transfers their ownership in a particular mark to someone else, it is called an assignment. Generally, for an assignment of a trademark to be valid , the assignment must also include the ‘goodwill’ associated with the mark (goodwill is an intangible asset that refers to the reputation and recognition of the mark among consumers). If the assignment of a trademark includes the mark’s goodwill and is otherwise legal, the assignee gains whatever rights the assignor had in the mark. Importantly, this includes the mark’s priority date, which has implications for protecting the mark from potential infringers going forward.

In contrast, if an assignment of a trademark is made without the mark’s accompanying goodwill, then it is considered an assignment “in gross” — and the assignment is invalid under U.S. law. Courts have analyzed whether an assignment was made in gross in a few different ways, but, as is the case with much of trademark law, protecting customers from deception and confusion is the primary motivation behind any analysis for determining the validity of an assignment.

One way courts determine if an assignment was made in gross is through the substantial similarity test. This test essentially examines whether the assignee is making a product or providing a service that is “substantially similar” to that of the assignor, such that consumers would not be deceived by the assignee’s use of the mark. This analysis includes an assessment of the quality and nature of the goods and services provided under the mark post-assignment. Thus, even if an assignee is using the mark on the same type of goods, but the goods are of lower quality than the goods previously offered by the assignor under the mark, the assignment could be invalid. However, slight or inconsequential changes to goods and services after an assignment are not likely to invalidate the assignment, as such changes are to be expected and would not thwart consumer expectations.

Decisions on the question of substantial similarity are only marginally instructive, as the test calls for a fact specific inquiry into what the consuming public has come to expect from the goods or services offered under a given mark. For example, courts have noted that despite similarities in services and goods, “even minor differences can be enough to threaten customer deception.” [1] Instances of products or services that were deemed not substantially similar (and thus resulted in invalid assignments) include: an assignee offering phosphate baking powder instead of alum baking powder; [2] an assignee using the mark on a pepper type beverage instead of a cola type beverage; [3] an assignee producing men’s boots as opposed to women’s boots; [4] an assignee using the mark on beer instead of whiskey; [5] and an assignee selling hi-fidelity consoles instead of audio reproduction equipment. [6]

Conversely, case law has also shown that substantial similarity can be found even when products or services do differ in some aspects, if consumers aren’t likely to be confused. For example, the following product changes did not result in a finding of an invalid assignment: an assignee offering dry cleaning detergent made with a different formula; [7] an assignee using thinner cigarette paper; [8] and an assignee selling a different breed of baby chicks. [9]

Whether goods or services are substantially similar may seem like an easy test to apply, but, as case law demonstrates, this fact-intensive analysis can yield results that look strange in the abstract. Disputes involving the validity of a trademark assignment are decided on a case-by-case basis, using the specific facts at hand to determine if consumer expectations are being met under the new use. Thus, while trademarks acquired through assignment can have significant value (and grant the assignee important rights formerly held by the assignor), assignees should be wary of changes to goods or services under an acquired mark that could be seen as deceiving the public.

[1] Clark & Freeman Corp. v. Heartland Co. Ltd. , 811 F. Supp. 137 (S.D.N.Y. 1993).

[2] Independent Baking Powder Co. v. Boorman , 175 F. 448 (C.C.D.N.J.1910).

[3] Pepsico, Inc. v. Grapette Company , 416 F.2d 285 (8th Cir. 1969).

[4] Clark & Freeman Corp. v. Heartland Co. Ltd. , 811 F. Supp. 137 (S.D.N.Y. 1993).

[5] Atlas Beverage Co. v. Minneapolis Brewing Co. , 113 F.2d 672 (8 Cir. 1940).

[6] H. H. Scott, Inc. v. Annapolis Electroacoustic Corp. , 195 F.Supp. 208 (D.Md.1961).

[7] Glamorene Products Corp. v. Procter & Gamble Co. , 538 F.2d 894 (C.C.P.A. 1976).

[8] Bambu Sales, Inc. v. Sultana Crackers, Inc. , 683 F. Supp. 899 (1988).

[9] Hy-Cross Hatchery, Inc v. Osborne 303 F.2d 947, 950 (C.C.P.A. 1962)

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Trademark Assignment

Understanding trademark assignments.

assignment of a federal trademark registration issued by the USPTO must be in writing and signed by all parties.

It is inevitable that at some point during the life of a trademark, the trademark owner may need to transfer ownership from one business to another business, change the name of the owner identified on the application or registration filed with the United States Patent & Trademark Office (USPTO), or transfer the rights in the trademark to a third party for some other reason. Great care should be taken when attempting to transfer (or assigning) trademark benefits and rights because, if handled improperly, those valuable trademark benefits and rights could be inadvertently terminated. It is important to note that Section 10 of the Trademark Act requires that assignments of federally registered trademarks (or applications) must be in writing and signed by all parties.

A Trademark Is a Symbol of Goodwill

Trademark ownership may be one of the most lucrative and recognizable assets of a company. A trademark is a tangible representation or symbol of goodwill. Edward S. Rodgers, who was the primary author of the Lanham Act (or Trademark Act), defined good will as an expectation of continued business which was symbolized by the trademark. “Good will is that which makes tomorrow’s business more than an accident. It is the reasonable expectation of future patronage based on past satisfactory dealings.” The California Supreme Court stated that “good will was the probability that business in the future will carry on as it has in the past.” Judge Learned Hand said that the definition of good will should be expanded to include not only the likelihood that customers will return to the old place of business, “but also that they will continue to do business with the old name.” While in the past a business might remain in the same physical location for years, today, the location may exist in cyberspace, but the trademark as the symbol that identifies the business remains the same regardless of location of the seller.

The Economist Magazine reported that goodwill is an asset that represents the business value of a company’s brand and reputation. It commented that when one business purchases another business, the premium paid over the seller’s book value is the value of its trademarks (and other intellectual property) as a symbol associated with the goodwill of the business. Therefore, because a trademark is the symbol of the goodwill of a business, a trademark cannot be separated from that goodwill or else it will lose all of its value. In other words, a trademark cannot be assigned apart from the goodwill that it represents.

Trademark Assignment In Gross

A sale of a trademark apart from its goodwill is called an “assignment in gross” and is invalid. As stated above, the basic rule of trademark assignments is that a trademark cannot be assigned to a third party separate from the goodwill the trademark represents. The US Court of Appeals for the Ninth Circuit (located in San Francisco, California) stated the following rule in Mister Donut of America, Inc. v. Mr. Donut (1969): “The law is well settled that there are no rights in a trademark alone and that no rights can be transferred apart from the business with which the mark has been associated.” Similarly, the US Court of Appeals for the Second Circuit (located in New York City) restated the rule in Marshak v. Green (1984): “A trade name or mark is merely a symbol of goodwill; it has no independent significance apart from the goodwill it symbolizes…[A] trademark cannot be sold or assigned apart from the goodwill it symbolizes…There are no rights in a trademark apart from the business with which the mark has been associated; they are inseparable…”

For example, let’s say a third party wants to sell surf apparel under the trademark “Slowtide” and files a trademark application for the same with the USPTO. The USPTO examining attorney reviews the third party’s application and issues an office action refusing trademark registration on the basis of likelihood of confusion with the registered trademark “Slowtide” for beach towels. The USPTO examining attorney argues in her trademark refusal that since beach towels and surf apparel are related products, if both trademarks existed in the marketplace there would be a high probability of consumer confusion between the two brands. In response, the third party’s leadership devises a plan to offer the trademark owner for “Slowtide” a certain amount of money to sell, assign, and transfer its trademark as an alternative strategy to registering the “Slowtide” trademark for clothing. The third party has no intent to use the “Slowtide” trademark with beach towels after the sale, assignment, and transfer. In this over-simplified example, the third party would be receiving the trademark assignment separate from the valuable goodwill associated with beach towels. As such, since the trademark was sold apart from the goodwill associated with beach towels, all rights in the trademark would terminate if used with surf apparel. This would be considered an trademark assignment in gross and thus invalid.

The law’s requirement that goodwill must follow the goods and/or services represented by the trademark is a way of insuring that the seller’s assignment of the trademark to the buyer will not be deceptive, and will not breach the continuity of the rights associated with the assigned trademark. The anti-assignment in gross rule precludes a purchaser from benefiting from the goodwill of the seller if the purchaser applies the mark to different goods. Courts strictly require goods to be very similar in order to uphold an assignment. As such, even if an assignment expressly assigns the goodwill associated with the trademark, the assignment may be ineffective if the assignee’s products are not nearly the same as the assignor’s goods.

Trademark Assignments Before Use In Commerce

A fundamental principle of trademark law is that trademark rights arise solely from use of the trademark in commerce associated with the specific goods and/or services to represent the goodwill of established business. Therefore, applying this rule, it is not possible to assign a trademark prior to selling goods and/or rendering services identified by the trademark, for there is technically no trademark to assign. There have been many instances where our trademark attorneys are contacted by a potential client desiring to trademark a certain name, symbol or phrase for the sole purpose of preventing others from using the trademark or to sell the trademark to a third party once it is registered. As discussed above, a valid trademark must be associated with certain goods and/or services and trademark rights/goodwill are only established through use in commerce. An idea for a trademark is not a trademark. Thus, it is impossible to register a federal trademark without it being associated to specific goods and/or services and without use of, or an intention to use, the trademark in commerce.

EXCEPTION – Under the Lanham Act, which governs trademark law in the United States, an intent-to-use (ITU) application under Section 1(b) can be assigned, but only under specific circumstances. The Lanham Act’s exception is found in Section 10(a)(1), which allows for the assignment of an ITU application if it is done in conjunction with the sale of the portion of a business to which the trademark pertains. The assignment must be accompanied by the goodwill of the business connected with the mark. This ensures that the trademark’s function as a source identifier is preserved and that there’s no disruption in the consumer perception of the mark.

Trademark Assignment and Recordation

As discussed above, under the Trademark Act the assignment of a federal trademark registration issued by the USPTO must be in writing and signed by all parties. The US Court of Appeals for the Second Circuit stated that “A clear writing effecting an assignment signals to the parties and the world that the assignee is the party that owns the trademark and is authorized to exclude all others from use.” Although recordation of the assignment with the USPTO is not mandatory, it is strongly suggested.

For example, the law states that a trademark assignment is void as against a later bona fide purchaser unless it is recorded with the USPTO (the ETAS system – Electronic Trademark Assignment System) within three (3) months of the assignment or prior to any subsequent assignment to a bona fide purchaser. Another reason that we strongly suggest all trademark assignments are recorded with the USPTO is due to future trademark maintenance requirements (e.g. Section 8 Affidavit). A Section 8 Declaration must be filed between the 5th and 6th years and 9th and 10th years after the trademark registration date. The Section 8 Declaration is mandatory if the trademark owner wants to keep its registration alive and valid. The Section 8 Declaration requires the then current owner of the trademark to attest to the use, and continued use (or excusable non-use), of the trademark in commerce in connection with all of the products and/or services listed in the trademark registration. If the trademark assignment is not recorded, the new owner will not be properly reflected in the trademark registration.

Once a trademark assignment is properly recorded, the new trademark owner (or assignee) stands in the shoes of the previous trademark owner (or assignor) and succeeds to all of the previous trademark owner’s rights and priorities. If the trademark assignment is properly recorded and valid, the new trademark owner carries on use of the trademark in commerce as it was used in the past (and on the same goods and/or services identified in the trademark registration), a continuity of the trademark and its goodwill is preserved. Note, the change in trademark ownership should be of no consequence to the purchasing public because the brand and its built-in reputation (goodwill) largely remains the same.

New Owner of Trademark (Assignee) Does Not Use In Commerce

It is not uncommon for a buyer of a business to discontinue use of the seller’s registered trademark, even when the trademarks were properly assigned and recorded. There could be a number of reasons why the new business owners decided not to use the previous businesses trademarks. For example, it is possible that the new owner simply purchased the business to sever competition, or it purchased the business to diversify the assets into other divisions, or it simply decided to re-brand under a different name and symbol. Whatever the reason, if the buyer (or assignor) of a business and its associated trademarks does not continue to use the trademarks in connection with the goods and/or services listed on the federal trademark registration, the trademarks and goodwill may become abandoned. In that situation, anyone and any business can then appropriate the trademark and seek to cancel the assigned trademark registration. Click here for more information on trademark cancellations.

Trademark Assignment To Acquire Priority Against Competitors

Priority in trademark rights is a fiercely contested issue in various proceedings before the USPTO. In the US, the rule of priority is that ownership and priority of a trademark go to the party who was first to use the trademark in commerce. The only exception to this rule is that priority can also be established by filing an application for federal trademark registration with the USPTO, which, upon registration, confers a constructive use date of first use (but only if the application turns into registration by a showing of actual use).

As noted above, a trademark assignment is an outright sale of all rights in the trademark. The fact that a buyer purchases a business, including all of the goodwill associated with the seller’s trademarks, based on the sole motivation to acquire priority rights in the trademarks against a competitor is not an illegal or invalid transaction or trademark assignment. The acquisition of priority over a competitor by buying a business with senior trademarks, even in the midst of litigation, is not improper and does not constitute unclean hands.

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Are you launching a new company or developing a new brand or product and need to clear and/or register a trademark? Are you an online seller enrolling in a brand registry program? Are you looking for help with another federal trademark matter? We can assist! Please do not hesitate to give us a call or fill out our contact form. There is absolutely no charge to schedule an initial consultation with one of our trademark attorneys.

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An assignment in gross is where someone assigns (that is, sells) their trademark without including the underlying goodwill (the value and name recognition) associated with that mark. Such an assignment in gross is not considered enforceable or valid and where there’s such an assignment in gross, the trademark will be deemed abandoned and neither party will have any rights in the mark.

To avoid this from happening, an assignment must include the underlying goodwill. Most courts have interpreted this as a requirement that the assignor sell its related underlying assets, so as to ensure that the standards of quality remain the same (for example, a valid assignment might include the assignor selling the equipment it uses for making the related goods that are sold with the trademark, or the details of how to make those goods). What, specifically, should be included in a trademark assignment varies on a case-by-case basis.

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Assignment, in gross.

Assignment of a mark without the necessary transfer of goodwill associated with the mark. Such assignments are invalid, and result in abandonment of the trademark. If so, the person to whom the mark was assigned will no longer have the benefit of the assignor's earlier first use date to establish priority .

Simple English definitions for legal terms

anti-assignment-in-gross rule

Read a random definition: effraction

A quick definition of anti-assignment-in-gross rule:

A more thorough explanation:.

The anti-assignment-in-gross rule is a legal doctrine that states that an assignment of a trademark without the goodwill associated with it is invalid. This means that if a company transfers its trademark to another party without transferring the business's goodwill, the assignment is not legally valid.

For example, if a company sells its trademark to another party but does not transfer the business's goodwill, the assignment is not valid. This is because the trademark is only valuable when it is associated with the goodwill of the business.

It is important to note that trademark rights are not destroyed when a mark is assigned in gross . However, if the assignor fails to continue using the mark and the transfer is ineffective, it may result in abandonment of the trademark.

Overall, the anti-assignment-in-gross rule ensures that trademarks are only transferred with the goodwill of the business, which is necessary for the trademark to have value.

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Calboli on Trademark Assignment in Gross

My colleague Irene Calboli has written a paper on trademark assignment in gross entitled Trademark Assignment With Goodwill: A Concept Whose Time Has Gone , scheduled to be published in the Florida Law Review later this year. She thoroughly recounts the history of, and policy debates about, the assignment in gross rule and offers her solutions. Trademark assignments create both practical and theoretical problems, and this paper is worth reading if you’re interested in either.

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The domain name as collateral: considerations for creditors seeking to use a domain name as a security interest or as a source of payment on a judgment.

The following is a survey of some of the issues faced when attempting to use a domain name as collateral, along with suggestions of methods for dealing with these problems.

The “assignment in gross” problem

To the extent that a domain name constitutes a trademark, it is subject to what is call “the anti-assignment in gross” rule. This rule is based on the notion that a trademark is really the embodiment of the goodwill relating to a business. As such, it cannot be transferred apart from this goodwill. If a trademark could be assigned and used for a different product or business, it could result in fraud on consumers, who would assume that the trademark signified that the same nature and quality of goods were present as when it was used in the original business. See McCarthy on Trademarks § 18:2-3.

I am aware of no cases dealing with domain names that directly address this issue. However, cases dealing with assignments of trademarks in general hold that if a lender wants to take a security interest in a trademark, it should obtain a security interest in the goodwill of the business associated with the trademark as well. See Marshak v. Green , 746 F.2d 927 (2d. Cir. 1984). What this means is that a lender wishing to obtain a security interest in a domain name should obtain a security interest in the goodwill of the business associated with the domain name.

Anti-assignment clauses

Domain name registrants assume that they can transfer their domain names to third parties at will — via sale or use as collateral. Indeed, there has long been a well-developed market for domain names. Ian Ballon’s treatise on internet law contains a list of hundreds of such sales over the past few years, with sale prices ranging into the many millions of dollars. See Ian Ballon, E-Commerce and Internet Law , §7.23[3].

Most domain name registrants have obtained their domain names via a contract with a domain name registrar. While many domain name registrars have procedures that permit the transfer of domain names, they often do not permit direct assignments. See Warren E. Agin, I’m a Domain Name. What Am I? Making Sense of Kremen v. Cohen, 14 Journal of Bankruptcy Law and Practice 3:73, 79 (2005). This would present a problem for parties wishing to use a domain name as a security interest, were it not for a special provision in the Uniform Commercial Code (UCC) that trumps such anti-assignment provisions. Section 9-408 of the UCC provides that a security interest may be granted in a general intangible, even if assignment is prohibited under by the contract relating to the intangible. See UCC § 9-408, comment 5. Most legal scholars believe that an Internet domain name qualifies as a general intangible under the UCC. See, e.g. , McCarthy on Trademarks , § 18:7. As such, a lender should be able to obtain a security interest in a domain name, despite the presence of an anti-assignment clause in the borrower’s contract with the registrar .

Now for the bad news. While a lender may obtain a security interest in a domain name subject to an anti-assignment clause, UCC Section 9-408(d)(6) prohibits the lender from enforcing such a security interest. So now the lender has a security interest in collateral that it can’t seize or sell.

One way around this problem is to put the debtor in bankruptcy. The Bankruptcy Code provides that a bankruptcy trustee generally may assume and then assign (e.g., sell) a debtor’s contracts , despite the presence of an anti-assignment clause. 11 U.S.C. § 365(f)(1). A creditor’s security interest in collateral attaches to the proceeds of the collateral, as well as the collateral itself. UCC § 9-315(a)(2). This means that if the bankruptcy trustee assumes and then sells a domain name contract (something that a bankruptcy trustee would normally be expected to do), a creditor with a security interest in the domain name should be able to claim the proceeds from the sale. See Straffi v. State of New Jersey (In re Chris Don, Inc.), 308 B.R. 214 (D.N.J. 2004) (creditor with lien on debtor’s liquor license entitled to proceeds from bankruptcy trustee’s sale of the license).

Another way around this problem may be for the lender to sue the borrower and obtain a judgment. As discussed below, at least under California law, it appears that a judgment creditor may levy a writ of execution and then obtain a sale of a domain name.

State laws prohibiting turnover of domain names

Some state courts have limited the judgment enforcement mechanisms that may be used for domain names. In 2000, the Virginia Supreme Court held that a judgment creditor could not use a state law procedure called “garnishment,” under which a third party who holds the debtor’s property is ordered to turn that property over to the county sheriff for sale. Network Solutions, Inc. v. Umbro Int’l, Inc. , 529 S.E.2d 80 (2000).

In June 2009, a California Court of Appeal similarly ruled that a judgment creditor was not entitled to an order requiring the debtor to turn over a domain name to the creditor for sale to satisfy the judgment. The case was Palacio Del Mar Homeowners Assn., Inc. v. McMahon , 174 Cal.App.4th 1386 (2009). In 2008, Palacio obtained a $40,000 judgment against McMahon. Palacio then attempted to collect on this judgment. It first obtained a writ of execution against McMahon, but was unable to satisfy its judgment. It then conducted a judgment debtor exam of McMahon. During the exam, Palacio discovered that McMahon had possession of the domain name www.ahrc.com. Palacio then asked the court to order McMahon to turn the domain name over to it.

The trial court granted Palacio’s motion, but the Court of Appeal reversed. The Court of Appeal first held that California’s turnover statute does not authorize a court to require a debtor to hand property directly over to a creditor. Id. at 1391. Rather, California law requires property taken from a debtor to be sold and the proceeds distributed to judgment creditors. Moreover, under California law, a turnover order is limited to “tangible property that can be levied upon by taking it into custody.” California Code of Civil Procedure Section 699.040. Even if a domain name constitutes property, “it cannot be taken into custody.” Palacio , 174 Cal.App.4th at 1391. As such, no turnover order can be issued for it.

So what can a judgment creditor in this position to do? While a turnover order cannot be obtained, California law does appear to permit a judgment creditor to use normal writ of execution procedures for intangible property , such as domain names. These procedures permit a judgment creditor to obtain a lien on the domain name by levy of a writ of execution. California Code of Civil Procedure §§ 699.080. Once a “general intangible” has been levied, the judgment creditor can then file a motion with the court to have it sold. Id. at 701.510, 701.520. If the court grants this motion, the property can sold and the proceeds distributed to all of the debtor’s creditors, including the judgment creditor, under a statutory priority scheme. Id. at 701.810.

Of course, for domain names that involve trademark rights, sale still might be hindered by such things as the assignment in gross rule.

A final option

If worse comes to worse for a judgment creditor, a number of bankruptcy court decisions have found that a domain name constitutes part of the property of a bankrupt debtor’s estate. In re Paige , 2009 WL 2591335 (D. Utah 2009); Koenig v. McLear , 2004 WL 3244582 (Bnkr. M.D. La. 2004) * 7. As such, if a debtor winds up in bankruptcy, its domain name can be sold and the proceeds used to satisfy either secured or unsecured debts.

Because of the central role a domain name plays in a business, the law appropriately does not make it easy for creditors to get access to it as either security for loans or to satisfy judgments. If you have questions about accomplishing either of these objectives, please feel free to contact me at the address below.

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PERSONAL FINANCIAL PLANNING

Guiding Clients Through the Transfer-for-Value Maze

Personal Financial Planning
Risk Management & Insurance Planning

One of the most attractive aspects of life insurance as an estate and financial planning tool is the tax treatment of the death proceeds. Generally, the proceeds of a life insurance policy received by a beneficiary are entirely free from income tax (Sec. 101(a)(1)). However, an often overlooked provision of the tax law, known as the transfer-for-value rule, can result in the loss of this advantageous tax treatment.

CPAs often advise their clients to purchase new life insurance or restructure the ownership of existing policies to serve as a valuable liquidity tool in the estate and business succession planning process. When dealing with life insurance transactions, one of the most important and challenging areas that the tax adviser must properly address is the transfer-for-value rules under Sec. 101(a)(2).

Generally, under the provisions in Sec. 101, life insurance proceeds, payable as a result of the death of the insured, are received income tax free. If properly structured, through third-party ownership of the policy, the proceeds can also be received estate tax free. However, if a life insurance policy, or interest in a policy, is transferred for valuable consideration of any form, such as in a cash transaction or to satisfy mutuality of promises, then the income tax exclusion is not available to the beneficiary and the death proceeds are subject to federal income tax. More specifically, the portion of the death proceeds equal to the consideration paid to acquire the policy or interest in the contract, plus all future premiums paid by the transferee (i.e., the transferee’s basis in the contract), are received income tax free, but the remaining death proceeds are taxed as ordinary income under Regs. Sec. 1.101-1(b)(3)(i).

While beyond the scope of this column, it should be noted that transferring an existing life insurance policy into an irrevocable life insurance trust (ILIT) can shield the entire death benefit from federal estate and generation-skipping transfer tax consequences. However, clients should be advised that, under Sec. 2035, the death proceeds of the policy transferred to an irrevocable trust are fully included in the decedent’s gross estate for transfer tax purposes if ownership of the policy was transferred by the insured to the ILIT within three years of the insured’s date of death.

Fortunately, a number of safe-harbor exceptions to the transfer-for-value rule allow a life insurance policy transfer to be made for valuable consideration without jeopardizing the income tax–free nature of the death benefit. Any one of these exceptions to the rule can effectively serve to insulate a policy’s death proceeds from adverse income tax consequences.

Safe-Harbor Exceptions to the Transfer-for-Value Rule

There are five exceptions to the transfer-for-value rule contained in Sec. 101(a)(2). Life insurance proceeds are received income tax free, even if there has been a transfer for valuable consideration of a policy or an interest in a policy, if the transfer is to:

1. Anyone whose basis is determined by reference to the original transferor’s basis;

2. The insured (or insured’s spouse or ex-spouse, if incident to a divorce under Sec. 1041);

3. A partner of the insured;

4. A partnership in which the insured is a partner; or

5. A corporation in which the insured is a shareholder or officer.

Transfer-for-Value Pitfalls and Opportunities

Gratuitous transfer: When the transferor of a life insurance policy receives consideration and is discharged from a policy loan obligation on the contract, the transfer of a policy subject to a nonrecourse loan is deemed a transfer for value. However, if the transferor’s basis in the policy is greater than the loan balance, a gratuitous transfer of the policy should qualify for the first exception to the transfer-for-value rule noted above, reflected in the basis carryover exception (Rev. Rul. 69-187; Letter Ruling 8951056).

Transfer to a partner or partnership: Since the transfer of a policy to a partner of the insured is one of the exceptions to the rule, the transfer-for-value issue does not occur in the context of a business partnership. Therefore, when restructuring business succession plans, it is possible to change from an entity-purchase or stock-redemption agreement to a cross-purchase agreement and use the same policies to fund the new transaction.

While the transfer of a life insurance policy to a partner of the insured is a protected transaction for transfer-for-value purposes, a policy transfer to a co-shareholder of the insured is not protected and results in a violation of this rule. Therefore, when a corporation owns life insurance policies on the lives of its shareholders, structured in the form of an entity purchase or stock redemption agreement, it is not possible to convert to a cross-purchase agreement and use the same policies to fund the new agreement. The resulting transaction would violate the transfer-for-value rule because a corporation’s transfer of an existing policy on the life of one stockholder to another stockholder is not one of the safe-harbor exceptions to the transfer-for-value rule.

While there does not appear to be any logical reason to exempt transfers of an interest in a life insurance policy to and among partners of the insured and not also afford this same exemption to transfers to and among closely held corporate shareholders, if the insured is a co-shareholder, unless the transferee is the insured, transfers of policies from a corporation to a shareholder and transfers among shareholders can easily violate the rule.

However, if the co-shareholders are all deemed partners in a partnership, the transaction may be exempt from the transfer-for-value rule under the partnership exception. In a private letter ruling, the IRS has approved the creation of a partnership for the purpose of receiving corporate-owned policies (Letter Ruling 199903020). Although a partnership must have a valid business purpose under state law and not be just an entity created to avoid taxes, this ruling appears to approve the creation of a partnership whose sole purpose is to “engage in the purchase and acquisition of life insurance policies on the lives of the partners.”

In Letter Ruling 9701026, three shareholders in a professional corporation were also partners in a partnership that owned and leased an office building to the professional corporation. The parties planned to enter into a cross-purchase agreement to provide the surviving shareholders with funds that might be needed to purchase a deceased shareholder’s shares in the professional corporation from his estate. Each shareholder owned insurance on the lives of the others, and the professional corporation owned a life insurance policy on one shareholder’s life that was subject to a collateral assignment split-dollar plan. The professional corporation proposed to transfer its ownership interest in the split-dollar policy to the other shareholders, who would assume the corporation’s position under the split-dollar plan. The letter ruling held that the transfer qualified for the partnership exception under Sec. 101(a)(2)(B).

Beneficiary designation: The designation of a policy beneficiary in exchange for any kind of valuable consideration constitutes a transfer for value. The consideration could be an exchange of policies or a promise to render future services and does not have to involve the exchange of money. However, the mere pledging or assignment of a life insurance policy as collateral is not deemed to be a transfer for value.

More specifically, a pledge or assignment of a life insurance policy as collateral security for a loan or other obligation owed by the policy owner is not a transfer for valuable consideration. Sec. 101(a)(2) is not applicable to amounts received by the pledgee or assignee that are treated as a repayment of capital and are therefore generally income tax free to the extent of the outstanding debt amount. However, insurance proceeds representing interest on the debt are taxed as ordinary income to the creditor (Regs. Sec. 1.101-1(b)(4)).

Term life insurance: Term life insurance policies, even though such policies do not accumulate cash value, are subject to the transfer-for-value rule (Letter Ruling 7734048). The transfer does not have to be of the policy itself. A transfer of some or all of the underlying interest in the policy (e.g., the death benefit proceeds) is sufficient to invoke the transfer-for-value rule. For example, the creation, for value, of an enforceable contractual right to receive all or part of a life insurance policy’s proceeds may constitute a transfer for valuable consideration. This can occur when an insured shareholder-owner of a corporation, which owns the policy on his life, is contractually bound under the terms of an enforceable buy-sell agreement to designate a co-shareholder as the policy beneficiary in order to fund the transaction.

Reciprocal promise transaction: A reciprocal promise can also constitute valuable consideration. For example, if several insured co-shareholders agree to “gift” their policies to one another in order to fund a cross-purchase arrangement, the reciprocal gifting constitutes valuable consideration. In addition, if the co-shareholders agree to continue paying premiums on the gifted policies (to fund the cross-purchase agreement), this too constitutes valuable consideration (Letter Ruling 199903020).

Intentionally defective grantor trust: A grantor trust that is taxed as if the underlying assets were owned by the insured grantor can purchase or obtain existing policies on the grantor’s life without adverse income tax consequences, since the transfer falls within the transfer-to-the-insured exception to the rule. More specifically, when a client wants to establish a new irrevocable trust in order to purchase an existing policy from another trust, for the purpose of changing the dispositive provisions, a transfer for value can occur. If the trust terms are no longer appropriate, then with the trustee’s consent, the insured may use the transfer-for-value exception to acquire the policy from the insurance trust and transfer the policy to a new trust with acceptable terms. Of course, the three-year rule of Sec. 2035 will begin with the new transfer.

Alternatively, the transfer could be made directly to a new insurance trust that satisfies one of the transfer-for-value safe-harbor exceptions. For example, the transfer to an intentionally defective grantor trust can be used to transfer a policy from one insurance trust to another. In Swanson , 518 F2d 59 (8th Cir. 1975), the insured retained the power to alter or amend a trust but could not vest ownership in himself. The insured was deemed the trust’s owner under Sec. 674; as a result, the sale of an insurance policy to the trust was deemed to be a transfer to the insured within the meaning of Sec. 101(a)(2)(B).

The final transfer: In a series of transfers of the same life insurance policy, if the final transfer is a transfer for value, the transfer-for-value rule will apply, and the exclusion, for income tax purposes, generally will be limited to the consideration paid for the policy by the transferee, plus any subsequent premiums paid by the transferee to keep the policy in force (Regs. Sec. 1.101-1(b)(3)(i)). However, if the final transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or an officer, the entire death proceeds of the policy will be received by the beneficiary income tax free (Regs. Sec. 1.101-1(b)(3)(ii)). If none of the stated exceptions to the transfer-for-value rule applies, but the final transferee carries over the transferor’s basis in whole or in part, the excludible amount is the amount that would have been excludible by the transferor had the transfer not taken place, plus any premiums paid by the final transferee (Regs. Sec. 1.101-1(b)(3)(iii)).

Planning Tips

Transfer-for-value problems can occur in many unexpected circumstances. As noted above, adverse income tax consequences can be triggered by a violation of the rule in both personal and business transactions and can apply far beyond the outright sale of a life insurance policy to a third party.

Without a thorough policy review, a transfer-for-value violation is a ticking time bomb, since the problem often remains undiscovered until after the insured’s death, when it is too late to remedy potentially severe income tax consequences to the beneficiaries.

Life insurance continues to be an excellent financial planning vehicle to provide the infusion of cash—precisely when needed—to generate an instant source of liquidity in order to promptly discharge the final debts, taxes, and administrative expenses arising at a client’s death. However, whenever individuals or business owners own life insurance or are contemplating the transfer of a policy in conjunction with the review or revision of their estate or business succession plan, tax advisers must consider potential transfer-for-value implications for their clients.

Therefore, any proposed transfer of an existing life insurance policy by clients should take into account the transfer-for-value rules under Sec. 101. Failure to carefully address these rules could cause the policy proceeds to be exposed to income taxes when received by a beneficiary as a result of the insured’s death. With proper planning and foresight by the client’s team of tax, legal, and insurance advisers, this is a tax problem that can generally be completely avoided.

While life insurance continues to remain a flexible financial planning tool in the estate planner’s arsenal, both planning opportunities and tax pitfalls do exist. Since the CPA is very often the client’s most trusted adviser, he or she must have a firm grasp of the issues surrounding life insurance and the transfer-for-value rule to help guide clients through the maze of complex, and often inconsistent, tax rules. This knowledge can help the tax adviser minimize the potential tax burden and maximize the transfer of wealth to the client’s surviving family members.

EditorNotes

Michael David Schulman is the third generation owner of Schulman CPA, An Accountancy Professional Corporation in New York, NY

For further information about this column, contact Mr. Schulman at [email protected] or Mr. Levin at [email protected] .

Recapture considerations for Inflation Reduction Act credits

Electing the unicap historic absorption ratio under the modified simplified production method, revisiting firpta and return-of-capital distributions, partners’ basis on the liquidation of an insolvent partnership, the bba’s ‘ceases-to-exist’ rule in partnership termination transactions.

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

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Payments to reduce cost of winter energy.

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Example 39.

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Exceptions.

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Spillover payments under certain 2022 state tax payment programs.

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Utility rebates.

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Year of deduction (or credit).

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Free options for tax preparation.

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Employers can register to use Business Services Online.

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What Is TAS?

How can you learn about your taxpayer rights, what can tas do for you, how can you reach tas, how else does tas help taxpayers, low income taxpayer clinics (litcs), publication 525 - additional material, publication 525 (2023), taxable and nontaxable income.

For use in preparing 2023 Returns

Publication 525 - Introductory Material

For the latest information about developments related to Pub. 525, such as legislation enacted after it was published, go to IRS.gov/Pub525 .

Deferred compensation contribution limit increased. If you participate in a 401(k), 403(b), or the federal government's Thrift Savings Plan (TSP), the total annual amount you can contribute is increased to $22,500 ($30,000 if age 50 or older). This also applies to most 457 plans.

Health flexible spending arrangements (health FSAs) under cafeteria plans. For tax years beginning in 2023, the dollar limitation under section 125(i) on voluntary employee salary reductions for contributions to health FSAs is $3,050.

Temporary allowance of 100% business meal deduction has expired. The temporary allowance of a 100% business meal deduction for food or beverages provided by a restaurant and paid or incurred after December 31, 2020, and before January 1, 2023, has expired. Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages aren’t considered lavish or extravagant.

Contributions to simplified employee pension plan (SEP) and savings incentive match plan for employees (SIMPLE) Roth IRAs. Section 601 of the SECURE 2.0 Act of 2022 provided that your employer may provide for contributions to a Roth IRA under a SEP or SIMPLE IRA plan.

Designated Roth nonelective contributions and designated Roth matching contributions. Section 604 of the SECURE 2.0 Act of 2022 permits certain nonelective contributions and matching contributions that are made after December 29, 2022, to be designated as Roth contributions.

De minimis financial incentives. Section 113 of the SECURE 2.0 Act of 2022 provided that employers can offer their employees de minimis financial incentives to make elective deferrals. These incentives may not exceed $250 in value, and, in general, are includible in employees’ income.

Paycheck Protection Program loan forgiveness. Gross income doesn’t include any amount arising from the forgiveness of a Paycheck Protection Program (PPP) loan, effective for taxable years ending after March 27, 2020. (See P.L. 116-136.) Likewise, gross income does not include any amount arising from the forgiveness of Second Draw PPP loans, effective December 27, 2020. (See P.L. 116-260.) When a taxpayer who does not factually satisfy the conditions for a qualifying forgiveness causes its lender to forgive the PPP loan by inaccurately representing that the taxpayer satisfies them, the taxpayer may not exclude the amount of the forgiven loan from gross income under 15 U.S.C. section 636m(i) or section 276(b)(1) of the COVID-related Tax Relief Act of 2020. For more information, see Forgiveness of Paycheck Protection Program (PPP) Loans .

Emergency financial aid grants. Certain emergency financial aid grants under the CARES Act are excluded from the income of college and university students, effective for grants made after March 26, 2020. (See P.L. 116-136 and P.L. 116-260.)

Other loan forgiveness under the CARES Act. Gross income does not include any amount arising from the forgiveness of certain loans, emergency Economic Injury Disaster Loan (EIDL) grants, and certain loan repayment assistance, each as provided by the CARES Act, effective for tax years ending after March 27, 2020. (See P.L. 116-136 and P.L. 116-260.)

Exclusion of income for volunteer firefighters and emergency medical responders. If you are a volunteer firefighter or emergency medical responder, you may be able to exclude from gross income certain rebates or reductions of state or local property or income taxes and up to $50 per month provided by a state or local government. For more information, see Volunteer firefighters and emergency medical responders .

Repeal of deduction for alimony payments and corresponding inclusion in gross income. Alimony received under a divorce or separation instrument executed after 2018 won't be includible in your income. The same is true of alimony received under a divorce or separation instrument executed before 2019 and modified after 2018, if the modification expressly states that the alimony isn't deductible to the payer or includible in your income. For more information, see Pub. 504.

Forms 1040A and 1040EZ no longer available. Forms 1040A and 1040EZ aren't available to file your 2023 taxes. If you used one of these forms in the past, you’ll now file Form 1040 or 1040-SR.

Qualified equity grants. For tax years beginning after 2017, certain qualified employees can make a new election to defer income taxation for up to 5 years for the qualified stocks received. See Qualified Equity Grants under Employee Compensation , later.

Suspension of qualified bicycle commuting reimbursement exclusion. For tax years beginning after 2017, reimbursement you receive from your employer for the purchase, repair, or storage of a bicycle you regularly use for travel between your residence and place of employment must be included in your gross income.

Unemployment compensation. If you received unemployment compensation but did not receive Form 1099-G, Certain Government Payments, through the mail, you may need to access your information through your state’s website to get your electronic Form 1099-G.

Achieving a Better Life Experience (ABLE) account. This is a type of savings account for individuals with disabilities and their families. Distributions are tax free if used to pay the beneficiary's qualified disability expenses. See Pub. 907 for more information.

Certain amounts received by wrongfully incarcerated individuals. Certain amounts you receive due to a wrongful incarceration may be excluded from gross income. See IRS.gov/Newsroom/IRS-Updates-Frequently-Asked-Questions-Related-to-Wrongful-Incarceration for more information.

Foreign income. If you're a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it’s exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Olympic and Paralympic medals and United States Olympic Committee (USOC) prize money. If you receive Olympic and Paralympic medals and USOC prize money, the value of the medals and the amount of the prize money may be nontaxable. See the Instructions for Schedule 1 (Form 1040), line 8m, at IRS.gov/Form1040 for more information.

Public safety officers. A spouse, former spouse, and child of a public safety officer killed in the line of duty can exclude from gross income survivor benefits received from a governmental section 401(a) plan attributable to the officer's service. See section 101(h).A public safety officer that's permanently and totally disabled or killed in the line of duty and a surviving spouse or child can exclude from income death or disability benefits received from the federal Bureau of Justice Assistance or death benefits paid by a state program. See section 104(a)(6).

Qualified Medicaid waiver payments. Certain payments you receive for providing care to an eligible individual in your home under a state's Medicaid waiver program may be excluded from your income under Notice 2014-7. See also Instructions for Schedule 1 (Form 1040), line 8s.

Qualified settlement income. If you're a qualified taxpayer, you can contribute all or part of your qualified settlement income, up to $100,000, to an eligible retirement plan, including an IRA. Contributions to eligible retirement plans, other than a Roth IRA or a designated Roth contribution, reduce the qualified settlement income that you must include in income. See Exxon Valdez settlement income under Other Income , later. Also, see Pub. 590-A for more information.

Taxpayer identification number (TIN). A TIN is your social security number (SSN), individual taxpayer identification number (ITIN), adoption taxpayer identification number (ATIN), or employer identification number (EIN).

Terrorist attacks. You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action. For more information, see Sickness and Injury Benefits , later; Pub. 3920, Tax Relief for Victims of Terrorist Attacks; and Pub. 907, Tax Highlights for Persons With Disabilities.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC) . Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 800-THE-LOST (800-843-5678) if you recognize a child.

Introduction

You can receive income in the form of money, property, or services. This publication discusses many kinds of income and explains whether they are taxable or nontaxable. It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties. It also includes information on disability pensions, life insurance proceeds, and welfare and other public assistance benefits. Check the index for the location of a specific subject.

In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but isn’t taxable.

If you are a cash method taxpayer, you are generally taxed on income that is available to you, regardless of whether it is actually in your possession.

A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you don’t cash the check or deposit it to your account until the next year. For example, if the postal service tries to deliver a check to you on the last day of the tax year but you aren’t at home to receive it, you must include the amount in your income for that tax year. If the check was mailed so that it couldn’t possibly reach you until after the end of the tax year, and you otherwise couldn’t get the funds before the end of the year, you include the amount in your income for the next tax year.

Income received by an agent for you is income you constructively received in the year the agent received it. If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the third party receives it.

You and your employer agree that part of your salary is to be paid directly to one of your creditors. You must include that amount in your income when your creditor receives it.

Generally, you report an advance payment for goods, services, or other items as income in the year you receive the payment. However, if you use an accrual method of accounting and are otherwise eligible, you can elect to postpone including the advance payment in income until the next year. See Pub. 538 for more information.

We welcome your comments about this publication and suggestions for future editions.

You can send us comments through IRS.gov/FormComments . Or, you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

If you have a tax question not answered by this publication or the How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/Help/ITA where you can find topics by using the search feature or viewing the categories listed.

Go to IRS.gov/Forms to download current and prior-year forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and instructions. The IRS will process your order for forms and publications as soon as possible. Don’t resubmit requests you’ve already sent us. You can get forms and publications faster online.

Useful Items

Publication

334 Tax Guide for Small Business

523 Selling Your Home

527 Residential Rental Property

541 Partnerships

544 Sales and Other Dispositions of Assets

550 Investment Income and Expenses

554 Tax Guide for Seniors

559 Survivors, Executors, and Administrators

575 Pension and Annuity Income

907 Tax Highlights for Persons With Disabilities

915 Social Security and Equivalent Railroad Retirement Benefits

970 Tax Benefits for Education

4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments

Form (and Instructions)

1040 U.S. Individual Income Tax Return

1040-NR U.S. Nonresident Alien Income Tax Return

1040-SR U.S. Tax Return for Seniors

1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

W-2 Wage and Tax Statement

See How To Get Tax Help at the end of this publication for information about getting these publications.

Publication 525 - Main Contents

Employee compensation.

In most cases, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.

You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. Include all your pay on Form 1040 or 1040-SR, line 1a, even if you don’t receive Form W-2, or you receive a Form W-2 that doesn’t include all pay that should be included on the Form W-2.

If you performed services, other than as an independent contractor, and your employer didn’t withhold social security and Medicare taxes from your pay, you must file Form 8919 with your Form 1040 or 1040-SR. These wages must be included on Form 1040 or 1040-SR, line 1g. See Form 8919 for more information.

The FMV of an item of property is the price at which the item would change hands between a willing buyer and a willing seller, neither being required to buy or sell and both having reasonable knowledge of the relevant facts.

If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you're not an employee, you're probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business. You generally aren’t an employee unless you're subject to the will and control of the person who employs you as to what you're to do, and how you're to do it.

If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.

Whether you're an employee or self-employed person, your income could be subject to self-employment tax. See the Instructions for Schedule C (Form 1040) and the Instructions for Schedule SE (Form 1040) if you're self-employed. Also see Pub. 926 for more information.

If you filed for bankruptcy under chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. Your Form W-2 will show your total wages and withheld income tax for the year. On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. If you receive other information returns (such as Form 1099-DIV or Form 1099-INT) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income.

The only exception is for purposes of figuring your self-employment tax if you're self-employed. For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case.

You must file a statement with your income tax return stating you filed a chapter 11 bankruptcy case. The statement must show the allocation and describe the method used to make the allocation. For a sample of this statement and other information, see Notice 2006-83, 2006-40 I.R.B. 596, available at IRS.gov/irb/2006-40_IRB#NOT-2006-83 .

Miscellaneous Compensation

This section discusses many types of employee compensation. The subjects are arranged in alphabetical order.

If you receive advance commissions or other amounts for services to be performed in the future and you're a cash-method taxpayer, you must include these amounts in your income in the year you receive them.

If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount of unearned commissions included in your income by the repayment. If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Other Itemized Deductions, line 16, or you may be able to take a credit for that year. See Repayments , later.

If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Pub. 463.

Include in income amounts you're awarded in a settlement or judgment for back pay. These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W-2.

Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must include the FMV of the goods or services in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it isn’t taxable until you receive it or it’s made available to you.

If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you must generally exclude its value from your income. However, the amount you can exclude is limited to your employer's cost and can’t be more than $1,600 ($400 for awards that aren’t qualified plan awards) for all such awards you receive during the year. Your employer can tell you whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that don’t create a significant likelihood of it being disguised pay.

However, the exclusion doesn’t apply to the following awards.

A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.

A safety achievement award if you're a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.

You received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, you must include $150 ($1,750 − $1,600) in your income.

This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. The payments are reported as wages on Form W-2.

Most payments received by U.S. Government civilian employees for working abroad are taxable. However, certain cost-of-living allowances are tax free. Pub. 516 explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad.

Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. This amount is shown in Form W-2, box 12, using code Y. This amount isn’t included in your income.

However, if at any time during the tax year, the plan fails to meet certain requirements, or isn’t operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. This amount is included in your wages shown in Form W-2, box 1. It’s also shown in Form W-2, box 12, using code Z.

In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. For this purpose, a nonqualified entity is one of the following.

A foreign corporation, unless substantially all of its income is:

Effectively connected with the conduct of a trade or business in the United States, or

Subject to a comprehensive foreign income tax.

A partnership, unless substantially all of its income is allocated to persons other than:

Foreign persons for whom the income isn’t subject to a comprehensive foreign income tax, and

Tax-exempt organizations.

If your employer gives you a secured note as payment for your services, you must include the FMV (usually the discount value) of the note in your income for the year you receive it. When you later receive payments on the note, a proportionate part of each payment is the recovery of the FMV that you previously included in your income. Don’t include that part again in your income. Include the rest of the payment in your income in the year of payment.

If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them.

You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract.

Severance payments are wages subject to social security and Medicare taxes. As noted in section 15 of Pub. 15, Special Rules for Various Types of Services and Payments , severance payments are also subject to income tax withholding and FUTA tax.

If you're a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2.

If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2.

If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income.

Pay you receive from your employer while you're sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from any of the following payers.

A welfare fund.

A state sickness or disability fund.

An association of employers or employees.

An insurance company, if your employer paid for the plan.

If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. However, these payments aren’t treated as social security and Medicare wages if you're a household worker or a farm worker.

Don’t include a stock appreciation right granted by your employer in income until you exercise (use) the right. When you use the right, you're entitled to a cash payment equal to the FMV of the corporation's stock on the date of use minus the FMV on the date the right was granted. You include the cash payment in income in the year you use the right.

If your employer gives you digital assets (such as Bitcoin) as payment for your services, you must include the FMV of the digital assets as of the date(s) of receipt in your income. The FMV of digital assets paid as wages is subject to federal income tax withholding, Federal Insurance Contribution Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2. Notice 2014-21, 2014-16 I.R.B. 938, describes how digital assets are treated for federal tax purposes and is available at IRS.gov/irb/2014-16_IRB#NOT-2014-21 . For further information, see IRS.gov/DigitalAssets .

Fringe Benefits

Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay FMV for them or they’re specifically excluded by law. Refraining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules.

See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income.

You're the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You're considered to be the recipient even if it’s given to another person, such as a member of your family. An example is a car your employer gives to your spouse for services you perform. The car is considered to have been provided to you and not to your spouse.

You don’t have to be an employee of the provider to be a recipient of a fringe benefit. If you're a partner, a director, or an independent contractor, you can also be the recipient of a fringe benefit.

Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. The provider can be a client or customer of an independent contractor.

You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report taxable noncash fringe benefits by using either of the following rules.

The general rule: benefits are reported for a full calendar year (January 1–December 31).

The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year.

You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for example, use of a car).

Your employer must include all taxable fringe benefits in Form W-2, box 1, as wages, tips, and other compensation, and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement).

Accident or Health Plan

In most cases, the value of accident or health plan coverage provided to you by your employer isn’t included in your income. Benefits you receive from the plan may be taxable, as explained under Sickness and Injury Benefits , later.

For information on the items covered in this section, other than Long-term care coverage , see Pub. 969.

Contributions by your employer to provide coverage for long-term care services generally aren’t included in your income. However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. This amount will be reported as wages in Form W-2, box 1.

Contributions by your employer to your Archer MSA generally aren’t included in your income. Their total will be reported in Form W-2, box 12, with code R. You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File the form with your return.

If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases aren’t included in your income.

For 2023, health FSAs are subject to a $3,050 limit on salary reduction contributions.

If your employer offers an HRA that qualifies as an accident or health plan, your coverage under the HRA and reimbursements of your medical care expenses from the HRA generally aren’t included in your income.

If you’re an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Contributions made by your employer aren’t included in your income. Distributions from your HSA that are used to pay qualified medical expenses aren’t included in your income. Distributions not used for qualified medical expenses are included in your income. See Pub. 969 for the requirements of an HSA.

Contributions by a partnership to a bona fide partner's HSA aren’t contributions by an employer. The contributions are treated as a distribution of money and aren’t included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.

Contributions by an S corporation to a 2%-shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.

You can make a one-time distribution from your individual retirement arrangement (IRA) to an HSA and you generally won’t include any of the distribution in your income. See Pub. 590-B for the requirements for these qualified HSA funding distributions.

You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. See the Instructions for Form 8839 for more information.

Adoption benefits are reported by your employer in Form W-2, box 12, with code T. They are also included as social security and Medicare wages in boxes 3 and 5. However, they aren’t included as wages in box 1. To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. File the form with your return.

If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value isn’t included in your compensation. The gym must be used primarily by employees, their spouses, and their dependent children.

If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation.

De Minimis (Minimal) Benefits

If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value isn’t included in your income. In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, occasional personal use of an employer’s copying machine (where at least 85% of the use of the machine is for business), and company picnics aren’t included in your income. Also, see Employee Discounts , later.

If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, don’t include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.

If your employer provides dependent care benefits under a dependent care assistance plan, you may be able to exclude these benefits from your income. Dependent care benefits include:

Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work,

The FMV of care in a daycare facility provided or sponsored by your employer, and

Pre-tax contributions you made under a dependent care FSA.

The amount you can exclude is limited to the lesser of:

The total amount of dependent care benefits you received during the year,

The total amount of qualified expenses you incurred during the year,

Your earned income,

Your spouse's earned income, or

$5,000 ($2,500 if married filing separately).

Your employer must show the total amount of dependent care benefits provided to you during the year under a dependent care assistance plan in Form W-2, box 10. Any amount over your employer’s plan limit is also included in box 1. See Form 2441.

To claim the exclusion, you must complete Part III of Form 2441. See the Instructions for Form 2441 for more information.

You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. For more information, see Pub. 970.

If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. However, it doesn’t apply to discounts on real property or property commonly held for investment (such as stocks or bonds).

The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage.

For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. (Ask your employer for this percentage.)

For a discount on services, 20% (0.20).

Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. Fees for tax or investment counseling are miscellaneous itemized deductions and are no longer deductible.

Qualified retirement planning services paid for you by your employer may be excluded from your income. For more information, see Retirement Planning Services , later.

Employer-Provided Group-Term Life Insurance

In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) isn’t included in your income. However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance.

For exceptions to this rule, see Entire cost excluded and Entire cost taxed , later.

If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in Form W-2, box 1. Also, it's shown separately in box 12 with code C.

This insurance is term life insurance protection (insurance for a fixed period of time) that:

Provides a general death benefit,

Is provided to a group of employees,

Is provided under a policy carried by the employer, and

Provides an amount of insurance to each employee based on a formula that prevents individual selection.

If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Your employer should be able to tell you the amount to include in your income.

Insurance that provides accidental or other death benefits but doesn't provide general death benefits (for example, travel insurance) isn’t group-term life insurance.

If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in Form W-2, box 1. Also, it's shown separately in box 12 with code C. Box 12 will also show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them on Schedule 2 (Form 1040), line 13. For more information, see the Instructions for Forms 1040 and 1040-SR.

Your exclusion for employer-provided group-term life insurance coverage can’t exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 won’t be correct. You must figure how much to include in your income. Reduce the amount you figure by any amount reported in Form W-2, box 12, with code C, add the result to the wages reported in box 1, and report the total on your return.

Use the following worksheet to figure the amount to include in your income.

If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you would otherwise include in your income. However, you can’t reduce the amount to include in your income by:

Payments for coverage in a different tax year;

Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions; or

Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded .

Worksheet 1. Figuring the Cost of Group-Term Life Insurance To Include in Income

1.	Enter the total amount of your insurance coverage from your employer(s)			1.	_____
2.	Limit on exclusion for employer-provided group-term life insurance coverage			2.
3.	Subtract line 2 from line 1			3.	_____
4.	Divide line 3 by $1,000. Figure to the nearest tenth			4.	_____
5.	Go to Table 1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group			5.	_____
6.	Multiply line 4 by line 5			6.	_____
7.	Enter the number of full months of coverage at this cost			7.	_____
8.	Multiply line 6 by line 7			8.	_____
9.	Enter the premiums you paid per month	9.	_____
10.	Enter the number of months you paid the premiums	10.	_____
11.	Multiply line 9 by line 10			11.	_____
12.	Subtract line 11 from line 8.			12.	_____

Table 1. Cost of $1,000 of Group-Term Life Insurance for 1 Month


	Under 25	$ .05
	25 through 29	.06
	30 through 34	.08
	35 through 39	.09
	40 through 44	.10
	45 through 49	.15
	50 through 54	.23
	55 through 59	.43
	60 through 64	.66
	65 through 69	1.27
	70 and above	2.06

You're 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the amount to include in your income as follows.

Worksheet 1. Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated

1.	Enter the total amount of your insurance coverage from your employer(s)		1.
2.	Limit on exclusion for employer-provided group-term life insurance coverage		2.
3.	Subtract line 2 from line 1		3.
4.	Divide line 3 by $1,000. Figure to the nearest tenth		4.
5.	Go to Table 1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group		5.
6.	Multiply line 4 by line 5		6.
7.	Enter the number of full months of coverage at this cost		7.
8.	Multiply line 6 by line 7		8.
9.	Enter the premiums you paid per month	9.
10.	Enter the number of months you paid the premiums	10.
11.	Multiply line 9 by line 10		11.
12.	Subtract line 11 from line 8.		12.

The total amount to include in income for the cost of excess group-term life insurance is $33. Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 don't include any part of that $33. You must add it to the wages shown on your Forms W-2 and include the total on your return.

You aren't taxed on the cost of group-term life insurance if any of the following circumstances apply.

You’re permanently and totally disabled and have ended your employment.

Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.

A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. (You aren’t entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.)

The plan existed on January 1, 1984, and:

You retired before January 2, 1984, and were covered by the plan when you retired; or

You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.

You’re taxed on the entire cost of group-term life insurance if either of the following circumstances applies.

The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan.

You’re a key employee and your employer's plan discriminates in favor of key employees.

Meals and Lodging

You don't include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met.

The meals are:

Furnished on the business premises of your employer, and

Furnished for the convenience of your employer.

The lodging is:

Furnished on the business premises of your employer,

Furnished for the convenience of your employer, and

A condition of your employment. (You must accept it in order to be able to properly perform your duties.)

You also don't include in your income the value of meals or meal money that qualifies as a minimal fringe benefit. See De Minimis (Minimal) Benefits , earlier.

If you're an employee of an educational institution or an academic health center and you're provided with lodging that doesn't meet the three conditions given earlier, you may still not have to include the value of the lodging in income. However, the lodging must be qualified campus lodging, and you must pay an Adequate rent .

This is an organization that meets the following conditions.

Its principal purpose or function is to provide medical or hospital care or medical education or research.

It receives payments for graduate medical education under the Social Security Act.

One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty.

Qualified campus lodging is lodging furnished to you, your spouse, or any of your dependents by, or on behalf of, the institution or center for use as a home. The lodging must be located on or near a campus of the educational institution or academic health center.

The amount of rent you pay for the year for qualified campus lodging is considered adequate if it's at least equal to the lesser of:

5% of the appraised value of the lodging, or

The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution.

The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis.

You are a sociology professor for State University and rent a home from the university that is qualified campus lodging. The house is appraised at $200,000. The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. You pay an annual rent of $11,000. You don’t include in your income any rental value because the rent you pay equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). If you paid annual rent of only $8,000, you would have to include $2,000 in your income ($10,000 − $8,000).

For tax years 2018 through 2025, reimbursements for certain moving expenses are no longer excluded from the gross income of nonmilitary taxpayers.

The value of services you receive from your employer for free, at cost, or for a reduced price isn't included in your income if your employer:

Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and

Doesn’t have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service).

In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets; hotel rooms; and telephone services.

You're employed as a flight attendant for a company that owns both an airline and a hotel chain. Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. The value of the personal flight isn't included in your income. However, the value of the hotel room is included in your income because you don't work in the hotel business.

If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer aren't included in your income. Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. You can't exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Also, see Financial Counseling Fees , earlier.

Transportation

If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. A qualified transportation fringe benefit is:

Transportation in a commuter highway vehicle (such as a van) between your home and work place,

A transit pass, or

Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass isn't readily available for direct distribution to you.

The exclusion for commuter vehicle transportation and transit pass fringe benefits can't be more than $300 a month.

The exclusion for the qualified parking fringe benefit can't be more than $300 a month.

If the benefits have a value that is more than these limits, the excess must be included in your income.

This is a highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle's mileage must reasonably be expected to be:

For transporting employees between their homes and workplace, and

On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver).

This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation.

This is parking provided to an employee at or near the employer's place of business. It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by car pool. It doesn't include parking at or near the employee's home.

You can exclude a qualified tuition reduction from your income. This is the amount of a reduction in tuition:

For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children;

For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution; or

Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program.

If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost isn't included in your income.

You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. The cost of the subscription isn't included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself.

Valuation of Fringe Benefits

If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. For an exception, see Employer-Provided Group-Term Life Insurance , earlier.

You must include in your income the amount by which the FMV of the fringe benefit is more than the sum of:

The amount, if any, you paid for the benefit, plus

The amount, if any, specifically excluded from your income by law.

The FMV of a fringe benefit is determined by all the facts and circumstances. It’s the amount you would have to pay a third party to buy or lease the benefit. This is determined without regard to:

Your perceived value of the benefit, or

The amount your employer paid for the benefit.

If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit.

Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. The value can't be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. See Notice 2021-7 for more information on temporary relief for employers and employees using the automobile lease valuation rule to determine the value of an employer-provided vehicle in 2020 or 2021. The special valuation rule used for 2021 under the Notice must continue to be used by the employer and the employee for all subsequent years, except to the extent the employer uses the commuting valuation rule. See Special valuation rules below.

Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party.

If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. The division must be based on all the facts, including which employee or employees control the use of the aircraft.

Generally, you can use a special valuation rule for a fringe benefit only if your employer uses the rule. If your employer uses a special valuation rule, you can't use a different special rule to value that benefit. You can always use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule.

If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of:

Any amount you repaid your employer, plus

Any amount specifically excluded from income by law.

The automobile lease rule.

The vehicle cents-per-mile rule.

The commuting rule.

The unsafe conditions commuting rule.

The employer-operated eating-facility rule.

For more information on these rules, see Pub. 15-B.

For information on the noncommercial flight and commercial flight valuation rules, see sections 1.61-21(g) and 1.61-21(h) of the regulations.

Retirement Plan Contributions

Except for Roth contributions, your employer's contributions to a qualified retirement plan for you aren’t included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included.

If your employer pays into a nonqualified plan for you, you must generally include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan isn't transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you don't have to include the value of your interest in your income until it's transferable or is no longer subject to a substantial risk of forfeiture.

Elective Deferrals

If you’re covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an “elective deferral”) is treated as an employer contribution to a qualified plan. An elective deferral, other than a designated Roth contribution (discussed later), isn't included in wages subject to income tax at the time contributed. However, it’s included in wages subject to social security and Medicare taxes.

Elective deferrals include elective contributions to the following retirement plans.

Cash or deferred arrangements (section 401(k) plans).

The TSP for federal employees.

Salary reduction simplified employee pension plans (SARSEP plans).

Savings incentive match plans for employees (SIMPLE plans).

Tax-sheltered annuity plans (section 403(b) plans).

Section 501(c)(18)(D) plans. (But see Reporting by employer , later.)

Section 457 plans.

Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. You’re to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. The notice must explain:

Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage; and

How contributions made will be invested in the absence of any investment decision by you.

You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions.

For 2023, you shouldn't have deferred more than a total of $22,500 of contributions to the plans listed in (1) through (3), earlier, unless you are 50 or older. The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. Amounts deferred under specific plan limits are part of the overall limit on deferrals.

Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you’re responsible for monitoring the total you defer to ensure that the deferrals aren't more than the overall limit.

You may be allowed catch-up contributions (additional elective deferrals) if you're age 50 or older by the end of your tax year. For 2023, the catch-up limit for section 401(k) and 403(b) plans, the TSP, SARSEP plans, and governmental section 457 plans is $7,500. For SIMPLE plans, it’s $3,500.

For more information about catch-up contributions to:

Section 401(k) plans, see Elective Deferrals in chapter 4 of Pub. 560;

SARSEPs, see Salary Reduction Simplified Employee Pensions in chapter 2 of Pub. 560;

SIMPLE plans, see SIMPLE Plans in chapter 3 of Pub. 560; and

Section 457 plans, see Limit for deferrals under section 457 plans , later.

If you're a participant in a SIMPLE plan, you generally shouldn't have deferred more than $15,500 in 2023. Amounts you defer under a SIMPLE plan count toward the overall limit ($22,500 for 2023) and may affect the amount you can defer under other elective deferral plans.

If you're a participant in a tax-sheltered annuity plan (section 403(b) plan), the limit on elective deferrals for 2023 is generally $22,500. However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts.

$15,000, reduced by the sum of:

The additional pre-tax elective deferrals made in earlier years because of this rule, plus

The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule.

$5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.

If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $25,500 for 2023.

For more information, see Pub. 571.

If you're a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($22,500 in 2023) and may affect the amount you can defer under other elective deferral plans.

If you're a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $22,500 in 2023. However, if you're within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. See Increased limit , later.

Generally, this is your Form W-2 wages plus elective deferrals. In most cases, it includes all the following payments.

Wages and salaries.

Fees for professional services.

The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that isn't included in your income.

Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items.

Commissions and tips.

Fringe benefits.

De minimis financial incentives to make elective deferrals to a qualified cash or deferred arrangement.

Employer contributions (elective deferrals) to the following.

The section 457 plan.

Section 401(k) plans that aren't included in your income.

A SARSEP plan.

A tax-sheltered annuity (section 403(b) plan).

A SIMPLE plan.

A section 125 cafeteria plan.

Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts.

Your wages as defined for income tax withholding purposes.

Your wages as reported in Form W-2, box 1.

Your wages that are subject to social security withholding (including elective deferrals).

During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of:

Twice the annual limit ($45,000 for 2023), or

The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50-or-over catch-up contributions).

You can generally have additional elective deferrals made to your governmental section 457 plan if:

You reached age 50 by the end of the year, and

No other elective deferrals can be made for you to the plan for the year because of limits or restrictions.

Employers with section 401(k) plans, section 403(b) plans, and governmental section 457 plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Designated Roth contributions are treated as elective deferrals, except that they're included in income. Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. In addition, your retirement plan may allow you to designate certain nonelective contributions or matching contributions as Roth contributions. These Roth contributions are also included in income.

Qualified distributions from a Roth account aren't included in income. A distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a Roth contribution to the account isn't a qualified distribution.

Your employer generally shouldn't include elective deferrals in your wages in Form W-2, box 1. Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12.

Wages shown in Form W-2, box 1, shouldn't have been reduced for contributions you made to a section 501(c)(18)(D) plan. The amount you contributed should be identified with code H in box 12. You may deduct the amount deferred subject to the limits that apply. Include your deduction in the total on Schedule 1 (Form 1040), line 24f.

These contributions are elective deferrals but are included in your wages in Form W-2, box 1. Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. Designated Roth contributions to a governmental section 457 plan are reported using code EE in box 12.

These contributions are reported on Form 1099-R for the year in which the contributions are allocated to your account. The total amount of designated Roth nonelective contributions and designated Roth matching contributions that are allocated to your account in the year is reported in box 1 and in box 2a. These contributions are reported using code G in box 7.

If your deferrals exceed the limit, you must notify your plan by the date required by the plan. If the plan permits, the excess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan must then pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year.

You must include the excess deferral in your income for the year of the deferral. File Form 1040 or 1040-SR to add the excess deferral amount to earned income on line 1h.

If you don't take out the excess amount, you can't include it in the cost of the contract even though you included it in your income. Therefore, you're taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution (unless the excess deferral was a designated Roth contribution).

If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, don't include it in income again in the year you receive it. If you receive it later, you must include it in income in both the year of the deferral and the year you receive it (unless the excess deferral was a designated Roth contribution). Any income on the excess deferral taken out is taxable in the tax year in which you take it out. If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income.

You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Use the following rules to report a corrective distribution shown on Form 1099-R for 2023.

If the distribution was for a 2023 excess deferral, your Form 1099-R should have code 8 in box 7. Add the excess deferral amount to your wages on your 2023 tax return.

If the distribution was for a 2023 excess deferral to a designated Roth account, your Form 1099-R should have codes B and 8 in box 7. Don’t add this amount to your wages on your 2023 return.

If the distribution was for a 2022 excess deferral, your Form 1099-R should have code P in box 7. If you didn't add the excess deferral amount to your wages on your 2022 tax return, you must file an amended return on Form 1040-X. If you didn't receive the distribution by April 15, 2023, you must also add it to your wages on your 2023 tax return.

If the distribution was for the income earned on an excess deferral, your Form 1099-R should have code 8 in box 7. Add the income amount to your wages on your 2023 income tax return, regardless of when the excess deferral was made.

If you're a highly compensated employee, the total of your elective deferrals made for you for any year under a section 401(k) plan or SARSEP plan may be limited by the average deferrals, as a percentage of pay, made by all eligible non-highly compensated employees.

If you contributed more to the plan than allowed, the excess contributions may be distributed to you. You must include the distribution in your income on Form 1040 or 1040-SR, line 1h.

If you receive a corrective distribution of excess contributions (and allocable income), it's included in your income in the year of the distribution. The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. You should receive a Form 1099-R for the year the excess contributions are distributed to you. Add the distribution to your wages for that year.

The amount contributed in 2023 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $66,000. Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions.

A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. A corrective payment consisting of your after-tax contributions isn't taxable.

If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with code E in box 7. Report the total payment shown in Form 1099-R, box 1, on Form 1040 or 1040-SR, line 5a. Report the taxable amount shown in Form 1099-R, box 2a, on Form 1040 or 1040-SR, line 5b.

Stock Options

In Wisconsin Central Ltd. v. United States , 138 S. Ct. 2067, the U.S. Supreme Court ruled that “money remuneration” is “currency issued by a recognized authority as a medium of exchange,” and that employee stock options aren’t “money remuneration” subject to the Railroad Retirement Tax Act (RRTA). Tier 1 and Tier 2 taxes aren’t withheld when employees covered by the RRTA exercise stock options. Federal income tax must still be withheld on taxable compensation from railroad employees exercising their options. If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Your employer can tell you which kind of option you hold.

Nonstatutory Stock Options

If you're granted a nonstatutory stock option, you may have income when you receive the option. The amount of income to include and the time to include it depend on whether the FMV of the option can be readily determined. The FMV of an option can be readily determined if it’s actively traded on an established market.

The FMV of an option that isn't traded on an established market can be readily determined only if all of the following conditions exist.

You can transfer the option.

You can exercise the option immediately in full.

The option or the property subject to the option isn't subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the FMV of the option.

The FMV of the option privilege can be readily determined.

If you receive a nonstatutory stock option that has a readily determinable FMV at the time it's granted to you, the option is treated like other property received as compensation. See Restricted Property , later, for rules on how much income to include and when to include it. However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer doesn't apply to a nonstatutory option.

If the FMV of the option isn't readily determinable at the time it's granted to you (even if it's determined later), you don't have income until you exercise or transfer the option.

When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value.

When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you don't have to include any amount in income.

When you exercise a nonstatutory stock option that didn't have a readily determinable value at the time the option was granted, the restricted property rules apply to the property received. The amount to include in your income is the difference between the amount you pay for the property and its FMV when it becomes substantially vested. If it isn't substantially vested at the time you exercise this nonstatutory stock option (so that you may have to give the stock back), you don't have to include any amount in income. You include the difference in income when the option becomes substantially vested. For more information on restricted property, see Restricted Property , later.

If you transfer a nonstatutory stock option without a readily determinable value in an arm's-length transaction to an unrelated person, you must include in your income the money or other property you received for the transfer as if you had exercised the option.

If you transfer a nonstatutory stock option without a readily determinable value in a non-arm's-length transaction (for example, a gift), the option isn't treated as exercised or closed at that time. You must include in your income, as compensation, any money or property received. When the transferee exercises the option, you must include in your income, as compensation, the excess of the FMV of the stock acquired by the transferee over the sum of the exercise price paid and any amount you included in income at the time you transferred the option. At the time of the exercise, the transferee recognizes no income and has a basis in the stock acquired equal to the FMV of the stock.

Any transfer of this kind of option to a related person is treated as a non-arm's-length transaction. See Regulations section 1.83-7 for the definition of a related person.

If you're an employee, and you issue a recourse note to your employer in satisfaction of the exercise price of an option to acquire your employer's stock, and your employer and you subsequently agree to reduce the stated principal amount of the note, you generally recognize compensation income at the time and in the amount of the reduction.

If you have income from the exercise of nonstatutory stock options, your employer should report the amount to you in Form W-2, box 12, with code V. The employer should show the spread (that is, the FMV of stock over the exercise price of options granted to you for that stock) from your exercise of the nonstatutory stock options. Your employer should include this amount in boxes 1, 3 (up to the social security wage base), and 5. Your employer should include this amount in box 14 if it's a railroad employer.

If you're a nonemployee spouse and you exercise nonstatutory stock options you received incident to a divorce, the income is reported to you in box 3 of Form 1099-MISC.

There are no special income rules for the sale of stock acquired through the exercise of a nonstatutory stock option. Report the sale as explained in the Instructions for Schedule D (Form 1040) for the year of the sale. You may receive a Form 1099-B reporting the sales proceeds.

Your basis in the property you acquire under the option is the amount you pay for it plus any amount you included in income upon grant or exercise of the option.

Your holding period begins as of the date you acquired the option, if it had a readily determinable value, or as of the date you exercised or transferred the option if it had no readily determinable value.

For options granted on or after January 1, 2014, the basis information reported to you on Form 1099-B won't reflect any amount you included in income upon grant or exercise of the option. For options granted before January 1, 2014, any basis information reported to you on Form 1099-B may or may not reflect any amount you included in income upon grant or exercise; therefore, the basis may need to be adjusted.

Statutory Stock Options

There are two kinds of statutory stock options.

Incentive stock options (ISOs) .

Options granted under employee stock purchase plans.

For either kind of option, you must be an employee of the company granting the option, or a related company, at all times during the period beginning on the date the option is granted and ending 3 months before the date you exercise the option (for an ISO, 1 year before if you're disabled). Also, the option must be nontransferable except at death.

If you don't meet the employment requirements, or you receive a transferable option, your option is a nonstatutory stock option.

If you receive a statutory stock option, don't include any amount in your income when the option is granted.

If you exercise a statutory stock option, don't include any amount in income when you exercise the option.

For the AMT, you must treat stock acquired through the exercise of an ISO as if no special treatment applied. This means that, when your rights in the stock are transferable or no longer subject to a substantial risk of forfeiture, you must include as an adjustment in figuring alternative minimum taxable income the amount by which the FMV of the stock exceeds the option price. Enter this adjustment on Form 6251, line 2i. Increase your AMT basis in any stock you acquire by exercising the ISO by the amount of the adjustment. However, no adjustment is required if you dispose of the stock in the same year you exercise the option.

See Restricted Property , later, for more information.

Your employer, Elm Company, granted you an ISO on April 8, 2022, to buy 100 shares of Elm Company at $9 a share, its FMV at the time. You exercised the option on January 7, 2023, when the stock was selling on the open market for $14 a share. On January 27, 2023, when the stock was selling on the open market for $16 a share, your rights to the stock first became transferable. You include $700 ($1,600 value when your rights first became transferable minus $900 option price) as an adjustment on Form 6251, line 2i.

You have taxable income or a deductible loss when you sell the stock that you bought by exercising the option. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss and report it as explained in the Instructions for Schedule D (Form 1040) for the year of the sale.

However, you may have ordinary income for the year that you sell or otherwise dispose of the stock in either of the following situations.

You don't satisfy the holding period requirement.

You satisfy the conditions described under Option granted at a discount under Employee stock purchase plan , later.

You satisfy the holding period requirement if you don't sell the stock until the end of the later of the 1-year period after the stock was transferred to you or the 2-year period after the option was granted. However, you're considered to satisfy the holding period requirement if you sold the stock to comply with conflict-of-interest requirements.

Your holding period for the property you acquire when you exercise an option begins on the day after you exercise the option.

If you sell stock acquired by exercising an ISO, you need to determine if you satisfied the holding period requirement.

If you sell stock acquired by exercising an ISO and satisfy the holding period requirement, your gain or loss from the sale is capital gain or loss. Report the sale as explained in the Instructions for Schedule D (Form 1040). The basis of your stock is the amount you paid for the stock.

If you sell stock acquired by exercising an ISO, don't satisfy the holding period requirement, and have a gain from the sale, the gain is ordinary income up to the amount by which the stock's FMV when you exercised the option exceeded the option price. Any excess gain is capital gain. If you have a loss from the sale, it's a capital loss and you don't have any ordinary income.

Your employer or former employer should report the ordinary income to you as wages in Form W-2, box 1, and you must report this ordinary income amount on Form 1040 or 1040-SR, line 1a. If your employer or former employer doesn't provide you with a Form W-2, or if the Form W-2 doesn't include the ordinary income in box 1, you must report the ordinary income as wages on Schedule 1 (Form 1040), line 8k, for the year of the sale or other disposition of the stock. Report the capital gain or loss as explained in the Instructions for Schedule D (Form 1040). In determining capital gain or loss, your basis is the amount you paid when you exercised the option plus the amount reported as wages.

Your employer, Oak Corporation, granted you an ISO on March 12, 2021, to buy 100 shares of Oak Corporation stock at $10 a share, its FMV at the time. You exercised the option on January 7, 2022, when the stock was selling on the open market for $12 a share. On January 27, 2023, you sold the stock for $15 a share. Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the option. In 2023, you must report the difference between the option price ($10) and the value of the stock when you exercised the option ($12) as wages. The rest of your gain is capital gain, figured as follows.

Selling price ($15 × 100 shares)	$ 1,500
Purchase price ($10 × 100 shares)
Gain	$ 500
Amount reported as wages [($12 × 100 shares) − $1,000]
	$ 300

If you sold stock acquired by exercising an option granted under an employee stock purchase plan, you need to determine if you satisfied the holding period requirement.

If you sold stock acquired by exercising an option granted under an employee stock purchase plan, and you satisfy the holding period requirement, determine your ordinary income as follows.

Your basis is equal to the option price at the time you exercised your option and acquired the stock. The timing and amount of pay period deductions don't affect your basis.

Pine Company has an employee stock purchase plan. The option price is the lower of the stock price at the time the option is granted or at the time the option is exercised. The value of the stock when the option was granted was $25. Pine Company deducts $5 from Adrian's pay every week for 48 weeks (total = $240 ($5 × 48)). The value of the stock when the option is exercised is $20. Adrian receives 12 shares of Pine Company’s stock ($240 ÷ $20). Adrian's holding period for all 12 shares begins the day after the option is exercised, even though the money used to purchase the shares was deducted from Adrian's pay on 48 separate days. Adrian's basis in each share is $20.

If, at the time the option was granted, the option price per share was less than 100% (but not less than 85%) of the FMV of the share, and you dispose of the share after meeting the holding period requirement, or you die while owning the share, you must include in your income as compensation the lesser of:

The excess of the FMV of the share at the time the option was granted over the option price, or

The excess of the FMV of the share at the time of the disposition or death over the amount paid for the share under the option.

Any excess gain is capital gain. If you have a loss from the sale, it's a capital loss, and you don't have any ordinary income.

Example 10.

Your employer, Willow Corporation, granted you an option under its employee stock purchase plan to buy 100 shares of stock of Willow Corporation for $20 a share at a time when the stock had a value of $22 a share. Eighteen months later, when the value of the stock was $23 a share, you exercised the option, and 14 months after that you sold your stock for $30 a share. In the year of sale, you must report as wages the difference between the option price ($20) and the value at the time the option was granted ($22). The rest of your gain ($8 per share) is capital gain, figured as follows.

Selling price ($30 × 100 shares)	$ 3,000
Purchase price (option price) ($20 × 100 shares)
Gain	$ 1,000
Amount reported as wages [($22 × 100 shares) − $2,000]
	$ 800

If you don't satisfy the holding period requirement, your ordinary income is the amount by which the stock's FMV when you exercised the option exceeded the option price. This ordinary income isn't limited to your gain from the sale of the stock. Increase your basis in the stock by the amount of this ordinary income. The difference between your increased basis and the selling price of the stock is a capital gain or loss.

Example 11.

The facts are the same as in Example 10 , except that you sold the stock only 6 months after you exercised the option. You didn't satisfy the holding period requirement, so you must report $300 as wages and $700 as capital gain, figured as follows.

Selling price ($30 × 100 shares)	$3,000
Purchase price (option price) ($20 × 100 shares)
Gain	$1,000
Amount reported as wages [($23 × 100 shares) − $2,000]
[$3,000 – ($2,000 + $300)]	$700

P.L. 115-97 made a change in the law that allows a new election for “qualified employees” of private corporations to elect to defer income taxation for up to 5 years from the date of vesting on “qualified stock” granted in connection with broad-based compensatory stock option and restricted stock unit (RSU) programs. This election is available for stock attributable to options exercised or RSUs settled after 2017. The corporation must have a written plan providing RSU or option to at least 80% of U.S. employees. The recipients must have the same rights and privileges under RSU or option plan.

The term “qualified employee” doesn’t include:

1% owner of corporation (current or any point during prior 10 calendar years),

Current or former CEO or CFO (current or any point previously),

Family of previously mentioned individuals, or

One of the four highest compensated officers (current or any point during prior 10 calendar years).

The term “qualified stock” means any stock in a corporation that is the employer of the employee if:

Stock is received relating to the exercise of an option, or

Stock is received in settlement of an RSU, and

Option or RSU was granted by the corporation.

The term “qualified stock” can’t include stock from stock-settled stock appreciation rights or restricted stock awards (restricted property). It won’t include any stock if the employee may receive cash instead of stock. The election is made in a manner similar to the election described under Choosing to include in income for year of transfer , later, under Restricted Property , even though the “qualified stock” isn't restricted property. The election must be made no later than 30 days after the first date the rights of the employee in such stock are transferable or aren’t subject to a substantial risk of forfeiture, whichever occurs earlier. See Restricted Property , later, for how to make the choice.

If an employee elects to defer income inclusion under the provision, the income must be included in the employee's income for the year that includes the earliest of (1) the first date the qualified stock becomes transferable, (2) the date the employee first becomes an excluded employee (as excluded from “qualified employee”), (3) the first date on which any stock of the employer becomes readily tradable on an established securities market, (4) the date 5 years after the first date the employee's right to the stock becomes substantially vested, or (5) the date on which the employee revokes his or her inclusion deferral election.

The employer corporation is required to provide notification of rights to employees covered under a qualified program or face penalties. There will be withholding at the highest marginal rate.

Restricted Property

In most cases, if you receive property for your services, you must include its FMV in your income in the year you receive the property. However, if you receive stock or other property that has certain restrictions that affect its value, you don't include the value of the property in your income until it has been substantially vested. (You can choose to include the value of the property in your income in the year it's transferred to you, as discussed later, rather than the year it's substantially vested.)

Until the property becomes substantially vested, it's owned by the person who makes the transfer to you, usually your employer. However, any income from the property, or the right to use the property, is included in your income as additional compensation in the year you receive the income or have the right to use the property.

When the property becomes substantially vested, you must include its FMV, minus any amount you paid for it, in your income for that year. Your holding period for this property begins when the property becomes substantially vested.

Example 12.

Your employer, the Holly Corporation, sells you 100 shares of its stock at $10 a share. At the time of the sale, the FMV of the stock is $100 a share. Under the terms of the sale, the stock is under a substantial risk of forfeiture (you have a good chance of losing it) for a 5-year period. Your stock isn't substantially vested when it's transferred, so you don't include any amount in your income in the year you buy it. At the end of the 5-year period, the FMV of the stock is $200 a share. You must include $19,000 in your income [100 shares × ($200 FMV − $10 you paid)]. Dividends paid by the Holly Corporation on your 100 shares of stock are taxable to you as additional compensation during the period the stock can be forfeited.

Property is substantially vested when:

It’s transferable, or

It isn't subject to a substantial risk of forfeiture. (You don't have a good chance of losing it.)

Property is transferable if you can sell, assign, or pledge your interest in the property to any person (other than the transferor), and if the person receiving your interest in the property isn't required to give up the property, or its value, if the substantial risk of forfeiture occurs.

Generally, a substantial risk of forfeiture exists only if rights in property that are transferred are conditioned, directly or indirectly, on the future performance (or refraining from performance) of substantial services by any person, or on the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial.

Example 13.

The Redwood Corporation transfers to you as compensation for services 100 shares of its corporate stock for $100 a share. Under the terms of the transfer, you must resell the stock to the corporation at $100 a share if you leave your job for any reason within 3 years from the date of transfer. You must perform substantial services over a period of time, and you must resell the stock to the corporation at $100 a share (regardless of its value) if you don't perform the services; so, your rights to the stock are subject to a substantial risk of forfeiture.

You can choose to include the value of restricted property at the time of transfer (minus any amount you paid for the property) in your income for the year it's transferred. If you make this choice, the substantial vesting rules don't apply and, generally, any later appreciation in value isn't included in your compensation when the property becomes substantially vested. Your basis for figuring gain or loss when you sell the property is the amount you paid for it plus the amount you included in income as compensation.

If you forfeit the property after you have included its value in income, your loss is the amount you paid for the property minus any amount you realized on the forfeiture.

You make the choice by filing a written statement with the Internal Revenue Service Center where you file your return. You must file this statement no later than 30 days after the date the property was transferred. Mail your statement to the address listed for your state under “Are requesting a refund or aren’t enclosing a check or money order...” given in Where Do You File in the Instructions for Forms 1040 and 1040-SR. You must give a copy of this statement to the person for whom you performed the services and, if someone other than you received the property, to that person.

You must sign the statement and indicate on it that you're making the choice under section 83(b) of the Internal Revenue Code. The statement must contain all of the following information.

Your name, address, and TIN.

A description of each property for which you're making the choice.

The date or dates on which the property was transferred and the tax year for which you're making the choice.

The nature of any restrictions on the property.

The FMV at the time of transfer (ignoring restrictions except those that will never lapse) of each property for which you're making the choice.

Any amount that you paid for the property.

A statement that you have provided copies to the appropriate persons.

Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on your Form W-2. If they are also reported on a Form 1099-DIV, you should list them on Schedule B (Form 1040), with a statement that you have included them as wages. Don’t include them in the total dividends received.

Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends. You should receive a Form 1099-DIV showing these dividends. Don’t include the dividends in your wages on your return. Report them as dividends.

These rules apply to the sale or other disposition of property that you didn't choose to include in your income in the year transferred and that isn't substantially vested.

If you sell or otherwise dispose of the property in an arm's-length transaction, include in your income as compensation for the year of sale the amount realized minus the amount you paid for the property. If you exchange the property in an arm's-length transaction for other property that isn't substantially vested, treat the new property as if it were substituted for the exchanged property.

The sale or other disposition of a nonstatutory stock option to a related person isn't considered an arm's-length transaction. See Regulations section 1.83-7 for the definition of a “related person.”

If you sell the property in a transaction that isn't at arm's length, include in your income as compensation for the year of sale the total of any money you received and the FMV of any substantially vested property you received on the sale. In addition, you'll have to report income when the original property becomes substantially vested, as if you still held it. Report as compensation its FMV minus the total of the amount you paid for the property and the amount included in your income from the earlier sale.

Example 14.

In 2020, you paid your employer $50 for a share of stock that had an FMV of $100 and was subject to forfeiture until 2023. In 2022, you sold the stock to your spouse for $10 in a transaction not at arm's length. You had compensation of $10 from this transaction. In 2023, when the stock had an FMV of $120, it became substantially vested. For 2022, you must report additional compensation of $60, figured as follows.

FMV of stock at time of substantial vesting		$120
Minus: Amount paid for stock	$50
Minus: Compensation previously included in income from sale to spouse
		$60

If you inherit property not substantially vested at the time of the decedent's death, any income you receive from the property is considered income in respect of a decedent and is taxed according to the rules for restricted property received for services. For information about income in respect of a decedent, see Pub. 559.

Special Rules for Certain Employees

This part of the publication deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers.

If you’re a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it isn't taxable to you.

If you’re a member of a religious organization and you give your outside earnings to the organization, you must still include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. See Pub. 526. Also, see Members of Religious Orders , later.

A pension or retirement pay for a member of the clergy is usually treated as any other pension or annuity. It must be reported on lines 5a and 5b of Form 1040 or 1040-SR.

Special rules for housing apply to members of the clergy. Under these rules, you don't include in your income the rental value of a home (including utilities) or a designated housing allowance provided to you as part of your pay. However, the exclusion can't be more than the reasonable pay for your service. If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you’re subject to the self-employment tax. For more information, see Pub. 517.

Members of Religious Orders

If you're a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order.

If you're performing the services as an agent of the order in the exercise of duties required by the order, don't include in your income the amounts turned over to the order.

If your order directs you to perform services for another agency of the supervising church or an associated institution, you're considered to be performing the services as an agent of the order. Any wages you earn as an agent of an order that you turn over to the order aren't included in your income.

Example 15.

You're a member of a church order and have taken a vow of poverty. You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. You're a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. However, you remain under the general direction and control of the order. You're considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order aren't included in your income.

If you're directed to work outside the order, your services aren't an exercise of duties required by the order unless they meet both of the following requirements.

They're the kind of services that are ordinarily the duties of members of the order.

They're part of the duties that you must exercise for, or on behalf of, the religious order as its agent.

Example 16.

You are a member of a religious order and have taken a vow of poverty. You renounce all claims to your earnings and turn over your earnings to the order.

You are a schoolteacher. You were instructed by the superiors of the order to get a job with a private tax-exempt school. You became an employee of the school, and, at your request, the school made the salary payments directly to the order.

Because you are an employee of the school, you’re performing services for the school rather than as an agent of the order. The wages you earn working for the school are included in your income.

Example 17.

You are a member of a religious order who, as a condition of membership, have taken vows of poverty and obedience. All claims to your earnings are renounced. You received permission from the order to establish a private practice as a psychologist and counsel members of religious orders as well as nonmembers. Although the order reviews your budget annually, you control not only the details of your practice but also the means by which your work as a psychologist is accomplished.

Your private practice as a psychologist doesn't make you an agent of the religious order. The psychological services you provide aren't the type of services that are provided by the order. The income you earn as a psychologist is earned in your individual capacity. You must include in your income the earnings from your private practice.

Foreign Employer

Special rules apply if you work for a foreign employer.

If you're a U.S. citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign employer, you must include your salary in your income.

You're exempt from social security and Medicare employee taxes if you're employed in the United States by an international organization or a foreign government. However, you must pay self-employment tax on your earnings from services performed in the United States, even though you aren't self-employed. This rule also applies if you're an employee of a qualifying wholly owned instrumentality of a foreign government.

Your compensation for official services to an international organization is exempt from federal income tax if you aren't a citizen of the United States or you're a citizen of the Philippines (whether or not you're a citizen of the United States).

Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true.

You aren't a citizen of the United States or you're a citizen of the Philippines (whether or not you're a citizen of the United States).

Your work is like the work done by employees of the United States in foreign countries.

The foreign government gives an equal exemption to employees of the United States in its country.

If you're an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration and Nationality Act to keep your immigrant status, any salary you receive after the date you file the waiver isn't exempt under this rule. However, it may be exempt under a treaty or agreement. See Pub. 519, U.S. Tax Guide for Aliens, for more information about treaties.

This exemption applies only to employees' wages, salaries, and fees. Pensions and other income, such as investment income, don't qualify for this exemption.

For information on the tax treatment of income earned abroad, see Pub. 54.

Payments you receive as a member of a military service are generally taxed as wages except for retirement pay, which is taxed as a pension. Allowances generally aren't taxed. For more information on the tax treatment of military allowances and benefits, see Pub. 3.

Any payments made to you by an employer during the time you're performing service in the uniformed services are treated as compensation. These wages are subject to income tax withholding and are reported on Form W-2. See the discussion under Miscellaneous Compensation , earlier.

If your retirement pay is based on age or length of service, it’s taxable and must be included in your income as a pension on lines 5a and 5b of Form 1040 or 1040-SR. Don’t include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan.

For a more detailed discussion of survivor annuities, see Pub. 575.

If you're retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits , later.

If you received a QRD of all or part of the balance in your health FSA because you're a reservist and you have been ordered or called to active duty for a period of 180 days or more, the QRD is treated as wages and is reportable on Form W-2.

Don’t include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). The following amounts paid to veterans or their families aren't taxable.

Education, training, and subsistence allowances.

Disability compensation and pension payments for disabilities paid either to veterans or their families.

Grants for homes designed for wheelchair living.

Grants for motor vehicles for veterans who lost their sight or the use of their limbs.

Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death.

Interest on insurance dividends left on deposit with the VA.

Benefits under a dependent-care assistance program.

The death gratuity paid to a survivor of a member of the U.S. Armed Forces who died after September 10, 2001.

Payments made under the compensated work therapy program.

Any bonus payment by a state or political subdivision because of service in a combat zone.

If, in a previous year, you received a bonus payment by a state or political subdivision because of service in a combat zone that you included in your income, you can file a claim for refund of the taxes on that income. Use Form 1040-X to file the claim. File a separate form for each tax year involved. In most cases, you must file your claim within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. See the Instructions for Form 1040-X for information on filing that form.

The tax treatment of amounts you receive as a volunteer is covered in the following discussions.

Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are exempt from tax.

The following allowances must be included in your income and reported as wages.

Allowances paid to your spouse and minor children while you're a volunteer leader training in the United States.

Living allowances designated by the Director of the Peace Corps as basic compensation. These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses.

Leave allowances.

Readjustment allowances or termination payments. These are considered received by you when credited to your account.

Example 18.

You are a Peace Corps volunteer and get $175 a month as a readjustment allowance during your period of service, to be paid to you in a lump sum at the end of your tour of duty. Although the allowance isn't available to you until the end of your service, you must include it in your income on a monthly basis as it’s credited to your account.

If you're a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages.

Don’t include in your income amounts you receive for supportive services or reimbursements for out-of-pocket expenses from the following programs.

Retired Senior Volunteer Program (RSVP).

Foster Grandparent Program.

Senior Companion Program.

If you receive amounts for supportive services or reimbursements for out-of-pocket expenses from SCORE, don't include these amounts in gross income.

Don’t include in your income any reimbursements you receive for transportation, meals, and other expenses you have in training for, or actually providing, volunteer federal income tax counseling for the elderly (TCE).

You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA) program.

If you are a volunteer firefighter or emergency medical responder, do not include in your income the following benefits you receive from a state or local government.

Rebates or reductions of property or income taxes you receive because of services you performed as a volunteer firefighter or emergency medical responder.

Payments you receive because of services you performed as a volunteer firefighter or emergency medical responder, up to $50 for each month you provided services.

The excluded income reduces any related tax or contribution deduction.

Business and Investment Income

This section provides information on the treatment of income from certain rents and royalties, and from interests in partnerships and S corporations.

You may be subject to the Net Investment Income Tax (NIIT). The NIIT is a 3.8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold amount. For details, see Form 8960 and its instructions.

Rents From Personal Property

If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is in most cases determined by:

Whether or not the rental activity is a business, and

Whether or not the rental activity is conducted for profit.

If you're in the business of renting personal property, report your income and expenses on Schedule C (Form 1040). The form instructions have information on how to complete them.

If you aren't in the business of renting personal property, report your rental income on Schedule 1 (Form 1040), line 8l.

If you rent personal property for profit, include your rental expenses in the total amount you enter on Schedule 1 (Form 1040), line 24b.

If you don't rent personal property for profit, your deductions are limited and you can't report a loss to offset other income. See Activity not for profit under Other Income , later.

Royalties from copyrights; patents; and oil, gas, and mineral properties are taxable as ordinary income.

In most cases, you report royalties on Schedule E (Form 1040). However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C (Form 1040).

Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions, are amounts paid to you for the right to use your work over a specified period of time. Royalties are generally based on the number of units sold, such as the number of books, tickets to a performance, or machines sold.

Royalty income from oil, gas, and mineral properties is the amount you receive when natural resources are extracted from your property. The royalties are generally based on production or revenue and are paid to you by a person or company who leases the property from you.

If you're the owner of an economic interest in mineral deposits or oil and gas wells, you can recover your investment through the depletion allowance.

Under certain circumstances, you can treat amounts you receive from the disposal of coal and iron ore as payments from the sale of a capital asset, rather than as royalty income. For information about gain or loss from the sale of coal and iron ore, see chapter 2 of Pub. 544.

If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of section 1231 property, not royalty income. Under certain circumstances, the sale is subject to capital gain or loss treatment as explained in the Instructions for Schedule D (Form 1040). For more information on selling section 1231 property, see chapter 3 of Pub. 544.

If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the property, you have made a lease or a sublease, and any cash you receive for the assignment of other interests in the property is ordinary income subject to a depletion allowance.

If you own mineral property but sell part of the future production, in most cases you treat the money you receive from the buyer at the time of the sale as a loan from the buyer. Don’t include it in your income or take depletion based on it.

When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct depletion from that amount to arrive at your taxable income from the property.

Partnership Income

A partnership generally isn't a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items. For more information, see Pub. 541.

Your distributive share of partnership income, gains, losses, deductions, or credits is generally based on the partnership agreement. You must report your distributive share of these items on your return whether or not they are actually distributed to you. However, your distributive share of the partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took place.

The partnership agreement usually covers the distribution of profits, losses, and other items. However, if the agreement doesn't state how a specific item of gain or loss will be shared, or the allocation stated in the agreement doesn't have substantial economic effect, your distributive share is figured according to your interest in the partnership.

Although a partnership generally pays no tax, it must file an information return on Form 1065. This shows the result of the partnership's operations for its tax year and the items that must be passed through to the partners.

You should receive from each partnership in which you're a member a copy of Schedule K-1 (Form 1065) showing your share of income, deductions, credits, and tax preference items of the partnership for the tax year. Keep Schedule K-1 for your records. Don’t attach it to your Form 1040 or 1040-SR, unless you're specifically required to do so.

You must generally report partnership items on your individual return the same way as they're reported on the partnership return. That is, if the partnership had a capital gain, you report your share as explained in the Instructions for Schedule D (Form 1040). You report your share of partnership ordinary income on Schedule E (Form 1040).

If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. For further information on how to make the election and which schedule(s) to file, see the instructions for your individual tax return.

S Corporation Income

In most cases, an S corporation doesn't pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's pro rata share. You must report your share of these items on your return. In most cases, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate.

An S corporation must file a return on Form 1120-S. This shows the results of the corporation's operations for its tax year and the items of income, losses, deductions, or credits that affect the shareholders' individual income tax returns.

You should receive a copy of Schedule K-1 (Form 1120-S) from any S corporation in which you're a shareholder. Schedule K-1 (Form 1120-S) shows your share of income, losses, deductions, and credits for the tax year. Keep Schedule K-1 (Form 1120-S) for your records. Don’t attach it to your Form 1040 or 1040-SR, unless you're specifically required to do so.

Your distributive share of the items of income, losses, deductions, or credits of the S corporation must be shown separately on your Form 1040 or 1040-SR. The character of these items is generally the same as if you had realized or incurred them personally.

In most cases, S corporation distributions are a nontaxable return of your basis in the corporation stock. However, in certain cases, part of the distributions may be taxable as a dividend, or as a long-term or short-term capital gain, or as both. The corporation's distributions may be in the form of cash or property.

For more information, see the Instructions for Form 1120-S.

Sickness and Injury Benefits

In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. However, certain payments may not be taxable to you. For information on nontaxable payments, see Military and Government Disability Pensions and Other Sickness and Injury Benefits , later in this discussion.

If you pay the entire cost of an accident or health plan, don't include any amounts you receive from the plan for personal injury or sickness as income on your tax return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. See Recoveries under Miscellaneous Income , later.

In most cases, if you're covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums wasn't included in your income, you aren't considered to have paid the premiums and you must include any benefits you receive in your income. If the amount of the premiums was included in your income, you're considered to have paid the premiums and any benefits you receive aren't taxable.

Disability Pensions

If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments on line 1h of Form 1040 or 1040-SR until you reach minimum retirement age. Minimum retirement age is generally the age at which you can first receive a pension or annuity if you aren't disabled.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 5a and 5b of Form 1040 or 1040-SR. For more information on pensions and annuities, see Pub. 575.

Don’t include in your income disability payments you receive for injuries incurred as a direct result of terrorist attacks or military action directed against the United States (or its allies), whether outside or within the United States. In the case of the September 11 attacks, injuries eligible for coverage by the September 11 Victim Compensation Fund are treated as incurred as a direct result of the attack. However, you must include in your income any amounts that you received that you would have received in retirement had you not become disabled as a result of a terrorist attack or military action. Accordingly, you must include in your income any payments you receive from a 401(k), pension, or other retirement plan to the extent that you would have received the amount at the same or later time regardless of whether you had become disabled. See Pub. 907.

A terrorist action is one that is directed against the United States or any of its allies (including a multinational force in which the United States is participating). A military action is one that involves the U.S. Armed Forces and is a result of actual or threatened violence or aggression against the United States or any of its allies, but doesn't include training exercises.

Disability payments you receive for injuries not incurred as a direct result of a terrorist attack or military action or for illnesses or diseases not resulting from an injury incurred as a direct result of a terrorist attack or military action can't be excluded from your income under this provision but may be excludable for other reasons. See Pub. 907.

If you receive payments from a retirement or profit-sharing plan that doesn't provide for disability retirement, don't treat the payments as a disability pension. The payments must be reported as a pension or annuity.

If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment isn't a disability payment. Include it in your income in the tax year you receive it.

Military and Government Disability Pensions

Certain military and government disability pensions aren't taxable.

You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.

The armed forces of any country.

The National Oceanic and Atmospheric Administration.

The Public Health Service.

The Foreign Service.

Don’t include the disability payments in your income if any of the following conditions apply.

You were entitled to receive a disability payment before September 25, 1975.

You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.

You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:

Results directly from armed conflict;

Takes place while you're engaged in extra-hazardous service;

Takes place under conditions simulating war, including training exercises such as maneuvers; or

Is caused by an instrumentality of war.

You would be entitled to receive disability compensation from the VA if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.

If you receive a disability pension based on years of service, in most cases, you must include it in your income. However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), don't include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.

If you retire from the U.S. Armed Forces based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040-X for each previous year during the retroactive period. You must include with each Form 1040-X a copy of the official VA determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit.

Generally, the VA determination letter will contain a table with five headings. The table on the letter must cover the same dates for the tax year reported on the Form 1040-X. To calculate the correct tax reduction, multiply the Effective Months by the Amount Withheld for the tax year. For example, Form 1040-X filed for tax year 2020. The table shows the Amount Withheld effective December 2019 is $320.00. To calculate the amount for the tax reduction, multiply the 2020 Effective Months by the Amount Withheld. In this case, January–December (2020) is 12 months x $320.00 (Amount Withheld) = $3,840.00; this amount should be the amount claimed as a reduction on Line 1 Adjusted Gross Income (AGI), Column B, of the 2020 Form 1040-X.

If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you're later given a retroactive disability rating by the VA.

In most cases, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination. This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and doesn't apply to any tax year that began more than 5 years before the date of the determination.

Example 19.

You retired in 2017 and receive a pension based on your years of service. On August 3, 2023, you receive a determination of service-connected disability retroactive to 2017. Generally, you could claim a refund for the taxes paid on your pension for 2020, 2021, and 2022. However, under the special limitation period, you can also file a claim for 2019 as long as you file the claim by August 3, 2024. You can't file a claim for 2017 and 2018 because those tax years began more than 5 years before the determination.

Combat-related special compensation, as described under 10 U.S.C. section 1413a, is a specific entitlement payable to only retirees of the Uniformed Services. If you are in receipt of combat-related special compensation, you may exclude the amount of your combat-related special compensation from your income. Other portions of your military or disability retirement pay may still be included in your income.

Don’t include in your income disability payments you receive for injuries resulting directly from a terrorist or military action. In the case of the September 11 attacks, injuries eligible for coverage by the September 11 Victim Compensation Fund are treated as incurred as a direct result of the attack. However, you must include in your income any amounts that you received that you would have received in retirement had you not become disabled as a result of a terrorist or military action. Accordingly, you must include in your income any payments you receive from a 401(k), pension, or other retirement plan to the extent that you would have received the amount at the same or later time regardless of whether you had become disabled. Disability payments you receive for injuries not incurred as a direct result of a terrorist or military action or for illnesses or diseases not resulting from an injury incurred as a direct result of a terrorist or military action may be excludable from income for other reasons. See Pub. 907.

Long-Term Care Insurance Contracts

In most cases, long-term care insurance contracts are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) are excludable in most cases from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return.

A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. The contract must:

Be guaranteed renewable;

Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;

Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits; and

In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.

Qualified long-term care services are:

Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services; and

Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.

A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following.

An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

The exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract is subject to a limit. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill. (For more information on accelerated death benefits, see Life Insurance Proceeds under Miscellaneous Income , later.)

Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.

The cost of qualified long-term care services during the period.

The dollar amount for the period ($420 per day for any period in 2023).

Workers' Compensation

Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they're paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, doesn't apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages.

If your disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities, part of it may be workers' compensation. That part is exempt from tax. The rest of your pension, based on years of service, is taxable as pension or annuity income. If you die, the part of your survivors' benefit that is a continuation of the workers' compensation is exempt from tax.

Other Sickness and Injury Benefits

In addition to disability pensions and annuities, you may receive other payments for sickness or injury.

Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. However, don't include them in your income if they're for an on-the-job injury.

These payments are similar to workers' compensation and aren't taxable in most cases.

Payments received under FECA for personal injury or sickness, including payments to beneficiaries in case of death, aren't taxable. However, you're taxed on amounts you receive under FECA as continuation of pay for up to 45 days while a claim is being decided. Report this income on line 1a of Form 1040 or 1040-SR. Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages.

For benefits and coverage provided after March 23, 2010, the value of any qualified Indian health care benefit isn't taxable. These benefits include any health service or benefits provided by the Indian Health Service, amounts to reimburse medical care expenses provided by an Indian tribe, coverage under accident or health insurance, and any other medical care provided by an Indian tribe.

Many other amounts you receive as compensation for sickness or injury aren't taxable. These include the following amounts.

Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments. See Court awards and damages under Other Income , later.

Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income.

Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.

Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits aren't taxable even if your employer pays for the accident and health plan that provides these benefits.

A reimbursement for medical care is generally not taxable. However, it may reduce your medical expense deduction. If you receive reimbursement for an expense you deducted in an earlier year, see Recoveries , later.

If you receive an advance reimbursement or loan for future medical expenses from your employer without regard to whether you suffered a personal injury or sickness or incurred medical expenses, that amount is included in your income, whether or not you incur uninsured medical expenses during the year.

Reimbursements received under your employer's plan for expenses incurred before the plan was established are included in income.

Amounts you receive under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other benefits are included in your income. For details, see Pub. 969.

Miscellaneous Income

This section discusses various types of income. You may have taxable income from certain transactions even if no money changes hands. For example, you may have taxable income if you lend money at a below-market interest rate or have a debt you owe canceled.

Bartering is an exchange of property or services. You must include in your income, at the time received, the FMV of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as FMV unless the value can be shown to be otherwise.

Generally, you report this income on Schedule C (Form 1040). However, if the barter involves an exchange of something other than services, such as in Example 23 , later, you may have to use another form or schedule instead.

Example 20.

You're a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you shares of its stock as payment for your services. You must include the FMV of the shares in your income on Schedule C (Form 1040) in the year you receive them.

Example 21.

You're a self-employed accountant. You and a house painter are members of a barter club. Members contact each other directly and bargain for the value of the services to be performed. In return for accounting services you provided, the house painter painted your home. You must report as your income on Schedule C (Form 1040) the FMV of the house painting services you received. The house painter must include in income the FMV of the accounting services you provided.

Example 22.

You're self-employed and a member of a barter club. The club uses credit units as a means of exchange. It adds credit units to your account for goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. The club subtracts credit units from your account when you receive goods or services from other members. You must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year.

Example 23.

You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. You must report as rental income on Schedule E (Form 1040) the FMV of the artwork, and the artist must report as income on Schedule C (Form 1040) the fair rental value of the apartment.

If you exchanged property or services through a barter exchange, Form 1099-B or a similar statement from the barter exchange should be sent to you by February 15, 2024. It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2023. The IRS will also receive a copy of Form 1099-B.

In most cases, the income you receive from bartering isn't subject to regular income tax withholding. However, backup withholding will apply in certain circumstances to ensure that income tax is collected on this income.

Under backup withholding, the barter exchange must withhold, as income tax, 24% of the income if:

You don't give the barter exchange your TIN, or

The IRS notifies the barter exchange that you gave it an incorrect TIN.

Canceled Debts

In most cases, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it's intended as a gift to you. A debt includes any indebtedness for which you're liable or which attaches to property you hold.

If the debt is a nonbusiness debt, report the canceled amount on Schedule 1 (Form 1040), line 8c. If it's a business debt, report the amount on Schedule C (Form 1040) or on Schedule F (Form 1040) if the debt is farm debt and you're a farmer.

Starting in 2014, you must include the income you elected to defer in 2009 or 2010 from a cancellation, reacquisition, or modification of a business debt. For information on this election, see Revenue Procedure 2009-37, available at IRS.gov/irb/2009-36_IRB#RP-2009-37 .

If a federal government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you may receive a Form 1099-C. Form 1099-C, box 2, shows the amount of debt either actually or deemed discharged. If you don't agree with the amount reported in box 2, contact your creditor.

If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest will also be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible if you paid it. See Deductible debt under Exceptions , later.

If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from box 2 of Form 1099-C. If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).

If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must include the canceled amount in your income.

If you're personally liable for a mortgage (recourse debt), and you're relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the FMV of the property. To the extent the mortgage discharge exceeds the FMV of the property, it's income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt , later. Report any income from discharge of indebtedness on nonbusiness debt that doesn't qualify for exclusion as other income on Schedule 1 (Form 1040), line 8c.

If you aren't personally liable for a mortgage (nonrecourse debt), and you're relieved of the mortgage when you dispose of the property (such as through foreclosure), that relief is included in the amount you realize. You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness property as a capital gain.

See Pub. 4681 for more information.

If you're a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that is generally dividend income to you. For more information, see Pub. 542.

If you're a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally don't realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.

If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. You can file a claim on Form 1040-X if the statute of limitations for filing a claim is still open. The statute of limitations generally doesn't end until 3 years after the due date of your original return.

There are several exceptions to the inclusion of canceled debt in income. These are explained next.

Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude amounts from gross income as a result of the cancellation or repayment of certain student loans. These exclusions are for:

Student loan cancellation due to meeting certain work requirements;

Cancellation of certain loans after December 31, 2020, and before January 1, 2026 (see Special rule for student loan discharges for 2021 through 2025 ); or

Certain student loan repayment assistance programs.

If your student loan is canceled in part or in whole in 2023 due to meeting certain work requirements, you may not have to include the canceled debt in your income. To qualify for this work-related exclusion, your loan must have been made by a qualified lender to assist you in attending an eligible educational organization described in section 170(b)(1)(A)(ii). In addition, the cancellation must be pursuant to a provision in the student loan that all or part of the debt will be canceled if you work:

For a certain period of time,

In certain professions, and

For any of a broad class of employers.

This is an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

These include the following.

The United States, or an instrumentality or agency thereof.

A state or territory of the United States; or the District of Columbia; or any political subdivision thereof.

A public benefit corporation that is tax-exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose employees are considered public employees under state law.

An educational organization described in section 170(b)(1)(A)(ii), if the loan is made:

As part of an agreement with an entity described in (1), (2), or (3) under which the funds to make the loan were provided to the educational organization; or

Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

The American Rescue Plan Act of 2021 modified the treatment of student loan forgiveness for discharges in 2021 through 2025. Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances you may be able to exclude this amount from gross income if the loan was one of the following.

A loan for postsecondary educational expenses.

A private education loan.

A loan from an educational organization described in section 170(b)(1)(A)(ii).

A loan from an organization exempt from tax under section 501(a) to refinance a student loan.

This is any loan provided expressly for postsecondary education, regardless of whether provided through the educational organization or directly to the borrower, if such loan was made, insured, or guaranteed by one of the following.

An eligible educational organization.

An eligible educational organization is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational organization. Also, the organization must be eligible to participate in a student aid program administered by the U.S. Department of Education.

An eligible educational organization also includes certain educational organizations located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.

A private education loan is a loan provided by a private educational lender that:

Is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965; and

Is issued expressly for postsecondary educational expenses to a borrower, regardless of whether the loan is provided through the educational organization that the student attends or directly to the borrower from the private educational lender. A private education loan does not include an extension of credit under an open end consumer credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan that is secured by real property or a dwelling.

A private educational lender is one of the following.

A financial institution that solicits, makes, or extends private education loans.

A federal credit union that solicits, makes, or extends private education loans.

Any other person engaged in the business of soliciting, making, or extending private education loans.

This is any loan made by the organization if the loan is made:

As part of an agreement with an entity described earlier under which the funds to make the loan were provided to the educational organization; or

Under a program of the educational organization that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.

Charitable.

Educational.

Scientific.

Testing for public safety.

Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).

The prevention of cruelty to children or animals.

In most cases, the cancellation of a student loan made by an educational organization because of services you performed for that organization or another organization that provided the funds for the loan must be included in gross income on your tax return.

If you refinanced a student loan with another loan from an eligible educational organization or a tax-exempt organization, that loan may also be considered as made by a qualified lender. The refinanced loan is considered made by a qualified lender if it’s made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Student loan repayments made to you are tax free if you received them for any of the following.

The National Health Service Corps (NHSC) Loan Repayment Program.

A state education loan repayment program eligible for funds under the Public Health Service Act.

Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).

You don't have income from the cancellation of a debt if your payment of the debt would be deductible. This exception applies only if you use the cash method of accounting. For more information, see chapter 5 of Pub. 334.

In most cases, if the seller reduces the amount of debt you owe for property you purchased, you don't have income from the reduction. The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property.

Don’t include a canceled debt in your gross income in the following situations.

The debt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Pub. 908.

The debt is canceled when you're insolvent. However, you can't exclude any amount of canceled debt that is more than the amount by which you're insolvent. See Pub. 908.

The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Pub. 225.

The debt is qualified real property business debt. See chapter 5 of Pub. 334.

The cancellation is intended as a gift.

The debt is qualified principal residence indebtedness, discussed next.

This is debt secured by your principal residence that you took out to buy, build, or substantially improve your principal residence. QPRI can't be more than the cost of your principal residence plus improvements.

You must reduce the basis of your principal residence by the amount excluded from gross income. To claim the exclusion, you must file Form 982 with your tax return.

Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

The exclusion applies only to debt discharged after 2006 and in most cases before 2026. The maximum amount you can treat as QPRI is $750,000 ($375,000 if married filing separately). You can't exclude debt canceled because of services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

If only part of a loan is QPRI, the exclusion applies only to the extent the canceled amount is more than the amount of the loan immediately before the cancellation that isn't QPRI.

Example 24.

You file a joint return. Your principal residence is secured by a debt of $900,000, of which $700,000 is QPRI. Your residence is sold for $600,000 and $300,000 of debt is canceled. Only $100,000 of the canceled debt may be excluded from income (the $300,000 that was discharged minus the $200,000 of nonqualified debt).

The forgiveness of a PPP loan creates tax-exempt income, so although you don't need to report the income from the forgiveness of your PPP loan on Form 1040 or 1040-SR, you do need to report certain information related to your PPP loan.

Rev. Proc. 2021-48, 2021-49 I.R.B. 835, permits taxpayers to treat tax-exempt income resulting from the forgiveness of a PPP loan as received or accrued: (1) as, and to the extent that, eligible expenses are paid or incurred; (2) when you apply for forgiveness of the PPP loan; or (3) when forgiveness of the PPP loan is granted. If you have tax-exempt income resulting from the forgiveness of a PPP loan, attach a statement to your return reporting each taxable year for which you are applying Rev. Proc. 2021-48, and which section of Rev. Proc. 2021-48 you are applying—either section 3.01(1), (2), or (3). Any statement should include the following information for each PPP loan.

Your name, address, and ITIN or SSN;

A statement that you are applying or applied section 3.01(1), (2), or (3) of Rev. Proc. 2021-48, and for what taxable year;

The amount of tax-exempt income from forgiveness of the PPP loan that you are treating as received or accrued and for what taxable year; and

Whether forgiveness of the PPP loan has been granted as of the date you file your return.

Write “RP 2021-48” at the top of your attached statement.

If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. You must report this item as income at its FMV.

Your out-of-pocket party expenses are subject to the 50% limit for meal expenses. For tax years beginning after 2017, no deduction is allowed for any expenses related to activities generally considered entertainment, amusement, or recreation. Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages aren’t considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant, or similar business contact. Food and beverages that are provided during entertainment events won’t be considered entertainment if purchased separately from the event.

For more information about the limit for meal expenses, see 50% Limit in Pub. 463.

Life Insurance Proceeds

Life insurance proceeds paid to you because of the death of the insured person aren't taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract issued on or before December 31, 1984. However, interest income received as a result of life insurance proceeds may be taxable.

If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. If the benefit payable at death isn't specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death.

If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.

To determine the excluded part, divide the amount held by the insurance company (generally, the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.

Example 25.

The face amount of the policy is $75,000 and, as beneficiary, you choose to receive 120 monthly installments of $1,000 each. The excluded part of each installment is $625 ($75,000 ÷ 120), or $7,500 for an entire year. The rest of each payment, $375 a month (or $4,500 for an entire year), is interest income to you.

If, as the beneficiary under an insurance contract, you're entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee.

If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. If you remarry, you can continue to take the exclusion.

If you're the policyholder of an employer-owned life insurance contract, you must include in income any life insurance proceeds received that are more than the premiums and any other amounts you paid on the policy. You're subject to this rule if you have a trade or business, you own a life insurance contract on the life of your employee, and you (or a related person) are a beneficiary under the contract.

However, you may exclude the full amount of the life insurance proceeds if the following apply.

Before the policy is issued, you provide written notice about the insurance to the employee and the employee provides written consent to be insured.

The employee was your employee within the 12-month period before death, or, at the time the contract was issued, was a director or highly compensated employee; or

The amount is paid to the family or designated beneficiary of the employee.

If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you're paid is taxable.

If your spouse died before October 23, 1986, and you chose to receive only the interest from your insurance proceeds, the $1,000 interest exclusion for a surviving spouse doesn't apply. If you later decide to receive the proceeds from the policy in installments, you can take the interest exclusion from the time you begin to receive the installments.

If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In most cases, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that weren’t included in your income.

You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 5a and 5b of Form 1040 or 1040-SR.

In most cases, a split-dollar life insurance arrangement is an arrangement between an owner and a nonowner of a life insurance contract under which either party to the arrangement pays all or part of the premiums, and one of the parties paying the premiums is entitled to recover all or part of those premiums from the proceeds of the contract. There are two mutually exclusive rules to tax split-dollar life insurance arrangements.

Under the economic benefit rule, the owner of the life insurance contract is treated as providing current life insurance protection and other taxable economic benefits to the nonowner of the contract.

Under the loan rule, the nonowner of the life insurance contract is treated as loaning premium payments to the owner of the contract.

An endowment contract is a policy under which you're paid a specified amount of money on a certain date unless you die before that date, in which case the money is paid to your designated beneficiary. Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost (investment in the contract) of the policy. To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Include the part of the lump payment that is more than your cost in your income.

Endowment proceeds that you choose to receive in installments instead of a lump sum payment at the maturity of the policy are taxed as an annuity. This is explained in Pub. 575. For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. This election must be made within 60 days after the lump-sum payment first becomes payable to you.

Accelerated Death Benefits

Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded from income if the insured is terminally or chronically ill.

This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code.

Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.

If the insured is a chronically ill individual who isn't terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. For 2023, this limit is $420. It applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits , earlier.

The exclusion doesn't apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured:

Is a director, officer, or employee of the person; or

Has a financial interest in the person's business.

To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853 with your return. You don't have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.

A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds, reimbursements, and rebates of itemized deductions. You may also have recoveries of nonitemized deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a tax credit.

You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year.

Refunds of federal income taxes aren't included in your income because they're never allowed as a deduction from income.

If you received a state or local income tax refund (or credit or offset) in 2023, you must generally include it in income if you deducted the tax in an earlier year. The payer should send Form 1099-G to you by January 31, 2024. The IRS will also receive a copy of the Form 1099-G. If you file Form 1040 or 1040-SR, use the worksheet in the 2023 Instructions for Schedule 1 (Form 1040) to figure the amount (if any) to include in your income. See Itemized Deduction Recoveries , later, for when you must use Worksheet 2 , later in this publication.

If you could choose to deduct for a tax year either:

State and local income taxes, or

State and local general sales taxes, then

For 2022, you can choose a $10,000 state income tax deduction or a $9,000 state general sales tax deduction. You choose to deduct the state income tax. In 2023, you receive a $2,500 state income tax refund. The maximum refund that you may have to include in income is $1,000, because you could have deducted $9,000 in state general sales tax.

For 2022, you can choose a $9,500 state general sales tax deduction based on actual expenses or a $9,200 state income tax deduction. You choose to deduct the general sales tax deduction. In 2023, you return an item you had purchased and receive a $500 sales tax refund. In 2023, you also receive a $1,500 state income tax refund. The maximum refund that you may have to include in income is $500, because it's less than the excess of the tax deducted ($9,500) over the tax you didn't choose to deduct ($9,200 − $1,500 = $7,700). Because you didn't choose to deduct the state income tax, you don't include the state income tax refund in income.

If you received a refund or credit in 2023 of mortgage interest paid in an earlier year, the amount should be shown in Form 1098, box 4. Don’t subtract the refund amount from the interest you paid in 2023. You may have to include it in your income under the rules explained in the following discussions.

Interest on any of the amounts you recover must be reported as interest income in the year received. For example, report any interest you received on state or local income tax refunds on Form 1040, 1040-SR, or 1040-NR, line 2b.

If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and isn't reported as income.

If you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate, on a pro rata basis, the recovered amount between the years in which you paid it. This allocation is necessary to determine the amount of recovery from any earlier years and to determine the amount, if any, of your allowable deduction for this item for the current year.

Example 28.

You paid 2022 estimated state income tax of $4,000 in four equal payments. You made your fourth payment in January 2023. You had no state income tax withheld during 2022. In 2023, you received a $400 tax refund based on your 2022 state income tax return. You claimed itemized deductions each year on Schedule A (Form 1040).

You must allocate the $400 refund between 2022 and 2023, the years in which you paid the tax on which the refund is based. You paid 75% ($3,000 ÷ $4,000) of the estimated tax in 2022, so 75% of the $400 refund, or $300, is for amounts you paid in 2022 and is a recovery item. If all of the $300 is a taxable recovery item, you'll include $300 on Schedule 1 (Form 1040), line 1, for 2023, and attach a copy of your calculation showing why that amount is less than the amount shown on the Form 1099-G you received from the state.

The balance ($100) of the $400 refund is for your January 2023 estimated tax payment. When you figure your deduction for state and local income taxes paid during 2023, you'll reduce the $1,000 paid in January by $100. Your deduction for state and local income taxes paid during 2023 will include the January net amount of $900 ($1,000 − $100), plus any estimated state income taxes paid in 2023 for 2023, and any state income tax withheld during 2023.

If you filed a joint state or local income tax return in an earlier year and you aren't filing a joint Form 1040 or 1040-SR with the same person for 2023, any refund of a deduction claimed on that state or local income tax return must be allocated to the person that paid the expense. If both persons paid a portion of the expense, allocate the refund based on your individual portion. For example, if you paid 25% of the expense, then you would use 25% of the refund to figure if you must include any portion of the refund in your income.

For the rules that apply to RDPs who are domiciled in community property states, see Pub. 555 and Form 8958.

If you didn't itemize deductions for the year for which you received the recovery of an expense that was deductible only if you itemized, don't include any of the recovery amount in your income.

Example 29.

You claimed the standard deduction on your 2022 federal income tax return. In 2023, you received a refund of your 2022 state income tax. Don’t report any of the refund as income because you didn't itemize deductions for 2022.

Itemized Deduction Recoveries

The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. However, you generally don't need to use this discussion if you file Form 1040 or 1040-SR and the recovery is for state or local income taxes paid in 2022. Instead, use the State and Local Income Tax Refund Worksheet—Schedule 1, Line 1, in the 2023 Instructions for Schedule 1 (Form 1040) for line 1 to figure the amount (if any) to include in your income. See the Instructions for Forms 1040 and 1040-SR.

You can't use the State and Local Income Tax Refund Worksheet—Schedule 1, Line 1, and must use this discussion if you're a nonresident alien (discussed later) or any of the following statements are true.

You received a refund in 2023 that is for a tax year other than 2022.

You received a refund other than an income tax refund, such as a general sales tax or real property tax refund, in 2023 of an amount deducted or credit claimed in an earlier year.

The amount on your 2022 Form 1040, line 13, was more than the amount on your 2022 Form 1040, line 11 minus line 12.

You had taxable income on your 2022 Form 1040, line 15, but no tax on your Form 1040, line 16, because of the 0% tax rate on net capital gains and qualified dividends in certain situations. See Capital gains , later.

Your 2022 state and local income tax refund is more than your 2022 state and local income tax deduction minus the amount you could have deducted as your 2022 state and local general sales taxes.

You made your last payment of 2022 estimated state or local income tax in 2023.

You owed AMT in 2022.

You couldn't use the full amount of credits you were entitled to in 2022 because the total credits were more than the amount shown on your 2022 Form 1040, line 18.

You could be claimed as a dependent by someone else in 2022.

You received a refund because of a jointly filed state or local income tax return, but you aren't filing a joint 2023 Form 1040 or 1040-SR with the same person.

If you're a nonresident alien and file Form 1040-NR, you can't claim the standard deduction. If you recover an itemized deduction that you claimed in an earlier year, you must generally include the full amount of the recovery in your income in the year you receive it. However, if you had no taxable income in that earlier year (see Negative taxable income , later), you should complete Worksheet 2 to determine the amount you must include in income. If any other statement under Total recovery included in income isn't true, see the discussion referenced in the statement to determine the amount to include in income.

If you determined your tax in the earlier year by using the Schedule D Tax Worksheet, or the Qualified Dividends and Capital Gain Tax Worksheet, and you receive a refund in 2023 of a deduction claimed in that year, you'll have to refigure your tax for the earlier year to determine if the recovery must be included in your income. If inclusion of the recovery doesn't change your total tax, you don't include the recovery in income. However, if your total tax increases by any amount, you must include the recovery in your income up to the amount of the deduction that reduced your tax in the earlier year.

If you recover any itemized deduction that you claimed in an earlier year, you must generally include the full amount of the recovery in your income in the year you receive it. This rule applies if, for the earlier year, all of the following statements are true.

Your itemized deductions exceeded the standard deduction by at least the amount of the recovery. (If your itemized deductions didn't exceed the standard deduction by at least the amount of the recovery, see Standard deduction limit , later.)

You had taxable income. (If you had no taxable income, see Negative taxable income , later.)

Your deduction for the item recovered equals or exceeds the amount recovered. (If your deduction was less than the amount recovered, see Recovery limited to deduction , later.)

You had no unused tax credits. (If you had unused tax credits, see Unused tax credits , later.)

You weren’t subject to AMT. (If you were subject to AMT, see Subject to AMT , later.)

If any of the earlier statements aren’t true, see Total recovery not included in income , later.

In addition to the previous five items, you must include in your income the full amount of a refund of state or local income tax or general sales tax if the excess of the tax you deducted over the tax you didn't deduct is more than the refund of the tax deducted.

If the refund is more than the excess, see Total recovery not included in income , later.

Enter your state or local income tax refund on Schedule 1 (Form 1040), line 1, and the total of all other recoveries as other income on Schedule 1 (Form 1040), line 8z.

Example 30.

For 2022, you filed a joint return on Form 1040. Your taxable income was $60,000 and you weren’t entitled to any tax credits. Your standard deduction was $25,900, and you had itemized deductions of $27,400. In 2023, you received the following recoveries for amounts deducted on your 2022 return.

Medical expenses	$200
State and local income tax refund	400
Refund of mortgage interest
	$925

None of the recoveries were more than the deductions taken for 2022. The difference between the state and local income tax you deducted and your local general sales tax you could have deducted was more than $400.

Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($27,400 − $25,900 = $1,500), so you must include your total recoveries in your income for 2023. Report the state and local income tax refund of $400 on Schedule 1 (Form 1040), line 1, and the balance of your recoveries, $525, on Schedule 1 (Form 1040), line 8z.

If one or more of the five statements listed earlier under Total recovery included in income isn't true, you may be able to exclude at least part of the recovery from your income. See the discussion referenced in the statement. You may be able to use Worksheet 2 to determine the part of your recovery to include in your income. You can also use Worksheet 2 to determine the part of a state tax refund (discussed earlier) to include in income.

If you aren't required to include all of your recoveries in your income, and you have both a state income tax refund and other itemized deduction recoveries, you must allocate the taxable recoveries between the state income tax refund you report on Schedule 1 (Form 1040 or 1040-NR), line 1, and the amount you report as other income on Schedule 1 (Form 1040 or 1040-NR), line 8z. If you don't use Worksheet 2 , make the allocation as follows.

Divide your state income tax refund by the total of all your itemized deduction recoveries.

Multiply the amount of taxable recoveries by the percentage in (1). This is the amount you report as a state income tax refund.

Subtract the result in (2) above from the amount of taxable recoveries. This is the amount you report as other income.

Example 31.

In 2023, you recovered $2,500 of your 2022 itemized deductions claimed on Schedule A (Form 1040), but the recoveries you must include in your 2023 income are only $1,500. Of the $2,500 you recovered, $500 was due to your state income tax refund. Your state income tax was more than your state general sales tax by $600. The amount you report as a state tax refund on Schedule 1 (Form 1040), line 1, is $300 [($500 ÷ $2,500) × $1,500]. The balance of the taxable recoveries, $1,200, is reported as other income on Schedule 1 (Form 1040), line 8z.

You are generally allowed to claim the standard deduction if you don't itemize your deductions. Only your itemized deductions that are more than your standard deduction are subject to the recovery rule (unless you're required to itemize your deductions). If your total deductions on the earlier year return weren’t more than your income for that year, include in your income this year the lesser of:

Your recoveries, or

The amount by which your itemized deductions exceeded the standard deduction.

To determine if amounts recovered in the current year must be included in your income, you must know the standard deduction for your filing status for the year the deduction was claimed. Look in the instructions for your tax return from prior years to locate the standard deduction for the filing status for that prior year. If you filed Form 1040-NR, you couldn't claim the standard deduction except for certain nonresident aliens from India (see Pub. 519).

Example 32.

You filed a joint return on Form 1040 for 2022 with taxable income of $45,000. Your itemized deductions were $26,150. The standard deduction that you could have claimed was $25,900. In 2023, you recovered $2,100 of your 2022 itemized deductions. None of the recoveries were more than the actual deductions for 2022. Include $250 of the recoveries in your 2023 income. This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($26,150 − $25,900 = $250).

If your taxable income for the prior year ( Worksheet 2 , line 10) was a negative amount, the recovery you must include in income is reduced by that amount. You have a negative taxable income for 2022 if your:

Form 1040, the sum of lines 12 and 13, was more than line 11; or

Form 1040-NR, line 14, was more than line 11.

Example 33.

The facts are the same as in Example 32 , except line 14 was $200 more than line 11 on your 2022 Form 1040, giving you a negative taxable income of $200. You must include $50 in your 2023 income, rather than $250.

You don't include in your income any amount of your recovery that is more than the amount you deducted in the earlier year. The amount you include in your income is limited to the smaller of:

The amount deducted, or

The amount recovered.

Example 34.

For 2022, you paid $1,700 for medical expenses. Because of the limit on deducting medical expenses, you deducted only $200 as an itemized deduction. In 2023, you received a $500 reimbursement from your medical insurance for your 2022 expenses. The only amount of the $500 reimbursement that must be included in your income for 2023 is $200, the amount actually deducted.

Overall limitation on itemized deductions no longer applies.

For tax years beginning after 2017, there is no limitation on itemized deductions based on your AGI.

To determine the part of the recovery you must include in income, follow the two steps below.

Figure the greater of:

The standard deduction for the earlier year, or

The amount of itemized deductions you would have been allowed for the earlier year if you had figured them using only the net amount of the recovery item. The net amount is the amount you actually paid reduced by the recovery amount.

Note. If you were required to itemize your deductions in the earlier year, use step 1b and not step 1a.

Subtract the amount in step 1 from the amount of itemized deductions actually allowed in the earlier year after applying the limit on itemized deductions.

If you had unused tax credits in the earlier year, see Unused tax credits , later.

For more information on this calculation, see Revenue Ruling 93-75. This ruling is in Cumulative Bulletin 1993-2.


1.	Enter the income tax refund from Form(s) 1099-G (or similar statement)	1.	_____
2.	Enter the refunds received for state and local real estate taxes and state and local personal property taxes	2.	_____
3.	Total state and local refunds. Add lines 1 and 2. But don’t enter more than the amount of your state and local taxes shown on your 2022 Schedule A, line 5d	3.	_____
4.	Is the amount of state and local income taxes (or general sales taxes), real estate taxes, and personal property taxes paid in 2022 (generally, this is the amount reported on your 2022 Schedule A, line 5d) more than the amount on your 2022 Schedule A, line 5e? ❑ Enter the amount from line 3 on line 4 and go to line 5. ❑ Subtract the amount on your 2022 Schedule A, line 5e, from the amount of state and local income taxes (or general sales taxes), real estate taxes, and personal property taxes paid in 2022 (generally, this is the amount reported on your 2022 Schedule A, line 5d). Enter the result here	4.	_____
5.	Is the amount on line 3 more than the amount on line 4? ❑ [STOP] None of the refunds on line 1 or 2 are taxable. ❑ Subtract line 4 from line 3 and enter the result here	5.	_____
6.	Add lines 1 and 2 and enter the result here	6.	_____
7.	Divide line 1 by line 6. Then multiply by the amount on line 5 and enter the result here and on Worksheet 2, line 1a	7.	_____
8.	Divide line 2 by line 6. Then multiply by the amount on line 5 and enter the result here and on Worksheet 2, line 1b	8.	_____

To determine whether you should complete this worksheet to figure the part of a recovery amount to include in income on your 2023 tax return, see . If you recovered amounts from more than 1 year, such as a state income tax refund from 2022 and a casualty loss reimbursement from 2021, complete a separate worksheet for each year. Use information from your tax return for the year the expense was deducted. A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the deduction). If you were subject to the AMT or your tax credits reduced your tax to zero, see and under . If your recovery was for an itemized deduction that was limited, you should read under .

1a.	State/local income tax refund or credit				1a.	_____
1b.	State/local real estate and personal property taxes				1b.	_____
2.	Enter the total of all other Schedule A refunds or reimbursements (excluding the amounts you entered on lines 1a and 1b)				2.	_____
3.	Add lines 1a, 1b, and 2				3.	_____
4.	Itemized deductions for the prior year. For 2022:		4.	_____
5.	Enter any amount previously refunded to you (don't enter an amount from line 1a or line 1b or line 2)		5.	_____
6.	Subtract line 5 from line 4		6.	_____
7.	Standard deduction for the prior year. If you filed Form 1040-NR, enter -0-		7.	_____
8.	Subtract line 7 from line 6. If the result is zero or less, stop here. The amounts on lines 1a, 1b, and 2 aren't taxable				8.	_____
9.	Enter the smaller of line 3 or line 8				9.	_____
10.	Taxable income for prior year (2022 Form 1040, line 15; or 2022 Form 1040-NR, line 15)		10.	_____
11.					11.	_____
	Enter the amount from line 1a on Schedule 1 (Form 1040), line 1. Enter the amounts from lines 1b and 2 on Schedule 1 (Form 1040), line 8z.
	If there is an amount on line 1a, enter the amount from line 11 on Schedule 1 (Form 1040), line 1. If there is an amount on lines 1b and/or 2, enter the amount from line 11 on Schedule 1 (Form 1040), line 8z.

	A.	Divide the amount on line 1a by the amount on line 3. Enter the percentage	A.	_____
	B.	Multiply the amount on line 11 by the percentage on line A. Enter the result here and on Schedule 1 (Form 1040), line 1			B.	_____
	C.	Subtract the amount on line B from the amount on line 11. Enter the result here and on Schedule 1 (Form 1040), line 8z			C.	_____

Don’t enter more than the amount deducted for the prior year. Don’t enter more than the excess of your state and local income tax deduction over your state and local general sales taxes you could have deducted.
Don’t enter more than the amount deducted for the prior year. If you deducted state and local general sales taxes and received a refund of those taxes, include the amount on line 2, but don't enter more than the excess of your sales tax deduction over your state and local income tax you could have deducted.
See the instructions for prior year forms at for prior year standard deduction.
If taxable income is a negative amount, enter that amount in brackets. Don’t enter zero unless your taxable income is exactly zero. See . Taxable income will have to be adjusted for any net operating loss carryover. For more information, see Pub. 536.
For example, $700 + ($400) = $300.

If you recover an item deducted in an earlier year in which you had unused tax credits, you must refigure the earlier year's tax to determine if you must include the recovery in your income. To do this, add the amount of the recovery to your earlier year's taxable income and refigure the tax and the credits on the refigured amount. If the refigured tax, after application of the credits, is more than the actual tax in the earlier year, include the recovery in your income up to the amount of the deduction that reduced the tax in the earlier year. For this purpose, any increase to a credit carried over to the current year that resulted from deducting the recovered amount in the earlier year is considered to have reduced your tax in the earlier year. If the recovery is for an itemized deduction claimed in a year in which the deductions were limited, see Itemized deductions limited , earlier.

If your tax, after application of the credits, doesn't change, you didn't have a tax benefit from the deduction. Don’t include the recovery in your income.

Example 35.

In 2022, you filed as head of household and itemized your deductions on Schedule A (Form 1040). Your taxable income was $5,260 and your tax was $528. You claimed a child care credit of $1,200. The credit reduced your tax to zero, and you had an unused tax credit of $672 ($1,200 − $528). In 2023, you recovered $1,000 of your itemized deductions. You reduce your 2022 itemized deductions by $1,000 and refigure that year's tax on taxable income of $6,260. However, the child care credit exceeds the refigured tax of $628. Your tax liability for 2022 isn't changed by reducing your deductions by the recovery. You didn't have a tax benefit from the recovered deduction and don’t include any of the recovery in your income for 2023.

If you were subject to the AMT in the year of the deduction, you'll have to refigure your tax for the earlier year to determine if the recovery must be included in your income. This will require a refiguring of your regular tax, as shown in Example 35 , and a refiguring of your AMT. If inclusion of the recovery doesn't change your total tax, you don't include the recovery in your income. However, if your total tax increases by any amount, you received a tax benefit from the deduction and you must include the recovery in your income up to the amount of the deduction that reduced your tax in the earlier year.

Nonitemized Deduction Recoveries

This section discusses recovery of deductions other than itemized deductions.

If you recover an amount that you deducted in an earlier year when you were figuring your AGI, you must generally include the full amount of the recovery in your income in the year received.

If any part of the deduction you took for the recovered amount didn't reduce your tax, you may be able to exclude at least part of the recovery from your income. You must include the recovery in your income only up to the amount of the deduction that reduced your tax in the year of the deduction. (See Tax benefit rule , earlier.)

If your taxable income for the prior year was a negative amount, the recovery you must include in income is reduced by that amount. You have a negative taxable income for 2022 if your:

If you received a recovery in 2023 for an item for which you claimed a tax credit in an earlier year, you must increase your 2022 tax by the amount of the recovery, up to the amount by which the credit reduced your tax in the earlier year. You had a recovery if there was a downward price adjustment or similar adjustment on the item for which you claimed a credit.

This rule doesn't apply to the investment credit or the foreign tax credit. Recoveries of these credits are covered by other provisions of the law. See Pub. 514 or Form 4255 for details.

A sharing economy is one in which assets are shared between individuals for a fee, usually through the internet. For example, you rent out your car when you don’t need it, or you share your wi-fi account for a fee.

A gig economy is one in which a short-term contract or freelance work is the norm, as opposed to a permanent job. For example, you drive for a ride-sharing service, or work as a fitness trainer, babysitter, or tutor.

Generally, if you have income from sharing economy transactions, or you did gig work, you must include all income received whether you received a Form 1099-K, Payment Card and Third Party Network Transactions, or not. See the Instructions for Schedule C (Form 1040) and the Instructions for Schedule SE (Form 1040).

Survivor Benefits

In most cases, payments made by or for an employer because of an employee's death must be included in income. The following discussions explain the tax treatment of certain payments made to survivors. For additional information, see Pub. 559.

Lump-sum payments you receive from a decedent's employer as the surviving spouse or beneficiary may be accrued salary payments; distributions from employee profit-sharing, pension, annuity, or stock bonus plans; or other items that should be treated separately for tax purposes. The tax treatment of these lump-sum payments depends on the type of payment.

Salary or wages received after the death of the employee are usually ordinary income to you.

Lump-sum distributions from qualified employee retirement plans are subject to special tax treatment. For information on these distributions, see Pub. 575 (or Pub. 721 if you're the survivor of a federal employee or retiree).

If you're a survivor of a public safety officer who was killed in the line of duty, you can exclude from income any amount received as a survivor annuity on account of the death of a public safety officer killed in the line of duty.

For this purpose, the term “public safety officer” includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. For more information, see Pub. 559.

Unemployment Benefits

The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.

Generally, you must include in income all unemployment compensation you receive. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you. In most cases, you enter unemployment compensation on Schedule 1 (Form 1040), line 7.

Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It includes the following benefits.

Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund.

State unemployment insurance benefits.

Railroad unemployment compensation benefits.

Disability payments from a government program paid as a substitute for unemployment compensation. (Amounts received as workers' compensation for injuries or illness aren't unemployment compensation. See Workers' Compensation under Sickness and Injury Benefits , earlier.)

Trade readjustment allowances under the Trade Act of 1974.

Unemployment assistance under the Disaster Relief and Emergency Assistance Act of 1974.

Unemployment assistance under the Airline Deregulation Act of 1978 Program.

If you contribute to a governmental unemployment compensation program and your contributions aren't deductible, amounts you receive under the program aren't included as unemployment compensation until you recover your contributions. If you deducted all of your contributions to the program, the entire amount you receive under the program is included in your income.

If you repaid in 2023 unemployment compensation you received in 2023, subtract the amount you repaid from the total amount you received and enter the difference on Schedule 1 (Form 1040), line 7. On the dotted line next to your entry, enter “Repaid” and the amount you repaid. If you repaid unemployment compensation in 2023 that you included in your income in an earlier year and the amount is more than $3,000, you can deduct the amount repaid on Schedule A (Form 1040), line 16, if you itemize deductions or you can take a credit against your tax on Schedule 3 (Form 1040), line 13b. See Repayments , later.

You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V and give it to the paying office. Tax will be withheld at 10% of your payment.

Benefits received from an employer-financed fund (to which the employees didn't contribute) aren't unemployment compensation. They're taxable as wages and are subject to withholding for income tax. They may be subject to social security and Medicare taxes. For more information, see Supplemental Unemployment Benefits in section 5 of Pub. 15-A. Report these payments on line 1a of Form 1040 or 1040-SR.

You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. If you repay the benefits in a later year, you must include the full amount of the benefits in your income for the year you received them.

Deduct the repayment in the later year as an adjustment to gross income on Form 1040 or 1040-SR. Include the repayment on Schedule 1 (Form 1040), line 24e. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. For information on this, see Repayments , later.

Unemployment benefit payments from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. Report the taxable amount on Schedule 1 (Form 1040), line 8z.

Benefits paid to you as an unemployed member of a union from regular union dues are included in your income on Schedule 1 (Form 1040), line 8z. However, if you contribute to a special union fund and your payments to the fund aren't deductible, the unemployment benefits you receive from the fund are includible in your income only to the extent they're more than your contributions.

Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are taxable as wages. Include them on line 1a of Form 1040 or 1040-SR.

Payments similar to a state's unemployment compensation may be made by the state to its employees who aren't covered by the state's unemployment compensation law. Although the payments are fully taxable, don't report them as unemployment compensation. Report these payments on Schedule 1 (Form 1040), line 8z.

Welfare and Other Public Assistance Benefits

Don’t include in your income governmental benefit payments from a public welfare fund based upon need, such as payments due to blindness. Payments from a state fund for the victims of crime shouldn't be included in the victims' incomes if they're in the nature of welfare payments. Don’t deduct medical expenses that are reimbursed by such a fund. You must include in your income any welfare payments that are compensation for services or that are obtained fraudulently.

Payments you receive from a state welfare agency for taking part in a work-training program aren't included in your income, as long as the payments (exclusive of extra allowances for transportation or other costs) don't total more than the public welfare benefits you would have received otherwise. If the payments are more than the welfare benefits you would have received, the entire amount must be included in your income as wages.

Payments you receive from a state agency under the RTAA must be included in your income. The state must send you Form 1099-G to advise you of the amount you should include in income. The amount should be reported on Schedule 1 (Form 1040), line 8z.

If you have a disability, you must include in income compensation you receive for services you perform unless the compensation is otherwise excluded. However, you don't include in income the value of goods, services, and cash that you receive, not in return for your services, but for your training and rehabilitation because you have a disability. Excludable amounts include payments for transportation and attendant care, such as interpreter services for the deaf, reader services for the blind, and services to help individuals with an intellectual disability do their work.

Don’t include post-disaster grants received under the Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Don’t deduct casualty losses or medical expenses that are specifically reimbursed by these disaster relief grants. If you have deducted a casualty loss for the loss of your personal residence and you later receive a disaster relief grant for the loss of the same residence, you may have to include part or all of the grant in your taxable income. See Recoveries , earlier. Unemployment assistance payments under the Act are taxable unemployment compensation. See Unemployment compensation under Unemployment Benefits , earlier.

You can exclude from income any amount you receive that is a qualified disaster relief payment. A qualified disaster relief payment is an amount paid to you:

To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster;

To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it’s due to a qualified disaster;

By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries incurred as a result of a qualified disaster; or

By a federal, state, or local government, or agency or instrumentality in connection with a qualified disaster in order to promote the general welfare.

A qualified disaster is:

A disaster that results from a terrorist or military action;

A federally declared disaster; or

A disaster that results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic by the Secretary of the Treasury or his or her delegate.

For amounts paid under item 4, a disaster is qualified if it's determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.

You can also exclude from income any amount you receive that is a qualified disaster mitigation payment. Qualified disaster mitigation payments are commonly paid to you in the period immediately following damage to property as a result of a natural disaster. However, disaster mitigation payments are used to mitigate (reduce the severity of) potential damage from future natural disasters. They're paid to you through state and local governments based on the provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act.

You can't increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments.

If you benefit from Pay-for-Performance Success Payments under HAMP, the payments aren't taxable.

If you receive or benefit from payments made under:

A State Housing Finance agency (State HFA) Hardest Hit Fund program in which program payments can be used to pay mortgage interest, or

An Emergency Homeowners' Loan Program (EHLP) administered by the Department of Housing and Urban Development (HUD) or a state,

The Homeowner Assistance Fund (HAF) program in which program payments are used to provide financial assistance to eligible homeowners for purposes of paying certain expenses related to their principal residence to prevent mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services, and also displacements of homeowners experiencing financial hardship after January 21, 2020,

For more details about the HAF program, go to Home.Treasury.gov/Policy-Issues/Coronavirus/Assistance-for-State-Local-and-Tribal-Governments/Homeowner-Assistance-Fund .

If you are a tribal member and wish more details about the HAF program, go to IRS.gov/Newsroom/FAQs-for-Payments-by-Indian-Tribal-Governments-and-Alaska-Native-Corporations-to-Individuals-Under-Covid-Relief-Legislation .

Payments made under section 235 of the National Housing Act for mortgage assistance aren't included in the homeowner's income. Interest paid for the homeowner under the mortgage assistance program can't be deducted.

Replacement housing payments made under the Uniform Relocation Assistance and Real Property Acquisition Policies Act for Federal and Federally Assisted Programs aren't includible in gross income, but are includible in the basis of the newly acquired property.

A relocation payment under section 105(a)(11) of the Housing and Community Development Act made by a local jurisdiction to a displaced individual moving from a flood-damaged residence to another residence isn't includible in gross income. Home rehabilitation grants received by low-income homeowners in a defined area under the same Act are also not includible in gross income.

Nonreimbursable grants under title IV of the Indian Financing Act of 1974 to Indians to expand profit-making Indian-owned economic enterprises on or near reservations aren't includible in gross income.

Gross income doesn't include the value of any Indian general welfare benefit. “Indian general welfare benefit” includes any payment made or services provided to or on behalf of a member (or any spouse or dependent of that member) of an Indian tribe or Alaska Native Corporation under an Indian tribal government program, but only if:

The program is administered under specified guidelines and doesn't discriminate in favor of members of the governing body of the Indian tribe or Alaska Native Corporation; and

The benefits provided under the program (a) are available to any tribal member who meets guidelines, (b) are for the promotion of general welfare, (c) aren't lavish or extravagant, and (d) aren't compensation for services.

Generally, any items of cultural significance, reimbursement of costs, or cash honorarium for participation in cultural or ceremonial activities for the transmission of tribal culture aren't treated as compensation for services.

The above exclusion was enacted by the Tribal General Welfare Exclusion Act of 2014, September 26, 2014. The exclusion applies to tax years for which the period of limitation on refund or credit under section 6511 has not expired (generally, within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever expires later). Additionally, a claim for the above exclusion will be allowed if made within 1 year of the enactment of the exclusion.

The enactment of the above exclusion generally codifies the exclusion afforded under Revenue Procedure 2014-35, June 4, 2014. See Revenue Procedure 2014-35 for more details.

Medicare benefits received under title XVIII of the Social Security Act aren't includible in the gross income of the individuals for whom they're paid. This includes basic (Part A (Hospital Insurance Benefits for the Aged)) and supplementary (Part B (Supplementary Medical Insurance Benefits for the Aged)).

The Social Security Administration (SSA) provides benefits such as old-age benefits, benefits to disabled workers, and benefits to spouses and dependents. These benefits may be subject to federal income tax depending on your filing status and other income. See Pub. 915 for more information. An individual originally denied benefits, but later approved, may receive a lump-sum payment for the period when benefits were denied (which may be prior years). See Pub. 915 for information on how to make a lump-sum election, which may reduce your tax liability. There are also other types of benefits paid by the SSA. However, SSI benefits and lump-sum death benefits (one-time payment to spouse and children of deceased) aren't subject to federal income tax. For more information on these benefits, go to SSA.gov .

If you received social security benefits during the year, you'll receive Form SSA-1099, Social Security Benefit Statement. An IRS Notice 703 will be enclosed with your Form SSA-1099. This notice includes a worksheet you can use to figure whether any of your benefits are taxable.

For an explanation of the information found on your Form SSA-1099, see Pub. 915.

If you received equivalent railroad retirement or special guaranty benefits during the year, you'll receive Form RRB-1099, Payments by the Railroad Retirement Board.

For an explanation of the information found on your Form RRB-1099, see Pub. 915.

If you're married and file a joint return, you and your spouse must combine your incomes and your social security and equivalent railroad retirement benefits when figuring whether any of your combined benefits are taxable. Even if your spouse didn't receive any benefits, you must add your spouse's income to yours when figuring if any of your benefits are taxable.

Use the worksheet in the Forms 1040 and 1040-SR instruction package to determine the amount of your benefits to include in your income. Pub. 915 also has worksheets you can use. However, you must use the worksheets in Pub. 915 if any of the following situations apply.

You received a lump-sum benefit payment during the year that is for one or more earlier years.

You exclude employer-provided adoption benefits or interest from qualified U.S. savings bonds.

You take the foreign earned income exclusion, the foreign housing exclusion or deduction, the exclusion of income from American Samoa, or the exclusion of income from Puerto Rico by bona fide residents of Puerto Rico.

You must use the special worksheets in Appendix B of Pub. 590-A to figure your taxable benefits and your IRA deduction if all of the following conditions apply.

You receive social security or equivalent railroad retirement benefits.

You have taxable compensation.

You contribute to your IRA.

You or your spouse is covered by a retirement plan at work.

If any of your benefits are taxable, you must use Form 1040 or 1040-SR to report the taxable part. Report your net benefits (as shown on your Forms SSA-1099 and RRB-1099) on line 6a of Form 1040 or 1040-SR. Report the taxable part on line 6b of Form 1040 or 1040-SR. If you elect to use the lump-sum election method, check the box on line 6c of Form 1040 or 1040-SR and see the instructions.

Food benefits you receive under the Nutrition Program for the Elderly aren't taxable. If you prepare and serve free meals for the program, include in your income as wages the cash pay you receive, even if you're also eligible for food benefits.

Payments made by a state to qualified people to reduce their cost of winter energy use aren't taxable.

Other Income

The following brief discussions are arranged in alphabetical order. Other income items briefly discussed below are referenced to publications that provide more information.

You must include on your return income from an activity from which you don't expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. Enter this income on Schedule 1 (Form 1040), line 8j. Deductions for expenses related to the activity are limited. They can't total more than the income you report and can be taken only if you itemize deductions on Schedule A (Form 1040).

If you received a payment from Alaska's mineral income fund (Alaska Permanent Fund dividend), report it as income on Schedule 1 (Form 1040), line 8g. The state of Alaska sends each recipient a document that shows the amount of the payment with the check. The amount is also reported to the IRS.

Include in your income on Schedule 1 (Form 1040), line 2a, any taxable alimony payments you receive. Amounts you receive for child support aren't income to you. For complete information, see Pub. 504 and the Instructions for Forms 1040 and 1040-SR.

A below-market loan is a loan on which no interest is charged or on which the interest is charged at a rate below the applicable federal rate. If you make a below-market gift or demand loan, you must include the forgone interest (at the federal rate) as interest income on your return. These loans are considered a transaction in which you, the lender, are treated as having made:

A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate; and

An additional payment to the borrower, which the borrower transfers back to you as interest.

Contribution to capital,

Payment of compensation, or

Another type of payment.

For more information on below-market loans, see chapter 1 of Pub. 550.

If you receive a bribe, include it in your income.

These contributions aren't income to a candidate unless they're diverted to the candidate’s personal use. To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. However, interest earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities are taxable and must be reported on Form 1120-POL. Excess campaign funds transferred to an office account must be included in the officeholder's income on Schedule 1 (Form 1040), line 8z, in the year transferred.

If you sell property (such as land or a residence) under a contract, but the contract is canceled and you return the buyer's money in the same tax year as the original sale, you have no income from the sale. If the contract is canceled and you return the buyer's money in a later tax year, you must include your gain in your income for the year of the sale. When you return the money and take back the property in the later year, you treat the transaction as a purchase that gives you a new basis in the property equal to the funds you return to the buyer.

Special rules apply to the reacquisition of real property where a secured indebtedness (mortgage) to the original seller is involved. For further information, see Repossession in Pub. 537.

Don’t include in your income amounts you receive from the passengers for driving a car in a carpool to and from work. These amounts are considered reimbursement for your expenses. However, this rule doesn't apply if you have developed carpool arrangements into a profit-making business of transporting workers for hire.

A cash rebate you receive from a dealer or manufacturer of an item you buy isn't income, but you must reduce your basis by the amount of the rebate.

Example 36.

You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. The $2,000 isn't income to you. Your basis in the car is $22,000. This is the basis on which you figure gain or loss if you sell the car, and figure depreciation if you use it for business.

You generally shouldn't report these reimbursements on your return unless you're figuring gain or loss from the casualty or theft. See Pub. 547.

If you're the beneficiary of a charitable gift annuity, you must include the yearly annuity or fixed percentage payment in your income.

The payer will report the types of income you received on Form 1099-R. Report the gross distribution from box 1 on Form 1040 or 1040-SR, line 5a, and the part taxed as ordinary income (box 2a minus box 3) on Form 1040 or 1040-SR, line 5b. Report the portion taxed as capital gain as explained in the Instructions for Schedule D (Form 1040).

You shouldn't report these payments on your return. See Pub. 504 for more information.

To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.

Interest on any award.

Compensation for lost wages or lost profits in most cases.

Punitive damages in most cases. It doesn't matter if they relate to a physical injury or physical sickness.

Amounts received in settlement of pension rights (if you didn't contribute to the plan).

Damages for:

Patent or copyright infringement,

Breach of contract, or

Interference with business operations.

Back pay and damages for emotional distress received to satisfy a claim under title VII of the Civil Rights Act of 1964.

Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.

Attorney fees and costs relating to whistleblower awards where the underlying recovery is included in gross income.

Don’t include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Emotional distress itself isn't a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Don’t include them in your income.

If the emotional distress is due to a personal injury that isn't due to a physical injury or sickness (for example, unlawful discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.

You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in section 62(e), a claim against the U.S. Government, or a claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Schedule 1 (Form 1040), line 24h. The following rules apply.

The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the U.S. Government, or the claim under section 1862(b)(3)(A) of the Social Security Act.

The deduction you're claiming can't be more than the amount of the judgment or settlement you're including in income for the tax year.

The judgment or settlement to which your attorney fees and court costs apply must occur after October 22, 2004.

If you receive damages under a written binding agreement, court decree, or mediation award that was in effect (or issued on or before) September 13, 1995, don't include in income any of those damages received on account of personal injuries or sickness.

In most cases, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. These plans make the minimum monthly payment on your credit card account if you can't make the payment due to injury, illness, disability, or unemployment. Report on Schedule 1 (Form 1040), line 8z, the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year.

If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance isn't included in your income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. If the corporation doesn't qualify, the assistance is treated as a rebate or reduction of the purchase price and isn't included in your basis.

If you get a job through an employment agency, and the fee is paid by your employer, the fee isn't includible in your income if you aren't liable for it. However, if you pay it and your employer reimburses you for it, it’s includible in your income.

You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit.

This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.

This includes a house, apartment, condominium, mobile home, boat, or similar property. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.

An estate or trust, unlike a partnership, may have to pay federal income tax. If you're a beneficiary of an estate or trust, you may be taxed on your share of its income distributed or required to be distributed to you. However, there is never a double tax. Estates and trusts file their returns on Form 1041, and your share of the income is reported to you on Schedule K-1 (Form 1041).

If you're the beneficiary of an estate or trust that must distribute all of its current income, you must report your share of the distributable net income, whether or not you actually received it.

If you're the beneficiary of an estate or trust and the fiduciary has the choice of whether to distribute all or part of the current income, you must report all income that is required to be distributed to you, whether or not it's actually distributed, plus all other amounts actually paid or credited to you, up to the amount of your share of distributable net income.

Treat each item of income the same way that the estate or trust would treat it. For example, if a trust's dividend income is distributed to you, you report the distribution as dividend income on your return. The same rule applies to distributions of tax-exempt interest and capital gains.

The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you're allowed on your individual income tax return.

Losses of estates and trusts generally aren't deductible by the beneficiaries.

Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. (The grantor is the one who transferred property to the trust.) This rule applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor's spouse.

Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of the transferred property, or has certain other powers.

If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment isn't includible in your income.

Include in your income on Schedule 1 (Form 1040), line 8z, any qualified settlement income you receive as a qualified taxpayer. See Statement , later. Qualified settlement income is any interest and punitive damage awards that are:

Otherwise includible in taxable income, and

Received in connection with the civil action In re Exxon Valdez , No. 89-095-CV (HRH) (Consolidated) (D. Alaska).

You're a qualified taxpayer if you were a plaintiff in the civil action mentioned earlier or you were a beneficiary of the estate of your spouse or a close relative who was such a plaintiff and from whom you acquired the right to receive qualified settlement income.

The income can be received as a lump sum or as periodic payments. You'll receive a Form 1099-MISC showing the gross amount of the settlement income paid to you in the tax year.

If you're a qualified taxpayer, you can contribute all or part of your qualified settlement income, up to $100,000, to an eligible retirement plan, including an IRA. Contributions to eligible retirement plans, other than a Roth IRA or a designated Roth account, reduce the qualified settlement income that you must include in income. See Statement , later. For more information on these contributions, see Pubs. 575 and 590-A.

For tax years after 2017, you can no longer deduct legal expenses that were subject to the 2%-of-adjusted-gross-income floor. If the qualified settlement income was received in connection with your trade or business (other than as an employee), you can reduce the taxable amount of qualified settlement income by these expenses.

If you report on Schedule 1 (Form 1040), line 8z, qualified settlement income that is less than the gross amount shown on Form 1099-MISC, you must attach a statement to your tax return. The statement must identify and show the gross amount of the qualified settlement income, the reductions for the amount contributed to an eligible retirement plan, and the net amount.

For purposes of the income averaging rules that apply to an individual engaged in a farming or fishing business, qualified settlement income is treated as attributable to a fishing business for the tax year in which it's received. See Schedule J (Form 1040) and its instructions for more information.

Include all fees for your services in your income. Examples of these fees are amounts you receive for services you perform as:

A corporate director;

An executor, administrator, or personal representative of an estate;

A manager of a trade or business you operated before declaring chapter 11 bankruptcy;

A notary public; or

An election precinct official.

Corporate director fees are self-employment income. Report these payments on Schedule C (Form 1040).

All personal representatives must include in their gross income fees paid to them from an estate. If you aren't in the trade or business of being an executor (for instance, you're the executor of a friend's or relative's estate), report these fees on Schedule 1 (Form 1040), line 8z. If you're in the trade or business of being an executor, report these fees as self-employment income on Schedule C (Form 1040). The fee isn't includible in income if it's waived.

Include in your income all payments received from your bankruptcy estate for managing or operating a trade or business that you operated before you filed for bankruptcy. Report this income on Schedule 1 (Form 1040), line 8z.

Report payments for these services on Schedule C (Form 1040). These payments aren't subject to self-employment tax. See the separate Instructions for Schedule SE (Form 1040) for details.

You should receive a Form W-2 showing payments for services performed as an election official or election worker. Report these payments on line 1a of Form 1040 or 1040-SR.

If you operate a daycare service and receive payments under the Child and Adult Care Food Program administered by the Department of Agriculture that aren't for your services, the payments aren't included in your income in most cases. However, you must include in your income any part of the payments you don't use to provide food to individuals eligible for help under the program.

If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you don't have to include that gain in your income unless it's more than $200. If the gain is more than $200, report it as a capital gain.

Generally, payment you receive from a state, political subdivision, or a qualified foster care placement agency for caring for a qualified foster individual in your home is excluded from your income. However, you must include in your income payment to the extent it's received for the care of more than 5 qualified foster individuals age 19 years or older.

A qualified foster individual is a person who:

Is living in a foster family home; and

Was placed there by:

An agency of a state or one of its political subdivisions, or

A qualified foster care placement agency.

These are payments that are designated by the payer as compensation for providing the additional care that is required for physically, mentally, or emotionally handicapped qualified foster individuals. A state must determine that the additional compensation is needed, and the care for which the payments are made must be provided in the foster care provider's home in which the qualified foster individual was placed.

Certain Medicaid waiver payments are treated as difficulty-of-care payments when received by an individual care provider for caring for an eligible individual (whether related or unrelated) living in the provider's home. See Notice 2014-7, available at IRS.gov/irb/2014-4_IRB#NOT-2014-7 , and related questions and answers, available at IRS.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income , for more information.

You must include in your income difficulty-of-care payments to the extent they're received for more than:

10 qualified foster individuals under age 19, or

Five qualified foster individuals age 19 or older.

If you're paid to maintain space in your home for emergency foster care, you must include the payment in your income.

If you receive payments that you must include in your income and you're in business as a foster care provider, report the payments on Schedule C (Form 1040). See Pub. 587 to help you determine the amount you can deduct for the use of your home.

If you find and keep property that doesn't belong to you that has been lost or abandoned (treasure trove), it's taxable to you at its FMV in the first year it's your undisputed possession.

If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. Report the FMV of the tour on Schedule 1 (Form 1040), line 8z, if you aren't in the trade or business of organizing tours. You can't deduct your expenses in serving as the voluntary leader of the group at the group's request. If you organize tours as a trade or business, report the tour's value on Schedule C (Form 1040).

You must include your gambling winnings in your income on Schedule 1 (Form 1040), line 8b. Winnings from fantasy sports leagues are gambling winnings. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings. If you're in the trade or business of gambling, use Schedule C (Form 1040). For tax years 2018 through 2025, professional gambling losses and expenses are limited to the amount of your winnings.

Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the FMV of bonds, cars, houses, and other noncash prizes. However, the difference between the FMV and the cost of an oil and gas lease obtained from the government through a lottery isn't includible in income.

Generally, if you win a state lottery prize payable in installments, you must include in your gross income the annual payments and any amounts you receive designated as interest on the unpaid installments. If you sell future lottery payments for a lump sum, you must report the amount you receive from the sale as ordinary income (on Schedule 1 (Form 1040), line 8b) in the year you receive it.

You may have received a Form W-2G showing the amount of your gambling winnings and any tax taken out of them. Include the amount from box 1 on Schedule 1 (Form 1040), line 8b. Include the amount shown in box 4 on Form 1040 or 1040-SR, line 25c, as federal income tax withheld.

In most cases, property you receive as a gift, bequest, or inheritance isn't included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.

If you inherited a pension or an IRA, you may have to include part of the inherited amount in your income. See Survivors and Beneficiaries in Pub. 575 if you inherited a pension. See What if You Inherit an IRA? in Pubs. 590-A and 590-B if you inherited an IRA.

If you sell an interest in an expected inheritance from a living person, include the entire amount you receive in gross income on Schedule 1 (Form 1040), line 8z.

If you receive cash or other property as a bequest for services you performed while the decedent was alive, the value is taxable compensation.

If you received payments for lost wages or income, property damage, or physical injury due to the Gulf oil spill, the payment may be taxable.

Payments you received for lost wages, lost business income, or lost profits are taxable.

Payments you received for property damage aren't taxable if the payments aren't more than your adjusted basis in the property. If the payments are more than your adjusted basis, you'll realize a gain. If the damage was due to an involuntary conversion, you may defer the tax on the gain if you purchase qualified replacement property. See Pub. 544.

If the payments (including insurance proceeds) you received, or expect to receive, are less than your adjusted basis, you may be able to claim a casualty deduction. See Pub. 547.

Payments you received for personal physical injuries or physical sickness aren't taxable. This includes payments for emotional distress that is attributable to personal physical injuries or physical sickness. Payments for emotional distress that aren't attributable to personal physical injuries or physical sickness are taxable.

For the most recent guidance, go to IRS.gov and enter “Gulf Oil Spill” in the search box.

Don’t include in your income any payment you receive under the National Historic Preservation Act to preserve a historically significant property.

Losses from a hobby aren't deductible from other income. A hobby is an activity from which you don't expect to make a profit. See Activity not for profit , earlier, under Other Income.

Restitution payments you receive as a Holocaust victim (or the heir of a Holocaust victim) and interest earned on the payments aren't taxable. Excludable interest is earned by escrow accounts or settlement funds established for holding funds prior to the settlement. You also don't include the restitution payments and interest the funds earned prior to disbursement in any calculation in which you ordinarily would add excludable income to your AGI, such as the calculation to determine the taxable part of social security benefits. If the payments are made in property, your basis in the property is its FMV when you receive it.

Excludable restitution payments are payments or distributions made by any country or any other entity because of persecution of an individual on the basis of race, religion, physical or mental disability, or sexual orientation by Nazi Germany, any other Axis regime, or any other Nazi-controlled or Nazi-allied country, whether the payments are made under a law or as a result of a legal action. They include compensation or reparation for property losses resulting from Nazi persecution, including proceeds under insurance policies issued before and during World War II by European insurance companies.

Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity.

If you're a member of a qualified Indian tribe that has fishing rights secured by treaty, executive order, or an Act of Congress as of March 17, 1988, don't include in your income amounts you receive from activities related to those fishing rights. The income isn't subject to income tax, self-employment tax, or employment taxes.

Amounts received by an individual Indian as a lump sum or periodic payment pursuant to the Class Action Settlement Agreement dated December 7, 2009, aren't included in gross income. This amount won't be used to figure AGI or MAGI in applying any Internal Revenue Code provision that takes into account excludable income.

In general, you exclude from your income the amount of interest earned on a frozen deposit. A deposit is frozen if, at the end of the calendar year, you can't withdraw any part of the deposit because:

The financial institution is bankrupt or insolvent, or

The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.

The amount of interest you exclude from income for the year is the interest that was credited on the frozen deposit for that tax year minus the sum of:

The net amount withdrawn from the deposit during that year, and

The amount that could have been withdrawn at the end of that tax year (not reduced by any penalty for premature withdrawals of a time deposit).

You may be able to exclude from income the interest from qualified U.S. savings bonds you redeem if you pay qualified higher education expenses in the same year. Qualified higher education expenses are those you pay for tuition and required fees at an eligible educational institution for you, your spouse, or your dependent. A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must have been issued to you when you were 24 years of age or older. For more information on this exclusion, see Education Savings Bond Program in chapter 1 of Pub. 550 and in chapter 10 of Pub. 970.

This interest is usually exempt from federal tax. However, you must show the amount of any tax-exempt interest on your federal income tax return. For more information, see State or Local Government Obligations in chapter 1 of Pub. 550.

If a prospective employer asks you to appear for an interview and either pays you an allowance or reimburses you for your transportation and other travel expenses, the amount you receive isn't taxable in most cases. You include in income only the amount you receive that is more than your actual expenses.

Jury duty pay you receive must be included in your income on Schedule 1 (Form 1040), line 8h. If you must give the pay to your employer because your employer continues to pay your salary while you serve on the jury, you can deduct the amount turned over to your employer as an adjustment to income. Enter the amount you repay your employer on Schedule 1 (Form 1040), line 24a.

You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity.

Example 37.

You sell cars and help arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you for referring customers to them. You must include the kickbacks in your income.

You must include as other income on Schedule 1 (Form 1040), line 8z (or Schedule C (Form 1040) if you're self-employed), incentive payments from a manufacturer that you receive as a salesperson. This is true whether you receive the payment directly from the manufacturer or through your employer.

Example 38.

You sell cars for an automobile dealership and receive incentive payments from the automobile manufacturer every time you sell a particular model of car. You report the incentive payments on Schedule 1 (Form 1040), line 8z.

In most cases, you don't include in income amounts you withdraw from your Archer MSA or Medicare Advantage MSA if you use the money to pay for qualified medical expenses. Generally, qualified medical expenses are those you can deduct on Schedule A (Form 1040). For more information about Archer MSAs or Medicare Advantage MSAs, see Pub. 969.

For tax years beginning after 2017, reimbursements for certain moving expenses are no longer excluded from the gross income of nonmilitary taxpayers.

If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income on Schedule 1 (Form 1040), line 8i. If you refuse to accept a prize, don't include its value in your income.

Prizes and awards in goods or services must be included in your income at their FMV.

Cash awards or bonuses given to you by your employer for good work or suggestions must generally be included in your income as wages. However, certain noncash employee achievement awards can be excluded from income. See Bonuses and awards under Miscellaneous Compensation , earlier.

If you're a salesperson and receive prize points redeemable for merchandise that are awarded by a distributor or manufacturer to employees of dealers, you must include their FMV in your income. The prize points are taxable in the year they're paid or made available to you, rather than in the year you redeem them for merchandise.

If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, you must generally include the value of the prize in your income. However, you don't include this prize in your income if you meet all of the following requirements.

You were selected without any action on your part to enter the contest or proceeding.

You aren't required to perform substantial future services as a condition for receiving the prize or award.

The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you. The following conditions apply to the transfer.

You can't use the prize or award before it's transferred.

You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should contain:

The purpose of the designation by making a reference to section 74(b)(3);

A description of the prize or award;

The name and address of the organization to receive the prize or award;

Your name, address, and TIN; and

Your signature and the date signed.

In the case of an unexpected presentation, you must return the prize or award before using it (or spending, depositing, or investing it, etc., in the case of money) and then prepare the statement as described in (b) above.

After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred.

These rules don't apply to scholarship or fellowship awards. See Scholarships and fellowships , later.

Effective December 22, 2017, section 1400Z-2 provides a temporary deferral of inclusion in gross income for eligible gains invested in QOFs, and a stepped-up basis to fair market value of the investment in the QOF at time of sale or exchange, if the investment is held for at least 10 years. See the Form 8949 instructions on how to report your election to defer eligible gains invested in a QOF. See Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, and its instructions for reporting information. For additional information, see Opportunity Zones Frequently Asked Questions, available at IRS.gov/Newsroom/Opportunity-Zones-Frequently-Asked-Questions .

A QTP (also known as a 529 program) is a program set up to allow you to either prepay or contribute to an account established for paying a student's qualified higher education expenses at an eligible educational institution. A program can be established and maintained by a state, an agency or instrumentality of a state, or an eligible educational institution.

The part of a distribution representing the amount paid or contributed to a QTP isn't included in income. This is a return of the investment in the program.

In most cases, the beneficiary doesn't include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified higher education expenses. See Pub. 970 for more information.

The following types of payments are treated as pension or annuity income and are taxable under the rules explained in Pub. 575.

Tier 1 railroad retirement benefits that are more than the social security equivalent benefit.

Tier 2 benefits.

Vested dual benefits.

If you receive a reward for providing information, include it in your income.

You may be able to exclude from income all or part of any gain from the sale or exchange of your main home. See Pub. 523.

If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it as explained in the Instructions for Schedule D (Form 1040). You can't deduct a loss.

However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital gain and any loss is deductible as a capital loss.

You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report your $80 gain as a capital gain as explained in the Instructions for Schedule D (Form 1040).

A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount you receive that is for:

Tuition and fees required to enroll at or attend an eligible educational institution; or

Course-related expenses, such as fees, books, and equipment that are required for courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Generally, you can't exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. This applies even if all candidates for a degree must perform the services to receive the degree.

You don't have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under:

The National Health Services Corps Scholarship Program,

The Armed Forces Health Professions Scholarship and Financial Assistance Program, or

A comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).

For information about the rules that apply to a tax-free qualified tuition reduction provided to employees and their families by an educational institution, see Pub. 970.

Allowances paid by the VA for education, training, or subsistence under any law administered by the Department of Veterans Affairs, aren't included in your income. These allowances aren't considered scholarship or fellowship grants.

Scholarship prizes won in a contest aren't scholarships or fellowships if you don't have to use the prizes for educational purposes. You must include these amounts in your income on Schedule 1 (Form 1040), line 8i, whether or not you use the amounts for educational purposes.

If you're an eligible individual who receives benefits under the Smallpox Emergency Personnel Protection Act of 2003 for a covered injury resulting from a covered countermeasure, you can exclude the payment from your income (to the extent it isn't allowed as a medical and dental expense deduction on Schedule A (Form 1040)). Eligible individuals include health care workers, emergency personnel, and first responders in a smallpox emergency who have received a smallpox vaccination.

Do not include payments on your tax return made by states under legislatively provided social benefit programs for the promotion of the general welfare. To qualify for the general welfare exclusion, state payments must be paid from a governmental fund, be for the promotion of general welfare (that is, based on the need of the individual or family receiving such payments), and not represent compensation for services.

In 2022, some states implemented programs to provide state payments to certain individuals residing in their states. Many of these programs were related to the various consequences of the COVID-19 pandemic. Some of those 2022 programs provided for payments to be made in early 2023. For special tax refunds or payments that were excluded from federal income in 2022, the same tax treatment applies to the special tax refund or payments received in 2023. This means taxpayers who didn’t get a payment under the program during 2022 may exclude from federal income a state payment provided under the 2022 program even if they actually received the payment in 2023. See IRS News Release IR-2023-158 at IRS.gov/Newsroom/IRS-Issues-Guidance-on-State-Tax-Payments for more information.

If you steal property, you must report its FMV in your income in the year you steal it, unless in the same year you return it to its rightful owner.

Don’t include in your income a school board mileage allowance for taking children to and from school if you aren't in the business of taking children to school. You can't deduct expenses for providing this transportation.

Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union can't be excluded from your income.

For tax years beginning after 2017, you can no longer deduct job-related expenses or other miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income floor.

Benefits paid to you by a union as strike or lockout benefits, including both cash and the FMV of other property, are usually included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show that the union intended them as gifts to you.

If you're a delegate of your local union chapter and you attend the annual convention of the international union, don't include in your income amounts you receive from the international union to reimburse you for expenses of traveling away from home to attend the convention. You can't deduct the reimbursed expenses, even if you're reimbursed in a later year. If you're reimbursed for lost salary, you must include that reimbursement in your income.

If you're a customer of an electric utility company and you participate in the utility's energy conservation program, you may receive on your monthly electric bill either:

A reduction in the purchase price of electricity furnished to you (rate reduction), or

A nonrefundable credit against the purchase price of the electricity.

If you receive a whistleblower's award from the IRS, you must include it in your income. Any deduction allowed for attorney fees and court costs paid by you, or on your behalf, in connection with the award are deducted as an adjustment to income, but can't be more than the amount included in income for the tax year.

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

The type of deduction you're allowed in the year of repayment depends on the type of income you included in the earlier year. In most cases, you deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, you may be able to deduct it as an other itemized deduction if the amount repaid is over $3,000.

If you repaid social security or equivalent railroad retirement benefits, see Pub. 915.

If the amount you repaid was more than $3,000, you can deduct the repayment as an other itemized deduction on Schedule A (Form 1040), line 16, if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. However, you can choose to take a credit for the year of repayment. Figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

Figure your tax for the year of repayment claiming a deduction for the repaid amount.

Figure your tax for the year of repayment claiming a credit for the repaid amount. Follow these steps.

Figure your tax for the year of repayment without deducting the repaid amount.

Refigure your tax from the earlier year without including in income the amount you repaid in the year of repayment.

Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.

Subtract the answer in (3) from the tax for the year of repayment figured without the deduction (step 1).

If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040 or 1040-SR. (If the year of repayment is 2022, and you're taking the credit, enter the credit on Schedule 3 (Form 1040), line 13b, and see the instructions for it.)

Example 40.

For 2022, you filed a return and reported your income on the cash method. In 2023, you repaid $5,000 included in your 2022 income under a claim of right. Your filing status in 2023 and 2022 is single. Your income and tax for both years are as follows.



Taxable Income	$15,000	$10,000
Tax	$1,598	$1,003



Taxable Income	$49,950	$44,950
Tax	$6,297	$5,197

Your tax under method 1 is $5,197. Your tax under method 2 is $6,297, figured as follows.

Tax previously determined for 2022		$1,598
Less: Tax as refigured
		$ 595

Regular tax liability for 2023		$6,297
Less: Decrease in 2022 tax
		$5,702

If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. If the employer refuses to refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. File a claim for refund using Form 843.

Employers can't make an adjustment or file a claim for refund for Additional Medicare Tax withholding when there is a repayment of wages received by an employee in a prior year because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year. If you had to repay an amount that you included in your wages or compensation in an earlier year, and on which Additional Medicare Tax was paid, you may be able to recover the Additional Medicare Tax paid on the amount. To recover Additional Medicare Tax on the repaid wages or compensation, you must file Form 1040-X for the prior year in which the wages or compensation were originally received. See the Instructions for Form 1040-X.

This discussion doesn't apply to:

Deductions for bad debts;

Deductions for theft losses due to criminal fraud or embezzlement in a transaction entered into for profit;

Deductions from sales to customers, such as returns and allowances, and similar items; or

Deductions for legal and other expenses of contesting the repayment.

If you use the cash method, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it’s a proper deduction under your accounting method. For example, if you use an accrual method, you're entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using software or Free File Fillable Forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA , download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE or download the free IRS2Go app for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource ( MilitaryOneSource.mil/MilTax ).

Also, the IRS offers Free Fillable Forms, which can be completed online and then e-filed regardless of income.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/EITCAssistant ) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application ( IRS.gov/EIN ) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator ( IRS.gov/W4App ) makes it easier for you to estimate the federal income tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

The First-Time Homebuyer Credit Account Look-up ( IRS.gov/HomeBuyer ) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator ( IRS.gov/SalesTax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040).

IRS.gov/Help : A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA : The Interactive Tax Assistant, a tool that will ask you questions and, based on your input, provide answers on a number of tax topics.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on the most recent tax changes and interactive links to help you find answers to your questions.

You may also be able to access tax information in your e-filing software.

There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos .

Youtube.com/irsvideosmultilingua .

Youtube.com/irsvideosASL .

The IRS Video portal ( IRSVideos.gov ) contains video and audio presentations for individuals, small businesses, and tax professionals.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

The IRS is committed to serving taxpayers with limited-English proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.

Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp .

Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.

Standard Print.

Large Print.

Audio (MP3).

Plain Text File (TXT).

Braille Ready File (BRF).

Go to IRS.gov/DisasterRelief to review the available disaster tax relief.

Go to IRS.gov/Forms to view, download, or print all the forms, instructions, and publications you may need. Or, you can go to IRS.gov/OrderForms to place an order.

Download and view most tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks .

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

With an online account, you can access a variety of information to help you during the filing season. You can get a transcript, review your most recently filed tax return, and get your adjusted gross income. Create or access your online account at IRS.gov/Account .

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account. For more information, go to IRS.gov/TaxProAccount .

The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, destroyed, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages (including shortened links), telephone calls, or social media channels to request or verify personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft , the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN .

Go to IRS.gov/Refunds .

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800-829-1954.

Payments of U.S. tax must be remitted to the IRS in U.S. dollars. Digital assets are not accepted. Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit Card, Credit Card, or Digital Wallet : Choose an approved payment processor to pay online or by phone.

Electronic Funds Withdrawal : Schedule a payment when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System : Best option for businesses. Enrollment is required.

Check or Money Order : Mail your payment to the address listed on the notice or instructions.

Cash : You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire : You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement ( IRS.gov/OPA ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC .

Go to IRS.gov/Form1040X for information and updates.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

You can now upload responses to all notices and letters using the Document Upload Tool. For notices that require additional action, taxpayers will be redirected appropriately on IRS.gov to take further action. To learn more about the tool, go to IRS.gov/Upload .

You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive communications, including notices and letters, in English until they are translated to your preferred language.

Keep in mind, many questions can be answered on IRS.gov without visiting a TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. TAS strives to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

TAS has offices in every state, the District of Columbia, and Puerto Rico . To find your advocate’s number:

Go to TaxpayerAdvocate.IRS.gov/Contact-Us ;

Download Pub. 1546, The Taxpayer Advocate Service Is Your Voice at the IRS, available at IRS.gov/pub/irs-pdf/p1546.pdf ;

Call the IRS toll free at 800-TAX-FORM (800-829-3676) to order a copy of Pub. 1546;

Check your local directory; or

Call TAS toll free at 877-777-4778.

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to TAS at IRS.gov/SAMS . Be sure to not include any personal taxpayer information.

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, go to the LITC page at TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List , at IRS.gov/pub/irs-pdf/p4134.pdf .

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Caveat Emptor or "Let The Buyer Beware" Applying Diligent Investor Principles to Trademark and Copyright Issues in Mergers and Acquisitions

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What is “Assignment of Income” Under the Tax Law?

Gross income is taxed to the individual who earns it or to owner of property that generates the income. Under the so-called “assignment of income doctrine,” a taxpayer may not avoid tax by assigning the right to income to another.

Specifically, the assignment of income doctrine holds that a taxpayer who earns income from services that the taxpayer performs or property that the taxpayer owns generally cannot avoid liability for tax on that income by assigning it to another person or entity. The doctrine is frequently applied to assignments to creditors, controlled entities, family trusts and charities.

A taxpayer cannot, for tax purposes, assign income that has already accrued from property the taxpayer owns. This aspect of the assignment of income doctrine is often applied to interest, dividends, rents, royalties, and trust income. And, under the same rationale, an assignment of an interest in a lottery ticket is effective only if it occurs before the ticket is ascertained to be a winning ticket.

However, a taxpayer can shift liability for capital gains on property not yet sold by making a bona fide gift of the underlying property. In that case, the donee of a gift of securities takes the “carryover” basis of the donor.

For example, shares now valued at $50 gifted to a donee in which the donor has a tax basis of $10, would yield a taxable gain to the donee of its eventual sale price less the $10 carryover basis. The donor escapes income tax on any of the appreciation.

For guidance on this issue, please contact our professionals at 315.242.1120 or [email protected] .

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Gross Income: Tax Benefit, Claim of Right and Assignment of Income (Portfolio 502)

James Maule

Professor of Law, Emeritus

Villanova University School of Law

At a glance

I. Introduction II. Tax Benefit Doctrine III. Claim of Right Doctrine IV. Assignment of Income

The Bloomberg Tax Portfolio, Gross Income: Tax Benefit, Claim of Right and Assignment of Income, No. 502, addresses three areas of gross income that are substantially judicial in origin and nature. It analyzes in depth the nature, concept, scope, and application of the tax benefit doctrine, the claim of right doctrine, and the assignment of income doctrine.

The tax benefit doctrine excludes from a taxpayer's gross income any recovery or refund of an amount deducted in a prior taxable year to the extent the deduction did not reduce tax liability. Under the claim of right doctrine, a taxpayer must include in gross income for the year of receipt any income received under a claim of right free of restrictions.

Under the assignment of income doctrine, gross income from personal services must be included in the gross income of the person who rendered the services. In addition, under that doctrine, gross income from property must be included in the gross income of the person who beneficially owns the property.

The Worksheets include relevant legislative history for provisions discussed in detail and for which regulations have not yet been issued.

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What are the rules of assignment?

Recently I've been reviewing some of the basics of algebra, and one thing that is taught rather flimsily are the rules of when we want to 'assign' to a symbol. Is there a formal language that allows us to define an assignment, for example we often see 'if $x=...$ or 'when $x=...$ '. The first question that a student might have is 'WHEN precisely is $x=3$ ' I understand in 'model theory' there exists an idea of 'assignment', but it does not seem naturally possible to link it to the simpler concept, Perhaps here we find the origins of this concept, but I cannot see it? Likewise, can we use the original 'variable' name? For example 'under the assignment $x=3$ , we know that $x^2=9$ ' in this case we are using the variable $x$ but under a particular assignment. If we can do this, is there any difference between a 'general' expression for the variable $x$ and an expression under an 'assignment'.

algebra-precalculus
$\begingroup$ Logical rules for equality. $\endgroup$ – Mauro ALLEGRANZA Commented Jun 5, 2022 at 17:30
2 $\begingroup$ This question is a great example of the extremely blurry line between mathematics and philosophy. $\endgroup$ – Silvio Mayolo Commented Jun 6, 2022 at 2:51
$\begingroup$ I think this is a great question, and one that is often confusing to students who get stuck in early levels of mathematics. The meaning of the equal sign changes subtly depending on context, and it can mean very different things depending on that context. $\endgroup$ – Amos Joshua Commented Jun 6, 2022 at 4:51

4 Answers 4

The problem here is that in actual practice, we are mixing both mathematical language and natural language, and it's not that the mathematical language or the natural language by themselves are tricky, but rather it's the mixing of the two that cause these concepts to become blurred.

The central bone of contention, as you're observing, is what exactly is the following hybrid of mathematical and natural language (English), in this case:

Let $x = 5$ .

What does it say about $=$ ? Does it mean $=$ is simply a verb indicating that something holds true, or is it something else? What I would suggest is that the above piece of language is formally ambiguous as to its interpretation, but both interpretations can be carried out in a consistent manner, and both of them have been suggested separately in the two answers given here.

The first is that this is introducing a hypothesis . The variable $x$ never actually gets a value. Instead, what is going on here is we are really saying "Suppose it is true that $x = 5$ ", and for sake of brevity, we use the term "let". That is, we are building what in formal language would look something like

$$(x = 5) \rightarrow \cdots$$

The second is that this statement, by its enunciation, actually does cause the fact that $x = 5$ to become true. That is, "let" expands to "I declare hereby that $x = 5$ ." This is the assignment version. Linguistically, this type of morsel is called in some circles a " performative ": it is a bit of language that causes its own truth simply by virtue of putting it forward. (This is similar to, but not quite the same as, the more commonly-known imperative : an imperative is a command given from one person to another. They both "do something", but the imperative requires further action to cause change, the performative does that all by itself.)

However, there then becomes the question of when and where the assignment ceases being valid, as you point out, since clearly it is not the case that from here on forever and everywhere $x = 5$ must hold otherwise we'd have a heck of a time trying to do maths and everyone would be fighting over what " $x$ ", a very common symbol, must mean! :) Hence if you take the assignment picture, you must thus also take the idea of scope . Unfortunately, while there is a semi-common symbol, $:=$ , for assignment, there is not a maths-only symbol for a scope. Thus, scopes are still implicit, not explicit.

Insofar as the "rules of assignment", it's basically this:

Declare a scope. (No notation!)
Make the assignments within that scope.
Choose this as the scope to do some argumentation, then do the argumentation. In that argumentation, the given assignments are the meanings of the variables.

Outside the scope, the variables' meanings are once more undetermined (or not fully determined). That, I believe, answers your last question: the statement's meaning changes depending on what scope it is enclosed in, but scopes are not written explicitly in mathematical papers. Instead, you have to mentally track them and it's something you just pick up with experience.

ADD: I see some comments that suggest you may be asking for, say, properties or axioms that assignment follows. I'd suggest that there's pretty much only one: once $a := b$ has been enunciated, then $a = b$ necessarily evaluates to "true".

Of course, the relationship between these two approaches is, of course, that once you make the assignment, it becomes a true hypothesis, and thus we can try reasoning forward from it. However, which approach you choose to formulate maths is not something with a single answer. It's a choice. In the strong computer-coding affinity this has, it's basically the difference between functional and imperative programming. In functional programming, everything is in terms of "this relates to that". In imperative programming, you more explicitly issue commands to the computer that make the computer do stuff, like set variables to certain values. Of course, since the computer is ultimately doing stuff, the functional program must somehow become translated to imperative, but it is not written like it is imperative.

That said, I'd still argue in the end that ultimately you can't get away from the assignment: after all, even if we take the hypothetical approach, for the result to have any use, somewhere $x$ ultimately has to get assigned. The trick, then, is that that would happen in a particular application. Like if you're calculating a geometric quantity, your variable assignments happen - again implicitly - as part of the specific problem in question.

I would claim that, indeed, in the practice of mathematics, the sign $=$ is used in (at least) three different ways. The tradition is to pretend that there is only one use, that of an assertion of a relationship, such as $2=1+1$ .

However, in practice, there is also assignment , as the question observes. So, for example, if we're doing Peano arithmetic, we might define $2$ by "let $2=1+1$ ".

Also, there are queries or tests, which do not assert a relationship, and do not assign anything. As in "if $x>y$ , then...". Yes, we can say that the smaller logical piece " $x>y$ " expresses a possible relationship, but it does not assert it. Depending on one's formal logical framework, this may be an empty distinction. However, in dealing with informal logic and basic mathematics, this conceptually distinct.

Some of this is blurred by what are, in my opinion, "fake implications", where one is looking at cases, or making certain assumptions, but expresses it as "if... then...", where, in fact, the "if" component is not in doubt. E.g., "if $x=2$ , then $x+x=4$ ". My quibble could be expressed as, "well, how do we test whether or not $x=2$ ?". It makes much more practical sense to say "for $x=2$ ..." or "when $x=2$ ..." or, again, an assignment: "let $x=2$ . Then $x+x=4$ ."

You seem to be thinking about mathematical variables like computer language variables. There are no scope rules. If I say "let $x=3$ " I mean just that. It is expected that what I say next will expose a reason for the statement.

In mathematical writing, there is no difference between a declaration and an assignment because the symbols are not names for boxes or references to boxes.

In fact, you probably wouldn't see a statement like $$\text{let }x=3$$ . You would more likely see something like $$\text{let }x\in\mathbb R\text{ be a real number}$$ and later see a statement like $$\text{if }x=3\text{ then ...}$$

1 $\begingroup$ True, there are few scope "rules" in most mathematics, but the concept of "scope" does play a large role, whether explicitly acknowledged (or codified) or not, and in particular when the ubiquitous "$x$" gets re-used endlessly. :) $\endgroup$ – paul garrett Commented Jun 5, 2022 at 18:09
2 $\begingroup$ @paulgarrett I have never seen $x$ get re-used in a mathematical proof. Re-using variables is a thing of computer programming. It isn't done in mathematical writing. $\endgroup$ – John Douma Commented Jun 5, 2022 at 18:11
1 $\begingroup$ I disagree. In fact, I often see (and frequently write) "let $x=3\in\mathbb R$"... and perhaps later in the same not-so-short proof, "now let $x>3$". $\endgroup$ – paul garrett Commented Jun 5, 2022 at 18:17
1 $\begingroup$ @paulgarrett would we not think that we are talking about different things that could or could not be true depending on the value of $x$ rather than 're-using' $x$? As we will replace every instance of $x$ when substituting which would not be the case if we were re-using $x$ for something else., $\endgroup$ – user1047679 Commented Jun 5, 2022 at 21:14
1 $\begingroup$ @user37577, yes, there is indeed an issue of "scope", although not usually recognized in mathematics, so that we know "which $x$" we're referring-to, and so on. An extreme case in practical basic math is "the variable of integration", where we write $\int f(x)\,dx$. In reality, there is no need to name the argument to the function $f$ in order to integrate it, etc. But it is very traditional to write this kind of thing. And then there is a traditional confusion about whether the output of that integration "is a function of $x$" (usually it is construed so!), or ... what? :) $\endgroup$ – paul garrett Commented Jun 5, 2022 at 21:25

You want to consider asking on the math educators site if you're specifically interested in how to teach students about $=$ or answer their questions about what it is.

Talking about assigning to a symbol in math is borrowing a metaphor from programming. That's not completely true; let $x$ $=$ something constructions are very old but I think that thinking of them as an assignment rather than a hypothesis is a programming metaphor. You can get a lot of mileage out of this metaphor, but it is not the only way to think about what $=$ is doing and it might be misleading, since $1 + 1 = 2$ is not an assignment. It is possible to lean into the programming metaphor further and use a dedicated symbol like $ := $ for assigning to variables, but that might be counterproductive.

In model theory / the semantics of first-order logic, an assignment has a specific meaning. It is a mapping from free variables to their denotations.

You need this map in order to define the notion of truth in a model.

For example, here is one such rule, giving the meaning of the existential quantifier.

$$ M, \vec{v} \models \exists x \mathop. \varphi(x, \vec{v}) \;\; \textit{if and only if}\;\; \text{there exists a variable assignment $\vec{u}$ extending $\vec{v}$ such that $M, \vec{u} \models \varphi(\vec{u})$} $$

A variable assignment $\vec{u}$ extending $\vec{v}$ means that the variables assigned any denotation at all by $\vec{u}$ are a superset of the ones assigned a denotation by $\vec{v}$ and that $\vec{u}$ and $\vec{v}$ agree on their common subset.

This is kind of unsatisfying though and doesn't really make the intuitive concept of hypothesizing a value for a variable clearer .

The semantics of equality are similarly unsatisfying and appeal to an intuitive notion of equality that already exists in the background.

$$ M, \vec{v} \models t_1(\vec{v}) = t_2(\vec{v}) \;\;\textit{if and only if}\;\; \text{the denotation of $t_1(\vec{v})$ is equal to the denotation of $t_2(\vec{v})$ in $M$} $$

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Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2025 and Updates to the IRF Quality Reporting Program

A Rule by the Centers for Medicare & Medicaid Services on 08/06/2024

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Document Details Published Content - Document Details Agencies Department of Health and Human Services Centers for Medicare & Medicaid Services Agency/Docket Number CMS-1804-F CFR 42 CFR 412 Document Citation 89 FR 64276 Document Number 2024-16911 Document Type Rule Pages 64276-64340 (65 pages) Publication Date 08/06/2024 RIN 0938-AV31 Published Content - Document Details
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FOR FURTHER INFORMATION CONTACT:

I. executive summary, b. summary of major provisions, c. summary of impact, ii. background, a. statutory basis and scope for irf pps provisions, b. provisions of the affordable care act and the medicare access and chip reauthorization act of 2015 (macra) affecting the irf pps in fy 2012 and beyond, c. operational overview of the current irf pps, iii. summary of provisions of the final rule, iv. analysis of and responses to public comments, a. general comments on the fy 2025 irf pps proposed rule, v. updates to the case-mix group (cmg) relative weights and average length of stay (alos) values for fy 2025, vi. fy 2025 irf pps payment update, a. background, b. fy 2025 market basket update and productivity adjustment, 1. fy 2025 market basket update, 2. fy 2025 productivity adjustment, c. labor-related share for fy 2025, d. wage adjustment for fy 2025, 1. background, 2. core-based statistical areas (cbsas) for the fy 2025 irf wage index, a. urban counties becoming rural, b. rural counties becoming urban, c. urban counties moving to a different urban cbsa, d. change to county-equivalents in the state of connecticut, 3. transition policy for fy 2025 wage index changes, 4. irf budget-neutral wage adjustment factor methodology, g. description of the irf standard payment conversion factor and payment rates for fy 2025, h. example of the methodology for adjusting the prospective payment rates, vii. update to payments for high-cost outliers under the irf pps for fy 2025, a. update to the outlier threshold amount for fy 2025, b. update to the irf cost-to-charge ratio (ccr) ceiling and urban/rural averages for fy 2025, viii. inpatient rehabilitation facility (irf) quality reporting program (qrp), a. background and statutory authority, b. general considerations used for the selection of measures for the irf qrp, 1. quality measures currently adopted for the irf qrp, c. collection of four new items as standardized patient assessment data elements and modification of one item collected as a standardized patient assessment data element beginning with the fy 2028 irf qrp, 1. definition of standardized patient assessment data, 2. social determinants of health collected as standardized patient assessment data elements, 3. collection of four new items as standardized patient assessment data elements beginning with the fy 2028 irf qrp, (a) living situation, (c) utilities, 4. interested party input, (a) comments on the living situation assessment item, (b) comments on the food assessment items, (c) comments on the utilities assessment item, 5. modification of the transportation item beginning with the fy 2028 irf qrp, d. irf qrp quality measure concepts under consideration for future years—request for information (rfi), 1. vaccination composite, 2. pain management, 3. depression, 4. other suggestions for future measure concepts, e. future irf star rating system: request for information (rfi), 1. specific criteria to use in measure selection, 2. presentation of irf star ratings information, 3. other comments received about an irf star ratings system, f. form, manner, and timing of data submission under the irf qrp, 2. reporting schedule for the proposed new standardized patient assessment data elements and the modified transportation data element beginning with the fy 2028 irf qrp, 3. removal of the admission class item from the irf-pai beginning october 1, 2026., (a) background, (b) removal of item, g. policies regarding public display of measure data for the irf qrp, ix. collection of information requirements, a. requirements for updates related to the irf qrp beginning with the fy 2028 irf qrp, x. regulatory impact analysis, a. statement of need, b. overall impact, c. anticipated effects, 1. effects on irfs, 2. detailed economic analysis, 3. description of table 17, 4. impact of the update to the outlier threshold amount, 5. impact of the wage index, labor-related share, and wage index cap, 6. impact of the updated cbsa delineations, 7. impact of the phase-out of the rural adjustment for irfs transitioning from rural to urban designations, 8. impact of the update to the cmg relative weights and alos values, 9. effects of requirements for the irf qrp beginning with the fy 2028 irf qrp, d. alternatives considered, e. regulatory review costs, f. accounting statement and table, g. conclusion.

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Medicare Program: Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2025 and Updates to the Inpatient Rehabilitation Facility Quality Reporting Program (CMS-1804-P)

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Department of Health and Human Services

Centers for medicare & medicaid services.

42 CFR Part 412
[CMS-1804-F]
RIN 0938-AV31

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services (HHS).

Final action.

This final action updates the prospective payment rates for inpatient rehabilitation facilities (IRFs) for Federal fiscal year (FY) 2025. As required by statute, this final action includes the classification and weighting factors for the IRF prospective payment system's case-mix groups and a description of the methodologies and data used in computing the prospective payment rates for FY 2025. We are updating the Office of Management and Budget (OMB) market area delineations for the IRF prospective payment system (PPS) wage index and applying a 3-year phase-out of the rural adjustment. This rule also includes updates for the IRF Quality Reporting Program (QRP).

This final action is effective on October 1, 2024.

Applicability dates: The updated IRF prospective payment rates are applicable for IRF discharges occurring on or after October 1, 2024, and on or before September 30, 2025 (FY 2025).

Patricia Taft, (410)-786-4561, for general information.

Kim Schwartz, (410) 786-2571, for information about the IRF payment policies, payment rates and coverage policies.

Ariel Cress, (410) 786-8571, for information about the IRF quality reporting program.

This final rule updates the prospective payment rates for IRFs for FY 2025 (that is, for discharges occurring on or after October 1, 2024, and on or before September 30, 2025) as required under section 1886(j)(3)(C) of the Social Security Act (the Act). As required by section 1886(j)(5) of the Act, this final rule includes the classification and weighting factors for the IRF PPS's case-mix groups (CMGs), a description of the methodologies and data used in computing the prospective payment rates for FY 2025, and revised OMB core-based statistical area delineations from the July 21, 2023, OMB Bulletin (No. 23-01) for the IRF PPS wage index.

For the IRF QRP, this rule finalizes the collection of four new items as standardized patient assessment data elements and the modification of one item collected as a standardized patient assessment data element, in the IRF-Patient Assessment Instrument (IRF-PAI) beginning with the FY 2028 IRF QRP. This final rule also finalizes a proposal with modification to remove one assessment item from the IRF-PAI. In addition, this final rule provides a summary of the information received on our Request for Information on quality measure concepts for the IRF QRP in future years and an IRF star rating system.

In this final rule, we use the methods described in the FY 2024 IRF PPS final rule ( 88 FR 50956 ) to update the prospective payment rates for FY 2025 using updated FY 2023 IRF claims and the most recent available IRF cost report data, which is FY 2022 IRF cost report data. We also use the revised OMB market area delineations from the July 21, 2023, OMB Bulletin (No. 23-01) for the IRF PPS wage index, and apply a 3-year phase-out of the rural adjustment for those IRFs changing from rural to urban.

For the IRF QRP, we are finalizing four new items as standardized patient assessment data elements that IRFs must collect and submit using the IRF-PAI beginning with the FY 2028 IRF QRP: one item for Living Situation, two items for Food, and one item for Utilities. We are also finalizing our proposal to modify the current Transportation item beginning with the FY 2028 IRF QRP. Additionally, we are finalizing with modification our proposal to remove Item 14. Admission Class from the IRF-PAI. Finally, in the proposed rule, we sought input from interested parties on future IRF QRP quality measure concepts and an IRF star rating system and are providing a summary of the comment we received.

TABLE 1—Cost and Benefit

Provision description Transfers/costs FY 2025 IRF PPS payment rate update The overall economic impact of this final rule is an estimated $280 million in increased payments from the Federal Government to IRFs during FY 2025. FY 2028 IRF QRP changes The overall economic impact of this final rule is an estimated increase in cost to IRFs of $392,113.40 beginning with the FY 2028 IRF QRP.

Section 1886(j) of the Act provides for the implementation of a per-discharge PPS for inpatient rehabilitation hospitals and inpatient rehabilitation units of a hospital (collectively, hereinafter referred to as IRFs). Payments under the IRF PPS encompass inpatient operating and capital costs of furnishing covered rehabilitation services (that is, routine, ancillary, and capital costs), but not direct graduate medical education costs, costs of approved nursing and allied health education activities, bad debts, and other services or items outside the scope of the IRF PPS. A complete discussion of the IRF PPS provisions appears in the original FY 2002 IRF PPS final rule ( 66 FR 41316 ) and the FY 2006 IRF PPS final rule ( 70 FR 47880 ) and we provided a general description of the IRF PPS for FYs 2007 through 2019 in the FY 2020 IRF PPS final rule ( 84 FR 39055 through 39057 ). A general description of the IRF PPS for FYs 2020 through 2024, along with detailed background information for various other aspects of the IRF PPS, is now available on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS .

Under the IRF PPS from FY 2002 through FY 2005, the prospective payment rates were computed across 100 distinct CMGs, as described in the FY 2002 IRF PPS final rule ( 66 FR 41316 ). We constructed 95 CMGs using rehabilitation impairment categories (RICs), functional status (both motor and cognitive), and age (in some cases, cognitive status and age may not be a factor in defining a CMG). In addition, we constructed five special CMGs to account for very short stays and for patients who expire in the IRF.

For each of the CMGs, we developed relative weighting factors to account for a patient's clinical characteristics and expected resource needs. Thus, the weighting factors accounted for the relative difference in resource use across all CMGs. Within each CMG, we created tiers based on the estimated effects that certain comorbidities would have on resource use.

We established the Federal PPS rates using a standardized payment conversion factor (formerly referred to as the budget-neutral conversion factor). For a detailed discussion of the budget-neutral conversion factor, please refer to our FY 2004 IRF PPS final rule ( 68 FR 45684 through 45685 ). In the FY 2006 IRF PPS final rule ( 70 FR 47880 ), we discussed in detail the methodology for determining the standard payment conversion factor.

We applied the relative weighting factors to the standard payment conversion factor to compute the unadjusted prospective payment rates under the IRF PPS from FYs 2002 through 2005. Within the structure of the payment system, we then made adjustments to account for interrupted stays, transfers, short stays, and deaths. Finally, we applied the applicable adjustments to account for geographic variations in wages (wage index), the percentage of low-income patients, location in a rural area (if applicable), and outlier payments (if applicable) to the IRFs' unadjusted prospective payment rates.

For cost reporting periods that began on or after January 1, 2002, and before October 1, 2002, we determined the final prospective payment amounts using the transition methodology prescribed in section 1886(j)(1) of the Act. Under this provision, IRFs transitioning into the PPS were paid a blend of the Federal IRF PPS rate and the payment that the IRFs would have received had the IRF PPS not been implemented. This provision also allowed IRFs to elect to bypass this blended payment and immediately be paid 100 percent of the Federal IRF PPS rate. The transition methodology expired as of cost reporting periods beginning on or after October 1, 2002 (FY 2003), and payments for all IRFs now consist of 100 percent of the Federal IRF PPS rate.

Section 1886(j) of the Act confers broad statutory authority upon the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF PPS final rule ( 70 FR 47880 ) and in correcting amendments to the FY 2006 IRF PPS final rule ( 70 FR 57166 ), we are finalizing a number of refinements to the IRF PPS case-mix classification system (the CMGs and the corresponding relative weights) and the case-level and facility-level adjustments. These refinements included the adoption of the Office of Management and Budget's (OMB's) Core-Based Statistical Area market definitions; modifications to the CMGs, tier comorbidities; and CMG relative weights, implementation of a new teaching status adjustment for IRFs; rebasing and revising the market basket used to update IRF payments, and updates to the rural, low-income percentage (LIP), and high-cost outlier adjustments. Beginning with the FY 2006 IRF PPS final rule ( 70 FR 47908 through 47917 ), the market basket used to update IRF payments was a market basket reflecting the operating and capital cost structures for freestanding IRFs, freestanding inpatient psychiatric facilities (IPFs), and long-term care hospitals (LTCHs). Any reference to the FY 2006 IRF PPS final rule in this final rule also includes the provisions effective in the correcting amendments. For a detailed discussion of the final key policy changes for FY 2006, please refer to the FY 2006 IRF PPS final rule.

In response to COVID-19 Public Health Emergency (PHE), we published two interim final rules with comment period affecting IRF payment and conditions for participation. The interim final rule with comment period (IFC) entitled “Medicare and Medicaid Programs; Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency,” published on April 6, 2020 ( 85 FR 19230 ) (hereinafter referred to as the April 6, 2020 IFC), included certain changes to the IRF PPS medical supervision requirements at 42 CFR 412.622(a)(3)(iv) and 412.29(e) during the PHE for COVID-19. In addition, in the April 6, 2020 IFC, we removed the post-admission physician evaluation requirement at § 412.622(a)(4)(ii) for all IRFs during the PHE for COVID-19. In the FY 2021 IRF PPS final rule, to ease documentation and administrative burden, we permanently removed the post-admission physician evaluation documentation requirement at § 412.622(a)(4)(ii) beginning in FY 2021.

A second IFC, entitled “Medicare and Medicaid Programs, Basic Health Program, and Exchanges; Additional Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency and Delay of Certain Reporting Requirements for the Skilled Nursing Facility Quality Reporting Program,” was published on May 8, 2020 ( 85 FR 27550 ) (hereinafter referred to as the May 8, 2020 IFC). Among other changes, the May 8, 2020 IFC included a waiver of the “3-hour rule” at § 412.622(a)(3)(ii) to reflect the waiver required by section 3711(a) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( Pub. L. 116-136 , enacted on March 27, 2020). In the May 8, 2020 IFC, we also modified certain IRF coverage and classification requirements for freestanding IRF hospitals to relieve acute care hospital capacity concerns in States (or regions, as applicable) experiencing a surge during the PHE for COVID-19. In addition to the policies adopted in our IFCs, we responded to the PHE with numerous blanket waivers [ 1 ] and other flexibilities, [ 2 ] some of which are applicable to the IRF PPS. CMS finalized these policies in the Calendar Year 2023 Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems final rule with comment period ( 87 FR 71748 ). Subsequently, on May 11, 2023, the U.S. Department of Health and Human Services (“HHS”) declared the expiration of the COVID-19 public health emergency. (See https://www.hhs.gov/about/news/2023/02/09/fact-sheet-covid-19-public-health-emergency-transition-roadmap.html . ) As a result, the “3-hour rule” waiver at § 412.622(a)(3)(ii), and other IRF flexibilities were terminated.

The regulatory history previously included in each rule or notice issued under the IRF PPS, including a general description of the IRF PPS for FYs 2007 through 2024, is available on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS .

The Patient Protection and Affordable Care Act ( Pub. L. 111-148 ) was enacted on March 23, 2010. The Health Care and Education Reconciliation Act of 2010 ( Pub. L. 111-152 ), which amended and revised several provisions of the Patient Protection and Affordable Care Act, was enacted on March 30, 2010. In this final rule, we refer to the two statutes collectively as the “Affordable Care Act” or “ACA”.

The ACA included several provisions that affect the IRF PPS in FYs 2012 and beyond. In addition to what was previously discussed, section 3401(d) of the ACA also added section 1886(j)(3)(C)(ii)(I) of the Act (providing for a “productivity adjustment” for FY 2012 and each subsequent FY). The productivity adjustment for FY 2025 is discussed in section V.D. of this final rule. Section 1886(j)(3)(C)(ii)(II) of the Act provides that the application of the productivity adjustment to the market basket update may result in an update that is less than 0.0 for a FY and in payment rates for a FY being less than such payment rates for the preceding FY.

Section 3004(b) of the ACA and section 411(b) of the MACRA ( Pub. L. 114-10 , enacted on April 16, 2015) also addressed the IRF PPS. Section 3004(b) of ACA reassigned the previously designated section 1886(j)(7) of the Act to section 1886(j)(8) of the Act and inserted a new section 1886(j)(7) of the Act, which contains requirements for the Secretary to establish a QRP for IRFs. Under that program, data must be submitted in a form and manner and at a time specified by the Secretary. Beginning in FY 2014, section 1886(j)(7)(A)(i) of the Act requires the application of a 2-percentage point reduction to the market basket increase factor otherwise applicable to an IRF (after application of paragraphs (C)(iii) and (D) of section 1886(j)(3) of the Act) for a FY if the IRF does not comply with the requirements of the IRF QRP for that FY. Application of the 2-percentage point reduction may result in an update that is less than 0.0 for a FY and in payment rates for a FY being lower than payment rates for the preceding FY. Reporting-based reductions to the market basket increase factor are not cumulative; they only apply for the FY involved. Section 411(b) of the MACRA amended section 1886(j)(3)(C) of the Act by adding paragraph (iii), which required us to apply for FY 2018, after the application of section 1886(j)(3)(C)(ii) of the Act, an increase factor of 1.0 percent to update the IRF prospective payment rates.

As described in the FY 2002 IRF PPS final rule ( 66 FR 41316 ), upon the admission and discharge of a Medicare Part A fee-for-service (FFS) patient, the IRF is required to complete the appropriate sections of a Patient Assessment Instrument (PAI), designated as the IRF-PAI. In addition, beginning with IRF discharges occurring on or after October 1, 2009, the IRF is also required to complete the appropriate sections of the IRF-PAI upon the admission and discharge of each Medicare Advantage (MA) patient, as described in the FY 2010 IRF PPS final rule ( 74 FR 39762 ) and the FY 2010 IRF PPS correction notice ( 74 FR 50712 ). All required data must be electronically encoded into the IRF-PAI software product. Generally, the software product includes patient classification programming called the Grouper software. The Grouper software uses specific IRF-PAI data elements to classify (or group) patients into distinct CMGs and account for the existence of any relevant comorbidities.

The Grouper software produces a five-character CMG number. The first character is an alphabetic character that indicates the comorbidity tier. The last four characters are numeric characters that represent the distinct CMG number. A free download of the Grouper software is available on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/Software.html . The Grouper software is also embedded in the internet Quality Improvement and Evaluation System (iQIES) User tool available in iQIES at https://www.cms.gov/medicare/quality-safety-oversight-general-information/iqies .

Once a Medicare Part A FFS patient is discharged, the IRF submits a Medicare claim as a Health Insurance Portability and Accountability Act of 1996 (HIPAA) ( Pub. L. 104-191 , enacted on August 21, 1996) compliant electronic claim or, if the Administrative Simplification Compliance Act of 2002 (ASCA) ( Pub. L. 107-105 , enacted on December 27, 2002) permits, a paper claim (a UB-04 or a CMS-1450 as appropriate) using the five-character CMG number and sends it to the appropriate Medicare Administrative Contractor (MAC). In addition, once a MA patient is discharged, in accordance with the Medicare Claims Processing Manual, chapter 3, section 20.3 (Pub. 100-04), hospitals (including IRFs) must submit to their MAC an informational-only bill (type of bill (TOB) 111) that includes Condition Code 04. This will ensure that the MA days are included in the hospital's Supplemental Security Income (SSI) ratio (used in calculating the IRF LIP adjustment) for FY 2007 and beyond. Claims submitted to Medicare must comply with both ASCA and HIPAA.

Section 3 of the ASCA amended section 1862(a) of the Act by adding paragraph (22), which requires the Medicare program, subject to section 1862(h) of the Act, to deny payment under Part A or Part B for any expenses for items or services for which a claim is submitted other than in an electronic form specified by the Secretary. Section 1862(h) of the Act, in turn, provides that the Secretary shall waive such denial in situations in which there is no method available for the submission of claims in an electronic form or the entity submitting the claim is a small provider. In addition, the Secretary also has the authority to waive such denial in such unusual cases as the Secretary finds appropriate. For more information, see the “Medicare Program; Electronic Submission of Medicare Claims” final rule ( 70 FR 71008 ). Our instructions for the limited number of Medicare claims submitted on paper are available at https://www.cms.gov/manuals/downloads/clm104c25.pdf .

Section 3 of the ASCA operates in the context of the administrative simplification provisions of HIPAA, which include, among others, the requirements for transaction standards and code sets codified in 45 CFR part 160 and part 162, subparts A and I through R (generally known as the Transactions Rule). The Transactions Rule requires covered entities, including covered healthcare providers, to conduct covered electronic transactions according to the applicable transaction standards. (See the CMS program claim memoranda at https://www.cms.gov/ElectronicBillingEDITrans/ and listed in the addenda to the Medicare Intermediary Manual, Part 3, section 3600.)

The MAC processes the claim through its software system. This software system includes pricing programming called the “Pricer” software. The Pricer software uses the CMG number, along with other specific claim data elements and provider-specific data, to adjust the IRF's prospective payment for interrupted stays, transfers, short stays, and deaths, and then applies the applicable adjustments to account for the IRF's wage index, percentage of low-income patients, rural location, and outlier payments. For discharges occurring on or after October 1, 2005, the IRF PPS payment also reflects the teaching status adjustment that became effective as of FY 2006, as discussed in the FY 2006 IRF PPS final rule ( 70 FR 47880 ).

In this FY 2025 IRF PPS final rule, we are finalizing our proposal to update the IRF PPS for FY 2025 and the IRF QRP for FY 2028.

The finalized policy changes and updates to the IRF prospective payment rates for FY 2025 will be as follows:

Update the CMG relative weights and average length of stay values for FY 2025, in a budget neutral manner, as discussed in section IV.
Update the IRF PPS payment rates for FY 2025 by the market basket increase factor, based upon the most current data available, with a productivity adjustment required by section 1886(j)(3)(C)(ii)(I) of the Act, as described in section V.
Update the FY 2025 IRF PPS payment rates by the FY 2025 wage index, describe the adoption of the revised OMB market area delineations, the phase-out of the rural adjustment for those IRFs changing from rural to urban, and the labor related share in a budget-neutral manner, as discussed in section V.
Describe the calculation of the IRF standard payment conversion factor for FY 2025, as discussed in section V.
Update the outlier threshold amount for FY 2025, as discussed in section VI.
Update the cost-to-charge ratio (CCR) ceiling and urban/rural average CCRs for FY 2025, as discussed in section VI.

The finalized policy changes and updates to the IRF QRP for FY 2028 will be as follows:

Adoption of four items as standardized patient assessment data elements and modification of one item currently collected as a standardized patient assessment data element in the IRF-PAI.
Remove Item 14. Admission Class item from the IRF-PAI.
Summarize comments received on the request for information on IRF QRP quality measure and concepts.
Summarize comments received on the request for information on an IRF QRP star rating system.

We received 44 timely responses from the public, many of which contained multiple comments on the FY 2025 IRF PPS proposed rule ( 89 FR 22246 ). We received comments from various trade associations, inpatient rehabilitation facilities, individual physicians, therapists, clinicians, health care industry organizations, and health care consulting firms. The following sections, arranged by subject area, include a summary of the public comments that we received, and our responses.

In addition to the comments we received on specific proposals contained within the proposed rule (which we address later in this final rule), commenters also submitted more general observations on the IRF PPS and IRF care generally.

Comment: We received several comments that were outside the scope of the FY 2025 IRF PPS proposed rule. Specifically, we received comments regarding updates to the facility-level adjustments (for example, teaching, LIP, and rural); the removal of physician-centric language from regulatory text; the inclusion of recreational therapy in the IRF intensity of therapy requirement; the consequences of increased Medicare Advantage participation for IRFs and Medicare Advantage (MA) payment adjustments; disclosures of ownership and additional disclosable parties' information in the skilled nursing facility setting; and applicability of the IPPS low wage index policy for the IRF PPS wage index.

Response: We thank the commenters for bringing these issues to our attention, and we will take these comments into consideration for potential policy refinements or direct the comments to the appropriate subject matter experts.

As specified in § 412.620(b)(1), we calculate a relative weight for each CMG that is proportional to the resources needed for an average inpatient rehabilitation case in that CMG. For example, cases in a CMG with a relative weight of 2, on average, will cost twice as much as cases in a CMG with a relative weight of 1. Relative weights account for the variance in cost per discharge due to the variance in resource utilization among the payment groups, and their use helps to ensure that IRF PPS payments support beneficiary access to care, as well as provider efficiency.

In this final rule, we update the CMG relative weights and ALOS values for FY2025. Typically, we use the most recent available data to update the CMG relative weights and ALOS values. For FY 2025, we are using the FY 2023 IRF claims and FY 2022 IRF cost report data. These data are the most current and complete data available at this time. Currently, only a small portion of the FY 2023 IRF cost report data is available for analysis, but the majority of the FY 2023 IRF claims data are available for analysis.

In the FY 2025 IRF PPS proposed rule, we proposed that if more recent data became available after the publication of the proposed rule and before the publication of the final rule, we would use such data to determine the FY 2025 CMG relative weights and ALOS values in this final rule.

We proposed to apply these data using the same methodologies that we have used to update the CMG relative weights and ALOS values each FY since we implemented an update to the methodology. The detailed cost to charge ratio (CCR) data from the cost reports of IRF provider units of primary acute care hospitals is used for this methodology, instead of CCR data from the associated primary care hospitals, to calculate IRFs' average costs per case, as discussed in the FY 2009 IRF PPS final rule ( 73 FR 46372 ). In calculating the CMG relative weights, we use a hospital-specific relative value method to estimate operating (routine and ancillary services) and capital costs of IRFs. The process to calculate the CMG relative weights for this final rule is as follows:

Step 1. We estimate the effects that comorbidities have on costs.

Step 2. We adjust the cost of each Medicare discharge (case) to reflect the effects found in Step 1.

Step 3. We use the adjusted costs from Step 2 to calculate CMG relative weights, using the hospital-specific relative value method.

Step 4. We normalize the FY 2025 CMG relative weights using a normalization factor that results in the average CMG relative weights in FY 2025 being the same as the average CMG relative weights in the FY 2024 IRF PPS final rule ( 88 FR 50956 ).

Consistent with the methodology that we have used to update the IRF classification system in each instance in the past, we are updating the CMG relative weights for FY 2025 in such a way that total estimated aggregate payments to IRFs for FY 2025 are the same with or without the changes (that is, in a budget-neutral manner) by applying a budget neutrality factor to the standard payment amount. To calculate the appropriate budget neutrality factor for use in updating the FY 2025 CMG relative weights, we use the following steps:

Step 1. Calculate the estimated total amount of IRF PPS payments for FY 2025 (with no changes to the CMG relative weights).

Step 2. Calculate the estimated total amount of IRF PPS payments for FY 2025 by applying the changes to the CMG relative weights (as discussed in this final rule).

Step 3. Divide the amount calculated in Step 1 by the amount calculated in Step 2 to determine the budget neutrality factor of 0.9976 that would maintain the same total estimated aggregate payments in FY 2025 with and without the changes to the final CMG relative weights.

Step 4. Apply the budget neutrality factor from Step 3 to the FY 2025 IRF PPS standard payment amount after the application of the budget-neutral wage adjustment factor.

In section V. of this final rule, we discuss the use of the existing methodology to calculate the standard payment conversion factor for FY 2025.

In Table 2, “Relative Weights and Average Length of Stay Values for Case Mix Groups,” we present the CMGs, the comorbidity tiers, the corresponding relative weights, and the ALOS values for each CMG and tier for FY 2025. The ALOS for each CMG is used to determine when an IRF discharge meets the definition of a short stay transfer, which results in a per diem case level adjustment.

Generally, updates to the CMG relative weights result in some increases and some decreases to the CMG relative weight values. Table 2 shows how we estimate that the application of the revisions for FY 2025 would affect particular CMG relative weight values, which would affect the overall distribution of payments within CMGs and tiers. We note that, because we implement the CMG relative weight revisions in a budget-neutral manner (as previously described), total estimated aggregate payments to IRFs for FY 2025 would not be affected as a result of the proposed CMG relative weight revisions. However, the revisions would affect the distribution of payments within CMGs and tiers.

TABLE 3—Distributional Effects of the Changes to the CMG Relative Weights

Percentage change in CMG relative weights Number of cases affected Percentage of cases affected (%) Increased by 15% or more 6 0.0 Increased by between 5% and 15% 1,875 0.5 Changed by less than 5% 406,808 99.2 Decreased by between 5% and 15% 1,468 0.4 Decreased by 15% or more 28 0.0

As shown in Table 3, 99.2 percent of all IRF cases are in CMGs and tiers that would experience less than a 5 percent change (either increase or decrease) in the CMG relative weight value as a result of the revisions for FY 2025. The changes in the ALOS values for FY 2025, compared with the FY 2024 ALOS values, are small and do not show any particular trends in IRF length of stay patterns.

We invited public comment on our proposed updates to the CMG relative weights and ALOS values for FY 2025.

The following is a summary of the public comments received on the proposed revisions to update the CMG relative weights and ALOS values for FY 2025 and our responses:

Comment: Public comments generally supported CMS' update to the CMG relative weights and average length of stay values and encouraged CMS to use the latest available data to update these values in the final rule. However, one commenter advocated for meaningful increases to the CMG weights for cases that include the 13 conditions used to identify qualifying facilities under the 60 percent rule in order to help payment increases match the cost of care. Another commenter recommended that CMS consider using an average-cost weighting method, rather than the current hospital-specific relative value method (HSRV), for calculating the CMG relative weights, to improve the relationship between costs and payments and increase the uniformity of profitability across IRF cases.

Response: We appreciate these commenters' support for updating the relative weights and ALOS values for FY 2025. We have updated our data between the FY 2025 IRF PPS proposed and this final rule to ensure that we use the most recent available data in calculating IRF PPS payments.

The methodology that we use to update the CMG relative weights uses the most recent cost data reported by IRFs to compute relative weights that reflect the relative costliness of different IRF cases. We increase or decrease relative weights of the CMGs annually, including for those CMGs associated with the 13 conditions that qualify for the 60 percent rule, under 42 CFR 412.29(b)(2) , based only on the cost data reported to us by IRFs each year.

We believe that these data accurately reflect the severity of the IRF patient population and the associated costs of caring for these patients in the IRF setting. The CMG relative weights are updated each year based on the most recent available data for the full population of IRF Medicare fee-for-service beneficiaries. This ensures that the IRF case mix system is as reflective as possible of changes in the IRF patient populations and the associated coding practices and ensures that IRF payments appropriately reflect the relative costs of caring for all types of IRF patients.

We appreciate commenters' feedback and suggestions for refinements to current methodologies. We recognize commenters' desire for increased weights for cases that include the 13 qualifying conditions. However, the 13 qualifying conditions reflect those conditions that were treated in IRFs when IRFs were first excluded from payment under the IPPS in 1983. These conditions have been used to define IRFs as distinct from IPPS hospitals in terms of the types of patients treated and the types of services provided to these patients. They are not necessarily supposed to be more costly in the IRF to treat than other conditions, just more likely to make up the bulk of patients in the IRF setting.

Also, as stated in section V. of this final rule, the weight calculated for each CMG is proportional to the resources needed for an average case in that CMG. These weights are relative to one another, for example, cases in a CMG with a relative weight of 2, on average, will cost twice as much as cases in a CMG with a relative weight of 1. The weights are empirically derived, based entirely on the data that IRFs report to us on their claims and cost reports, and we do not believe it would be appropriate for us to manipulate these data to increase certain relative weights.

Furthermore, we did not propose any changes to the current HSRV method used to assign payment weights for FY 2025 and believe that a careful evaluation of the advantages and disadvantages of moving to an average-cost weighting method is essential, given the major distributional shifts that would be associated with such a change. The purpose of the HSRV method is, in part, to place a greater emphasis on more efficient IRF providers (that treat complex IRF patients at lower costs). Moving to an average-cost weighting method places more emphasis on high cost IRF providers, which could have higher costs because they are operating less efficiently. We will continue evaluating the effects of changing from HSRV weighting to average-cost weighting. The results of this analysis will inform future rulemaking.

After consideration of the comments we received, we are finalizing our proposal to update the CMG relative weights and ALOS values for FY 2025 using the same methodologies that we have used to update the CMG relative weights and ALOS values each FY since we implemented an update to the methodology in FY 2009, as shown in Table 2 of this final rule. These updates are effective for FY 2025, that is, for discharges occurring on or after October 1, 2024, and on or before September 30, 2025.

Section 1886(j)(3)(C) of the Act requires the Secretary to establish an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services for which payment is made under the IRF PPS. According to section 1886(j)(3)(A)(i) of the Act, the increase factor shall be used to update the IRF prospective payment rates for each FY. Section 1886(j)(3)(C)(ii)(I) of the Act requires the application of the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Thus, in this final rule, we are updating the IRF PPS payments for FY 2025 by a market basket increase factor as required by section 1886(j)(3)(C) of the Act based upon the most current data available, with a productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act.

We have utilized various market baskets through the years in the IRF PPS. For a discussion of these market baskets, we refer readers to the FY 2016 IRF PPS final rule ( 80 FR 47046 ).

In FY 2016, we finalized the use of a 2012-based IRF market basket, using Medicare cost report data for both freestanding and hospital-based IRFs ( 80 FR 47049 through 47068 ). In FY 2020, we finalized a rebased and revised IRF market basket to reflect a 2016 base year. The FY 2020 IRF PPS final rule ( 84 FR 39071 through 39086 ) contains a complete discussion of the development of the 2016-based IRF market basket. Beginning with FY 2024, we finalized a rebased and revised IRF market basket to reflect a 2021 base year. The FY 2024 IRF PPS final rule ( 88 FR 50966 through 50988 ) contains a complete discussion of the development of the 2021-based IRF market basket.

For FY 2025 (that is, beginning October 1, 2024, and ending September 30, 2025), we proposed to update the IRF PPS payments by a market basket increase factor as required by section 1886(j)(3)(C) of the Act, with a productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act. For FY 2025, we proposed to use the same methodology described in the FY 2024 IRF PPS final rule ( 88 FR 50982 through 50984 ).

Consistent with historical practice, we proposed to estimate the market basket update for the IRF PPS for FY 2025 based on IHS Global Inc.'s (IGI's) forecast using the most recent available data. Based on IGI's fourth quarter 2023 forecast with historical data through the third quarter of 2023, the proposed 2021-based IRF market basket increase factor for FY 2025 was projected to be 3.2 percent. We also proposed that if more recent data became available after the publication of the proposed rule and before the publication of the final rule (for example, a more recent estimate of the market basket percentage increase or productivity adjustment), we would use such data, if appropriate, to determine the FY 2025 market basket update in this final rule.

Based on IGI's second quarter 2024 forecast with historical data through the first quarter of 2024, the 2021-based IRF market basket percentage increase for FY 2025 is 3.5 percent.

According to section 1886(j)(3)(C)(i) of the Act, the Secretary shall establish an increase factor based on an appropriate percentage increase in a market basket of goods and services. Section 1886(j)(3)(C)(ii) of the Act requires that, after establishing the increase factor for a FY, the Secretary shall reduce such increase factor for FY 2012 and each subsequent FY, by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Section 1886(b)(3)(B)(xi)(II) of the Act sets forth the definition of this productivity adjustment. The statute defines the productivity adjustment to be equal to the 10-year moving average of changes in annual economy-wide, private nonfarm business multifactor productivity (as projected by the Secretary for the 10-year period ending with the applicable FY, year, cost reporting period, or other annual period) (the “productivity adjustment”). The U.S. Department of Labor's Bureau of Labor Statistics (BLS) publishes the official measures of productivity for the U.S. economy. We note that previously the productivity measure referenced in section 1886(b)(3)(B)(xi)(II) of the Act, was referred to by BLS as private nonfarm business multifactor productivity. Beginning with the November 18, 2021, release of productivity data, BLS replaced the term multifactor productivity (MFP) with total factor productivity (TFP). BLS noted that this is a change in terminology only and will not affect the data or methodology. As a result of this change, the productivity measure referenced in section 1886(b)(3)(B)(xi)(II) is now published by BLS as private nonfarm business total factor productivity. However, as mentioned above, the data and methods are unchanged. Please see www.bls.gov for the BLS historical published TFP data. A complete description of IGI's TFP projection methodology is available on the CMS website at https://www.cms.gov/data-research/statistics-trends-and-reports/medicare-program-rates-statistics/market-basket-research-and-information . In addition, in the FY 2022 IRF final rule ( 86 FR 42374 ), we noted that effective with FY 2022 and forward, CMS changed the name of this adjustment to refer to it as the productivity adjustment rather than the MFP adjustment.

Using IGI's fourth quarter 2023 forecast, the 10-year moving average growth of TFP for FY 2025 was projected to be 0.4 percent. In accordance with section 1886(j)(3)(C) of the Act, we proposed to base the FY 2025 market basket update, which is used to determine the applicable percentage increase for the IRF payments, on IGI's fourth quarter 2023 forecast of the 2021-based IRF market basket. We proposed to then reduce the market basket percentage increase by the estimated productivity adjustment for FY 2025 of 0.4 percentage point (the 10-year moving average growth of TFP for the period ending FY 2025 based on IGI's fourth quarter 2023 forecast). Therefore, the proposed FY 2025 IRF update was equal to 2.8 percent (3.2 percent market basket percentage increase reduced by the 0.4 percentage point productivity adjustment). Furthermore, we proposed that if more recent data became available after the publication of the proposed rule and before the publication of the final rule (for example, a more recent estimate of the market basket percentage increase and/or productivity adjustment), we would use such data, if appropriate, to determine the FY 2025 market basket percentage increase and productivity adjustment in the final rule.

Using IGI's second quarter 2024 forecast, the 10-year moving average growth of TFP for FY 2025 is projected to be 0.5 percent. Thus, in accordance with section 1886(j)(3)(C) of the Act, the FY 2025 market basket percentage increase, which is used to determine the applicable percentage increase for the IRF payments, is equal to 3.5 percent using IGI's second quarter 2024 forecast of the 2021-based IRF market basket. We then reduce this percentage increase by the estimated productivity adjustment for FY 2025 of 0.5 percentage point (the 10-year moving average growth of TFP for the period ending FY 2025 based on IGI's second quarter 2024 forecast). Therefore, the FY 2025 IRF update is equal to 3.0 percent (3.5 percent market basket percentage increase reduced by the 0.5 percentage point productivity adjustment).

CMS recognizes that the Medicare Payment Advisory Commission (MedPAC) recommends that we reduce IRF PPS payment rates by 5 percent for FY 2025. [ 3 ] As discussed, and in accordance with sections 1886(j)(3)(C) and 1886(j)(3)(D) of the Act, the Secretary proposed to update the IRF PPS payment rates for FY 2025 by the proposed productivity-adjusted IRF market basket increase factor of 2.8 percent.

Based on more recent data, the current estimate of the productivity-adjusted IRF market basket increase factor for FY 2025 is 3.0 percent. Section 1886(j)(3)(C) of the Act does not provide the Secretary with the authority to apply a different update factor to IRF PPS payment rates for FY 2025.

We invited public comment on the proposed FY 2025 market basket percentage increase and productivity adjustment. The following is a summary of the public comments received and our responses:

Comment: Several commenters agreed with the general approach of increasing the standard payment conversion factor, but many commenters stated concerns that the proposed increase is inadequate. Commenters cited that the proposed payment increase does not keep pace with the higher increases in costs faced by IRFs such as labor, drug, medical supplies, personal protective equipment, and capital investment costs. Commenters also stated other challenges that could impact costs such as staffing shortages, supply chain disruptions, rising need for cybersecurity investment, higher administrative costs due to MA and commercial plan practices, high patient volumes and rising acuity, and unprecedented high inflation.

Some commenters argued that the increased discrepancy between payment inflation and cost inflation is causing a material financial hardship on hospitals and that increases in hospital costs have dramatically decreased hospital profit margins. One commenter stated that in calendar year 2022, half of U.S. hospitals reported negative profit margins and through the first 10 months of 2023, IRF operating margins were down by 12 percent compared to 2022 and down by 25 percent compared to 2021.

Several commenters stated that labor shortages and higher than typical cost inflation are expected to continue and must be met with correspondingly higher payment rates, especially as some public health emergency resources have concluded. Other commenters stated that the proposed increase factor was too small and called on CMS to increase its proposed market basket percentage in the final rule, with some stating that this increase should be higher than the increase in FY 2024. Some commenters requested that CMS account for the effects of the true inflationary cost using the latest available data in the final rule and other commenters requested that CMS recalculate the market basket update using data that more accurately reflects the growth in input prices. In the absence of such data, some commenters urged CMS to consider an alternative approach to better align the market basket increases with the rising cost of treating patients.

Several commenters expressed concern that CMS' market basket forecast process relies on generalized hospital goods and services, which would not recognize the specialized training and experience IRFs require of their therapists, nurses, and other clinicians. The commenter also noted that IRFs typically pay higher costs for advanced rehabilitation technologies and specialized drugs that are likely not properly captured in the market basket.

Many commenters requested that CMS reexamine the current forecasting approach for determining the IRF PPS market basket update as well as the underlying construction of the market basket. Some commenters urged CMS to consider whether adjustments are necessary in its approach to annual market basket updates. Specifically, the commenters claimed that since the COVID-19 public health emergency, IGI's forecasted growth for the IRF market basket has shown a consistent trend of under-forecasting actual market basket growth. The commenters noted that while they are cognizant of the fact that forecasts will always be imperfect, in the past, they have been more balanced. However, the commenters argued that with four straight years of under-forecasts, they were concerned that there is a more systemic issue with IGI's forecasting. Therefore, the commenters stated that absent action from CMS, these missed forecasts are permanently established in the standard payment rate for IRFs and will continue to compound. In addition, the commenters claimed that these underpayments also influence other payments, including the growing Medicare Advantage patient population, as well as commercial insurer payment rates. The commenters further stated that in addition to inaccurate forecasts, the underlying market basket itself may have shortcomings that fail to properly capture growth. The commenters stated that it is confounding how hospitals, and especially labor-intensive IRFs, could have a change in the market basket that is significantly below general inflation. The commenters provided an example of one such factor may be CMS' use of the Employment Cost Index (ECI) to measure changes in labor compensation in the market basket. The commenters stated that the ECI may not be adequately capturing growth in the costs of employment and labor. However, the commenters claimed that this is just one example of a potential issue and encouraged CMS to thoroughly reexamine the market basket and its recent shortcomings to identify other potential areas for refinement. The commenters stated their support to work with CMS to assist with such an endeavor.

Response: We acknowledge and appreciate commenters' concerns regarding recent trends in inflation. We are required to update IRF PPS payments by the market basket update adjusted for productivity, as directed by section 1886(j)(3)(C) of the Act. Specifically, section 1886(j)(3)(C)(i) states that the increase factor shall be based on an appropriate percentage increase in a market basket of goods and services comprising services for which payment is made. In the FY 2024 IRF PPS final rule, we rebased the IRF market basket to reflect a 2021 base year ( 88 FR 50966 through 50982 ). We believe the increase in the 2021-based IRF market basket adequately reflects the average change in the price of goods and services hospitals purchase in order to provide IRF medical services and is technically appropriate to use as the IRF payment update factor.

The IRF market basket is a fixed-weight, Laspeyres-type index that measures the change in price over time of the same mix of goods and services purchased by IRFs in the base period. As we discussed in response to similar comments in the FY 2024 IRF PPS final rule ( 88 FR 50983 ), the IRF market basket update would reflect the prospective price pressures described by the commenters as increasing during a high inflation period but would inherently not reflect other factors that might increase the level of costs, such as the quantity of labor used. We note that cost changes (that is, the product of price and quantities) would only be reflected when a market basket is rebased, and the base year weights are updated to a more recent time period. Therefore, we believe the 2021-based IRF market basket appropriately reflects IRF cost structures.

To reflect expected price growth for each of the cost categories in the IRF market basket, we rely on impartial economic forecasts of the price proxies used in the market basket from IGI. We have consistently used the IGI economic price proxy forecasts in the market baskets used to update the IRF PPS payments since the implementation of the IRF PPS. For example, to measure price growth for IRF wages and salaries costs in the IRF market basket, since IRF-specific information is unavailable, we use the ECI for Wages and Salaries for All Civilian workers in Hospitals. As stated in the FY 2024 IRF final rule ( 88 FR 50978 ), we believe that this ECI is the best available price proxy to account for the occupational skill mix within IRFs and in the absence of an IRF-specific ECI, we believe that the highly skilled hospital workforce captured by the ECI for Wages and Salaries for All Civilian workers in Hospitals (inclusive of therapists, nurses, other clinicians, etc.) is a reasonable proxy for the compensation component of the IRF market basket.

IGI is a nationally recognized economic and financial forecasting firm with which CMS contracts to forecast the components of the market baskets. At the time of the FY 2025 IRF PPS proposed rule, based on IGI's fourth quarter 2023 forecast with historical data through the third quarter of 2023, the 2021-based IRF market basket update was forecasted to be 3.2 percent for FY 2025, reflecting forecasted compensation price growth of 3.7 percent (by comparison, compensation price growth in the IRF market basket averaged 2.8 percent from 2014 through 2023). We also note that when developing its forecast for labor prices, IHS Global Inc. considers overall labor market conditions (including rise in contract labor employment due to tight labor market conditions) as well as trends in contract labor wages, which both have an impact on wage pressures for workers employed directly by the hospital.

As is our general practice, in the FY 2025 IRF PPS proposed rule, we proposed that if more recent data became available, we would use such data, if appropriate, to derive the final FY 2025 IRF market basket update for the final rule. For this final rule, we now have an updated forecast of the price proxies underlying the market basket that incorporates more recent historical data and reflects a revised outlook regarding the U.S. economy and expected price inflation for FY 2025. Based on IGI's second quarter 2024 forecast with historical data through the first quarter of 2024, we are projecting a FY 2025 IRF market basket update of 3.5 percent (reflecting forecasted compensation price growth of 4.0 percent) and a productivity adjustment of 0.5 percentage point. Therefore, for FY 2025 a final IRF productivity-adjusted market basket update of 3.0 percent (3.5 percent less 0.5 percentage point) will be applicable, compared to the 2.8 percent market basket update that was proposed.

Furthermore, we acknowledge that while the projected IRF hospital market basket updates for FY 2021 through FY 2023 were under forecast (actual increases less forecasted increases were positive), this was largely due to unanticipated inflationary and labor market pressures as the economy emerged from the COVID-19 PHE. In addition, forecast errors have been both positive and negative. Only considering the forecast error for years when the IRF market basket update was lower than the actual market basket update does not consider the full experience and impact of forecast error.

Finally, we acknowledge the commenter's recommendation that we thoroughly reexamine the market basket to identify other potential areas for refinement. We continue to monitor any recent data on IRF cost structures, historical price growth, as well as updated forecasts of price pressures faced by IRFs. Any changes to the IRF market basket would be proposed in future rulemaking.

Comment: Many commenters expressed concern about the continued application of the productivity adjustment to IRFs. Commenters requested that CMS temporarily suspend the productivity adjustment to the IRF market basket due to recent declines in hospital productivity. One commenter urged CMS to use its “special exceptions and adjustments” authority to eliminate the productivity cut for FY 2025 and another commenter urged CMS to consider its regulatory authority to modify the productivity adjustment or make a PHE and inflation related exception in its application for the FY 2025 update. One commenter stated that due to the imbalance between the economy-wide productivity measure and IRFs, they encouraged CMS to explore all available avenues to provide additional financial relief for IRFs, working within the agency's existing authority under the statute. Other commenters respectfully requested CMS to carefully monitor the impact that these productivity adjustments will have on the rehabilitation hospital sector, provide feedback to Congress as appropriate, and reduce the productivity adjustment.

Response: Section 1886(j)(3)(C)(ii)(I) of the Act requires the application of the productivity adjustment, described in section 1886(b)(3)(xi)(II) of the Act, to the IRF PPS market basket increase factor. As required by statute, the FY 2025 productivity adjustment is derived based on the 10-year moving average growth in economy-wide productivity for the period ending FY 2025. We recognize the concerns of the commenters regarding the appropriateness of the productivity adjustment; however, we are required pursuant to section 1886(j)(3)(C)(ii)(I) of the Act to apply the specific productivity adjustment described here.

Comment: Many commenters urged CMS to explore all available options to update IRF PPS payments to ensure there are no disruptions in access to IRF services for Medicare beneficiaries. One commenter encouraged CMS to consider additional funding opportunities in the final rule either through an updated market basket or other allowable means.

One commenter requested CMS consider other methods and data sources to calculate the final rule “base” (before additional adjustments) market basket update that better reflects the rapidly increasing input prices facing IRFs. Specifically, the commenter requested that CMS consider using the average growth rate in allowable Medicare costs per risk adjusted discharge for IRF hospitals from IRF cost reports (both freestanding and sub-providers of an acute care hospital) for FY 2022 to calculate the FY 2025 final rule market basket update. The commenter stated that this growth rate will capture the increased cost of contract labor, unlike the proxy for labor cost growth currently used in the proposed market basket update. Based on their analysis, the commenter claimed that this would yield an unadjusted market basket update of 4.08 percent. The commenter stated that a net market basket update of 3.68 percent for FY 2025 better reflects the actual input price inflation hospitals anticipate facing in the coming year, rather than the 2.8 percent net market basket update proposed by CMS.

Another commenter requested that CMS apply a retrospective payment adjustment to account for the differences between the FY 2022 through 2024 market basket updates and the actual market basket. They stated that CMS is not required to use IHS Global Inc. data, or solely such data, as the basis for the IRF PPS increase factor and stated that CMS has the discretion to adjust the market basket update in order to account for any increased labor costs incurred by providers not currently reflected in a market basket data source(s). The commenter stated that CMS incorrectly dismissed the option of applying a special payment adjustment for IRFs in the FY 2023 IRF PPS Final Rule and the FY 2024 IRF PPS Final Rule. The commenter claimed that CMS' position is essentially that because the forecast was relatively accurate prior to the COVID-19 pandemic, it is acceptable to penalize IRFs with a less accurate payment update for the periods during and after the pandemic. However, the commenter claimed that the FY 2024 IRF final rule did not discuss the difference between the forecast and actual market basket update for periods after FY 2020, when the forecasted market basket update used for rate setting has consistently fallen far short of the actual market basket update.

A few commenters stated that considering this once-in-a-generation convergence of inflationary pressures and pandemic forces, they respectfully urged CMS to consider a one-time adjustment to the market basket update to account for forecast errors made during and after the PHE to ensure that the FY 2025 annual rate update is applied to a base rate that more accurately reflects the cost of IRF care and actual inflation experienced since the beginning of the pandemic. Specifically, a few commenters requested CMS adopt a one-time forecast error adjustment of 3.7 percentage point to the FY 2025 update based on the difference in the IRF PPS market basket percentage increase in FYs 2021, 2022, and 2023. Another commenter requested that CMS make a one-time 3.5 percentage points adjustment to the IRF market basket percentage increase in FY 2025 to account for the underpayments that occurred in FYs 2022 through 2024. One commenter requested an adjustment similar to the forecast error adjustments proposed in the FY 2025 SNF and IPPS Capital Input Price Index rules and requested that CMS apply this adjustment to a proposed FY 2025 IRF market basket update of 4.08 percent to result in a 7.78 percent update, prior to application of the 0.4 percent ACA productivity adjustment. The commenter claimed that nothing in Section 1886(j)(3) of the Act, that specifically precludes the use of a forecast error adjustment and that the word “prospective” is not used in Section 1886(j)(3)(C)(i) of the Act, to describe or modify the IRF “increase factor”, just that it is noted that the section requires that the factor be based on an “appropriate percentage increase.” One commenter also urged CMS to increase the market basket percentage increase when CMS determines actual market basket exceeds the forecasted market basket.

Response: As most recently discussed in the FY 2024 IRF PPS final rule, the IRF PPS market basket updates are set prospectively, which means that the market basket update relies on a mix of both historical data for part of the period for which the update is calculated and forecasted data for the remainder. For instance, the FY 2025 market basket update in this final rule reflects historical data through the first quarter of CY 2024 and forecasted data through the third quarter of CY 2025. While there is no precedent to adjust for market basket forecast error in the IRF payment update, a forecast error can be calculated by comparing the actual market basket increase for a given year less the forecasted market basket increase. Due to the uncertainty regarding future price trends, forecast errors can be both positive and negative. The cumulative forecast error since IRF PPS inception (FY 2003 to FY 2023) for the years where the payment update was not mandated by statute is 0.5 percent (cumulative forecasted increase was slightly lower than actual increase) and over the last ten years the cumulative forecast error is −0.1 percent (cumulative forecasted increase was slightly higher than actual increase). Though it is still too soon to know what the final IRF market basket forecast error is for FY 2024, so far it is 0.3 percent. Only considering the forecast error for years when the IRF market basket update was lower than the actual market basket update does not consider the full experience and impact of forecast error.

After careful consideration of public comments, we are finalizing a FY 2025 IRF productivity-adjusted market basket increase of 3.0 percent based on the most recent data available.

Section 1886(j)(6) of the Act specifies that the Secretary is to adjust the proportion (as estimated by the Secretary from time to time) of IRFs' costs that are attributable to wages and wage-related costs, of the prospective payment rates computed under section 1886(j)(3) of the Act, for area differences in wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for such facilities. The labor-related share is determined by identifying the national average proportion of total costs that are related to, influenced by, or vary with the local labor market. We proposed to continue to classify a cost category as labor-related if the costs are labor-intensive and vary with the local labor market.

Based on our definition of the labor-related share and the cost categories in the 2021-based IRF market basket, we proposed to calculate the labor-related share for FY 2025 as the sum of the FY 2025 relative importance of Wages and Salaries, Employee Benefits, Professional Fees: Labor-Related, Administrative and Facilities Support Services, Installation, Maintenance, and Repair Services, All Other: Labor-Related Services, and a portion of the Capital-Related relative importance from the 2021-based IRF market basket. For more details regarding the methodology for determining specific cost categories for inclusion in the 2021-based IRF labor-related share, see the FY 2024 IRF PPS final rule ( 88 FR 50985 through 50988 ).

The relative importance reflects the different rates of price change for these cost categories between the base year (2021) and FY 2025. We proposed to calculate the labor-related relative importance from the IRF market basket, and it approximates the labor-related portion of the total costs after taking into account historical and projected price changes between the base year and FY 2025. The price proxies that move the different cost categories in the market basket do not necessarily change at the same rate, and the relative importance captures these changes. Based on IGI's fourth quarter 2023 forecast of the 2021-based IRF market basket, the sum of the FY 2025 relative importance for Wages and Salaries, Employee Benefits, Professional Fees: Labor-Related, Administrative and Facilities Support Services, Installation Maintenance & Repair Services, and All Other: Labor-Related Services was 70.5 percent. We proposed that the portion of Capital-Related costs that are influenced by the local labor market is 46 percent. Since the relative importance for Capital-Related costs was 8.1 percent of the 2021-based IRF market basket for FY 2025, we proposed to take 46 percent of 8.1 percent to determine the labor-related share of Capital-Related costs for FY 2025 of 3.7 percent. Therefore, we proposed a total labor-related share for FY 2025 of 74.2 percent (the sum of 70.5 percent for the proposed labor-related share of operating costs and 3.7 percent for the proposed labor-related share of Capital-Related costs). We also proposed that if more recent data became available after publication of the proposed rule and before the publication of the final rule (for example, a more recent estimate of the labor-related share), we would use such data, if appropriate, to determine the FY 2025 IRF labor-related share in the final rule.

Based on IGI's second quarter 2024 forecast for the 2021-based IRF market basket, the sum of the FY 2025 relative importance for Wages and Salaries, Employee Benefits, Professional Fees: Labor-related, Administrative and Facilities Support Services, Installation Maintenance & Repair Services, and All Other: Labor-Related Services is 70.7 percent. The portion of Capital-Related costs that is influenced by the local labor market is estimated to be 46 percent, which is the same percentage applied to the 2016-based IRF market basket ( 84 FR 39088 through 39089 ). Since the relative importance for Capital is 8.1 percent of the 2021-based IRF market basket in FY 2025, we took 46 percent of 8.1 percent to determine the labor-related share of Capital-Related costs for FY 2025 of 3.7 percent. Therefore, the total labor-related share for FY 2025 based on more recent data is 74.4 percent (the sum of 70.7 percent for the operating costs and 3.7 percent for the labor-related share of Capital-Related costs).

We invited public comment on the proposed labor-related share for FY 2025. The following is a summary of the public comments received and our responses:

Comment: One commenter appreciated that CMS only proposed to increase the labor-related share from 74.1 percent in FY 2024 to 74.2 percent in FY 2025. The commenter stated that although there is not a material increase in the wage percentage each increase to the labor-related share percentage penalizes any facility that has a wage index less than 1.0. The commenter stated that across the country, there is a growing disparity between high-wage and low-wage States that harms hospitals in many rural and underserved communities; limiting the increase in the labor-related share helps mitigate that growing disparity. However, another commenter believed that the 0.1 percentage point increase in the labor-related share update is inadequate and does not reflect the many challenges faced by health care facilities.

Response: We proposed to use the FY 2025 relative importance values for the labor-related cost categories from the 2021-based IRF market basket because it accounts for more recent data regarding price pressures and cost structure of IRFs. This methodology is consistent with the determination of the labor-related share since the implementation of the IRF PPS. As stated in the FY 2025 IRF proposed rule, we also proposed that if more recent data became available, we would use such data, if appropriate, to determine the FY 2025 labor-related share for the final rule. Based on IHS Global Inc.'s second quarter 2024 forecast with historical data through the first quarter of 2024, the FY 2025 labor-related share for the final rule is 74.4 percent.

After consideration of the public comments, we are finalizing a FY 2025 labor-related share of 74.4 percent. Table 4 shows the current estimate of the FY 2025 labor-related share and the FY 2024 final labor-related share using the 2021-based IRF market basket relative importance.

TABLE 4—FY 2025 IRF Labor-Related Share and FY 2024 IRF Labor-Related Share

FY 2025 Labor- related share FY 2024 Final labor-related share Wages and Salaries 49.4 49.0 Employee Benefits 11.8 11.8 Professional Fees: Labor-Related 5.5 5.5 Administrative and Facilities Support Services 0.7 0.7 Installation, Maintenance, and Repair Services 1.5 1.5 All Other: Labor-Related Services 1.8 1.8 Subtotal 70.7 70.3 Labor-related portion of Capital-Related (46%) 3.7 3.8 Total Labor-Related Share 74.4 74.1 Based on the 2021-based IRF market basket relative importance, IGI 2nd quarter 2024 forecast. Based on the 2021-based IRF market basket relative importance as published in the ( ). Includes all contract advertising and marketing costs and a portion of accounting, architectural, engineering, legal, management consulting, and home office contract labor costs.

Section 1886(j)(6) of the Act requires the Secretary to adjust the proportion of rehabilitation facilities' costs attributable to wages and wage-related costs (as estimated by the Secretary from time to time) by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for those facilities. The Secretary is required to update the IRF PPS wage index on the basis of information available to the Secretary on the wages and wage-related costs to furnish rehabilitation services. Any adjustment or updates made under section 1886(j)(6) of the Act for a FY are made in a budget-neutral manner.

In the FY 2023 IRF PPS final rule ( 87 FR 47054 through 47056 ) we finalized a policy to apply a 5-percent cap on any decrease to a provider's wage index from its wage index in the prior year, regardless of the circumstances causing the decline. We amended IRF PPS regulations at § 412.624(e)(1)(ii) to reflect this permanent cap on wage index decreases. Additionally, we finalized a policy that a new IRF would be paid the wage index for the area in which it is geographically located for its first full or partial FY with no cap applied because a new IRF would not have a wage index in the prior FY. A full discussion of the adoption of this policy is found in the FY 2023 IRF PPS final rule.

For FY 2025, we maintained the policies and methodologies described in the FY 2024 IRF PPS final rule ( 88 FR 50956 ) related to the labor market area definitions and the wage index methodology for areas with wage data. Thus, we use the core based statistical areas (CBSAs) labor market area definitions and the FY 2025 pre-reclassification and pre-floor hospital wage index data. In accordance with section 1886(d)(3)(E) of the Act, the FY 2025 pre-reclassification and pre-floor hospital wage index is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2020, and before October 1, 2021 (that is, FY 2021 cost report data).

The labor market designations made by the Office of Management and Budget (OMB) include some geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation of the IRF PPS wage index. We continue to use the same methodology discussed in the FY 2008 IRF PPS final rule ( 72 FR 44299 ) to address those geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation for the FY 2025 IRF PPS wage index. For FY 2025, the only rural area without wage index data available is in North Dakota. We have determined that the borders of 18 rural counties are local and contiguous with 8 urban counties. Therefore, under this methodology, the wage indexes for the counties of Burleigh/Morton/Oliver (CBSA 13900: 0.9020), Cass (CBSA 22020: 0.8763), Grand Forks (CBSA 24220: 0.7865), and McHenry/Renville/Ward (CBSA 33500: 0.7686) are averaged, resulting in an imputed rural wage index of 0.8334 for rural North Dakota for FY 2025. In past years for rural Puerto Rico, we did not apply this methodology due to the distinct economic circumstances there; due to the proximity of almost all of Puerto Rico's various urban and nonurban areas, this methodology would produce a wage index for rural Puerto Rico that is higher than that in half of its urban areas. However, because rural Puerto Rico now has hospital wage index data on which to base an area wage adjustment, we will not apply this policy for FY 2025. For urban areas without specific hospital wage index data, we will continue using the average wage indexes of all urban areas within the State to serve as a reasonable proxy for the wage index of that urban CBSA as proposed and finalized in FY 2006 ( 70 FR 47927 ). For FY 2025, the only urban area without wage index data available is CBSA 25980, Hinesville Fort Stewart, GA.

We invited public comment on the proposed Wage Adjustment for FY 2025. The following is a summary of the public comments received on the proposed revisions to the Wage Adjustment for FY 2025:

Comment: Several commenters suggested changes to the wage index methodology. Generally, commenters recommended that CMS use the same wage index adjustments for providers paid under the IPPS and under the IRF PPS in the same area. These recommendations were aimed at increasing parity between IPPS and IRF PPS hospitals. Most comments on this topic expressed concern over comparisons of shared labor markets. One commenter also voiced concerns that IPPS hospitals that have benefited from IPPS-specific geographic reclassification or other wage adjustments no longer put the same resources into the completion of Occupational Mix Surveys.

Several commenters specifically expressed support for the IPPS low wage index hospital policy, wherein wage index values are increased for the lowest quartile of the wage index values across all hospitals. These commenters urged CMS to develop and apply a corresponding low wage index hospital policy for IRFs. Commentors expressed concerns that the disparity in policy puts IRFs at a competitive disadvantage within shared labor markets and believed that extending the low wage index policy to IRFs would help maintain parity and ensure that low wage index and rural IRFs would have adequate resources to continue to provide access to care. Several commentors argued that this low wage index hospital policy to IRFs should be implemented without applying a budget neutrality adjustment.

Additionally, several commenters found the continued use of the pre-reclassification and pre-floor IPPS wage index unreasonable and urged CMS to revise its policy and apply the post-classification and post-floor hospital IPPS wage index to all IRFs, but especially the hospital-based distinct part units (DPUs). Like others, these commentors expressed concerns related to shared labor markets. Commenters believed that the current policy places inpatient hospital-based IRFs and other DPUs at a disadvantage in the labor markets in which they must compete with acute-care hospitals for staff. Additionally, several commenters suggested that CMS could leverage existing data to evaluate the policy change using the CMS Form 2552-96, Worksheet S-3, which captures “excluded area” salaries and wage-related costs.

Response: We appreciate the commenters' suggestion to adopt the IPPS low wage index hospital policy, post-classification and post-floor hospital IPPS wage index, and other IPPS wage index adjustments for the IRF wage index. We also acknowledge and appreciate the commenters' concerns regarding competition for labor resulting from different applicable wage index policies across different settings of care. While CMS and other interested parties have explored potential alternatives to the current wage index system in the past, no consensus has been achieved regarding how best to implement a replacement system that is evidence-based and data-driven. These concerns will be taken into consideration while we continue to explore potential wage index reforms and monitor IRF wage index policies.

As most recently discussed in the FY 2024 IRF PPS final rule ( 88 FR 50956 ), we would like to note that the IRF wage index is derived from IPPS wage data, that is, the pre-reclassification and pre-floor inpatient PPS (IPPS) wage index discussed in section D. of this final rule. Thus, to the extent that increasing wage index values under the IPPS for low wage index hospitals results in those hospitals increasing employee compensation, this increase would be reflected in the IPPS wage data that the IRF wage index is derived from and likely would result in higher wage indices for these areas under the IRF PPS. As such, any effects of this policy on the wage data of IPPS hospitals would be extended to the IRF setting, as this data would be used to establish the wage index for IRFs in the future. We note that IPPS wage index values are based on historical data and typically lag by four years.

As stated in prior years, as we do not have an IRF-specific wage index, we are unable to determine the degree, if any, to which these IPPS policies under the IRF PPS would be appropriate. However, CMS acknowledges that commenters have suggested that such data may be available in CMS Form 2552-96, Worksheet S-3 and will take this under consideration. Data pertaining to any IPPS policies that are applied to the pre-reclassification/pre-floor wage index is available in the FY 2024 IPPS proposed rule at https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps . The rationale for our current wage index policies was most recently published in the FY 2022 IRF PPS final rule ( 86 FR 42377 through 42378 ) and fully described in the FY 2006 IRF PPS final rule ( 70 FR 47880 , 47926 through 47928 ).

Comment: Several commenters voiced specific concerns about rising reliance on contract labor. The commenters stated that, as contract labor is generally not tied to the local economy, the local wage index is less and less reflective of the actual costs incurred by hospitals as the use of contract labor grows. Concerns about the rising use of contract labor were tied to concerns about workforce shortages, increasingly competitive labor markets, and the lack of parity between IRFs and IPPS hospitals in shared labor markets.

To address these challenges, several commentors encouraged CMS to explore how geographic differences in market wide labor costs and the increased use of contract labor impacts costs, and to make corresponding adjustments in policy.

Response: CMS acknowledges commenters' concerns that the current wage index policies may not capture or keep up with actual costs of care as well as specific concerns related to the cost of contract labor. As noted in the FY 2024 IRF PPS final rule ( 42 CFR 412 ), an analysis of Medicare cost report data for IPPS hospitals shows that contract labor hours accounted for about 4 percent of total compensation hours (reflecting employed and contract labor staff) in 2021. We will continue to monitor the trends in the increased use of contract labor.

Comment: Many commenters supported the existing 5 percent wage index cap and expressed appreciation of having a policy to cap and phase in the wage index changes that a provider can experience in a given year. However, at least one commenter remarked that, while they appreciate the cap policy, they believe that it does not do enough to correct the widening range in wage index amounts. Another commenter expressed frustration that the wage index values of the hospitals subject to the cap differ from the currently published tables and urged CMS to release wage index tables in the final rule that incorporate the cap on CBSAs that meet the 5 percent decrease criteria.

Response: We appreciate the commenters' support of the permanent cap on wage index decreases. We realize that the 5-percent cap on annual decreases in the wage index values does not entirely eliminate the effects of annual changes in the wage index, but we believe that it does substantially reduce the financial impact on IRFs of these annual changes. The wage index tables for IRF PPS are provided at the CBSA level. The 5-percent cap policy is applied at the provider level. Hence, when the 5-percent cap is applicable, each IRF should work directly with its MAC to understand how the 5-percent cap is applied. MACs have more detailed information about the location of each IRF and the applicability of the 5-percent cap to each IRFs situation, and CMS has provided careful instructions to the MACs on applying the 5-percent cap policy (see publication 100-04 Medicare Claims Processing Manual, Chapter 3).

After consideration of the comments we received, we are finalizing our proposals regarding the wage adjustment for FY 2025.

The wage index used for the IRF PPS is calculated using the pre-reclassification and pre-floor inpatient PPS (IPPS) wage index data and is assigned to the IRF on the basis of the labor market area in which the IRF is geographically located. IRF labor market areas are delineated based on the CBSAs established by the OMB. The CBSA delineations (which were implemented for the IRF PPS beginning with FY 2016) are based on revised OMB delineations issued on February 28, 2013, in OMB Bulletin No. 13-01. OMB Bulletin No. 13-01 established revised delineations for Metropolitan Statistical Areas, Micropolitan Statistical Areas, and Combined Statistical Areas in the United States and Puerto Rico based on the 2010 Census and provided guidance on the use of the delineations of these statistical areas using standards published in the June 28, 2010, Federal Register ( 75 FR 37246 through 37252 ). We refer readers to the FY 2016 IRF PPS final rule ( 80 FR 47068 through 47076 ) for a full discussion of our implementation of the OMB labor market area delineations beginning with the FY 2016 wage index.

Generally, OMB issues major revisions to statistical areas every 10 years, based on the results of the decennial census. Additionally, OMB occasionally issues updates and revisions to the statistical areas in between decennial censuses to reflect the recognition of new areas or the addition of counties to existing areas. In some instances, these updates merge formerly separate areas, transfer components of an area from one area to another or drop components from an area. On July 15, 2015, OMB issued OMB Bulletin No. 15-01, which provides minor updates to and supersedes OMB Bulletin No. 13-01 that was issued on February 28, 2013. The attachment to OMB Bulletin No. 15-01 provides detailed information on the update to statistical areas since February 28, 2013. The updates provided in OMB Bulletin No. 15-01 are based on the application of the 2010 Standards for Delineating Metropolitan and Micropolitan Statistical Areas to Census Bureau population estimates for July 1, 2012, and July 1, 2013.

In the FY 2018 IRF PPS final rule ( 82 FR 36250 through 36251 ), we adopted the updates set forth in OMB Bulletin No. 15-01 effective October 1, 2017, beginning with the FY 2018 IRF wage index. For a complete discussion of the adoption of the updates set forth in OMB Bulletin No. 15-01, we refer readers to the FY 2018 IRF PPS final rule. In the FY 2019 IRF PPS final rule ( 83 FR 38527 ), we continued to use the OMB delineations that were adopted beginning with FY 2016 to calculate the area wage indexes, with updates set forth in OMB Bulletin No. 15-01 that we adopted beginning with the FY 2018 wage index.

On August 15, 2017, OMB issued OMB Bulletin No. 17-01, which provided updates to and superseded OMB Bulletin No. 15-01 that was issued on July 15, 2015. The attachments to OMB Bulletin No. 17-01 provide detailed information on the update to statistical areas since July 15, 2015, and are based on the application of the 2010 Standards for Delineating Metropolitan and Micropolitan Statistical Areas to Census Bureau population estimates for July 1, 2014, and July 1, 2015. In the FY 2020 IRF PPS final rule ( 84 FR 39090 through 39091 ), we adopted the updates set forth in OMB Bulletin No. 17-01 effective October 1, 2019, beginning with the FY 2020 IRF wage index.

On April 10, 2018, OMB issued OMB Bulletin No. 18-03, which superseded the August 15, 2017, OMB Bulletin No. 17-01, and on September 14, 2018, OMB issued OMB Bulletin No. 18-04, which superseded the April 10, 2018 OMB Bulletin No. 18-03. These bulletins established revised delineations for Metropolitan Statistical Areas, Micropolitan Statistical Areas, and Combined Statistical Areas, and provided guidance on the use of the delineations of these statistical areas. A copy of this bulletin may be obtained at https://www.whitehouse.gov/wp-content/uploads/2018/09/Bulletin-18-04.pdf .

To this end, as discussed in the FY 2021 IRF PPS proposed ( 85 FR 22075 through 22079 ) and final ( 85 FR 48434 through 48440 ) rules, we adopted the revised OMB delineations identified in OMB Bulletin No. 18-04 (available at https://www.whitehouse.gov/wp-content/uploads/2018/09/Bulletin-18-04.pdf ) beginning October 1, 2020, including a 1-year transition for FY 2021 under which we applied a 5-percent cap on any decrease in an IRF's wage index compared to its wage index for the prior fiscal year (FY 2020). The updated OMB delineations more accurately reflect the contemporary urban and rural nature of areas across the country, and the use of such delineations allows us to determine more accurately the appropriate wage index and rate tables to apply under the IRF PPS. OMB issued further revised CBSA delineations in OMB Bulletin No. 20-01, on March 6, 2020 (available on the web at https://www.whitehouse.gov/wp-content/uploads/2020/03/Bulletin-20-01.pdf ). However, we determined that the changes in OMB Bulletin No. 20-01 do not impact the CBSA-based labor market area delineations adopted in FY 2021. Therefore, we did not propose to adopt the revised OMB delineations identified in OMB Bulletin No. 20-01 for FY 2022 through FY 2024.

On July 21, 2023, OMB issued OMB Bulletin No. 23-01 (available at https://www.whitehouse.gov/wp-content/uploads/2023/07/OMB-Bulletin-23-01.pdf ) which updates and supersedes OMB Bulletin No. 20-01 based upon the 2020 Standards for Delineating Core Based Statistical Areas (“the 2020 Standards”) published by OMB on July 16, 2021 ( 86 FR 37770 ). OMB Bulletin No. 23-01 revised CBSA delineations which are comprised of counties and equivalent entities (for example, boroughs, a city and borough, and a municipality in Alaska, planning regions in Connecticut, parishes in Louisiana, municipios in Puerto Rico, and independent cities in Maryland, Missouri, Nevada, and Virginia). For FY 2025, we proposed to adopt the revised OMB delineations identified in OMB Bulletin No. 23-01.

As previously discussed, we are implementing the new OMB statistical area delineations (based upon the 2020 decennial Census data) beginning in FY 2025 for the IRF PPS wage index. Our analysis shows that a total of 54 counties (and county equivalents) that are currently considered part of an urban CBSA would be considered located in a rural area, for IRF PPS payment beginning in FY 2025, if we adopt the new OMB delineations. Table 5 lists the 54 urban counties that will be rural now that we are finalizing our proposal to implement the new OMB delineations.

We are finalizing our proposal that the wage data for all hospitals located in the counties listed in Table 5 now be considered rural when their respective State's rural wage index value is calculated. This rural wage index value would be used under the IRF PPS.

Analysis of the new OMB delineations (based upon the 2020 decennial Census data) shows that a total of 54 counties (and county equivalents) that are currently located in rural areas would be in urban areas based on finalizing our proposal to implement the new OMB delineations. Table 6 lists the 54 rural counties that will be urban after we finalize this proposal.

We proposed and are finalizing that when calculating the area wage index, the wage data for hospitals located in these counties would be included in their new respective urban CBSAs.

In addition to rural counties becoming urban and urban counties becoming rural, several urban counties would shift from one urban CBSA to another urban CBSA after we adopt the new OMB delineations. In other cases, if we adopt the new OMB delineations, counties would shift between existing and new CBSAs, changing the constituent makeup of the CBSAs.

In one type of change, an entire CBSA would be subsumed by another CBSA. For example, CBSA 31460 (Madera, CA) currently is a single county (Madera, CA) CBSA. Madera County would be a part of CBSA 23420 (Fresno, CA) under the new OMB delineations.

In another type of change, some CBSAs have counties that would split off to become part of, or to form, entirely new labor market areas. For example, CBSA 29404 (Lake County-Kenosha County, IL-WI) currently is comprised of two counties (Lake County, IL and Kenosha County, WI). Under the new OMB delineations, Kenosha County would split off and form the new CBSA 28450 (Kenosha, WI), while Lake County would remain in CBSA 29404.

Finally, in some cases, a CBSA would lose counties to another existing CBSA if we adopt the new OMB delineations. For example, Meade County, KY, would move from CBSA 21060 (Elizabethtown-Fort Knox, KY) to CBSA 31140 (Louisville/Jefferson County, KY-IN). CBSA 21060 would still exist in the new labor market delineations with fewer constituent counties. Table 7 lists the urban counties that would move from one urban CBSA to another urban CBSA under the new OMB delineations.

If providers located in these counties move from one CBSA to another under the new OMB delineations, there may be impacts, both negative and positive, upon their specific wage index values.

In other cases, adopting the revised OMB delineations would involve a change only in CBSA name and/or number, while the CBSA continues to encompass the same constituent counties. For example, CBSA 19430 (Dayton-Kettering, OH) would experience a change to its name and become CBSA 19430 (Dayton-Kettering-Beavercreek, OH), while all of its three constituent counties would remain the same. We consider these changes (where only the CBSA name and/or number would change) to be inconsequential changes with respect to the IRF PPS wage index. Table 8 sets forth a list of such CBSAs where there would be a change in CBSA name and/or number only if we adopt the revised OMB delineations.

The June 6, 2022, Census Bureau Notice ( 87 FR 34235-34240 ), OMB Bulletin No. 23-01 replaced the 8 counties in Connecticut with 9 new “Planning Regions.” Planning regions now serve as county-equivalents within the CBSA system. We are adopting the planning regions as county equivalents for wage index purposes. We believe it is necessary to adopt this migration from counties to planning region county-equivalents in order to maintain consistency with OMB updates. We are providing the following crosswalk with the current and as finalized FIPS county and county-equivalent codes and CBSA assignments.

TABLE 9—Connecticut Counties to Planning Regions
FIPS	Current County	Current CBSA	FIPS	Proposed planning region area (County Equivalent)	CBSA
9003	Hartford	25540	9110	Capitol	25540
9015	Windham	49340	9150	Northeastern Connecticut	7
9005	Litchfield	7	9160	Northwest Hills	7
9001	Fairfield	14860	9190	Western Connecticut	14860
9011	New London	35980	9180	Southeastern Connecticut	35980
9013	Tolland	25540	9110	Capitol	25540
9009	New Haven	35300	9170	South Central Connecticut	35300
9007	Middlesex	25540	9130	Lower Connecticut River Valley	25540

Overall, we believe that implementing the new OMB delineations would result in wage index values being more representative of the actual costs of labor in a given area. We recognize that some providers (10 percent) would have a higher wage index due to our implementation of the new labor market area delineations. However, we also recognize that more providers (16 percent) would experience decreases in wage index values as a result of our implementation of the new labor market area delineations. Our analysis for the FY 2025 final rule indicates that 16 IRFs will experience a change in either rural or urban designations. Of these, 8 facilities designated as rural in FY 2024 would be designated as urban in FY 2025. Based upon the CBSA delineations, those rural IRFs that change from rural to urban would lose the 14.9 percent rural adjustment. To mitigate the financial impacts of this loss, we proposed a transition for these facilities, as discussed further below.

CMS recognizes that IRFs in certain areas may experience reduced payments due to the adoption of the revised OMB delineations and is finalizing transition policies to mitigate negative financial impacts and provide stability to year-to-year wage index variations. In the FY 2021 final rule ( 85 FR 48434 ), CMS finalized a wage index transition policy to apply a 5-percent cap for IRFs that may experience decreases in their final wage index from the prior fiscal year. In FY 2023, the 5-percent cap policy was made permanent. This 5-percent cap on reductions policy is discussed in further detail in FY 2023 final rule at 87 FR 47054 through 47056 . It is CMS' long held opinion that revised labor market delineations should be adopted as soon as is possible to maintain the integrity of the wage index system. We believe the 5-percent cap policy will sufficiently mitigate significant disruptive financial impacts on hospitals negatively affected by the adoption of the revised OMB delineations. Besides the rural adjustment transition discussed immediately below, we do not believe any additional transition is necessary considering that the current cap on wage index decreases, which was not in place when implementing prior decennial census updates in FY 2006 and FY 2015, ensures that an IRFs wage index would not be less than 95 percent of its final wage index for the prior year.

Consistent with the transition policy adopted in FY 2006 ( 70 FR 47923 [ 4 ] through 47927 [ 5 ] ), we considered the appropriateness of applying a 3-year phase-out of the rural adjustment for IRFs located in rural counties that would become urban under the new OMB delineations, given the potentially significant payment impacts for these facilities. We continue to believe, as discussed in the FY 2006 IRF final rule ( 70 FR 47880 [ 6 ] ), that the phase-out of the rural adjustment transition period for these facilities specifically is appropriate because, as a group, we expect these IRFs would experience a steeper and more abrupt reduction in their payments compared to other IRFs. Therefore, we are finalizing a budget neutral three-year phase-out of the rural adjustment for existing FY 2024 rural IRFs that will become urban in FY 2025 and that experience a loss in payments due to changes from the new CBSA delineations. Accordingly, the incremental steps needed to reduce the impact of the loss of the FY 2024 rural adjustment of 14.9 percent will be phased out over FYs 2025, 2026, and 2027. This policy will allow rural IRFs which would be classified as urban in FY 2025 to receive two-thirds of the 2024 rural adjustment for FY 2025. For FY 2026, these IRFs will receive the full FY 2026 wage index and one-third of the FY 2024 rural adjustment. For FY 2027, these IRFs will receive the full FY 2027 wage index without a rural adjustment. We believe a three-year budget-neutral phase-out of the rural adjustment for IRFs that transition from rural to urban status under the new CBSA delineations would best accomplish the goals of mitigating the loss of the rural adjustment for existing FY 2024 rural IRFs. The purpose of the gradual phase-out of the rural adjustment for these facilities is to alleviate the significant payment implications for existing rural IRFs that may need time to adjust to the loss of their FY 2024 rural payment adjustment or that experience a reduction in payments solely because of this redesignation. As stated, this policy is specifically for rural IRFs that become urban in FY 2025 and that experience a loss in payments due to changes from the new CBSA delineations. Thus, we are not implementing a transition policy for urban facilities that become rural in FY 2025 because these IRFs will receive the full rural adjustment of 14.9 percent beginning October 1, 2024.

We invited public comment on the proposed implementation of revised labor market area delineations and on the proposed transition policy for rural IRFs that would be designated as urban under the new CBSA delineations.

The following is a summary of the public comments received on the proposed implementation of the revised labor market area delineations and the proposed transition policy:

Comment: Overall, many commenters supported the adoption of OMB's CBSA delineation revisions. Several others voiced appreciation for CMS' inclusion of a transition policy to reduce the impact of the CBSA delineation changes, without voicing any opposition to the adoption of the new delineations. However, some commenters specifically opposed the adoption of OMB's CBSA delineation revisions. The commenters stated that both OMB guidance and the Metropolitan Areas Protection and Standardization Act (MAPS) ( Public Law 117-219 ) support that, if CMS chooses to adopt new OMB delineations, CMS must fully explain why reliance on the updated CBSAs as set forth by OMB is appropriate for purposes of the FY 2025 wage index adjustments. The commenters stated that CMS has not provided any rationale or explanation for why relying on the updated CBSAs is appropriate. Rather than simply adopting the OMB CBSAs by default, the commenters stated that CMS must make a fact-specific determination of those CBSAs' suitability for Medicare reimbursement purposes, including whether it would be appropriate to use additional data to modify OMB's delineation to ensure that such changes are appropriate for purposes of defining regional labor markets for IRF workers.

Response: We appreciate the majority of commenters' support for the adoption of OMB's CBSA delineation revisions and recognize others' opposition. We do not agree with the commenters' assessment that CMS has not provided a rationale for the proposed adoption of the revised CBSA delineations for FY 2025. The MAPS Act specifically states that “this act limits the automatic application of, and directs the Office of Management and Budget (OMB) to provide information about, changes to the standards for designating a core-based statistical area (CBSA) . . .” We believe that our proposed rule meets the requirements of the MAPS Act because we have not automatically applied the revised CBSAs outlined in OMB Bulletin 23-01. Rather, as we noted in the proposed rule, we proposed the adoption of the revised CBSA delineations because we believe it is important for the IRF PPS to use, as soon as is reasonably possible, the latest available labor market area delineations to maintain a more accurate and up-to-date payment system that reflects the reality of population shifts and labor market conditions. We also believe that using the most current delineations increase the integrity of the IRF PPS wage index system by creating a more accurate representation of geographic variations in wage levels.

With respect to the suggestion that CMS consider whether it would be appropriate to use additional data to modify OMB's delineation to ensure that such changes are appropriate for purposes of defining regional labor markets for IRF workers, we do not believe that the use of such additional data is appropriate. As we have previously discussed in the FY 2016 final rule ( 80 FR 47069 ) and as we noted earlier in this final rule, we believe that the labor market area in which the IRF is geographically located is most appropriate for determining the wage adjustment. Accordingly, we do not believe it would be appropriate to use additional data to modify OMB's delineations, for the same reasons we previously stated with regard to floors or reclassifications. For example, using additional data to modify OMB's CBSA delineations would significantly increase administrative burden, both for IRFs and for CMS, associated with particular geographical areas or even individual IRFs moving from one CBSA to another, and it would significantly increase the complexity of the methodology.

Furthermore, because all CBSA delineation changes would be applied budget-neutrally under the wage index, these policies would increase the wage index for some IRFs while reducing IRF PPS payments for all other IRFs, which would be a departure from our longstanding policies that IRFs have relied on for many years. For these reasons, we continue to believe it is important for the IRF PPS to use the latest available labor market area delineations, based on the latest available CBSA delineations established by OMB as soon as is reasonably possible in order to maintain a more accurate and up-to-date payment system that reflects the reality of population shifts and labor market conditions. We further believe that using the delineations reflected in OMB Bulletin No. 23-01 would increase the integrity of the IRF PPS wage index system by creating a more accurate representation of geographic variations in wage levels. Therefore, we believe that it is appropriate to implement the new OMB delineations without delay.

Comment: Public comments generally all supported the phase-out policy for IRFs being reclassified from rural to urban CBSAs. Commenters expressed that this phase-out policy for loss of the rural adjustment is a reasonable way to ensure that no IRF faces a dramatic cut to its reimbursement as a result of the new CBSA delineation. A few commentors specifically noted that while they appreciate the existing permanent 5-percent cap policy, they do not believe that it is sufficient to mitigate the impact of the CBSA change, and therefore supported the implementation of a 3-year wage index transition period to allow for a wage index transition consistent with prior updates to the CBSA categorization.

Response: We appreciate the commenters' support for a 3-year phase-out of the rural adjustment for FY 2024 rural IRFs that will be considered urban in FY 2025 and for supporting the CBSA change in conjunction with applying the existing permanent 5-percent cap policy. We believe that the existing permanent 5-percent cap policy substantially mitigates the financial impact on IRFs of the updated CBSA market area delineations, and we believe that phasing in these new CBSA market area delineations over 3 years would be overly complex to administer and is therefore not the best approach. We will continue monitoring the effects of the wage index updates to ensure that the permanent 5-percent cap policy is adequately mitigating any substantial decreases in wage index values.

After consideration of the comments we received, we are finalizing our proposal to adopt the revised OMB delineations contained in OMB Bulletin No. 23-01 as well as our proposal to implement a budget neutral three-year phase-out of the rural adjustment for existing FY 2024 rural IRFs that will become urban in FY 2025.

The proposed wage index applicable to FY 2025 is set forth in Table A and Table B available on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/IRF-Rules-and-Related-Files.html .

To calculate the wage-adjusted facility payment for the payment rates set forth in this final rule, we multiply the unadjusted Federal payment rate for IRFs by the FY 2025 labor-related share based on the 2021-based IRF market basket relative importance (74.4 percent) to determine the labor-related portion of the standard payment amount. (A full discussion of the calculation of the labor-related share appears in section VI.E. of this final rule.) We then multiply the labor-related portion by the applicable IRF wage index. The wage index tables are available on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/IRF-Rules-and-Related-Files.html .

Adjustments or updates to the IRF wage index made under section 1886(j)(6) of the Act must be made in a budget-neutral manner. We calculate a budget-neutral wage adjustment factor as established in the FY 2004 IRF PPS final rule ( 68 FR 45689 ) and codified at § 412.624(e)(1), as described in the steps below. We use the listed steps to ensure that the FY 2025 IRF standard payment conversion factor reflects the update to the wage indexes (based on the FY 2021 hospital cost report data) and the update to the labor-related share, in a budget-neutral manner:

Step 1. Calculate the total amount of estimated IRF PPS payments using the labor-related share and the wage indexes from FY 2024 (as published in the FY 2024 IRF PPS final rule ( 88 FR 50956 )).

Step 2. Calculate the total amount of estimated IRF PPS payments using the FY 2025 wage index values (based on updated hospital wage data and considering the permanent cap on wage index decreases policy) and the FY 2025 labor-related share of 74.4 percent.

Step 3. Divide the amount calculated in Step 1 by the amount calculated in Step 2. The resulting quotient is the FY 2025 budget-neutral wage adjustment factor of 0.9924.

Step 4. Apply the budget neutrality factor from Step 3 to the FY 2025 IRF PPS standard payment amount after the application of the increase factor to determine the FY 2025 standard payment conversion factor.

We discuss the calculation of the standard payment conversion factor for FY 2025 in section VI.G. of this final rule.

We invited public comment on our proposals regarding the Wage Adjustment for FY 2025.

Comment: Several commentors specified that the wage index cap policy should be implemented without applying a budget neutrality adjustment.

Response: We do not believe that the permanent 5-percent cap policy for the IRF wage index should be applied in a non-budget-neutral manner. As a matter of fact, the statute at section 1886(j)(6) of the Act requires that adjustments for geographic variations in labor costs for a FY be made in a budget-neutral manner. We refer readers to the FY 2023 IRF PPS final rule ( 87 FR 47054 through 47056 ) for a detailed discussion on the wage index cap policy.

As a result of the public comments, we are finalizing our proposals regarding the IRF budget neutral wage adjustment factor methodology for FY 2025.

To calculate the standard payment conversion factor for FY 2025, as illustrated in Table 10, we begin by applying the finalized increase factor for FY 2025, as adjusted in accordance with sections 1886(j)(3)(C) of the Act, to the standard payment conversion factor for FY 2024 ($18,541). Applying the 3.0 productivity-adjusted market basket increase factor for FY 2025 to the standard payment conversion factor for FY 2024 of $18,541 yields a standard payment amount of $19,097. Then, we apply the budget neutrality factor for the FY 2025 wage index (taking into account the policy placing a permanent cap on decreases in the wage index), and labor-related share of 0.9924, which results in a standard payment amount of $18,592. We next apply the budget neutrality factor for the CMG relative weights of 0.9976, which results in the standard payment conversion factor of $18,907 for FY 2025.

We invited public comment on the proposed FY 2025 standard payment conversion factor.

We did not receive any comments on our proposed FY 2025 standard payment conversion factor, and therefore, we are finalizing the revisions as proposed.

TABLE 10—Calculations to Determine the FY 2025 Standard Payment Conversion Factor
Explanation for Adjustment	Calculations
FY 2024 Standard Payment Conversion Factor	$18,541
Market Basket Increase Factor for FY 2025 (3.5%), reduced by 0.5 percentage point for the productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act	× 1.030
Budget Neutrality Factor for the Updates to the Wage Index and Labor-Related Share	× 0.9924
Budget Neutrality Factor for the Revisions to the CMG Relative Weights	× 0.9976
FY 2025 Standard Payment Conversion Factor	= $18,907

We then apply the CMG relative weights described in section IV. of this final rule to the FY 2025 standard payment conversion factor ($18,907), to determine the unadjusted IRF prospective payment rates for FY 2025. The unadjusted prospective payment rates for FY 2025 are shown in Table 11.

Table 12 illustrates the methodology for adjusting the prospective payments (as described in section V. of this final rule). The following examples are based on two hypothetical Medicare beneficiaries, both classified into CMG 0104 (without comorbidities). The unadjusted prospective payment rate for CMG 0104 (without comorbidities) appears in Table 11.

Example: One beneficiary is in Facility A, an IRF located in rural Spencer County, Indiana, and another beneficiary is in Facility B, an IRF located in urban Harrison County, Indiana. Facility A, a rural non-teaching hospital has a Disproportionate Share Hospital (DSH) percentage of 5 percent (which would result in a LIP adjustment of 1.0156), a wage index of 0.8657, and a rural adjustment of 14.9 percent. Facility B, an urban teaching hospital, has a DSH percentage of 15 percent (which would result in a LIP adjustment of 1.0454 percent), a wage index of 0.9068, and a teaching status adjustment of 0.0784.

To calculate each IRF's labor and non-labor portion of the prospective payment, we begin by taking the FY 2025 unadjusted prospective payment rate for CMG 0104 (without comorbidities) from Table 11. Then, we multiply the labor-related share for FY 2025 (74.4 percent) described in section VI. of this final rule by the unadjusted prospective payment rate. To determine the non-labor portion of the prospective payment rate, we subtract the labor portion of the Federal payment from the unadjusted prospective payment.

To compute the wage-adjusted prospective payment, we multiply the labor portion of the Federal payment by the appropriate wage index located in the applicable wage index table. This table is available on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/IRF-Rules-and-Related-Files.html .

The resulting figure is the wage-adjusted labor amount. Next, we compute the wage-adjusted Federal payment by adding the wage-adjusted labor amount to the non-labor portion of the Federal payment.

Adjusting the wage-adjusted Federal payment by the facility-level adjustments involves several steps. First, we take the wage-adjusted prospective payment and multiply it by the appropriate rural and LIP adjustments (if applicable). Second, to determine the appropriate amount of additional payment for the teaching status adjustment (if applicable), we multiply the teaching status adjustment (0.0784, in this example) by the wage-adjusted and rural-adjusted amount (if applicable). Finally, we add the additional teaching status payments (if applicable) to the wage, rural, and LIP-adjusted prospective payment rates. Table 12 illustrates the components of the adjusted payment calculation.

Thus, the adjusted payment for Facility A would be $30,649.63, and the adjusted payment for Facility B would be $30,519.74.

Section 1886(j)(4) of the Act provides the Secretary with the authority to make payments in addition to the basic IRF prospective payments for cases incurring extraordinarily high costs. A case qualifies for an outlier payment if the estimated cost of the case exceeds the adjusted outlier threshold. We calculate the adjusted outlier threshold by adding the IRF PPS payment for the case (that is, the CMG payment adjusted by all of the relevant facility-level adjustments) and the adjusted threshold amount (also adjusted by all of the relevant facility-level adjustments). Then, we calculate the estimated cost of a case by multiplying the IRF's overall Cost-to-Charge Ratio (CCR) by the Medicare allowable covered charge. If the estimated cost of the case is higher than the adjusted outlier threshold, we make an outlier payment for the case equal to 80 percent of the difference between the estimated cost of the case and the outlier threshold.

In the FY 2002 IRF PPS final rule ( 66 FR 41362 through 41363 ), we discussed our rationale for setting the outlier threshold amount for the IRF PPS so that estimated outlier payments would equal 3 percent of total estimated payments. For the FY 2002 IRF PPS final rule, we analyzed various outlier policies using 3, 4, and 5 percent of the total estimated payments, and we concluded that an outlier policy set at 3 percent of total estimated payments would optimize the extent to which we could reduce the financial risk to IRFs of caring for high cost- patients, while still providing for adequate payments for all other (non-high cost outlier) cases.

Subsequently, we updated the IRF outlier threshold amount in the FYs 2006 through 2024 IRF PPS final rules and the FY 2011 and FY 2013 notices ( 70 FR 47880 , 71 FR 48354 , 72 FR 44284 , 73 FR 46370 , 74 FR 39762 , 75 FR 42836 , 76 FR 47836 , 76 FR 59256 , 77 FR 44618 , 78 FR 47860 , 79 FR 45872 , 80 FR 47036 , 81 FR 52056 , 82 FR 36238 , 83 FR 38514 , 84 FR 39054 , 85 FR 48444 , 86 FR 42362 , 87 FR 47038 , and 88 FR 50956 respectively) to maintain estimated outlier payments at 3 percent of total estimated payments. We also stated in the FY 2009 final rule ( 73 FR 46370 at 46385) that we would continue to analyze the estimated outlier payments for subsequent years and adjust the outlier threshold amount as appropriate to maintain the 3 percent target.

To update the IRF outlier threshold amount for FY 2025, we proposed to use FY 2023 claims data and the same methodology that we used to set the initial outlier threshold amount in the FY 2002 IRF PPS final rule ( 66 FR 41362 through 41363 ), which is also the same methodology that we used to update the outlier threshold amounts for FYs 2006 through 2024. The outlier threshold is calculated by simulating aggregate payments and using an iterative process to determine a threshold that results in outlier payments being equal to 3 percent of total payments under the simulation. To determine the outlier threshold for FY 2025, we estimated the amount of FY 2025 IRF PPS aggregate and outlier payments using the most recent claims available (FY 2023) and the FY 2025 standard payment conversion factor, labor-related share, and wage indexes, incorporating any applicable budget-neutrality adjustment factors. The outlier threshold is adjusted either up or down in this simulation until the estimated outlier payments equal 3 percent of the estimated aggregate payments. Based on an analysis of the preliminary data used for the proposed rule, we estimated that IRF outlier payments as a percentage of total estimated payments would be approximately 3.2 percent in FY 2024. Therefore, we proposed to update the outlier threshold amount from $10,423 for FY 2024 to $12,158 for FY 2025 to maintain estimated outlier payments at approximately 3 percent of total estimated aggregate IRF payments for FY 2025.

We note that, as we typically do, we will update our data between the FY 2025 IRF PPS proposed and final rules to ensure that we use the most recent available data in calculating IRF PPS payments. This updated data includes a more complete set of claims for FY 2023. Based on our analysis using this updated data, we estimate that IRF outlier payments as a percentage of total estimated payments are approximately 3.2 percent in FY 2024. Therefore, we will update the outlier threshold amount from $10,423 for FY 2024 to $12,043 for FY 2025 to account for the increases in IRF PPS payments and estimated costs and to maintain estimated outlier payments at approximately 3 percent of total estimated aggregate IRF payments for FY 2025.

We invited public comment on the proposed update to the IRF outlier threshold for FY 2025. The following is a summary of the public comments received on our proposed update to the IRF outlier threshold:

Comment: Commenters were mixed in their support of the proposed high-cost outlier threshold, although more commentors supported the proposed threshold than opposed it. Those that supported the proposed threshold indicated support of CMS' policy to keep the outlier payments at 3 percent of total payments. However, these supporters also expressed concern over the lack of stability and predictability in the threshold, stating that the lack of stability makes it difficult for facilities to budget and poses challenges to IRFs that treat a large number of complex patients. One commenter expressed concern over the reduction in outlier payments during a time when increasing costs are outside of the hospital's control. Many suggested modifications to the outlier threshold methodology.

Response: We appreciate the commenters' support of the current 3 percent outlier threshold policy and recognize the commenters' concern regarding a reduction in outlier payments this year, and the commenters' desire for increased stability and predictability in the threshold from year-to-year. It has been our long-standing practice to utilize the most recent full fiscal year of data to update the prospective payment rates and determine the outlier threshold amount, as this data is generally considered to be the best overall predictor of experience in the upcoming fiscal year. Additionally, we continue to believe that maintaining the outlier pool at 3 percent of aggregate IRF payments optimizes the extent to which we can reduce financial risk to IRFs of caring for highest-cost patients, while still providing for adequate payments for all other non-outlier cases.

Although we recognize commenters' concerns about increasing IRF costs, we do not believe that it would be appropriate to address these concerns through the outlier payment policy. The outlier payment policy is designed to compensate IRFs for treating unusually high-cost patients, not for addressing overall inflationary pressures that increase the costs of caring for all IRF patients.

We will continue to examine ways of enhancing the stability and predictability of the outlier threshold from year to year. However, since 3 percent was deducted from IRF payments in the beginning of the IRF PPS to fund the outlier pool, we do not believe that it would be appropriate to deliberately pay more than 3 percent in outlier payments to IRFs in a given year, as that additional funding would increase overall payments to IRFs. Thus, we believe that any changes to the outlier threshold methodology to make it more stable and predictable would still need to maintain the integrity of the outlier pool, which is currently set at 3 percent. CMS will continue to monitor year-to-year changes in the outlier threshold and the impact of these changes on payment.

Comment: Several commenters expressed concerns that outlier payments may not be consistently targeted towards patients who require more intensive or complex services with related higher costs. Some of the commenters believed that factors other than patient complexity and case mix may be driving these payments. One commenter presented analysis to support their claim that inefficient cost structures, rather than highly complex patients, appear to be driving the distribution of overall IRF outlier payments, potentially resulting in patients at IRFs that warrant an outlier payment not receiving one. Moreover, many commenters expressed concern that outlier payments are being concentrated among an increasingly small number of providers. Several of these comments urged CMS to analyze the increasing concentration of outlier payments and make such analysis publicly accessible.

Response: We acknowledge commenters' concerns that outlier payments may be concentrated among a small subset of providers and may not be consistently targeted towards patients with intensive or complex needs. As most recently discussed in the FY 2024 IRF PPS Final Rule ( 88 FR 68494 ), our outlier policy is intended to reimburse IRFs for treating extraordinarily costly cases. Any future consideration given to imposing a limit on outlier payments or adjusting the outlier threshold to account for historical outlier reconciliation dollars would need to be carefully assessed and take into consideration the effect on access to IRF care for certain high-cost populations. We continue to believe that maintaining the outlier pool at 3 percent of aggregate IRF payments optimizes the extent to which we can reduce financial risk to IRFs caring for highest-cost patients, while still providing for adequate payments for all other non-outlier cases. We appreciate the commenters' suggestions for additional analysis on our methodology and will take them into consideration as we continue to assess our outlier threshold.

Comment: Many commenters provided suggestions to improve the high-cost outlier threshold methodology. By far the most frequent suggestion was for CMS to consider implementing a 3-year rolling average as a stabilizing factor for the outlier threshold, similar to the method used for the facility-level adjustments in the past. Commenters suggested that this methodology could reduce the annual outlier changes and provide greater predictability for the field. Several comments also suggested that CMS consider developing and implementing an outlier reconciliation policy for the IRF PPS, similar to the one used in IPPS. Other, less frequent suggestions that commenters offered were the following: establishing an outlier baseline and then increasing the outlier threshold each year by the approved market basket percentage increase, capping the overall outlier payments an IRF can receive, and reducing the overall 3 percent outlier pool.

Response: We thank the commenters for their suggestions regarding the outlier threshold. We appreciate the suggestion to modify the outlier threshold methodology to use a 3-year average; however, it has been our practice to utilize the most recent full fiscal year of data to update the prospective payment rates and determine the outlier threshold amount, as this data is generally considered to be the best overall predictor of experience in the upcoming fiscal year. Additionally, utilizing a 3-year rolling average approach would not be setting outlier payments at the 3 percent target and could potentially exceed or reduce the 3 percent outlier pool objective. We appreciate the commenters' suggestions and will take them into consideration as we continue to consider revisions to our outlier threshold methodology in future rulemaking.

As most recently discussed in the FY 2023 IRF PPS final rule ( 87 FR 47038 ), our outlier policy is intended to reimburse IRFs for treating extraordinarily costly cases. Any future consideration given to adjusting the outlier threshold to account for historical outlier reconciliation dollars or imposing a limit on outlier payments would need to be carefully assessed and take into consideration the effect on access to IRF care for certain high-cost populations. We continue to believe that maintaining the outlier pool at 3 percent of aggregate IRF payments optimizes the extent to which we can reduce financial risk to IRFs of caring for highest-cost patients, while still providing for adequate payments for all other non-outlier cases.

Additionally, we do not believe it would be appropriate to limit changes in the outlier threshold to changes in the market basket percentage as constraining adjustments to the outlier threshold may result in a threshold that generates outlier payments above or below the 3 percent target.

We appreciate the commenters' suggestions for refinements to the outlier methodology as well as the suggested areas of analysis and will take them into consideration as we continue to assess our outlier threshold methodology. We will continue to monitor our outlier policy to ensure it continues to compensate IRFs appropriately.

After consideration of the comments received and considering the most recent available data, we are finalizing the outlier threshold amount of $12,043 to maintain estimated outlier payments at approximately 3 percent of total estimated aggregate IRF payments for FY 2025.

CCRs are used to adjust charges from Medicare claims to costs and are computed annually from facility-specific data obtained from MCRs. IRF-specific CCRs are used in the development of the CMG relative weights and the calculation of outlier payments under the IRF PPS. In accordance with the methodology stated in the FY 2004 IRF PPS final rule ( 68 FR45692 through 45694 ), we proposed to apply a ceiling to IRFs' CCRs. Using the methodology described in that final rule, we proposed to update the national urban and rural CCRs for IRFs, as well as the national CCR ceiling for FY 2025, based on analysis of the most recent data available. We apply the national urban and rural CCRs to:

New IRFs that have not yet submitted their first MCR.
IRFs with an overall CCR that exceeds the national CCR ceiling for FY 2025, as discussed below in this section.
Other IRFs for which accurate data to calculate an overall CCR are not available.

Specifically, for FY 2025, we proposed to estimate a national average CCR of 0.492 for rural IRFs, which we calculated by taking an average of the CCRs for all rural IRFs using their most recently submitted cost report data. Similarly, we proposed to estimate a national average CCR of 0.406 for urban IRFs, which we calculated by taking an average of the CCRs for all urban IRFs using their most recently submitted cost report data. We apply weights to both of these averages using the IRFs' estimated costs, meaning that the CCRs of IRFs with higher total costs factor more heavily into the averages than the CCRs of IRFs with lower total costs. For this final rule, we have used the most recent available cost report data (FY 2022). This includes all IRFs whose cost reporting periods begin on or after October 1, 2021, and before October 1, 2022. If, for any IRF, the FY 2022 cost report was missing or had an “as submitted” status, we used data from a previous FY's (that is, FY 2004 through FY 2021) settled cost report for that IRF. We do not use cost report data from before FY 2004 for any IRF because changes in IRF utilization since FY 2004 resulting from the 60 percent rule and IRF medical review activities suggest that these older data do not adequately reflect the current cost of care. Using updated FY 2022 cost report data for this final rule, we estimate a national average CCR of 0.485 for rural IRFs, and a national average CCR of 0.405 for urban IRFs.

In accordance with past practice, we proposed to set the national CCR ceiling at 3 standard deviations above the mean CCR. Using this method, we proposed a national CCR ceiling of 1.52 for FY 2025. This means that, if an individual IRF's CCR were to exceed this ceiling of 1.52 for FY 2025, we will replace the IRF's CCR with the appropriate national average CCR (either rural or urban, depending on the geographic location of the IRF). We calculated the national CCR ceiling by:

Step 1. Taking the national average CCR (weighted by each IRF's total costs, as previously discussed) of all IRFs for which we have sufficient cost report data (both rural and urban IRFs combined).

Step 2. Estimating the standard deviation of the national average CCR computed in Step 1.

Step 3. Multiplying the standard deviation of the national average CCR computed in Step 2 by a factor of 3 to compute a statistically significant reliable ceiling.

Step 4. Adding the result from Step 3 to the national average CCR of all IRFs for which we have sufficient cost report data, from Step 1.

We also proposed that if more recent data become available after the publication of the proposed rule and before the publication of this final rule, we would use such data to determine the FY 2025 national average rural and urban CCRs and the national CCR ceiling in the final rule. Using the FY 2022 cost report data for this final rule, we estimate a national average CCR ceiling of 1.50, using the same methodology.

We invited public comment on the proposed update to the IRF CCR ceiling and the urban/rural averages for FY 2025.

We did not receive any comments on the proposed update to the IRF CCR ceiling and the urban/rural averages for FY 2025. Consistent with the methodology outlined in the proposed rule, and using the most recent cost report data, we are finalizing a national average urban CCR at 0.405, the national average rural CCR at 0.485, and the national average CCR ceiling at 1.50 for FY 2025.

The Inpatient Rehabilitation Facility Quality Reporting Program (IRF QRP) is authorized by section 1886(j)(7) of the Act, and it applies to freestanding IRFs, as well as inpatient rehabilitation units of hospitals or Critical Access Hospitals (CAHs) paid by Medicare under the IRF PPS. Section 1886(j)(7)(A)(i) of the Act requires the Secretary to reduce by 2 percentage points the annual increase factor for discharges occurring during a FY for any IRF that does not submit data in accordance with the IRF QRP requirements set forth in subparagraphs (C) and (F) of section 1886(j)(7) of the Act. We have codified our program requirements in our regulations at § 412.634.

We proposed to require IRFs to report four new items to the IRF-Patient Assessment Instrument (PAI) and modify one item on the IRF-PAI as described in section VII.C. of the proposed rule. We also proposed to remove an item from the IRF-PAI as described in section VII.F.3 of the proposed rule. Finally, we also sought information on future measure concepts for the IRF QRP and on an IRF star rating system in sections VII.D. and VII.E. of the proposed rule, respectively.

For a detailed discussion of the considerations we use for the selection of IRF QRP quality, resource use, or other measures, we refer readers to the FY 2016 IRF PPS final rule ( 80 FR 47083 and 47084 ).

The IRF QRP currently has 18 adopted measures, which are listed in Table 13. For a discussion of the factors used to evaluate whether a measure should be removed from the IRF QRP, we refer readers to § 412.634(b)(2).

Table 13—Quality Measures Currently Adopted for the IRF QRP

Short name Measure name & data source Pressure Ulcer/Injury Changes in Skin Integrity Post-Acute Care: Pressure Ulcer/Injury. Application of Falls Application of Percent of Residents Experiencing One or More Falls with Major Injury (Long Stay). Discharge Mobility Score IRF Functional Outcome Measure: Discharge Mobility Score for Medical Rehabilitation Patients. Discharge Self-Care Score IRF Functional Outcome Measure: Discharge Self-Care Score for Medical Rehabilitation Patients. DRR Drug Regimen Review Conducted with Follow-Up for Identified Issues—Post Acute Care (PAC) Inpatient Rehabilitation Facility (IRF) Quality Reporting Program (QRP). TOH-Provider Transfer of Health Information to the Provider—Post-Acute Care (PAC). TOH-Patient Transfer of Health Information to the Patient—Post-Acute Care (PAC). DC Function Discharge Function Score. Patient/Resident COVID-19 Vaccine COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date. CAUTI National Healthcare Safety Network (NHSN) Catheter-Associated Urinary Tract Infection Outcome Measure. CDI National Healthcare Safety Network (NHSN) Facility-wide Inpatient Hospital-onset Infection (CDI) Outcome Measure. HCP Influenza Vaccine Influenza Vaccination Coverage among Healthcare Personnel. HCP COVID-19 Vaccine COVID-19 Vaccination Coverage among Healthcare Personnel (HCP). MSPB IRF Medicare Spending Per Beneficiary (MSPB)—Post Acute Care (PAC) IRF QRP. DTC Discharge to Community—PAC IRF QRP. PPR 30 day Potentially Preventable 30-Day Post-Discharge Readmission Measure for IRF QRP. PPR Within Stay Potentially Preventable Within Stay Readmission Measure for IRFs.

We did not propose to adopt any new measures for the IRF QRP.

In the proposed rule, we proposed to require IRFs to report the following four new items [ 7 ] as standardized patient assessment data elements under the social determinants of health (SDOH) category: one item for Living Situation; two items for Food; and one item for Utilities. We also proposed to modify one of the current items collected as standardized patient assessment data under the SDOH category (the Transportation item), as described in section VII.C.5. of the proposed rule. [ 8 ]

Section 1886(j)(7)(F)(ii) of the Act requires IRFs to submit standardized patient assessment data required under section 1899B(b)(1) of the Act. Section 1899B(b)(1)(A) of the Act requires post-acute care (PAC) providers to submit standardized patient assessment data under applicable reporting provisions (which, for IRFs, is the IRF QRP) with respect to the admission and discharge of an individual (and more frequently as the Secretary deems appropriate) using a standardized patient assessment instrument. Section 1899B(a)(1)(C) of the Act requires, in part, the Secretary to modify the PAC assessment instruments in order for PAC providers, including IRFs, to submit standardized patient assessment data under the Medicare program. IRFs are currently required to report standardized patient assessment data through the patient assessment instrument, referred to as the Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-PAI). Section 1899B(b)(1)(B) of the Act describes standardized patient assessment data as data required for at least the quality measures described in section 1899B(c)(1) of the Act and that is with respect to the following categories: (1) functional status, such as mobility and self-care at admission to a PAC provider and before discharge from a PAC provider; (2) cognitive function, such as ability to express ideas and to understand, and mental status, such as depression and dementia; (3) special services, treatments, and interventions, such as need for ventilator use, dialysis, chemotherapy, central line placement, and total parenteral nutrition; (4) medical conditions and comorbidities, such as diabetes, congestive heart failure, and pressure ulcers; (5) impairments, such as incontinence and an impaired ability to hear, see, or swallow; and (6) other categories deemed necessary and appropriate by the Secretary.

Section 1899B(b)(1)(B)(vi) of the Act authorizes the Secretary to collect standardized patient assessment data elements with respect to other categories deemed necessary and appropriate. Accordingly, we finalized the creation of the SDOH category of standardized patient assessment data elements in the FY 2020 IRF PPS final rule ( 84 FR 39149 through 39161 ), and defined SDOH as the socioeconomic, cultural, and environmental circumstances in which individuals live that impact their health. [ 9 ] According to the World Health Organization, research shows that the SDOH can be more important than health care or lifestyle choices in influencing health, accounting for between 30-55% of health outcomes. [ 10 ] This is a part of a growing body of research that highlights the importance of SDOH on health outcomes. Subsequent to the FY 2020 IRF PPS final rule, we expanded our definition of SDOH: SDOH are the conditions in the environments where people are born, live, learn, work, play, worship, and age that affect a wide range of health, functioning, and quality-of-life outcomes and risks. [ 11 12 13 ] This update will align our definition of SDOH with the definition used by HHS agencies, including OASH, the Centers for Disease Control and Prevention (CDC), and the White House Office of Science and Technology Policy. [ 14 15 ] We currently collect seven items in this SDOH category of standardized patient assessment data elements: ethnicity, race, preferred language, interpreter services, health literacy, transportation, and social isolation ( 84 FR 39149 through 39161 ). [ 16 ]

In accordance with our authority under section 1899B(b)(1)(B)(vi) of the Act, we similarly finalized the creation of the SDOH category of standardized patient assessment data elements for Skilled Nursing Facilities (SNFs) in the FY 2020 SNF PPS final rule ( 84 FR 38805 through 38817 ), for Long-Term Care Hospitals (LTCHs) in the FY 2020 Inpatient Prospective Payment System (IPPS)/LTCH PPS final rule ( 84 FR 42577 through 42588 ), and for Home Health Agencies (HHAs) in the Calendar Year (CY) 2020 HH PPS final rule ( 84 FR 60597 through 60608 ). We also collect the same seven SDOH items in these PAC providers' respective patient/resident assessment instruments ( 84 FR 38817 , 84 FR 42590 , and 84 FR 60610 , respectively).

Access to standardized data relating to SDOH on a national level permits us to conduct periodic analyses, and to assess their appropriateness as risk adjustors or in future quality measures. Our ability to perform these analyses and to make adjustments relies on existing data collection of SDOH items from PAC settings. We adopted these SDOH items using common standards and definitions across the four PAC providers to promote interoperable exchange of longitudinal information among these PAC providers, including IRFs, and other providers. We believe this information may facilitate coordinated care, continuity in care planning, and the discharge planning process from PAC settings.

We noted in the FY 2020 IRF PPS final rule that each of the items was identified in the 2016 National Academies of Sciences, Engineering, and Medicine (NASEM) report as impacting care use, cost, and outcomes for Medicare beneficiaries ( 84 FR 39150 through 39151 ). At that time, we acknowledged that other items may also be useful to understand. The SDOH items we proposed to adopt as standardized patient assessment data elements under the SDOH category in this proposed rule were also identified in the 2016 NASEM report [ 17 ] or the 2020 NASEM report [ 18 ] as impacting care use, cost, and outcomes for Medicare beneficiaries. The items have the capacity to take into account treatment preferences and care goals of patients and their caregivers, to inform our understanding of patient complexity and SDOH that may affect care outcomes and ensure that IRFs are in a position to impact through the provision of services and supports, such as connecting patients and their caregivers with identified needs with social support programs.

Health-related social needs (HRSNs) are the resulting effects of SDOH, which are individual-level, adverse social conditions that negatively impact a person's health or health care. [ 19 ] Examples of HRSNs include lack of access to food, housing, or transportation, and have been associated with poorer health outcomes, greater use of emergency departments and hospitals, and higher health care costs. [ 20 ] Certain HRSNs can lead to unmet social needs that directly influence an individual's physical, psychosocial, and functional status. This is particularly true for food security, housing stability, utilities security, and access to transportation. [ 21 ]

We proposed to require IRFs to collect and submit four new items in the IRF-PAI as standardized patient assessment data elements under the SDOH category because these items would collect information not already captured by the current SDOH items. Specifically, we believe the ongoing identification of SDOH would have three significant benefits. First, promoting screening for SDOH could serve as evidence-based building blocks for supporting healthcare providers in actualizing their commitment to address disparities that disproportionately impact underserved communities. Second, screening for SDOH improves health equity through identifying potential social needs so the IRF may address those with the patient, their caregivers, and community partners during the discharge planning process, if indicated. [ 22 ] Third, these SDOH items could support our ongoing IRF QRP initiatives by providing data with which to stratify IRFs' performance on measures and in future quality measures.

Collection of additional SDOH items would permit us to continue developing the statistical tools necessary to maximize the value of Medicare data and improve the quality of care for all beneficiaries. For example, we recently developed and released the Health Equity Confidential Feedback Reports, which provided data to IRFs on whether differences in quality measure outcomes are present for their patients by dual-enrollment status and race and ethnicity. [ 23 ] We note that advancing health equity by addressing the health disparities that underlie the country's health system is one of our strategic pillars [ 24 ] and a Biden-Harris Administration priority. [ 25 ]

We proposed to require IRFs to collect and submit four new items as standardized patient assessment data elements under the SDOH category using the IRF-PAI: one item for Living Situation, as described in section VIII.3.(a) of this final rule; two items for Food, as described in section VIII.3.(b) of this final rule; and one item for Utilities, as described in VIII.3.(c) of this final rule.

We selected the SDOH items from the Accountable Health Communities (AHC) Health-Related Social Needs (HRSN) Screening Tool developed for the AHC Model. [ 26 ] The AHC HRSN Screening Tool is a universal, comprehensive screening for HRSNs that addresses five core domains as follows: (1) housing instability (for example, homelessness, poor housing quality), (2) food insecurity, (3) transportation difficulties, (4) utility assistance needs, and (5) interpersonal safety concerns (for example, intimate-partner violence, elder abuse, child maltreatment). [ 27 ]

We believe that requiring IRFs to report new items that are included in the AHC HRSN Screening Tool will further standardize the screening of SDOH across quality programs. For example, as outlined in the proposed rule, our proposal will align, in part, with the requirements of the Hospital Inpatient Quality Reporting (IQR) Program and the Inpatient Psychiatric Facility Quality Reporting (IPFQR) Program. As of January 2024, hospitals are required to report whether they have screened patients for the standardized SDOH categories of housing instability, food insecurity, utility difficulties, transportation needs, and interpersonal safety to meet the Hospital IQR Program requirements. [ 28 ] Additionally, beginning January 2025, IPFs will also be required to report whether they have screened patients for the same set of SDOH categories. [ 29 ] As we continue to standardize data collection across settings, we believe using common standards and definitions for new items is important to promote interoperable exchange of longitudinal information between IRFs and other providers to facilitate coordinated care, continuity in care planning, and the discharge planning process.

Below we describe each of the four proposed items in more detail.

Healthy People 2030 prioritizes economic stability as a key SDOH, of which housing stability is a component. [ 30 31 ] Lack of housing stability encompasses several challenges, such as having trouble paying rent, overcrowding, moving frequently, or spending the bulk of household income on housing. [ 32 ] These experiences may negatively affect one's physical health and access to health care. Housing instability can also lead to homelessness, which is housing deprivation in its most severe form. [ 33 ] On a single night in 2023, roughly 653,100 people, or 20 out of every 10,000 people in the United States, were experiencing homelessness. [ 34 ] Studies also found that people who are homeless have an increased risk of premature death and experience chronic disease more often than among the general population. [ 35 ]

We believe that IRFs can use information obtained from the Living Situation item during a patient's discharge planning. For example, IRFs could work in partnership with community care hubs and community-based organizations to establish new care transition workflows, including referral pathways, contracting mechanisms, data sharing strategies, and implementation training that can track HRSNs to ensure unmet needs, such as housing, are successfully addressed through closed loop referrals and follow-up. [ 36 ] IRFs could also take action to help alleviate a patient's other related costs of living, like food, by referring the patient to community-based organizations that would allow the patient's additional resources to be allocated towards housing without sacrificing other needs. [ 37 ] Finally, IRFs could use the information obtained from the Living Situation item to better coordinate with other healthcare providers, facilities, and agencies during transitions of care, so that referrals to address a patient's housing stability are not lost during vulnerable transition periods.

Due to the potential negative impacts housing instability can have on a patient's health, we proposed to adopt the Living Situation item as a new standardized patient assessment data element under the SDOH category. This proposed Living Situation item is based on the Living Situation item collected in the AHC HRSN Screening Tool, [ 38 39 ] and was adapted from the Protocol for Responding to and Assessing Patients' Assets, Risks, and Experiences (PRAPARE) tool. [ 40 ] The proposed Living Situation item asks, “What is your living situation today?” The proposed response options are: (1) I have a steady place to live; (2) I have a place to live today, but I am worried about losing it in the future; (3) I do not have a steady place to live; (7) Patient declines to respond; and (8) Patient unable to respond. A draft of the Living Situation item proposed to be adopted as a standardized patient assessment data element under the SDOH category can be found in the Downloads section of the IRF-PAI and IRF-PAI Manual web page at https://www.cms.gov/medicare/quality/inpatient-rehabilitation-facility/irf-pai-and-irf-qrp-manual .

The U.S. Department of Agriculture, Economic Research Service defines a lack of food security as a household-level economic and social condition of limited or uncertain access to adequate food. [ 41 ] Adults who are food insecure may be at an increased risk for a variety of negative health outcomes and health disparities. For example, a study found that food-insecure adults may be at an increased risk for obesity. [ 42 ] Another study found that food-insecure adults have a significantly higher probability of death from any cause or cardiovascular disease in long-term follow-up care, in comparison to adults that are food secure. [ 43 ]

While having enough food is one of many predictors for health outcomes, a diet low in nutritious foods is also a factor. [ 44 ] The United States Department of Agriculture (USDA) defines nutrition security as “consistent and equitable access to healthy, safe, affordable foods essential to optimal health and well-being.” [ 45 ] Nutrition security builds on and complements long standing efforts to advance food security. Studies have shown that older adults struggling with food insecurity consume fewer calories and nutrients and have lower overall dietary quality than those who are food secure, which can put them at nutritional risk. [ 46 ] Older adults are also at a higher risk of developing malnutrition, which is considered a state of deficit, excess, or imbalance in protein, energy, or other nutrients that adversely impacts an individual's own body form, function, and clinical outcomes. [ 47 ] Up to 50 percent of older adults are affected by or at risk for malnutrition, which is further aggravated by a lack of food security and poverty. [ 48 ] These facts highlight why the Biden-Harris Administration launched the White House Challenge to End Hunger and Build Healthy Communities. [ 49 ]

We believe that adopting items to collect and analyze information about a patient's food security at home could provide additional insight to their health complexity and help facilitate coordination with other healthcare providers, facilities, and agencies during transitions of care, so that referrals to address a patient's food security are not lost during vulnerable transition periods. For example, an IRF's dietitian or other clinically qualified nutrition professional could work with the patient and their caregiver to plan healthy, affordable food choices prior to discharge. [ 50 ] IRFs could also refer a patient that indicates lack of food security to government initiatives such as the Supplemental Nutrition Assistance Program (SNAP) and food pharmacies (programs to increase access to healthful foods by making them affordable), two initiatives that have been associated with lower health care costs and reduced hospitalization and emergency department visits. [ 51 ]

We proposed to adopt two Food items as new standardized patient assessment data elements under the SDOH Category. These proposed items are based on the Food items collected in the AHC HRSN Screening Tool and were adapted from the USDA 18-item Household Food Security Survey (HFSS). [ 52 ] The first proposed Food item states, “Within the past 12 months, you worried that your food would run out before you got money to buy more.” The second proposed Food item states, “Within the past 12 months, the food you bought just didn't last and you didn't have money to get more.” We proposed the same response options for both items: (1) Often true; (2) Sometimes true; (3) Never True; (7) Patient declines to respond; and (8) Patient unable to respond. A draft of the proposed Food items proposed to be adopted as standardized patient assessment data elements under the SDOH category can be found in the Downloads section of the IRF-PAI and IRF-PAI Manual web page at https://www.cms.gov/medicare/quality/inpatient-rehabilitation-facility/irf-pai-and-irf-qrp-manual .

A lack of energy (utility) security can be defined as an inability to adequately meet basic household energy needs. [ 53 ] According to the United States Department of Energy, one in three households in the U.S. are unable to adequately meet basic household energy needs. [ 54 ] The consequences associated with a lack of utility security are represented by three primary dimensions: economic, physical, and behavioral. Patients with low incomes are disproportionately affected by high energy costs, and they may be forced to prioritize paying for housing and food over utilities. [ 55 ] Some patients may face limited housing options and therefore are at increased risk of living in lower-quality physical conditions with malfunctioning heating and cooling systems, poor lighting, and outdated plumbing and electrical systems. [ 56 ] Patients with a lack of utility security may use negative behavioral approaches to cope, such as using stoves and space heaters for heat. [ 57 ] In addition, data from the Department of Energy's U.S. Energy Information Administration confirm that a lack of energy security disproportionately affects certain populations, such as low-income and African American households. [ 58 ] The effects of a lack of utility security include vulnerability to environmental exposures such as dampness, mold, and thermal discomfort in the home, which have a direct impact on a person's health. [ 59 ] For example, research has shown associations between a lack of energy security and respiratory conditions as well as mental health-related disparities and poor sleep quality in vulnerable populations such as the elderly, children, the socioeconomically disadvantaged, and the medically vulnerable. [ 60 ]

We believe adopting an item to collect information upon a patient's admission to an IRF about their utility security would facilitate the identification of patients who may not have utility security and who may benefit from engagement efforts. For example, IRFs may be able to use the information on utility security to help connect some patients in need to programs that can help older adults pay for their home energy (heating/cooling) costs, like the Low-Income Home Energy Assistance Program (LIHEAP). [ 61 ] IRFs may also be able to partner with community care hubs and community-based organizations to assist the patient in applying for these and other local utility assistance programs, as well as helping them navigate the enrollment process. [ 62 ]

We proposed to adopt a new item, Utilities, as a new standardized patient assessment data element under the SDOH category. This proposed item is based on the Utilities item collected in the AHC HRSN Screening Tool and was adapted from the Children's Sentinel Nutrition Assessment Program (C-SNAP) survey. [ 63 ] The proposed Utilities item asks, “In the past 12 months, has the electric, gas, oil, or water company threatened to shut off services in your home?” The proposed response options are: (1) Yes; (2) No; (3) Already shut off; (7) Patient declines to respond; and (8) Patient unable to respond. A draft of the proposed Utilities item to be adopted as a standardized patient assessment data element under the SDOH category can be found in the Downloads section of the IRF-PAI and IRF-PAI Manual web page at https://www.cms.gov/medicare/quality/inpatient-rehabilitation-facility/irf-pai-and-irf-qrp-manual .

We developed our updates to add these items after considering feedback we received in response to our Health Equity Update in the FY 2024 IRF PPS final rule. While there were commenters who urged CMS to balance reporting requirements so as not to create undue administrative burden and avoid making generalizations about differences in health and health care on certain data elements, it was also suggested CMS incentivize collection of data on SDOH such as housing stability and food security. Two commenters emphasized that any additional stratification of quality measures, including social risk factors and SDOH, would be of value to PAC providers, including IRFs. The FY 2024 IRF PPS final rule ( 88 FR 51037 through 51039 ) includes a summary of the public comments that we received in response to the Health Equity Update and our responses to those comments.

Additionally, we considered feedback we received when we proposed the creation of the SDOH category of standardized patient assessment data elements in the FY 2020 IRF PPS proposed rule ( 84 FR 17319 through 17326 ). Commenters were generally in favor of the concept of collecting SDOH items and stated that if implemented appropriately the data could be useful in identifying and addressing health care disparities, as well as refining the risk adjustment of outcome measures. One commenter specifically recommended CMS consider including data collection of housing status, since unmet housing needs can put patients at higher risk for readmission. The FY 2020 IRF PPS final rule ( 84 FR 39149 through 39161 ) includes a summary of the public comments that we received and our responses to those comments. We incorporated this input into the development of this proposal.

We solicited comment on the proposal to adopt four new items as standardized patient assessment data elements in the IRF-PAI under the SDOH category beginning with the FY 2028 IRF QRP: one Living Situation item; two Food items; and one Utilities item ( 89 FR 22279 ).

The following is a summary of the public comments received on the proposal and our responses:

Comment: Many commenters expressed support for the proposed new SDOH assessment items, viewing this as an important step towards identifying health disparities, improving health outcomes, understanding diverse patient needs, improving discharge planning and care coordination, and fostering continuous quality improvement. One of these commenters also emphasized the importance of collecting SDOH data in helping recognize areas of need and enhancing efforts to improve patient outcomes across healthcare settings, and another commenter emphasized the importance of identifying, documenting, and addressing SDOH in order to provide equitable, high-quality, holistic, patient-centered care.

Several commenters noted the importance of the proposed new SDOH assessment items in facilitating discharge planning strategies that can account for a person's housing, food, utilities, and transportation needs. Three of these commenters noted that the information obtained from these proposed new SDOH assessment items will provide data that can be used to better address identified needs with the patient, their caregivers, and community partners during the discharge planning process. These commenters also mentioned that addressing non-medical factors during patient visits can help connect patients to the resources they need and lead to successful discharges to the community or improved health outcomes. Another one of these commenters noted that the direct value to providers in the inpatient rehabilitation space is the insight into the home life and resources available to the patient once discharged. Finally, one of these commenters noted that these proposed SDOH assessment items support a culture of engaging with and advancing equity in IRFs by reflecting a proactive approach towards addressing the multifaceted determinants of health.

Response: We appreciate the support. We agree that the collection of the proposed SDOH assessment items will support IRFs that wish to understand the health disparities that affect their populations, facilitate coordinated care, foster continuity in care planning, and assist with the discharge planning process from the IRF setting.

Comment: Several commenters appreciated CMS' efforts at standardizing collection of patient assessment data elements related to SDOH by proposing to adopt the four new assessment items, Living Situation, Food, and Utilities, in the IRF-PAI. One of these commenters supported CMS' decision to align and standardize new SDOH data collection in the IRF QRP with data already being collected in other settings, such as the Hospital Inpatient Quality Reporting (IQR) Program and the Inpatient Psychiatric Facility Quality Reporting (IPFQR) Program. Another one of these commenters noted that the utilization of the AHC HRSN Screening Tool will help fill the existing gap of standardized SDOH data collection for CMS programs, which will reduce the administrative burden with collecting SDOH data. In addition, three commenters noted their support of the proposed new SDOH assessment items because they are similar to questions many IRFs already ask for discharge planning purposes, minimizing additional burden.

Response: We thank the commenter for recognizing that our proposal aligns, in part, with the requirements of the Hospital IQR Program and the IPFQR Program. As we continue to standardize data collection across settings, we believe using common standards and definitions for new assessment items is important to promote interoperable exchange of longitudinal information between IRFs and other providers. We heard from many IRFs that they are already collecting similar information and integrating it into their admission and discharge processes in order to facilitate coordinated care and continuity in care planning. We believe collecting this information in all IRFs may facilitate coordinated care, continuity in care planning, and IRFs' discharge planning process in accordance with our regulation at § 482.43(a).

Comment: Several commenters agreed with the importance of collecting SDOH assessment items through the IRF-PAI but also expressed concerns about the additional administrative burden associated with collecting the new SDOH data. Several of these commenters noted that data collection is overburdening the workforce, and one noted that it will take away resources from patient care while another commenter urged CMS to ensure the additional burden on providers provides meaningful benefit to rehab patients. One of these commenters requested additional funding for the increased costs associated with what they believe are tasks outside the normal day-to-day operations of the facilities.

Response: Although the addition of four new SDOH assessment items to the IRF-PAI will increase the burden associated with completing the IRF-PAI, we carefully considered this increased burden of collecting new assessment items against the benefits of adopting those assessment items for the IRF-PAI. Collection of additional SDOH assessment items will permit us to continue developing the statistical tools necessary to maximize the value of Medicare data and improve the quality of care for all beneficiaries. As noted in section VII.C.2 of the proposed rule ( 89 FR 22276 ) and section VIII.C.2. of this final rule, we recently developed and released the Health Equity Confidential Feedback Reports, which provided data to IRFs on whether differences in quality measure outcomes are present for their patients by dual-enrollment status and race and ethnicity. [ 64 ] In balancing the reporting burden for IRFs, we prioritized our policy objective to collect additional SDOH standardized patient assessment data elements that will inform care planning and coordination and quality improvement across care settings.

In response to the commenters who believe this policy, if finalized, would take time away from patient care, we believe the proposed assessment items (Living Situation, Food, and Utilities) are all important pieces of information to developing and administering a comprehensive plan of care in accordance with our regulation at § 412.606. A comprehensive plan of care includes the initiation of a discharge plan. Given the relatively short length of stay in IRFs, discharge planning generally begins at the time of admission and this information would inform the comprehensive plan of care. Using this information, IRFs have an opportunity to implement interventions to address these SDOH, if appropriate. For example, IRFs may determine that educating patients about transportation resources, teaching them how to use adaptive transportation if their condition now requires it, educating patients about safe choices for utilities, or begin the process of finding resources for patients is appropriate for the patient's comprehensive plan of care. Rather than taking time away from patient care, providers will be documenting information they are likely already collecting through the course of providing care to the patients.

Regarding the comment requesting additional funding for the increased costs associated with collecting data on these new assessment items, we find the comment unclear. We interpret the commenter to mean that they do not believe that current IRF PPS payments are sufficient to cover the increased burden (specifically, costs) associated with collection of this additional data for the proposed new SDOH assessment items. As discussed previously, we carefully considered the increased burden associated with collection of these four new SDOH assessment items against the benefits of adopting these items for the IRF-PAI. We believe the collection of these items is within the normal day-to-day operations of the facilities. For instance, IRFs are required by regulation at § 482.43(a) to identify, at an early stage of hospitalization, those patients who are likely to suffer adverse health consequences upon discharge in the absence of adequate discharge planning and must provide a discharge planning evaluation for those patients. The proposed new SDOH assessment items were identified in either the 2016 NASEM report [ 65 ] or the 2020 NASEM report [ 66 ] as impacting care use, cost, and outcomes for Medicare beneficiaries. We believe the proposed new SDOH assessment items have the potential to generate actionable data IRFs can use to implement effective discharge planning processes that can reduce the risk for negative outcomes such as hospital readmissions and admission to a nursing facility for long-term care. Given that IRFs must develop and implement an effective discharge planning process that ensures the discharge needs of each patient are identified, we believe IRFs are likely collecting some of this data already. Collection of these new SDOH items will provide key information to IRFs to support effective discharge planning.

Finally, we also plan to provide training resources in advance of the initial collection of the new SDOH assessment items to ensure that IRFs have the tools necessary to administer these new items and reduce the burden to IRFs having to create their own training resources. These training resources may include online learning modules, tip sheets, questions and answers documents, and recorded webinars and videos. We anticipate that we will make these materials available to IRFs in mid-2025, which will give IRFs several months prior to required collection and reporting to take advantage of the learning opportunities.

Comment: One commenter who supported the proposal to collect the new and modified SDOH assessment items also encouraged CMS to ensure the new assessment items are valid and reliable. Several commenters who did not support the proposal noted concerns with the validity and reliability of the proposed new and modified SDOH assessment items, and several of these commenters recommended further testing of these assessment items for the IRF population. In addition, one commenter noted that most hospitals in their network reported they do not use the AHC tool for screening for social services as they find the tool suboptimal for its ability to gather accurate information and get patients the services they need.

Response: We disagree that the proposed new and modified SDOH assessment items require further testing prior to collecting them on the IRF-PAI for the IRF QRP. The AHC HRSN Screening Tool is evidence-based and informed by practical experience. With input from a panel of national experts convened by our contractor, we developed the tool under the Center for Medicare and Medicaid Innovation (CMMI) by conducting a review of existing screening tools and questions focused on core and supplemental HRSN domains, including housing instability, food insecurity, transportation difficulties, utility assistance needs, and interpersonal safety concerns. [ 67 ] These domains were chosen based upon literature review and expert consensus utilizing the following criteria: (1) availability of high-quality scientific evidence linking a given HRSN to adverse health outcomes and increased healthcare utilization, including hospitalizations and associated costs; (2) ability for a given HRSN to be screened and identified in the inpatient setting prior to discharge, addressed by community-based services, and potentially improve healthcare outcomes, including reduced readmissions; and (3) evidence that a given HRSN is not systematically addressed by healthcare providers. [ 68 ] In addition to established evidence of their association with health status, risk, and outcomes, these domains were selected because they can be assessed across the broadest spectrum of individuals in a variety of settings. [ 69 70 ]

Through this process, over 50 screening tools totaling more than 200 questions were compiled. In order to refine this list, CMS' contractor consulted a technical expert panel (TEP) consisting of a diverse group of tool developers, public health and clinical researchers, clinicians, population health and health systems executives, community-based organization leaders, and Federal partners. Over the course of several meetings, this TEP met to discuss opportunities and challenges involved in screening for HRSNs; consider and pare down CMS' list of evidence-based screening questions; and recommend a short list of questions for inclusion in the final tool. The AHC HRSN Screening Tool was tested across many care delivery sites in diverse geographic locations across the United States. More than one million Medicare and Medicaid beneficiaries have been screened using the AHC HRSN Screening Tool, which was evaluated psychometrically and demonstrated evidence of both reliability and validity, including inter-rater reliability and concurrent and predictive validity. Moreover, the AHC HRSN Screening Tool can be implemented in a variety of places where individuals seek healthcare, including IRFs.

We selected these proposed assessment items for the IRF QRP from the AHC HRSN Screening Tool because we believe that collecting information on living situation, food, utilities, and transportation could have a direct and positive impact on patient care in IRFs. Specifically, collecting the information provides an opportunity for the IRF to identify patients' potential HRSNs, and if indicated, to those with the patient, their caregivers, and community partners during the discharge planning process, potentially resulting in improvements in patient outcomes.

Comment: Three of these commenters referenced CMS' second evaluation of the AHC model from 2018 through 2021. [ 71 ] These commenters interpret the Findings at a Glance to conclude that the AHC HRSN Screening Tool “did not appear to increase beneficiaries' connection to community services or HRSN resolution.”

Response: This two-page summary of the AHC Model 2018-2021 [ 72 ] describes the results of testing whether systematically identifying and connecting beneficiaries to community resources for their HRSNs improved health care utilization outcomes and reduced costs. To ensure consistency in the screening offered to beneficiaries across both an individual community's clinical delivery sites and across all the communities in the model, CMS developed a standardized HRSN screening tool. This AHC HRSN Screening Tool was used to screen Medicare and Medicaid beneficiaries for core HRSNs to determine their eligibility for inclusion in the AHC Model. If a Medicare or Medicaid beneficiary was eligible for the AHC Model, they were randomly assigned to one of two tracks: (1) Assistance; or (2) Alignment. The Assistance Track tested whether navigation assistance that connects navigation-eligible beneficiaries with community services results in increased HRSN resolution, reduced health care expenditures, and unnecessary utilization. The Alignment Track tested whether navigation assistance, combined with engaging key stakeholders in continuous quality improvement (CQI) to align community service capacity with beneficiaries' HRSNs, results in greater increases in HRSN resolution and greater reductions in health expenditures and utilization than navigation assistance alone. Regardless of assigned track, all beneficiaries received HRSN screening, community referrals, and navigation to community services. [ 73 ]

We believe the commenter inadvertently misinterpreted the findings, believing these findings were with respect to the effectiveness and scientific validity of the AHC HRSN Screening Tool itself. The findings section of this two-page summary described six key findings from the AHC Model, which examined whether the Assistance Track or the Alignment Track resulted in greater increases in HRSN resolution and greater reductions in health expenditures and utilization. Particularly, the AHC Model reduced emergency department visits among Medicaid and FFS Medicare beneficiaries in the Assistance Track, which was suggestive that navigation may help patients use the health care system more effectively. We acknowledge that navigation alone did not increase beneficiaries' connection to community services or HRSN resolution, and this was attributed to gaps between community resource availability and beneficiary needs. The AHC HRSN Screening Tool used in the AHC Model was limited to identifying Medicare and Medicaid beneficiaries with at least one core HRSN who could be eligible to participate in the AHC Model. Our review of the AHC Model did not identify any issues with the validity and scientific reliability of the AHC HRSN Screening Tool.

Finally, as part of our routine item and measure monitoring work, we continually assess the implementation of new assessment items, including the four new proposed SDOH assessment items.

Comment: Three commenters requested that CMS articulate the vision for how CMS plans to use the data collected from the proposed SDOH standardized patient assessment data elements in quality and payment programs. These commenters noted concern that CMS may use the SDOH assessment data to develop an IRF QRP measure that would hold IRFs solely accountable for social drivers of health that require resources and engagement across an entire community to address.

Response: We proposed the four new SDOH assessment items because collection of additional SDOH items would permit us to continue developing the statistical tools necessary to maximize the value of Medicare data and improve the quality of care for all beneficiaries. For example, we recently developed and released the Health Equity Confidential Feedback Reports, which provided data to IRFs on whether differences in quality measure outcomes are present for their patients by dual-enrollment status and race and ethnicity. [ 74 ] We note that advancing health equity by addressing the health disparities that underlie the country's health system is one of our strategic pillars [ 75 ] and a Biden-Harris Administration priority. [ 76 ] Furthermore, any updates to the IRF QRP measure set or payment system would be addressed through future notice-and-comment rulemaking, as necessary.

Comment: Several commenters did not agree with CMS that the proposed SDOH assessment items would produce interoperable data within the CMS quality programs because the proposed requirements for IRF are not standardized with the SDOH collection requirements in the Hospital IQR Program and IPFQR Programs. This commenter noted that the Screening for SDOH measures in the Hospital IQR and IPFQR Programs do not specify when a patient is screened (for example, at admission) and how the screening questions are asked (in other words, specific wording and responses). Instead, providers reporting these measures under the Hospital IQR and IPFQR Programs are only asked to document that a patient was screened for the following domains: housing instability, food insecurity, transportation difficulties, utility assistance needs, and interpersonal safety concerns.

Response: We disagree that the proposed collection of four new SDOH Assessment items and one modified SDOH assessment item for the IRF QRP and the requirements for the Hospital IQR and IPFQR Programs do not promote standardization and interoperability. Although hospitals and IPFs participating in these programs can use a self-selected SDOH screening tool, the Screening for SDOH and Screen Positive Rate for SDOH measures we have adopted for the Hospital IQR and IPFQR Programs address same SDOH domains that we have proposed to collect as standardized patient assessment data under the IRF QRP: housing instability, food insecurity, utility difficulties, transportation needs. We believe that this partial alignment will facilitate longitudinal data collection on the same topics across healthcare settings. As we continue to standardize data collection, we believe using common standards and definitions for new assessment items is important to promote interoperable exchange of longitudinal information between IRFs and other providers to facilitate coordinated care, continuity in care planning, and the discharge planning process. This is evidenced by our recent proposals to add these four SDOH assessment items and one modified SDOH assessment item in the SNF QRP ( 89 FR 23462 through 23468 ), LTCH QRP ( 89 FR 36345 through 36350 ), and Home Health QRP ( 89 FR 55383 through 55388 ).

Comment: One commenter recommended the inclusion of assessment items to improve the overall patient care among those with disabilities, such as: disability-status, caregiver availability, patients' independent living status, and ability to return to work.

Response: We appreciate the comments and suggestions provided by the commenters, and we agree that it is important to understand the needs of patients with disabilities. As we continue to evaluate SDOH standardized patient assessment data elements and future policy options, we will consider this feedback. We note that although we proposed to require the collection of the Living Situation, Food, and Utilities items for the IRF QRP, our proposals would not preclude IRFs from choosing to screen their patients for additional SDOH they believe are relevant to their patient population and the community they serve, including screening for disability-status, caregiver availability, patients' independent living status, and ability to return to work.

Comment: Several commenters supported the proposal to adopt the Living Situation assessment item as a standardized patient assessment data element in the IRF-PAI. One of these commenters noted that having information about a patient's living situation enables better care coordination, identifies support gaps, and allows IRFs to develop tailored care plans. Another one of these commenters noted that this information helps them to improve facility operations and develop internal quality improvement efforts and population health initiatives. Finally, another one of these commenters noted that understanding a person's living situation can ensure the appropriate provision of necessary adaptive equipment and engagement with community partners to address patients' needs.

Response: We thank the commenters for their support and agree that information on a person's living situation can be used to develop tailored care plans, assist with quality improvement efforts, and collaborate with partners such as community care hubs and community-based organizations during transitions of care.

Comment: Two commenters recommended that the Living Situation assessment item incorporate information on whether a patient's living situation is suitable for potentially new complex care needs. One of these commenters highlighted the changing nature of IRF patients' needs and noted that some patients may have been housing secure prior to their condition, but that prior living situation may no longer be suitable for their current needs. The other commenter noted that in some cases, a patient's prior living situation may no longer be appropriate for them following their injury or illness, due to requirements such as mobility equipment, ramps, and other accessible modifications.

Response: While we proposed to require the collection of the Living Situation item at admission only, the collection could potentially prompt the IRF to initiate additional conversations with their patients about their living situation needs throughout their stay. As the commenter pointed out, it is important to think about the patient's living situation in the context of their new care needs, and collecting the Living Situation assessment item at admission would be an important first step to that process. Additionally, IRFs may seek to collect any additional information that they believe may be relevant to their patient population in order to inform their care and discharge planning process.

Comment: Two commenters expressed concerns with the time frame of the response options for the proposed the Living Situation item. One of these commenters suggested that adding a look back period of one year or less to the response options would allow healthcare providers to promptly intervene and mitigate any eminent negative housing situations. This commenter was concerned that, if left open-ended, patients may respond yes, thinking about many possible scenarios that may occur in the distant future. The other commenter encouraged CMS to consider a shorter look back period for the Living Situation assessment item, as a 12-month look back could capture circumstances that are no longer accurate.

Response: We interpret the comments to be suggesting that a time frame be added to two of the Living Situation response options, specifically: (1) I have a place to live today, but I am worried about losing it in the future; and (2) I do not have a steady place to live. We want to clarify that the proposed Living Situation item frames the question as, “What is your living situation today?” The question establishes the look back period (the present) the patient should consider in responding to the item.

Comment: Three commenters expressed concerns with utilizing the proposed Living Situation assessment item as currently worded. Specifically, commenters believe that asking about patients' living situation “today” may be difficult for IRF patients who are receiving treatment for a traumatic injury or serious medical event to answer accurately.

Response: We acknowledge the complex medical conditions of most IRF patients. However, there are other patient interview assessment items that IRFs currently collect that address this concern, and we believe IRFs have experience in managing these complex scenarios successfully in order to obtain the information required. We would also like to remind the commenter that we proposed response options for patients that are unable to respond or decline to respond.

We also plan to provide training resources in advance of the initial collection of the assessment items to ensure that IRFs have the tools necessary to administer the new SDOH assessment items and reduce the burden to IRFs in creating their own training resources. These training resources may include online learning modules, tip sheets, questions and answers documents, and recorded webinars and videos, and would be available to providers as soon as technically feasible.

Comment: One commenter recommended that CMS simplify the responses for the Living Situation assessment item because they are likely to lead to confusion. This commenter suggested CMS align the responses for the Living Situation assessment item with the proposed Food assessment item that has an “Often true,” “Sometimes true,” and “Never true” response option or with the modified Transportation assessment item that has a “Yes” or “No” response. They believe this would be simpler for patients to answer and be easier on the IRF staff to collect the information.

Response: We agree that standardized patient assessment data elements should be easy to understand and have clear response options. However, we believe that including the specific distinction in the Living Situation response options is needed. Specifically, we believe that additional response options to indicate whether a patient is worried about their living situation in the future helps reduce ambiguity for patients who may only have temporary housing. For example, having a “Yes” and “No” response and eliminating an option for “I have a place to live today, but I am worried about losing it in the future” would not capture those patients that may be at risk of losing their place to live due to lost income resulting from the traumatic injury or event precipitating their admission to the IRF. Identifying these patients who are worried about losing their housing in the future may help IRFs facilitate discharge planning and make appropriate community referrals.

Comment: One commenter stated they did not support the proposal to add the proposed new Living Situation assessment item to the IRF-PAI because a patient's ability to be discharged to home is a variable IRFs use when considering whether admission to IRF is appropriate. This commenter noted that patients who do not have a location they can be discharged to are not good candidates for IRFs, and as a result, the addition of the proposed Living Situation assessment item will increase burden without providing data to drive outcomes. Two commenters also noted that CMS could collect a patient's living status through assessment items already collected in the IRF-PAI, such as Discharge Living Setting and Discharge Living With.

Response: We disagree with the commenter's suggestions that the collection of the proposed Living Situation assessment item will increase burden without providing data to drive outcomes or that patients who do not have a location they can be discharged to are not good candidates for IRFs. A comprehensive preadmission screening includes anticipated discharge destination, since this information would be important to developing the interdisciplinary plan of care. However, the decision whether a patient is or is not appropriate for IRF admission is generally based on whether the patient requires the interdisciplinary services offered by IRFs. Specifically IRF admission is based on whether: the patient requires the active and ongoing therapeutic intervention of multiple therapy disciplines, one of which must be physical or occupational therapy; the patient generally requires and can reasonably be expected to actively participate in, and benefit from, an intensive rehabilitation therapy program; the patient is sufficiently stable at the time of admission to the IRF to be able to actively participate in the intensive rehabilitation therapy program; and the patient requires physician supervision by a rehabilitation physician. [ 77 ] As with all new assessment items, we will monitor all aspects of data collection and submission under the IRF QRP, and should we identify changes in provider behavior, we will take the appropriate administrative action.

Regarding the comment that we ascertain a patient's living status through assessment items already collected in the IRF-PAI, such as item 44D. Patient's Discharge Destination/Living Setting and item 45. Discharge to Living With, we disagree with the suggestion since these items are not collected until the patient is discharged. As discussed in section VII.C.4(a) of the proposed rule, we proposed the Living Situation assessment item for collection at admission, rather than at discharge. The primary purpose of collecting this information at admission is to facilitate coordinated care, continuity in care planning, and the discharge planning process from IRF settings. As we stated in section VIII.C.2 of this final rule, according to the World Health Organization, research shows that SDOH can be more important than health care or lifestyle choices in influencing health, accounting for between 30 to 55 percent of health outcomes. [ 78 ] This is part of a growing body of research that highlights the importance of SDOH on health outcomes. We believe that having information on patients' living situation at admission will help IRFs better understand and address the broader needs of their patients. We also believe this information is essential for comprehensive patient care, potentially leading to improved health outcomes and more effective discharge planning.

Comment: We received several comments supporting the collection of the two proposed Food assessment items because of the importance of nutrition and food access to IRF patients' health outcomes, and the usefulness of this information for treatment and discharge planning. Specifically, two commenters highlighted the association between a lack of access to food and low-nutrient diets with negative health outcomes. Moreover, one of these commenters noted that information from the two proposed Food assessment items can give healthcare professionals a greater understanding of a patient's complex needs and improve coordination with other healthcare providers during transitions of care. Further, one commenter noted that the responses to the proposed Food assessment items would help providers incorporate treatment strategies that address patients' food access. Finally, another commenter acknowledged the intersection between these proposed SDOH assessment items, highlighting the important relationship between transportation and a person's ability to access food. This commenter provided the example that a person may have enough funds to purchase food, but not have access to transportation to obtain food.

Response: We agree that a person's access to food affects their health outcomes and risk for adverse events. Understanding the potential needs of patients admitted to IRF through the collection of the two proposed Food assessment items can help IRFs facilitate resources for IRF patients, if indicated, when discharged.

Comment: Two commenters were concerned that the proposed Food assessment items ask patients to rate the frequency of their food shortage using a three-point scale, which is inconsistent with other questions on the IRF-PAI such as the patient mood, behavioral symptoms, and daily preference assessment items, which use a four-point scale to determine frequency. This commenter suggested this inconsistency may lead to confusion for staff and patients.

Response: We clarify that the proposed Food assessment items include three frequency responses in addition to response options in the event the patient declines to respond or is unable to respond: (0) Often true; (1) Sometimes true; (2) Never True; (7) Patient declines to respond; and (8) Patient unable to respond. We acknowledge there are a number of patient interview assessment items on the IRF-PAI that use a four-point scale, but there are also assessment items on the IRF-PAI that do not use a four-point scale. For example, the Health Literacy (B1300) and Social Isolation (D0700) assessment items currently use a five-point scale and the Pain Interference with Therapy Activities (J0520) assessment item currently uses a five-point scale. We chose the proposed Food assessment items from the AHC HRSN Screening Tool, and it was tested and validated using a three-point response scale. Since the IRF-PAI currently includes assessment items that use varying response scales, we do not believe staff and patients will be confused. We plan to develop resources IRF staff can use to ensure patients understand the proposed assessment item questions and response options. For example, CMS developed cue cards to assist IRFs in conducting the Brief Interview for Mental Status (BIMS) in Writing, the Patient Mood Interview (PHQ-2 to 9), the Pain Assessment Interview, and the Interview for Daily and Activity Preference. [ 79 ]

Comment: Several commenters were concerned with the 12-month look back period of the proposed Food assessment items, noting that this broad look back period may capture needs that occurred in the past that have already been resolved. These commenters recommended a 3-month look back period instead, to capture true concerns that should inform IRFs' care and discharge planning.

Response: We disagree that the 12-month look back period for the proposed Food assessment items is too long and will not result in reliable responses. We believe the proposed 12-month look back is more appropriate than a shorter, 3-month look back period, because a person's Food situation may fluctuate over time. One study of Medicare Advantage beneficiaries found that approximately half of U.S. adults report one or more HRSNs over four quarters. However, at the individual level, participants had substantial fluctuations: 47.4 percent of the participants fluctuated between zero and one or more HRSNs over the four quarters, and 21.7 percent of participants fluctuated between one, two, three, or four or more HRSNs over the four quarters. [ 80 ] The researchers noted that the dynamic nature of individual-level HRSNs requires consideration by healthcare providers screening for HRSNs.

To account for potentially changing Food needs over time, we believe it is important to use a longer lookback window to comprehensively capture any Food needs a person may have had, so that IRFs may consider them in their care and discharge planning. However, as we develop coding guidance for these proposed new assessment items, we will utilize the feedback received in these comments.

Comment: One commenter recognized the importance of collecting patients' food access through a streamlined data collection process but urged CMS to combine the two proposed Food assessment items into a singular comprehensive assessment item to enhance efficiency and reduce respondent burden, while still capturing the nuanced aspects of food insecurity crucial for care planning and recourse allocation.

Response: While we appreciate the commenters' recommendation, past testing of the items found that the item sensitivity was higher when using both Food assessment items, as opposed to just one. Specifically, analyses found that an affirmative response to just one of the questions provided a sensitivity of 93 percent or 82 percent, depending on the item, whereas collecting both items, and evaluating whether there is an affirmative response to the first and/or second item yielded a sensitivity of 97 percent. [ 81 ] This means that only 3 percent of respondents who have food needs were likely to be misclassified. Therefore, we believe it is important to include both proposed Food assessment items.

Comment: One commenter urged CMS to recommend that IRFs complete the proposed Food assessment items in the IRF-PAI as soon as applicable for the patient after admission. This commenter highlighted that timely diagnoses of nutrition insecurity allows for immediate planning of future post-discharge plans. Because referrals and enrollment in public programs like the Supplemental Nutrition Assistance Program (SNAP) often have wait times that delay access to necessary interventions, they suggested CMS encourage IRFs to minimize delays in the delivery of adequate nutrition assistance and malnutrition intervention.

Response: We appreciate the commenter's input on timely collection of the proposed Food assessment items, and we note that in section VIII.C.3.(b) of this final rule, we proposed to collect these assessment items at admission only. Admission information on the IRF-PAI is collected as close to the time of admission as possible. As we develop coding guidance for the proposed new Food assessment item, we will utilize the feedback received in these comments.

Comment: One commenter supported the proposal to add a new Utilities assessment item to the IRF-PAI and highlighted that a patient's access to utilities, similar to a patient's living situation, is crucial for maintaining good health. Specifically, they pointed out that access to clean water is essential, particularly for patients who are unable to drive or have the funds to purchase bottled water. Additionally, this commenter highlighted that IRF patients are often discharged with equipment requiring constant, consistent electricity (for example, supplemental oxygen, vents, continuous positive airway pressure (CPAP), bilevel positive airway pressure (BiPAP), continuous ambulatory delivery device (CADD) pumps for Dobutamine and left ventricular assist device (LVAD)). If a patient does not have access to a reliable power source for these critical supports, they are at risk of not using the equipment as prescribed or dying.

Response: We thank the commenters for their support and agree that patients' utilities needs can affect IRF patients' health outcomes, and the collection of the proposed Utilities assessment item can equip IRFs with the information to inform care plans and discharge planning.

Comment: A few commenters were concerned with the 12-month look back period of the proposed Utilities assessment item. Two of these commenters noted that the 12-month look back period may not result in reliable responses because patients may have difficulty remembering if a relevant event, such as a utility shut-off threat, occurred within such a long period, especially for patients that may be recovering from a stroke or traumatic brain injury. Three of these commenters recommended a 3-month look back period instead, to provide more reliable, valid, timely, and actionable information as part of the transition of care. These commenters also recommended against the inclusion of all utilities (electric, gas, oil, or water) in the assessment item as well as the use of the term “threatened” in the proposed Utilities assessment item because they are concerned these all-encompassing and vague terms may lead to inconsistent, unreliable, or invalid responses.

Response: We disagree that the 12-month look back period for the proposed Utilities assessment item is too long and that it will not result in reliable responses. We believe a 12-month look back is more appropriate than a shorter, 3-month look back period, because a person's Utilities situation may fluctuate over time. One study of Medicare Advantage beneficiaries found that approximately half of U.S. adults report one or more HRSNs over four quarters. However, at the individual level, participants had substantial fluctuations: 47.4 percent of the participants fluctuated between zero and one or more over the four quarters, and 21.7 percent of participants fluctuated between one, two, three, or four or more over the four quarters. [ 82 ] The researchers noted that the dynamic nature of individual-level HRSNs requires consideration by healthcare providers screening for HRSNs. In order to account for potentially changing Utilities needs over time, we believe it is important to use a longer lookback window to comprehensively capture any Utilities needs a person may have had, so that IRFs may consider them in their care and discharge planning.

We also acknowledge that IRFs are accustomed to working with patients with very complex medical conditions, including traumatic brain injury, stroke, and others, and we are confident in their ability to collect this data in a consistent manner. There are currently several patient interview assessment items on the IRF-PAI, and IRFs are accustomed to administering these questions to impaired patients. We remind IRFs we proposed response options for the Utilities item that address when a patient declines to respond or when a patient is unable to respond.

We also believe it is important to capture utility needs across electric, gas, oil, and water services, in order to comprehensively understand patients' access to necessary utility services, especially since patients' needs for utilities may vary depending on their equipment needs at discharge. We note that while the IRF-PAI requires the collection of certain HRSNs, IRFs may screen for additional HRSNs that they believe are relevant for their patient population and the community in which they serve. For example, if it is useful to understand patients' access to a specific type of utility service, such as access to water or voltage capacity, IRFs may seek to collect any additional information they believe relevant for their patient population in order to inform their care and discharge planning process. However, as we develop coding guidance for the proposed new Utilities assessment item, we will utilize the feedback received in these comments.

After careful consideration of public comments we received, we are finalizing our proposal to adopt four new items as standardized patient assessment data elements under the SDOH category beginning with the FY 2028 IRF QRP: one Living Situation item; two Food items; and one Utilities item.

Beginning October 1, 2022, IRFs began collecting seven items adopted as standardized patient assessment data elements under the SDOH category on the IRF-PAI. [ 83 ] One of these items, Item A1250. Transportation collects data on whether a lack of transportation has kept a patient from getting to and from medical appointments, meetings, work, or from getting things they need for daily living. This item was adopted as a standardized patient assessment data element under the SDOH category in the FY 2020 IRF PPS final rule ( 84 FR 39158 and 39159 ). As we discussed in the FY 2020 IRF PPS final rule ( 84 FR 39158 ), we continue to believe that access to transportation for ongoing health care and medication access needs, particularly for those with chronic diseases, is essential to successful chronic disease management and the collection of a Transportation item would facilitate the connection to programs that can address identified needs.

As part of our routine item and measure monitoring work, we continually assess the implementation of the new SDOH items. We have identified an opportunity to improve the data collection for A1250. Transportation in the IRF-PAI by aligning it with the Transportation category collected in our other programs. [ 84 85 ] Specifically, we proposed to modify the current Transportation item in the IRF-PAI so that it aligns with a Transportation item collected on the AHC HRSN Screening Tool available to the IPFQR and Hospital IQR Programs.

A1250. Transportation collected in the IRF-PAI asks: “Has lack of transportation kept you from medical appointments, meetings, work, or from getting things needed for daily living?” The response options are: (A) Yes, it has kept me from medical appointments or from getting my medications; (B) Yes, it has kept me from non-medical meetings, appointments, work, or from getting things that I need; (C) No; (X) Patient unable to respond; and (Y) Patient declines to respond. The Transportation item collected in the AHC HRSN Screening Tool asks, “In the past 12 months, has lack of reliable transportation kept you from medical appointments, meetings, work or from getting things needed for daily living?” The two response options are: (1) Yes; and (2) No. Consistent with the AHC HRSN Screening Tool, we proposed to modify the A1250. Transportation item collected in the IRF-PAI in two ways: (1) revise the look back period for when the patient experienced lack of reliable transportation; and (2) simplify the response options.

First, the proposed modification of the Transportation item would use a defined 12-month look back period, while the current Transportation item uses a look back period of six to 12 months. We believe the distinction of a 12-month look back period would reduce ambiguity for both patients and clinicians, and therefore improve the validity of the data collected. Second, we proposed to simplify the response options. Currently, IRFs separately collect information on whether a lack of transportation has kept the patient from medical appointments or from getting medications, and whether a lack of transportation has kept the patient from non-medical meetings, appointments, work, or from getting things they need. Although transportation barriers can directly affect a person's ability to attend medical appointments and obtain medications, a lack of transportation can also affect a person's health in other ways, including accessing goods and services, obtaining adequate food and clothing, and social activities. [ 86 ] The proposed modified Transportation item would collect information on whether a lack of reliable transportation has kept the patient from medical appointments, meetings, work, or from getting things needed for daily living, rather than collecting the information separately. As discussed previously, we believe reliable transportation services are fundamental to a person's overall health, and as a result, the burden of collecting this information separately outweighs its potential benefit.

For the reasons stated previously, we proposed to modify A1250. Transportation based on the Transportation item adopted for use in the AHC HRSN Screening Tool and adapted from the PRAPARE tool. The proposed Transportation item asks, “In the past 12 months, has a lack of reliable transportation kept you from medical appointments, meetings, work or from getting things needed for daily living?” The proposed response options are: (0) Yes; (1) No; (7) Patient declines to respond; and (8) Patient unable to respond. A draft of the proposed modified Transportation item can be found in the Downloads section of the IRF-PAI and IRF-PAI Manual web page at https://www.cms.gov/medicare/quality/inpatient-rehabilitation-facility/irf-pai-and-irf-qrp-manual .

We solicited comment on the proposal to modify the current Transportation item previously adopted as a standardized patient assessment data element under the SDOH category beginning with the FY 2028 IRF QRP.

Comment: Several commenters supported the proposal to modify the Transportation assessment item. One of these commenters stated that knowing this information will allow the IRF to connect patients, particularly those who are dependent on a wheelchair or other assisted device for mobility, with reliable transportation services. Four of these commenters supported the simplified response options, noting it would make it easier for patients to answer the question and reduce the administrative burden associated with the transportation assessment item. Three of these commenters also expressed support for the new 12-month look back period because it would help clarify the question, improve patient comprehension of the proposed Transportation assessment item, and reduce provider burden. One of these commenters agreed with CMS' proposal to no longer require separate response options for difficulty with transportation to medical appointments and transportation to non-medical appointments.

Response: We thank the commenters for their support of the proposed modification of the Transportation assessment item. We agree that the proposed changes will help streamline the data collection process by simplifying the item for both patients and IRF staff collecting the data. The use of a 12-month look back period will reduce ambiguity for both patients and staff, and therefore, improve the validity of the data collected.

Comment: Several commenters did not support the proposal to modify the Transportation assessment item due to the retention of the 12-month look back period. These commenters noted that the 12-month look back period is too broad and long for effective care coordination and discharge planning, and some of these commenters recommended a three-month look back period instead. Four of these commenters also noted concerns with the response options, suggesting they may not provide reliable and valid information. These commenters explained that the responses do not collect information about the frequency of the patient's concern, the reasons why they do not have reliable transportation, and consideration for patients with a disability that requires special accommodations for transportation, such as wheelchair accessibility. Finally, one commenter highlighted their concern about the utility of continuing to collect data on the current Transportation assessment item through September 30, 2025, if finalized.

Response: We disagree that the 12-month look back period for the proposed modification to the Transportation assessment item is too long and that it will not result in reliable responses. We believe a 12-month look back is more appropriate than a shorter, 3-month look back period, because a person's Transportation needs may fluctuate over time. As we have noted in an earlier response, a study of Medicare Advantage beneficiaries found that approximately half of U.S. adults report one or more HRSNs over four quarters. However, at the individual level, participants had substantial fluctuations: 47.4 percent of the participants fluctuated between zero and one or more HRSNs over the four quarters, and 21.7 percent of participants fluctuated between one, two, three, or four or more HRSNs over the four quarters. [ 87 ] The researchers noted that the dynamic nature of individual-level HRSNs requires consideration by healthcare providers screening for HRSNs. In order to account for potentially changing Transportation needs over time, we believe it is important to use a longer look back period to comprehensively capture any Transportation needs an IRF patient may have had, so that IRFs may consider them in their care and discharge planning.

Regarding the comment stating the responses do not allow for nuanced understanding of the patient's transportation needs (the frequency of the concern, the reasons why reliable transportation is not available, or the special accommodations a person may need for transportation), we note that although the proposal would require the collection of the Transportation assessment item at admission only, the collection could potentially prompt the IRF to initiate conversations with its patients about their specific Transportation needs. Additionally, IRFs may seek to collect any additional information that they believe may be relevant to their patient population in order to inform their care and discharge planning process. However, as we develop coding guidance for this Transportation assessment item, we will utilize all the feedback received in these comments.

Regarding the comment about the utility of continuing to collect an assessment item that CMS has proposed to replace, we acknowledge the commenter's concern. Although we have proposed to change the assessment item in order to improve standardization across programs, we still believe collecting the information in the interim is necessary for care coordination and discharge planning purposes in accordance with CFR 482.43(a).

After careful consideration of public comments we received, we are finalizing our proposal to modify the current Transportation item previously adopted as a standardized patient assessment data element under the SDOH category beginning with the FY 2028 IRF QRP.

In the proposed rule, we sought input on the importance, relevance, appropriateness, and applicability of each of the concepts under consideration listed in Table 14 for future years in the IRF QRP. The FY 2024 IRF PPS proposed rule ( 88 FR 21000 through 21003 ) included a request for information (RFI) on a set of principles for selecting and prioritizing IRF QRP measures, identifying measurement gaps, and suitable measures for filling these gaps. Within the FY 2024 IRF PPS proposed rule, we also sought input on data available to develop measures, approaches for data collection, perceived challenges or barriers, and approaches for addressing identified challenges. We refer readers to the FY 2024 IRF PPS final rule ( 88 FR 51036 and 51037 ) for a summary of the public comments we received in response to the RFI.

Subsequently, our measure development contractor convened a Technical Expert Panel (TEP) on December 15, 2023, to obtain expert input on the future measure concepts that could fill the measurement gaps identified in our FY 2024 RFI. [ 88 ] The TEP discussed the alignment of PAC and Hospice measures with CMS' “Universal Foundation” of quality measures. [ 89 ]

In consideration of the feedback we have received through these activities, we solicited input on three concepts for the IRF QRP (See Table 14). One is a composite of vaccinations, [ 90 ] which could represent overall immunization status of patients such as the Adult Immunization Status (AIS) measure [ 91 ] in the Universal Foundation. A second concept on which we sought feedback is the concept of depression for the IRF QRP, which may be similar to the Clinical Screening for Depression and Follow-up measure [ 92 ] in the Universal Foundation. Finally, we sought feedback on the concept of pain management.

TABLE 14—Future Measure Concepts Under Consideration for the IRF QRP

Quality Measure Concepts Vaccination Composite. Pain Management. Depression.

We received public comments on this RFI. The following is a summary of the comments we received:

Comments: Several commenters supported the idea of adding a composite vaccination measure like the AIS measure into the IRF QRP. These commenters noted that a composite vaccination measure could improve vaccination rates for those vaccines recommended by the Advisory Committee on Immunization Practices (ACIP), as well as reduce administrative burden through alignment with the Universal Foundation. One of these commenters noted that immunization rates in PAC settings are suboptimal and believes a measure such as the Adult Immunization Status measure would improve immunization rates in PAC settings, including IRFs.

Some commenters, however, did not support the idea of adding a composite vaccination measure into the IRF QRP for a number of reasons. They questioned whether a composite vaccination measure for the IRF QRP would be suitable and whether it would represent the quality of care provided by IRFs, described the administrative challenges a composite vaccination measure would impose on IRFs, and noted reliability and validity concerns associated with a possible vaccination composite measure.

Most commenters suggested IRFs would have difficulty collecting information on patients' vaccination status when a patient may have received care from multiple proximal providers and thought a composite vaccination measure would be better suited for primary care clinicians who usually administer these vaccines as part of their preventative care. Several commenters noted that it may be infeasible or inappropriate for an IRF to offer vaccination for patients due to length of stay, ability to manage side effects and medical contraindications. They also noted that a patient's vaccination status is dependent on many factors outside an IRF's control, including the fact that patients can choose to decline recommended vaccines. Other commenters requested that CMS provide more information on the specific outcomes CMS expects to collect from this information. One of these commenters recommended CMS report on specific vaccination rates, since it would provide more actionable data to IRFs.

Other commenters stated they were concerned about the accuracy and reliability of a composite vaccination measure for the IRF QRP since IRF patients often experience cognitive deficits related to their illness or injury and verification of their vaccination status would be difficult. Commenters noted that vaccines are intended for certain age groups and have multiple doses and medical contraindications, raising questions around data validity. Several commenters also recommended that CMS evaluate the reliability, validity, and effectiveness of existing vaccination measures before developing a composite vaccination measure.

Comments: We received several comments supporting the pain management measure concept. One of these commenters stated this was an important concept for the IRF QRP and strongly encouraged CMS to move forward with measure development and testing. Another one of these commenters recommended that these measures reflect the full spectrum of recommended pain management interventions, including nonpharmacologic pain management.

Most commenters noted that pain management is a challenging topic to address in IRFs where patients are undergoing physical rehabilitation for extremely serious conditions or injuries and the experience of pain and discomfort is usually an unavoidable reality of this process. Several of these commenters were concerned that a pain management measure in the IRF QRP focused on an expectation of improvement may be misleading and could inadvertently lead to over prescribing of pain medication, including opioids. Other commenters opposed a patient-reported pain management measure since they believe it would be an unrealistic objective for an IRF to manage a patient's pain to their expectation. These commenters suggested CMS should instead seek feedback from interested parties on the aspects of pain management relevant to IRFs and then determine if there is sufficient information to develop a meaningful quality measure.

Several commenters also noted that we are considering this measure concept for other post-acute care settings as well, including SNF and LTCH, and they believe it would invariably lead to inappropriate comparisons in pain management across PAC settings. These commenters suggested that if CMS is looking to address whether pain is managed adequately, it should seek feedback from multiple interested parties to identify what aspects of pain management are of most interest and relevance to the IRF population, such as staff responsiveness to pain, and determine if there is sufficient available information to develop a meaningful quality measure.

Other commenters stated that a more meaningful pain measure in the IRF setting should be designed to assess whether staff are responsive to and help manage patients' pain, and that such a measure could rely on patient-reported data. These commenters noted that a patient reported outcome measure [ 93 ] (PROM) would be significantly more meaningful for quality measurement than a process measure collecting the existence of pain and could be collected directly from the patient without additional measure collection burden to an IRF. Specifically, they pointed to the standardized patient assessment data elements on the IRF-PAI, including items introduced on October 1, 2022, that collect information on the level of pain interference a patient experiences with daily activities, sleep, and participation in therapy activities in section J of the IRF-PAI. These commenters believe these quality indicators in section J of the IRF-PAI could present an opportunity to develop a quality measure with no additional data collection burden to IRFs.

Comments: Many commenters supported the concept of depression for a future IRF QRP measure, and one of these commenters noted that early identification and intervention for a patient's risk of depression can improve outcomes and quality of life, since depression can hinder a patient's progress and treatment. Two commenters supported a depression and follow-up measure, suggesting that the Patient Health Questionnaire (PHQ)-2 to -9 (PHQ-2 to -9) screening tool [ 94 ] could be utilized for the development of a measure. These commenters also suggested that, if a depression measure is developed, there should not be an exclusion for patients with a prior depression or bipolar diagnosis since all symptoms of depression should be reassessed when a person is recovering from life-altering events.

Other commenters suggested that, since IRFs are already required to conduct a screening for depression using the PHQ-2 to -9 on the IRF-PAI, this screening can be used to monitor and measure the severity of depression, an additional quality measure regarding depression screening would be redundant. One commenter suggested that a depression screening measure for IRF patients would be misguided, since there are already detailed questions asked on the IRF-PAI related to depression. They also note that most patients admitted to an IRF have experienced a life-altering event(s), such as a severe accident, an act of violence, or a major injury requiring intensive rehabilitation. These events can be extremely distressing and are often accompanied by new chronic conditions that are difficult to manage. As a result, many of these patients may have post-traumatic stress disorder, which is fundamentally different from clinical depression.

Several other commenters were concerned that a depression screening measure would result in a requirement for IRFs to have additional resources to treat depression, such as a psychiatrist or psychologist. They note that IRFs already collect information and use physician documentation to identify mental health or other behavioral health issues. These commenters stated that adding another screening requirement would not improve the quality of care, or better equip these facilities to care for rehabilitation needs, and instead was best left to behavioral health and primary care providers to address. At the same time, commenters noted that such a measure could add cost and burden to the IRF clinical team. Two of these commenters recommended CMS not implement a depression measure without first determining the availability of resources to treat depression within IRFs.

Comments: In addition to comments received on the three measure concepts of pain, depression and vaccination, we also received comments suggesting other concepts for future measures for the IRF QRP, including management of degenerative cognitive conditions, effectiveness of disposition planning and care transitions, changes in patient function, rates of follow-up care, and patients' access to appropriate treatments and medications, including access to a physical medicine and rehabilitation physician. One commenter suggested we consider measures of cognition and behavior in addition to mobility. Another commenter recommended including food and nutrition security and other social determinants of health (SDOH) as future IRF QRP quality measure concepts. Finally, one commenter recommended the Patient Active Measure (PAM®) [ 95 ] instrument be added to the IRF-PAI or required in parallel to the IRF-PAI.

Response: We thank all the commenters for responding to this RFI. We will take this feedback into consideration for future development of measures for the IRF QRP.

In the proposed rule, we sought feedback on the development of a five-star methodology for IRFs that can meaningfully distinguish between quality of care offered by IRFs. Star ratings serve an important function for patients, caregivers, and families, helping them to more quickly comprehend complex information about a health care providers' care quality and to easily assess differences among providers. This transparency serves an important educational function, while also helping to promote competition in health care markets. Informed patients and consumers are more empowered to select among health care providers, fostering continued quality improvement. We refer readers to the RFI in the proposed rule ( 89 FR 22281 ) for more information.

Specifically, we invited public comment on the following questions:

1. Are there specific criteria CMS should use to select measures for an IRF star rating system?

2. How should CMS present IRF star ratings information in a way that it is most useful to consumers?

We received several comments in response to this RFI, which are summarized below.

Comments: We received many comments in response to this RFI providing feedback on the criteria we should use for selecting measures to include in a potential IRF star ratings system. Many of these commenters stated the importance of including measures that are patient-centered, and several of these commenters also stated that the measures selected for an IRF star rating system should be representative of IRFs' emphasis on functional outcomes and treating pain. Several of these commenters, as well as other commenters, suggested that the IRF star rating system should incorporate measures of clinical relevance and effectiveness, such as prevention of adverse events or readmissions, discharge to home and weaning patients from catheters or other mechanical supports. Other commenters provided more general recommendations, such as selecting measures that allow for meaningful comparisons among IRFs in order to distinguish performance.

Several commenters strongly recommended against inclusion of the Falls with Major Injury measure because of inconsistency with clinical guidelines in the IRF. These commenters also recommended against inclusion of the Catheter-Associated Urinary Tract Infection (CAUTI) measure, stating that there is a lack of meaningful differences in IRF performance.

Comments: Commenters provided recommendations on how to engage the public in the development and presentation of IRF star ratings. Several of these commenters strongly recommended CMS engage with patients, caregivers, providers, and specialty societies to inform the development and display of the IRF star ratings system. Additionally, three commenters emphasized full transparency of the star ratings methodology. Finally, one commenter recommended that visualizations of the star ratings should be clear, concise, and accompanied with contextual information to empower consumers in making informed healthcare decisions.

Several commenters noted concerns about the variation in IRF volumes across the nation and raised concerns about reportability. Specifically, they believe there will be IRFs that would not have enough publicly reported data to report a star rating. Some of these commenters also suggested that that due to the limited number of IRF quality measures and the fact that many IRFs have low patient volumes, the ability to develop an overall star rating will be challenging.

Comments: We also received several comments about IRFs' need for feedback additional reports to support their efforts at improving patient outcomes. Most of these commenters noted that the lack of patient-level reports for claims-based measures available to IRFs presents barriers to identifying areas for improvement in care. Several of these commenters, as well as other commenters, urged CMS to provide IRFs timely access to their data submitted for the IRF QRP and especially data submitted for measures that may be included in a star rating system. Three of these commenters noted that IRFs should receive feedback reports for any claims-based measures used in a star rating system on a quarterly basis, noting that CMS currently provides this level of information to hospitals. Two of these commenters recommended shortening the time period between an IRF's data submission on measures and the publicly reporting of IRFs' performance on Care Compare.

Commenters also provided recommendations on additional aspects of care, specific measures to consider, the proposed methodology, and insights from other star ratings to help shape the development of an IRF star ratings system. A few commenters recommended factoring into the star ratings system other indicators of quality such as the presence of physical medicine and rehabilitation doctors, staffing levels, staff turnover, and using the same standards as IRF accreditation bodies, such as the Commission on Accreditation of Rehabilitation Facilities (CARF). Additionally, several commenters recommended accounting for factors that differentiate IRFs such as case mix and payer mix. Another commenter recommended assessing and addressing the appropriateness of social determinants of health in and IRF star ratings system.

Finally, several commenters shared their concerns about other CMS star rating systems. Many of these commenters urged CMS to delay the implementation of an IRF star rating system until these issues with existing star ratings systems have been resolved. Another commenter recommended CMS should apply lessons learned from the development and maintenance of the existing star ratings programs as well as allow sufficient time for the development and implementation of a star rating system.

Response: We thank all the commenters for responding to the RFI on this important CMS priority. We will take these recommendations into consideration in our future star rating development efforts.

We refer readers to the regulatory text at § 412.634(b)(1) for information regarding the current policies for reporting specified data for the IRF QRP.

As discussed in sections VII.C.3. and VII.C.5. of the proposed rule, we proposed to adopt four new items as standardized patient assessment data elements under the SDOH category (one Living Situation item, two Food items, and one Utilities item) and to modify the Transportation standardized patient assessment data element previously adopted under the SDOH category beginning with the FY 2028 IRF QRP.

We proposed that IRFs would be required to report these new items and the transportation item using the IRF-PAI beginning with patients admitted on October 1, 2026, for purposes of the FY 2028 IRF QRP. Starting in CY 2027, IRFs would be required to collect and submit data for the entire calendar year with the FY 2029 IRF QRP.

We also proposed that IRFs that collect and submit the Living Situation, Food, and Utilities items with respect to admission only would be deemed to have collected and submitted those items with respect to both admission and discharge. We proposed that IRFs would be required to collect and submit these four items at admission only (and not at discharge) because it is unlikely that the assessment of those items at admission would differ from the assessment of the same item at discharge. This would align the data collection for these proposed items with other SDOH items (that is, Race, Ethnicity, Preferred Language, and Interpreter Services) which are only collected at admission. [ 96 ] A draft of the proposed items is available in the Downloads section of the IRF-PAI and IRF-PAI Manual web page at https://www.cms.gov/medicare/quality/inpatient-rehabilitation-facility/irf-pai-and-irf-qrp-manual .

As we noted in section VIII.C.5. of this final rule, we continually assess the implementation of the new SDOH items, including A1250. Transportation, as part of our routine item and measure monitoring work. We received feedback from interested parties in response to the FY 2020 IRF PPS proposed rule ( 84 FR 39149 through 39161 ) noting their concern with the burden of collecting the Transportation item at admission and discharge. Specifically, commenters stated that a patient's access to transportation is unlikely to change between admission and discharge ( 84 FR 39159 ). We analyzed the data IRFs reported from October 1, 2022, through June 30, 2023 (Quarter 4 CY 2022 through Quarter 2 CY 2023) and found that patient responses do not significantly change from admission to discharge. [ 97 ] Specifically, the proportion of patients [ 98 ] who responded “Yes” to the Transportation item at admission versus at discharge differed by only 0.19 percentage points during this period. We find these results convincing, and therefore we proposed to require IRFs to collect and submit the proposed modified standardized patient assessment data element, Transportation, at admission only.

We invited public comment on our proposal to collect data on the following items proposed as standardized patient assessment data elements under the SDOH category at admission beginning October 1, 2026 with the FY 2028 IRF QRP: (1) Living Situation as described in section VII.C.3.(a) of the proposed rule; (2) Food as described in section VII.C.3.(b) of the proposed rule; and (3) Utilities as described in section VII.C.3.(c) of the proposed rule. We also invited comment on our proposal to collect and submit the proposed modified standardized patient assessment data element, Transportation, at admission only beginning October 1, 2026, with the FY 2028 IRF QRP as described in section VII.C.5. of the proposed rule.

We received public comments on these proposals. The following is a summary of the comments we received and our responses.

Comment: Several commenters supported the proposed collection of four new SDOH assessment items once, upon admission, noting that this could mitigate the administrative burden of data collection and reduce redundancy. One of these commenters recommended CMS change the collection requirements for all standardized patient assessment data elements in the SDOH category to admission only, because they believe that for most patients, the response is not going to change between admission and discharge.

In addition, several commenters supported the proposal to collect the modified Transportation assessment item at admission only, and one of these commenters agreed with CMS that the response to the Transportation assessment item is unlikely to change during the IRF stay. These commenters noted that removing the Transportation assessment item at discharge will reduce redundancy, improve the patient experience, and improve and align data collection.

Response: We appreciate the commenters' support in requiring the proposed SDOH assessment items at admission only. We continually assess the implementation of the new SDOH assessment items as part of our routine assessment item and measure monitoring work, and when we identify an opportunity to improve data collection, we want to implement it. In the FY 2025 IRF Proposed Rule ( 89 FR 22281 and 22282 ), we proposed to collect these new and modified assessment items at admission only because we believe it is unlikely that the assessment of these items at admission would differ from the assessment of the same items at discharge. We are mindful of provider burden and appreciate the support from several commenters who agreed that collection at admission only, rather than at both admission and discharge, would mitigate the administrative burden of data collection on these new and modified assessment items.

Comment: Two commenters suggested CMS offer flexibility for IRFs on how to collect the proposed SDOH assessment items, and not mandate the assessment items on the AHC HRSN Screening Tool. One of the commenters stated that they believed CMS' focus should be on whether the information is collected and less on the specific vendor or tool used for collection. The other commenter noted that flexibility in gathering screening information would allow IRFs to use their own methods of identifying patients' needs and the best time to collect this information.

Three commenters noted that CMS already collects many of the proposed SDOH assessment items from other health care providers, such as hospitals or other post-acute providers, prior to an IRF stay. These commenters recommended CMS allow IRF-PAI responses to be based upon data already collected in other settings of the hospital or health system when it is available prior to admission at an IRF to avoid unnecessary duplication of screenings and assessments.

Response: We interpret these commenters to be suggesting that CMS should allow IRFs to obtain information collected in previous healthcare settings, rather than requiring IRFs to obtain this information from the patient upon the patient's admission to the IRF. We appreciate that many IRFs may share electronic health record systems with referring hospitals. However, we proposed the collection of these assessment items through patient interview in an effort to increase the patient's voice in the assessment process and the IRF QRP. Obtaining information about the Living Situation, Food, Utilities, and Transportation assessment items directly from the patient, sometimes called “hearing the patient's voice,” is more reliable and accurate than obtaining it from a health care provider that previously cared for the patient for several reasons: the IRF would not know whether it was collected from the patient or from a family member or other source; the IRF would not know how the SDOH domain was defined—for example, whether utilities included electricity, gas, oil, or water or only asked about electricity; and the IRF would not be able to determine whether the potential problem had been resolved since then. Most importantly, we believe that by asking the patient these questions at admission, it may prompt further discussion with the patient about their needs and help formulate an appropriate discharge care plan.

We also want to clarify that the proposed SDOH assessment items will not require the use of a new collection tool, because the assessment items will be collected through the IRF-PAI, in the same way other standardized patient assessment data elements are collected. IRFs may use different methods to collect the information from the patient, as long as they are consistent with the coding guidance and defined lookback periods in the IRF-PAI manual. As we develop guidance for these new assessment items, we will utilize the feedback received in these comments.

Comment: Several commenters offered suggestions or recommendations for guidance related to collecting the proposed SDOH assessment items. One commenter recommended that CMS include coding logic to allow skipping the Utilities assessment item if a patient indicated that they do not have a steady place to live, since it would be inappropriate to ask about utilities if a patient has no place to live.

Response: We appreciate all the comments we received about coding these proposed new and modified SDOH assessment items, including the Utilities assessment item. We proposed that IRFs would be required to collect and submit information on the four new assessment items, in order to have complete information. We do not agree that it would be inappropriate to ask about utilities just because a patient does not have a place to live at the time of the assessment. The patient may be living in temporary housing or a shelter, and gathering this information would still be important for their discharge planning.

In response to the commenter who noted that patients may be uncomfortable sharing sensitive personal information with facility staff, we acknowledge that the proposed SDOH assessment items require the patient to be asked potentially sensitive questions. We also note that we proposed additional response options for these new and modified SDOH items for patients that decline to respond or are unable to respond. We encourage IRFs to assess all patients and select the appropriate response options for all SDOH assessment items.

Comment: Some commenters were concerned that the proposed SDOH assessment items are not applicable to certain types of patients receiving care in the IRF setting, including patients younger than 18 years old and patients requiring special accommodations. Many commenters highlighted that beginning October 1, 2024, IRFs will begin collecting IRF-PAI data on all patients regardless of payer and recommended that CMS exclude patients under 18 from these assessments because the proposed assessment items have not been validated or tailored for the pediatric and adolescent populations. One of these commenters stated the PRAPARE website Frequently Asked Questions (FAQs) stated, “Currently there is no PRAPARE version that is specifically tailored for pediatrics/adolescents. There are health centers who have modified PRAPARE to be used with their pediatric and adolescent populations, which varies based on their staffing model and engagement of family members. The National NACHC team hopes to develop a Pediatric/Adolescent version of PRAPARE in the coming years.” [ 99 ]

Response: We are uncertain what the commenter's concerns are related to collecting the items adapted from the PRAPARE tool, Living Situation and Transportation, from patients younger than 18 years old, but we interpret the commenter to be concerned that these patients would be too young to provide a response or that these patients may be too young to own a house or have a driver's license, so the questions would not be applicable to them.

In response to the potential concern that patients would be too young to provide a response, we highlight that there is growing recognition of the need for effective screening methods for HRSNs in all patient populations, including pediatrics and adolescents. Children are especially vulnerable to HRSNs, as poverty in childhood correlates to poor health outcomes. [ 100 101 102 ] Although there is no standardized protocol for screening in pediatric settings, [ 103 ] organizations like the American Academy of Pediatrics provide toolkits with suggestions for a screening protocol. Housing and transportation have been identified by hospitals and clinics [ 104 105 ] that care for pediatric and adolescent patients as an important area to screen. One hospital system began using the AHC HRSN Screening Tool, including the proposed Living Situation and Transportation item, during selected well child visits at a Federally Qualified Health Center, and found the tool was feasible to administer and identified more than a third of patients with one or more HRSNs. [ 106 ]

In response to the potential concern that the question would not be applicable to these patients because they may be too young to own a house or have a driver's license, we believe that even if a patient younger than 18 years old cannot own a house or drive themselves, they may rely on others, or they may live in shelters and use public transportation. As a result, they may still have living situation and transportation access needs that should be identified.

Finally, we interpret the second part of the comment to be recommending that CMS modify the response options to collect information about patients requiring special transportation accommodations. We note that although the proposal would require IRFs to collect the modified Transportation assessment item as described in section VIII.F.2. of this final rule, such collection could potentially prompt the IRF to initiate conversations with its patients about their potential Transportation needs, such as special accommodations a patient may need to access transportation. Additionally, IRFs may seek to collect any additional information that they believe may be relevant to their patient population in order to inform their care and discharge planning process.

Comment: Several commenters were also concerned that the proposed SDOH assessment items will be challenging for IRF patients to respond to, considering that many IRF patients have cognitive deficits as a result of a traumatic injury or are more severely ill than the average Medicare beneficiary for which the screening tool was developed. One of these commenters recommended that CMS reassess the wording and response options for the SDOH assessment items to account for these patients.

Response: We interpret the comments to be recommending that CMS reassess the wording and response options for the proposed SDOH assessment items to account for these patients with cognitive impairment. However, we believe IRFs are accustomed to working with patients with very complex medical conditions, including traumatic brain injury, stroke, and others, and we are confident in their ability to collect this data in a consistent manner. There are currently several patient interview assessment items on the IRF-PAI, and IRFs are accustomed to administering these questions to cognitively impaired patients.

We also plan to provide training resources in advance of the initial collection of the assessment items to ensure that IRFs have the tools necessary to administer the new SDOH assessment items and reduce the burden to IRFs in creating their own training resources. These training resources may include online learning modules, tip sheets, questions and answers documents, and/or recorded webinars and videos, and would be available to providers as soon as technically feasible.

After careful consideration of public comments we received, we are finalizing our proposal to require IRFs to collect and submit data on the following items adopted as standardized patient assessment data elements under the SDOH category at admission only beginning with the FY 2028 IRF QRP: (1) Living Situation as described in section VIII.C.3(a) of this final rule; (2) Food as described in section VIII.C.3(b) of this final rule; and (3) Utilities as described in section VIII.C.3(c) of this final rule. We are also finalizing our proposal to require IRFs to collect and submit the modified standardized patient assessment data element, Transportation, at admission only beginning October 1, 2026, with the FY 2028 IRF QRP as described in section VIII.C.5 and VIII.E.2. of this final rule.

In the CY 2002 PPS for IRFs final rule ( 66 FR 41324 through 41342 ), we finalized the use of the IRF-PAI, through which IRFs are now required to collect and electronically submit patient data for all Medicare Part A FFS and Medicare Part C (Medicare Advantage) patients admitted and discharged from an IRF through September 30, 2024 [ 107 ] and for all patients regardless of payer beginning October 1, 2024. [ 108 ] Item 14-Admission Class has been included on the IRF-PAI since the IRF-PAI was first implemented and is completed only at admission. The most recent version of the IRF-PAI is available for reference on the IRF-PAI and IRF QRP Manual web page at https://www.cms.gov/medicare/quality/inpatient-rehabilitation-facility/irf-pai-and-irf-qrp-manual . Item 14-Admission Class, includes the following response options: (i) Initial Rehab; (iii) Readmission; (iv) Unplanned Discharge; and (v) Continuing Rehabilitation.

We routinely review item sets for redundancies and identify opportunities to simplify data submission requirements. We proposed to remove Item 14-Admission Class entirely from the IRF-PAI, beginning October 1, 2026. We identified this item is currently not used in the calculation of quality measures already adopted in the IRF QRP. It is also not used for previously established purposes unrelated to the IRF QRP, such as payment, survey, or care planning.

We invited public comment on the proposal to remove Item 14-Admission Class from the IRF-PAI, effective October 1, 2026.

Comment: Most commenters supported the proposal to remove Item 14-Admission Class from the IRF-PAI, pointing to its lack of value to the assessment process. One of these commenters appreciated CMS' review of the IRF-PAI to identify potential items for removal. The other commenters acknowledged that the proposed removal aligns with CMS' commitment to reducing administrative burden and agreed that it would result in a reduction in administrative burden.

Response: We thank the commenters for their support of the proposed removal of Item 14-Admission Class and agree that the removal of this item will reduce administrative burden for IRFs.

Comment: Four commenters suggested that CMS perform additional analysis of the IRF-PAI and other PAC patient assessment tools to identify additional items that could be removed.

Response: As part of our routine item and measure monitoring work, we continually assess the implementation of items collected on the IRF-PAI. We will continue to look for opportunities to improve data collection using the IRF-PAI, including considering items to remove from the IRF-PAI in order to reduce administrative burden.

Comment: Three commenters expressed concerns about removing the item and its potential impact on data collection requirements. They noted that response option (4) Unplanned Discharges is used to activate a skip pattern for incomplete stays in the IRF-PAI data specifications. These commenters suggested CMS conduct an impact analysis to identify the implications of the item removal. Two commenters suggested CMS modify the item, instead of removing it, to track incomplete stays and use the item to trigger skip patterns across the IRF-PAI in cases of unplanned discharges.

Response: We acknowledge the commenters' concerns about the item's use with triggering skip patterns in the data specifications, but the data specifications currently include a means to identify incomplete stays that does not rely on Item 14-Admission Class. Therefore, this item is not necessary. Additionally, as we noted in the proposed rule and this section of this final rule, we have identified that this item is currently not used in the calculation of quality measures already adopted in the IRF QRP, nor is it used for previously established purposes unrelated to the IRF QRP, such as payment, survey, or care planning. Therefore, its removal will not have an impact in our data, such as activation of a skip pattern for incomplete stays. Additionally, we conduct regular item monitoring and carefully consider the downstream implications of removing any item from the IRF-PAI. Accordingly, prior to proposing removal of this item, we analyzed CY 2023 assessment data and confirmed less than one percent of IRF-PAI admission assessments are coded as incomplete stays using Item 14-Admission Class. CMS will continue to monitor and assess changes resulting from removal of this item to ensure there are no unintended consequences or added burden to providers.

Comment: One commenter suggested that CMS remove the item from the IRF-PAI beginning October 1, 2024, instead of the proposed October 1, 2026 date. This commenter noted that delaying the removal of the Item 14-Admission Class item until October 1, 2026 is unreasonable provided IRFs are still required to collect and submit data for the Admission Class item even though CMS is not utilizing the information.

Response: We appreciate the commenter's suggestion, but we proposed October 1, 2026, to effectuate this change. Removing an item from the IRF-PAI has downstream logistical implications, such as changes to data submission specifications, updates to the assessment instruments, revisions to the IRF-PAI guidance manual, and provider training, if necessary. For example, we finalized and published the IRF-PAI 4.2 item set that will be effective October 1, 2024, almost 12 months before the October 12, 2023, to allow providers adequate time for preparation. The IRF-PAI Manual Version 4.0 was published over 7 months before the October 1, 2024 on February 1, and the IRF data specifications V5.00.1 were published over 4 months before the October 1, 2024 on May 25, 2024. Additionally, to allow for adequate time to draft, test and implement item set changes, we typically follow a 2-year cycle of updates to the item sets. Therefore, IRFs will continue to see Item 14-Admission Class on the IRF-PAI until the next release of the IRF-PAI on October 1, 2026.

However, we acknowledge that there is no longer a need to collect this information at admission. Therefore, we are finalizing our proposal with modification to reflect that IRFs would no longer be required to collect Item 14-Admission Class at admission beginning with patients admitted on October 1, 2024. Item 14-Admission Class is not a standardized patient assessment data element and therefore its completion does not have an impact on an IRF's annual compliance determination for the IRF QRP.

After careful consideration of public comments we received, we are finalizing our proposal to remove Item 14-Admission Class from the IRF-PAI with modification. Specifically, while we are finalizing our proposal to remove Item 14-Admission Class from the IRF-PAI effective October 1, 2026 as proposed, IRFs will no longer be required to collect and submit data on this Item 14-Admission Class beginning with patients admitted on October 1, 2024.

We did not propose any new policies regarding the public display of measure data in the proposed rule. For a more detailed discussion about our policies regarding public display of IRF QRP measure data and procedures for the opportunity to review and correct data and information, we refer readers to the FY 2017 IRF PPS final rule ( 81 FR 52125 through 52131 ).

Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

The need for the information collection and its usefulness in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection burden.
The quality, utility, and clarity of the information to be collected.
Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

This final rule refers to associated information collections that are not discussed in the regulation text contained in this document.

An IRF that does not meet the requirements of the IRF QRP for a fiscal year will receive a 2-percentage point reduction to its otherwise applicable annual increase factor for that fiscal year.

In section VII.C. of the proposed rule, we proposed to adopt four items as standardized patient assessment data elements and modify one item currently collected and submitted as a standardized patient assessment data element beginning with the FY 2028 IRF QRP. In section VII.F.3. of the proposed rule, we proposed to remove one item, Item 14-Admission Class, from the IRF-PAI.

As stated in sections VIII.C.3. and VIII.C.5. of this final rule, we proposed to adopt four items as standardized patient assessment data elements and modify one item currently collected and submitted as a standardized patient assessment data element beginning with the FY 2028 IRF QRP. The four new and modified items would be collected and submitted using the IRF-PAI. The IRF-PAI, in its current form, has been approved under OMB control number 0938-0842. [ 109 ] Four items will need to be added to the IRF-PAI at admission to allow for collection of these data, and one item would be modified. Additionally, as stated in section VIII.F.2. of this final rule, we proposed that IRFs would submit the four new items and one modified item at admission only. The net result of collecting and submitting four new items at admission, modifying the Transportation item (including the modification that this item be collected at admission only, rather than at admission and discharge is an increase of 0.9 minutes or 0.015 hour of clinical staff time at admission [(4 items × 0.005 hour) minus (1 item × 0.005 hour)]. We identified the staff type based on past IRF burden calculations, and our assumptions are based on the categories generally necessary to perform an assessment. We believe that the items would be completed equally by a Registered Nurse (RN) (50 percent of the time) and a Licensed Practical and Licensed Vocational Nurse (LPN/LVN) (50 percent of the time). However, IRFs determine the staffing resources necessary.

For the purposes of calculating the costs associated with the collection of information requirements, we obtained median hourly wages for these staff from the U.S. Bureau of Labor Statistics' (BLS) May 2022 National Occupational Employment and Wage Estimates. [ 110 ] To account for other indirect costs and fringe benefits, we doubled the hourly wage. These amounts are detailed in Table 15. We established a composite cost estimate using our adjusted wage estimates. The composite estimate of $65.31/hr was calculated by weighting each adjusted hourly wage equally (that is, 50 percent) [($78.10/hr × 0.5) + ($52.52/hr × 0.5) = $65.31].

Table 15—U.S. Bureau of Labor and Statistics' May 2022 National Occupational Employment and Wage Estimates
Occupation title	Occupation code	Median hourly wage ($/hr)	Other indirect costs and fringe benefit ($/hr)	Adjusted hourly wage ($/hr)
Registered Nurse (RN)	29-1141	$39.05	$39.05	$78.10
Licensed Practical and Licensed Vocational Nurse (LPN/LVN)	29-2061	26.26	26.26	52.52

We estimated that the burden and cost for IRFs for complying with requirements of the FY 2028 IRF QRP would increase under this proposal. Using FY 2023 data, we estimate a total of 571,151 admissions to and 512,677 planned discharges from 1,160 IRFs annually for an increase of 8,859.64 hours in burden for all IRFs [(571,151 × 0.02 hour) admissions−(512,677 × 0.005 hour) planned discharges]. Given 0.02 hour at $65.31 per hour to complete an average of 492 IRF-PAI admission assessments per IRF per year minus 0.005 at $65.31 per hour to complete an average of 442 IRF-PAI Planned Discharge assessments per IRF per year, we estimate the total cost will be increased by $498.81 per IRF annually, or $578,622.76 for all IRFs annually.

In section VIII.F.3. of this final rule, we proposed to remove one item, Item 14-Admission Class, from the IRF-PAI beginning October 1, 2026. We believe that the removal of Item 14-Admission Class will result in a decrease of 18 seconds (0.3 minutes or 0.005 hours) of clinical staff time at admission beginning with the FY 2028 IRF QRP. We believe the IRF-PAI item, Item 14-Admission Class, is completed equally by a Registered Nurse (RN) and a Licensed Practical and Licensed Vocational Nurse (LPN/LVN). Individual IRFs determine the staffing resources necessary.

We estimated that the burden and cost for IRFs for complying with requirements of the FY 2028 IRF QRP will decrease under this proposal in section VIII.F.3. Specifically, we believe that there will be a 2.46 hour decrease in clinical staff time to report data for each IRF-PAI completed at admission. Using data from FY 2023, we estimated 571,151 admission assessments from 1,160 IRFs annually. This equates to a decrease of 2,855.76 hours in burden at admission for all IRFs (0.005 hour × 571,151 admissions). Given 0.005 hour at $65.31 per hour to complete an average of 492 IRF-PAI admission assessments per IRF per year, we estimated the total cost will be decreased by $160.78 ($186,509.36 total decrease/1,160 IRFs) per IRF annually, or $186,509.36 for all IRFs annually, based on the proposal to remove one item from the IRF-PAI.

In summary, under OMB control number 0938-0842, the changes to the IRF QRP will result in a burden increase of $338.03 per IRF ($392,113.40/1,160 IRFs). The total cost increase related to this proposed information collection is approximately $392,113.40 and is summarized in Table 16.

Table 16—Estimated Change in Burden Associated with OMB Control Number 0938-0842
Requirement	Per IRF		All IRFs
Requirement	Estimated change in annual burden hours	Estimated change in annual cost	Estimated change in annual burden hours	Estimated change in annual cost
Collection of Four New Items as Standardized Patient Assessment Data Elements and Modification of One Item Collected as a Standardized Patient Assessment Data Element beginning with the FY 2028 IRF QRP	+7.64	+$498.81	+8,859.64	+$578,622.76
Removal of Item 14-Admission Class item effective October 1, 2026	−2.46	−$160.78	−2,855.76	−$186,509.36
Change in burden for the IRF QRP associated with 0938-0842	5.18	$338.03	6,003.88	$392,113.40

We invited public comments on the proposed information collection requirements. The following is a summary of the public comments received on the proposed information collection requirements as well as our responses.

Comment: Three commenters urged CMS to update its estimate of the change in burden resulting from these new IRF QRP changes to account for the costs associated with training and education, time required to administer and reconcile patient assessments, and costs associated with software development and other required technical updates. One of these commenters specifically noted they do not believe the estimate accurately reflects the time to conduct patient interviews and reconcile information from the patient nor does it account for the costs associated with software development and other technology that will make the collection of this information easier and timelier for IRFs and other providers.

Response: We acknowledge that the net effect of our policies finalized in this final rule is an increase of $338.03 per IRF per year.

The burden estimate for the proposed SDOH items is based on past IRF burden calculations and represents the time it takes to encode the IRF-PAI. As the commenter pointed out in their example, the patient must be assessed and information gathered. After the patient assessment is completed, the IRF-PAI is coded with the information and submitted to the internet Quality Improvement and Evaluation System (iQIES), and it is these steps (after the patient assessment) that the estimated burden and cost captures. This method is consistent with past collection of information estimates. [ 111 ]

We also note that some IRFs will incur a higher cost than was estimated due to their size and volume of admissions, and some IRFs will incur a lower cost. Regarding the comments about IRFs' costs associated with training and education, time required to administer and reconcile patient assessments, and costs associated with software development and other required technical updates, CMS continually looks for opportunities to minimize burden associated with collection and submission of the IRF-PAI for information users through strategies that simplify collection and submission requirements. This includes standardizing instructions, providing a help desk, hosting a dedicated web page, communication strategies, free data specifications, and free on-demand reports. We describe each of those below and how they will potentially reduce new burden on IRFs collecting and submitting these new and modified SDOH assessment items.

First, we will standardize the collection instructions for the new and modified SDOH assessment items across all IRFs, ensuring that all instructions and notices are written in plain language, and by providing step-by-step examples for completing the IRF-PAI. Second, CMS provides a dedicated help desk to support users and respond to questions about the data collection, and IRFs can utilize this help desk when they have questions about the new and modified SDOH assessment items. Third, a dedicated IRF QRP web page houses multiple modes of tools, such as instructional videos, case studies, user manuals, and frequently asked questions. We plan to update this web page with new resources to support IRFs' understanding of the new SDOH assessment items and the modified assessment item as soon as technically feasible, and these resources will be available to all users of the IRF-PAI. Fourth, CMS utilizes a listserv to facilitate outreach to users, such as communicating timely and important new material(s), and we will use those outreach resources when providing training and information about the new and modified SDOH assessment items. Fifth, CMS creates data collection and submission specifications for IRF electronic health record (EHR) software available free of charge to all IRFs and their technology partners, and these will be updated to incorporate the new and modified SDOH assessment items. Finally, CMS provides IRFs with a free internet-based system through which users can access on-demand reports for feedback about the IRFs' compliance with collection and submission of the new and modified SDOH assessment items associated with their facility.

Comment: One commenter urged CMS to recognize that administrative requirements are already overburdening the IRF workforce and incorporating these new standardized patient assessment data elements would further decrease resources from patient care. This commenter reported that it currently takes an average of 45 minutes per patient to pull information and scores and enter them into the IRF-PAI. This commenter noted that the 45 minutes of time does not include the time it takes their staff to complete their assessments that contribute to the IRF-PAI, and completing assessments for patients with cognitive deficits takes even longer.

Response: As the commenter pointed out in their example, the patient must be assessed, and information gathered. We disagree that this policy, if finalized, will take time away from patient care. The new assessment items (Living Situation, Food, and Utilities) are all important pieces of information to developing and administering a comprehensive plan of care in accordance with § 412.606. Rather than taking time away from patient care, providers will be documenting information they are likely already collecting through the course of providing care to the patients.

After the patient assessment is completed, the IRF-PAI is coded with the information and submitted to the CMS system, and it is these steps (after the patient assessment) that the estimated burden and cost captures. As we stated in section IX.A. of this final rule, our assumptions for staff type were based on the categories generally necessary to perform an assessment, and subsequently encode it, which is consistent with past collection of information estimates. [ 112 ] While we acknowledge that some IRFs may train and utilize other personnel, our estimates are based on the categories of personnel necessary to complete the IRF-PAI.

We also note that the commenter's estimate of the time it takes its members to code the IRF-PAI (45 minutes) is consistent with the total time we report in our Paperwork Reduction Act (PRA) package (0938-0842). We estimate the next version of the IRF-PAI will take an average of 1 hour and 47 minutes per IRF-PAI assessment which includes the time to review instructions, search existing data resources, gather the data needed, and complete and review the information collection.

After considering the public comments received, and for the reasons outlined in this section of the final rule and our comment responses, we are finalizing our proposal to remove Item 14-Admission Class from the IRF-PAI with modification. Specifically, while we are finalizing our proposal to remove Item 14-Admission Class from the IRF-PAI effective October 1, 2026 as proposed, IRFs will no longer be required to collect and submit data on this Item 14-Admission Class beginning with patients admitted on October 1, 2024. We are also finalizing our proposal to collect and submit data on the following items adopted as standardized patient assessment data elements under the SDOH category at admission only beginning with October 1, 2026 IRF admissions: (1) Living Situation as described in section VIII.C.3(a) of this final rule; (2) Food as described in section VIII.C.3(b) of this final rule; and (3) Utilities as described in section VIII.C.3(c) of this final rule. We are also finalizing our proposal to collect and submit the modified standardized patient assessment data element, Transportation, at admission only beginning with October 1, 2026, IRF admissions as described in section VIII.C.5 of this final rule.

This final rule updates the IRF prospective payment rates for FY 2025 as required under section 1886(j)(3)(C) of the Act and in accordance with section 1886(j)(5) of the Act, which requires the Secretary to publish in the Federal Register on or before August 1 before each FY, the classification and weighting factors for CMGs used under the IRF PPS for such FY and a description of the methodology and data used in computing the prospective payment rates under the IRF PPS for that FY. This final rule will also implement section 1886(j)(3)(C) of the Act, which requires the Secretary to apply a productivity adjustment to the market basket percentage increase for FY 2012 and subsequent years.

Furthermore, this final rule adopts policy changes to the IRF QRP under the statutory discretion afforded to the Secretary under section 1886(j)(7) of the Act. This rule updates the IRF QRP requirements beginning with the FY 2028 IRF QRP.

We have examined the impacts of this rule as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), Executive Order 14094 on Modernizing Regulatory Review (April 6, 2023), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995; Pub. L. 104-4 ), and Executive Order 13132 on Federalism (August 4, 1999) and the Congressional Review Act ( 5 U.S.C. 804(2) ).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 14094 (Modernizing Regulatory Review) amends section 3(f)(1) of Executive Order 12866 (Regulatory Planning and Review). The amended section 3(f) of Executive Order 12866 defines a “significant regulatory action” as an action that is likely to result in a rule: (1) having an annual effect on the economy of $200 million or more in any 1 year (adjusted every 3 years by the Administrator of OMB's Office of Information and Regulatory Affairs (OIRA) for changes in gross domestic product), or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, territorial, or Tribal governments or communities; (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise legal or policy issues for which centralized review would meaningfully further the President's priorities or the principles set forth in the Executive order, as specifically authorized in a timely manner by the Administrator of OIRA in each case.

A regulatory impact analysis (RIA) must be prepared for major rules with significant regulatory action/s and/or with significant effects as per section 3(f)(1) ($200 million or more in any 1 year). We estimate the total impact of the policy updates described in this final rule by comparing the estimated payments in FY 2025 with those in FY 2024. This analysis results in an estimated $280 million increase for FY 2025 IRF PPS payments. Additionally, we estimated that costs associated with updating the reporting requirements under the IRF QRP result in an estimated $392,113.40 additional cost for IRFs in FY 2026 for purposes of meeting the FY 2028 IRF QRP. Based on our estimates, OMB's Office of Information and Regulatory Affairs has determined this rulemaking is significant per section 3(f)(1) as measured by the $200 million or more in any 1 year, and hence also a major rule under Subtitle E of the Small Business Regulatory Enforcement Fairness Act of 1996 (also known as the Congressional Review Act). Accordingly, we have prepared an RIA that, to the best of our ability, presents the costs and benefits of the rulemaking.

The RFA requires agencies to analyze options for regulatory relief of small entities, if a rule has a significant impact on a substantial number of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most IRFs and most other providers and suppliers are small entities, either by having revenues of $9.0 million to $47.0 million or less in any 1 year depending on industry classification, or by being nonprofit organizations that are not dominant in their markets. (For details, see the Small Business Administration's final rule that set forth size standards for health care industries, at 65 FR 69432 at https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf , effective January 1, 2017, and updated on August 19, 2019.) Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary IRFs or the proportion of IRFs' revenue that is derived from Medicare payments. Therefore, we assume that all IRFs (an approximate total of 1,160 IRFs, of which approximately 50 percent are nonprofit facilities) are considered small entities and that Medicare payment constitutes the majority of their revenues. HHS generally uses a revenue impact of 3 to 5 percent as a significance threshold under the RFA. As shown in Table 17, we estimate that the net revenue impact of the final rule on all IRFs is to increase estimated payments by approximately 2.8 percent. The rates and policies proposed in this rule would not have a significant impact (not greater than 5 percent) on a substantial number of small entities. The estimated impact on small entities is shown in Table 17. MACs are not considered to be small entities. Individuals and States are not included in the definition of a small entity.

In addition, section 1102(b) of the Act requires us to prepare an RIA if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. As shown in Table 17, we estimate that the net revenue impact of this final rule on rural IRFs is to increase estimated payments by approximately 4.9 percent based on the data of the 131 rural units and 13 rural hospitals in our database of 1,160 IRFs for which data were available. We estimate an overall impact for rural IRFs in all areas between 1.4 percent and 10.7 percent. As a result, we anticipate that this final rule will not have a significant negative impact on a substantial number of small entities.

Section 202 of the Unfunded Mandates Reform Act of 1995 ( Pub. L. 104-04 , enacted March 22, 1995) (UMRA) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2024, that threshold is approximately $183 million. This final rule does not mandate any requirements for State, local, or Tribal governments, or for the private sector.

Executive Order 13132 establishes certain requirements that an agency must meet when it issues a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has federalism implications. As stated, this final rule will not have a substantial effect on State and local governments, preempt State law, or otherwise have a federalism implication.

This final rule updates the IRF PPS rates contained in the FY 2024 IRF PPS final rule ( 88 FR 50956 ). Specifically, this final rule updates the CMG relative weights and ALOS values, the wage index, and the outlier threshold for high-cost cases. This final rule will apply a productivity adjustment to the FY 2025 IRF market basket percentage increase in accordance with section 1886(j)(3)(C)(ii)(I) of the Act.

We estimate that the impact of the changes and updates described in this final rule will be a net estimated increase of $280 million in payments to IRFs. The impact analysis in Table 17 of this final rule represents the projected effects of the updates to IRF PPS payments for FY 2025 compared with the estimated IRF PPS payments in FY 2024. We determined the effects by estimating payments while holding all other payment variables constant. We use the best data available, but we do not attempt to predict behavioral responses to these changes, and we do not make adjustments for future changes in such variables as number of discharges or case-mix.

We note that certain events may combine to limit the scope or accuracy of our impact analysis, because such an analysis is future-oriented and, thus, susceptible to forecasting errors because of other changes in the forecasted impact time period. Some examples could be legislative changes made by the Congress to the Medicare program that would impact program funding, or changes specifically related to IRFs. Although some of these changes may not necessarily be specific to the IRF PPS, the nature of the Medicare program is such that the changes may interact, and the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon IRFs.

In updating the rates for FY 2025, we are implementing the standard annual revisions described in this final rule (for example, the update to the wage index and market basket percentage increase used to adjust the Federal rates). We are also reducing the FY 2025 IRF market basket percentage increase by a productivity adjustment in accordance with section 1886(j)(3)(C)(ii)(I) of the Act. We estimate the total increase in payments to IRFs in FY 2025, relative to FY 2024, will be approximately $280 million.

This estimate is derived from the application of the FY 2025 IRF market basket percentage increase, reduced by a productivity adjustment in accordance with section 1886(j)(3)(C)(ii)(I) of the Act, which yields an estimated increase in aggregate payments to IRFs of $300 million. However, there is an estimated $20 million decrease in aggregate payments to IRFs due to the update to the outlier threshold amount. Therefore, we estimate that these updates will result in a net increase in estimated payments of $280 million from FY 2024 to FY 2025.

The effects of the updates that impact IRF PPS payment rates are shown in Table 17. The following updates that affect the IRF PPS payment rates are discussed separately below:

The effects of the update to the outlier threshold amount, from approximately 3.2 percent to 3.0 percent of total estimated payments for FY 2025, consistent with section 1886(j)(4) of the Act.
The effects of the annual market basket update (using the 2021-based IRF market basket) to IRF PPS payment rates, as required by sections 1886(j)(3)(A)(i) and (j)(3)(C) of the Act, including a productivity adjustment in accordance with section 1886(j)(3)(C)(ii)(I) of the Act.
The effects of applying the budget-neutral labor-related share and wage index adjustment, as required under section 1886(j)(6) of the Act, accounting for the permanent cap on wage index decreases when applicable.
The effects of the budget-neutral changes to the CMG relative weights and ALOS values under the authority of section 1886(j)(2)(C)(i) of the Act.
The total change in estimated payments based on the FY 2025 payment changes relative to the estimated FY 2024 payments.

Table 17 shows the overall impact on the 1,160 IRFs included in the analysis.

The next 12 rows of Table 17 contain IRFs categorized according to their geographic location, designation as either a freestanding hospital or a unit of a hospital, and by type of ownership; all urban, which is further divided into urban units of a hospital, urban freestanding hospitals, and by type of ownership; and all rural, which is further divided into rural units of a hospital, rural freestanding hospitals, and by type of ownership. There are 1,016 IRFs located in urban areas included in our analysis. Among these, there are 653 IRF units of hospitals located in urban areas and 363 freestanding IRF hospitals located in urban areas. There are 144 IRFs located in rural areas included in our analysis. Among these, there are 131 IRF units of hospitals located in rural areas and 13 freestanding IRF hospitals located in rural areas. There are 498 for-profit IRFs. Among these, there are 463 IRFs in urban areas and 35 IRFs in rural areas. There are 567 non-profit IRFs. Among these, there are 477 urban IRFs and 90 rural IRFs. There are 95 government-owned IRFs. Among these, there are 76 urban IRFs and 19 rural IRFs.

The remaining five parts of Table 17 show IRFs grouped by their urban or rural status before and after the application of the new CBSA delineations, by geographic location within a region, by teaching status, and by DSH patient percentage (PP). First, IRFs are categorized by their urban or rural designation before and after the updates to the OMB CBSA delineations. Second, IRFs located in urban areas are categorized for their location within a particular one of the nine Census geographic regions. Third, IRFs located in rural areas are categorized for their location within a particular one of the nine Census geographic regions. In some cases, especially for rural IRFs located in the New England, Mountain, and Pacific regions, the number of IRFs represented is small. IRFs are then grouped by teaching status, including non-teaching IRFs, IRFs with an intern and resident to average daily census (ADC) ratio less than 10 percent, IRFs with an intern and resident to ADC ratio greater than or equal to 10 percent and less than or equal to 19 percent, and IRFs with an intern and resident to ADC ratio greater than 19 percent. Finally, IRFs are grouped by DSH PP, including IRFs with zero DSH PP, IRFs with a DSH PP less than 5 percent, IRFs with a DSH PP between 5 and less than 10 percent, IRFs with a DSH PP between 10 and 20 percent, and IRFs with a DSH PP greater than 20 percent.

The estimated impacts of each policy described in this final rule to the facility categories listed are shown in the columns of Table 17. The description of each column is as follows:

Column (1) shows the facility classification categories.
Column (2) shows the number of IRFs in each category in our FY 2025 analysis file.
Column (3) shows the number of cases in each category in our FY 2025 analysis file.
Column (4) shows the estimated effect of the adjustment to the outlier threshold amount.
Column (5a) shows the estimated effect of the FY 2025 update to the IRF labor-related share, FY 2024 CBSA delineations, and FY 2025 wage index with the 5-percent cap, in a budget-neutral manner.
Column (5b) shows the estimated effect of the FY 2025 update to the IRF labor-related share, FY2025 CBSA delineations and FY 2025 wage index with the 5-percent cap, in a budget-neutral manner. These updates are made without applying the rural adjustment to IRFs transitioning from urban to rural status under the new CBSA delineations or reducing the rural adjustment or IRFs transitioning from rural to urban status.
Column (5c) shows the estimated effects of the 3-year phase-out of the rural adjustment for IRFs transitioning from rural to urban status under the new CBSA delineations and the application of the standard rural adjustment for IRFs transitioning to rural status.
Column (6) shows the estimated effect of the update to the CMG relative weights and ALOS values, in a budget-neutral manner.
Column (7) compares our estimates of the payments per discharge, incorporating all of the policies reflected in this final rule for FY 2025 to our estimates of payments per discharge in FY 2024.

The average estimated increase for all IRFs is approximately 2.8 percent. This estimated net increase includes the effects of the IRF market basket update for FY 2025 of 3.0 percent, which is based on a IRF market basket percentage increase of 3.5 percent, less a 0.5 percentage point productivity adjustment, as required by section 1886(j)(3)(C)(ii)(I) of the Act. It also includes the approximate 0.2 percent overall decrease in estimated IRF outlier payments from the update to the outlier threshold amount. Since we are updating the IRF wage index, labor-related share and the CMG relative weights in a budget-neutral manner, we estimate there is no expected impact to total estimated IRF payments in aggregate. However, as described in more detail in each section, we estimate there will be expected impacts to the estimated distribution of payments among providers.

The estimated effects of the update to the outlier threshold adjustment are presented in column 4 of Table 17.

For the FY 2025 proposed rule, we used preliminary FY 2023 IRF claims data and based on that preliminary analysis, we estimated that IRF outlier payments as a percentage of total estimated IRF payments would be 3.2 percent in FY 2024. As we typically do between the proposed and final rules each year, we updated our FY 2023 IRF claims data to ensure that we are using the most recent available data in setting IRF payments. Therefore, based on an updated analysis of the most recent IRF claims data for this final rule, we estimate that IRF outlier payments as a percentage of total estimated IRF payments are 3.2 percent in FY 2024. Thus, we are adjusting the outlier threshold amount in this final rule to maintain total estimated outlier payments equal to 3 percent of total estimated payments in FY 2025.

The estimated change in total IRF payments for FY 2025, therefore, includes an approximate 0.2 percentage point decrease in payments because the estimated outlier portion of total payments is estimated to decrease from approximately 3.2 percent to 3.0 percent.

The impact of this update to the outlier threshold amount (as shown in column 4 of Table 17) is to decrease estimated overall payments to IRFs by 0.2 percentage point.

In column 5a of Table 17, we present the effects of the budget-neutral update of the wage index and labor-related share, taking into account the permanent 5-percent cap on wage index decreases when applicable, without taking into account the updated FY2025 CBSA delineations, which are presented separately in the next column. The changes to the wage index and the labor-related share are discussed together because the wage index is applied to the labor-related share portion of payments, so the changes in the two have a combined effect on payments to providers. As discussed in section VI.E. of this final rule, we are updating the FY 2025 labor-related share from 74.1 percent in FY 2024 to 74.4 percent in FY 2025.

In column 5b of Table 17, we present the effects of the revised FY2025 CBSA delineations, without applying the rural adjustment to IRFs transitioning from urban to rural status under the new CBSA delineations or reducing the rural adjustment for IRFs transitioning from rural to urban status. In aggregate, we do not estimate that these updates will affect overall estimated payments to IRFs. However, we do expect these updates to have small distributional effects. We estimate the largest decrease in payment from the update to the FY 2025 CBSA delineation and wage index and labor-related share (column 5b of Table 17) to be a 0.5 percent decrease for IRFs in the Rural Middle Atlantic region and the largest increase in payment to be a 1.4 percent increase for IRFs in the Rural South Atlantic region.

In column 5c of Table 17, we present the effects of the 3-year phase-out of the rural adjustment for IRFs transitioning from rural to urban status under the new CBSA delineations and the application of the standard rural adjustment for IRFs transitioning to rural status. Under the IRF PPS, IRFs located in rural areas receive a 14.9 percent adjustment to their payment rates to account for the higher costs incurred in treating beneficiaries in rural areas. Under the new CBSA delineations, we estimate that 8 IRFs will transition from rural to urban status for purposes of the IRF PPS wage index adjustment in FY 2025. Without the phase-out of the rural adjustment, these 8 IRFs would experience an automatic 14.9 percent decrease in payments as a result of this change from rural to urban status in FY 2025.

To mitigate the effects of this relatively large decrease in payments, we will phase-out the rural adjustment for these providers over a 3-year period, as discussed in more detail in section VI.D.3 of this final rule. Thus, these IRFs would receive two thirds of the rural adjustment in FY 2025, one third of the rural adjustment in FY 2026, and none of the rural adjustment in FY 2027, thus giving these IRFs time to adjust to the reduced payments.

Column 5c shows the effect on providers of this budget-neutral phase-out of the rural adjustment for IRFs transitioning from rural to urban status in FY 2025. Under this policy, these providers would only experience a reduction in payments of one third of the 14.9 percent rural adjustment in FY 2025. While this does not impact aggregate payments, there are small effects on the distribution of payments to IRFs. The largest decrease as a result of this policy change is a 4.1 percent decrease in payments to IRFs that transitioned from rural to urban status since they will receive only two thirds of the rural adjustment in FY 2025. We note that the decrease in payments to these providers is substantially lessened from what it otherwise would have been as a result of the phase-out of the rural adjustment for these IRFs.

In column 6 of Table 17, we present the effects of the budget-neutral update of the CMG relative weights and ALOS values. In the aggregate, we do not estimate that these updates will affect overall estimated payments of IRFs. However, we do expect these updates to have small distributional effects between −0.1 to 0.2.

In accordance with section 1886(j)(7)(A) of the Act, the Secretary must reduce by 2 percentage points the annual market basket increase factor otherwise applicable to an IRF for a fiscal year if the IRF does not comply with the requirements of the IRF QRP for that fiscal year. In section IX.A. of the final rule, we discussed the method for applying the 2-percentage points reduction to IRFs that fail to meet the IRF QRP requirements.

As discussed in sections VIII.C.3. and VIII.C.5. of this final rule, we are finalizing our proposal to collect four new items as standardized patient assessment data elements under the SDOH category and modify one item collected as a standardized patient assessment data element under the SDOH category on the IRF-PAI beginning with the FY 2028 IRF QRP. Although the increase in burden will be accounted for in a revised information collection request under OMB control number (0938-0842), we are providing impact information. We believe the items would be completed equally by a Registered Nurse (RN) (50 percent of the time) and a Licensed Practical and Vocational Nurses (LPN/LVN) (50 percent of the time). For the purposes of calculating the costs associated with the collection of information requirements, we obtained median hourly wages for these staff from the U.S. Bureau of Labor Statistics' (BLS) May 2022 National Occupational Employment and Wage Estimates. [ 113 ] To account for other indirect costs and fringe benefits, we doubled the hourly wage. These amounts are detailed in Table 18.

Table 18—U.S. Bureau of Labor and Statistics' May 2022 National Occupational Employment and Wage Estimates
Occupation title	Occupation code	Median hourly wage ($/hr)	Other indirect costs and fringe benefit ($/hr)	Adjusted hourly wage ($/hr)
Registered Nurse (RN)	29-1141	$39.05	$39.05	$78.10
Licensed Practical and Licensed Vocational Nurse (LPN/LVN)	29-2061	26.26	26.26	52.52

With 571,151 admissions from 1,160 IRFs annually, we estimated an annual burden increase of 8,859.64 hours [(571,151 × 0.02 hour) admissions—(512,677 × 0.005 hour) planned discharges] and an increase of $578,622.76 [8,859.64 hours × $65.31/hr)]. For each IRF, we estimate an annual burden increase of 7.64 hours (8,859.64 hours/1,160 IRFs) for an annual increase of $498.81 ($578,622.76/1,160 IRFs).

As discussed in section VII.F.3. of this final rule, we are finalizing our proposal to remove Item 14, Admission Class, from the IRF-PAI with modification. Specifically, while we are finalizing our proposal to remove Item 14—Admission Class from the IRF-PAI effective October 1, 2026 as proposed, IRFs will no longer be required to collect and submit data on this Item 14—Admission Class beginning with patients admitted on October 1, 2024. We estimate the removal of this item would result in a decrease of 0.005 hour of clinical staff time beginning with admission assessments completed on October 1, 2026. Although the decrease in burden will be accounted for in a revised information collection request under OMB control number 0938-0842, we are providing impact information. We estimate this item is completed equally by an RN (50 percent of the time) and by an LPN/LVN (50 percent of the time). For the purposes of calculating the costs associated with the collection of information requirements, we obtained median hourly wages for these staff from the U.S. Bureau of Labor Statistics' (BLS) May 2022 National Occupational Employment and Wage Estimates. [ 114 ] To account for other indirect costs and fringe benefits, we doubled the hourly wage. These amounts are detailed in Table 18. With 571,151 admissions from 1,160 IRFs annually, we estimate an annual burden decrease of 2,855.76 hours (571,151 admissions × 0.005 hour) and a decrease of $186,509.36 [2,855.76 hours × $65.31/hr)]. For each IRF we estimate an annual burden decrease of 2.46 hours (2,855.76 hours/1,160 IRFs) for an annual decrease of $160.78 ($186,509.36/1,160 IRFs).

In summary, under OMB control number 0938-0842, the changes we are finalizing to the IRF QRP would result in an estimated increase in programmatic burden for 1,160 IRFs. The total burden increase is approximately $392,113.40 for all IRFs and $338.03 per IRF and is summarized in Table 19.

Table 19—Estimated IRF QRP Program Impacts for FY 2028
Requirement	Per IRF		All IRFs
Requirement	Estimated change in annual burden hours	Estimated change in annual cost	Estimated change in annual burden hours	Estimated change in annual cost
Collection of Four New Items as Standardized Patient Assessment Data Elements and Modification of One Item Collected as a Standardized Patient Assessment Data Element beginning with the FY 2028 IRF QRP	+7.64	+$498.81	+8,859.64	+$578,622.76
Removal of the Admission Class item effective October 1, 2026	−2.46	−160.78	−2,855.76	−186,509.36
Increase in burden for the IRF QRP	5.18	338.03	6,003.88	392,113.40

We invited public comments on the overall impact of the IRF QRP proposals for FY 2028. We received several comments on the impact of the IRF QRP proposals and responded to those comments in sections VIII.C.4, VIII.F.2, and IX.A of this final rule.

The following is a discussion of the alternatives considered for the IRF PPS updates contained in the final rule.

As noted previously, section 1886(j)(3)(C) of the Act requires the Secretary to update the IRF PPS payment rates by an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services included in the covered IRF services and section 1886(j)(3)(C)(ii)(I) of the Act requires the Secretary to apply a productivity adjustment to the market basket percentage increase for FY 2025. Thus, in accordance with section 1886(j)(3)(C) of the Act, we updated the IRF prospective payments in this final rule by 3.0 percent (which equals the 3.5 percent IRF market basket percentage increase for FY 2025 reduced by a 0.5 percentage point productivity adjustment as determined under section 1886(b)(3)(B)(xi)(II) of the Act (as required by section 1886(j)(3)(C)(ii)(I) of the Act).

We considered maintaining the existing CMG relative weights and average length of stay values for FY 2025. However, in light of recently available data and our desire to ensure that the CMG relative weights and average length of stay values are as reflective as possible of recent changes in IRF utilization and case mix, we believe that it is appropriate to update the CMG relative weights and average length of stay values at this time to ensure that IRF PPS payments continue to reflect as accurately as possible the current costs of care in IRFs.

We considered maintaining the existing outlier threshold amount for FY 2025. However, analysis of updated FY 2024 data indicates that estimated outlier payments would be more than 3 percent of total estimated payments for FY 2025, unless we updated the outlier threshold amount. Consequently, we are adjusting the outlier threshold amount to maintain estimated outlier payments at 3 percent of estimated aggregate payments in FY 2025.

With regard to the proposal to collect and submit four new items as standardized patient assessment data elements under the SDOH category and modify one item collected and submitted as a standardized patient assessment data element under the SDOH category beginning with the FY 2028 IRF QRP, we believe these proposals would advance the CMS National Quality Strategy Goals of equity and engagement. We considered the alternative of delaying the proposal to collect and submit these assessment items but given the fact they would encourage meaningful collaboration among healthcare providers, caregivers, and community-based organizations to address SDOH prior to discharge from the IRF, we believe further delay is unwarranted.

With regard to the proposal to remove one item, Item 14-Admission Class, from the IRF-PAI, we routinely review the IRF-PAI for redundancies and opportunities to simplify data submission requirements. We have identified that this item is currently not used in the calculation of quality measures already adopted in the IRF QRP, payment, survey, or care planning, and therefore no alternatives were considered.

If regulations impose administrative costs on private entities, such as the time needed to read and interpret this final rule, we should estimate the cost associated with regulatory review. Due to the uncertainty involved with accurately quantifying the number of entities that will review the rule, we assume that the total number of unique commenters on the FY 2025 IRF PPS proposed rule will be the number of reviewers of this year's final rule. We acknowledge that this assumption may understate or overstate the costs of reviewing this final rule. It is possible that not all commenters reviewed the FY 2025 IRF PPS proposed rule in detail, and it is also possible that some reviewers chose not to comment on the FY 2025 proposed rule. For these reasons, we believe that the number of commenters would be a fair estimate of the number of reviewers of this final rule.

We also recognize that different types of entities are in many cases affected by mutually exclusive sections of this final rule, and therefore, for the purposes of our estimate we assume that each reviewer reads approximately 50 percent of the rule.

Using the national mean hourly wage data from the May 2023 BLS for Occupational Employment Statistics (OES) for medical and health service managers (SOC 11-9111), we estimate that the cost of reviewing this rule is $129.28 per hour, including other indirect costs and fringe benefits ( https://www.bls.gov/oes/current/oes_nat.htm ). Assuming an average reading speed, we estimate that it will take approximately 3 hours for the staff to review half of this final rule. For each reviewer of the rule, the estimated cost is $387.84 (3 hours × $129.28). Therefore, we estimate that the total cost of reviewing this regulation is $17,064.96 ($387.84 × 44 reviewers).

As required by OMB Circular A-4 (available at https://www.whitehouse.gov/wp-content/uploads/2023/11/CircularA-4.pdf ), in Table 20 we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this final rule. Table 20 provides our best estimate of the increase in Medicare payments under the IRF PPS as a result of the updates presented in this final rule based on the data for 1,160 IRFs in our database.

TAble 20—Accounting Statement: Classification of Estimated Expenditure
	Category	Transfers
Change in Estimated Transfers from FY 2024 IRF PPS to FY 2025 IRF PPS	Annualized Monetized Transfers From Whom to Whom?	$280 million. Federal Government to IRF Medicare Providers.
Estimated Costs Associated with the FY 2028 IRF QRP	Annualized monetized cost in FY 2028 due to proposed data collection requirements	$392,113.40.
Estimated Costs Associated with Review Cost for FY 2025 IRF PPS	Cost associated with regulatory review cost	17,064.96.

Overall, the estimated payments per discharge for IRFs in FY 2025 are projected to increase by 2.8 percent, compared with the estimated payments in FY 2024, as reflected in column 7 of Table 17.

IRF payments per discharge are estimated to increase by 2.7 percent in urban areas and 4.9 percent in rural areas, compared with estimated FY 2024 payments. Payments per discharge to rehabilitation units are estimated to increase 2.1 percent in urban areas and 4.8 percent in rural areas. Payments per discharge to freestanding rehabilitation hospitals are estimated to increase 3.0 percent in urban areas and 5.2 percent in rural areas.

Overall, IRFs are estimated to experience a net increase in payments as a result of the policies in this final rule. The largest payment increase is estimated to be a 21.4 percent increase for IRFs transitioning to rural status under the new CBSA delineations, followed by a 10.7 percent increase for IRFs located in the Rural Middle Atlantic region. The analysis above, together with the remainder of this preamble, provides an RIA.

In accordance with the provisions of Executive Order 12866 , this regulation was reviewed by OMB.

Chiquita Brooks-LaSure, Administrator of the Centers for Medicare & Medicaid Services, approved this document on July 25, 2024.

Xavier Becerra,

Secretary, Department of Health and Human Services.

1. CMS, “COVID-19 Emergency Declaration Blanket Waivers for Health Care Providers,” (updated Feb. 19, 2021) (available at https://www.cms.gov/files/document/summary-covid-19-emergency-declaration-waivers.pdf ).

2. CMS, “COVID-19 Frequently Asked Questions (FAQs) on Medicare Fee-for-Service (FFS) Billing,” (updated March 5, 2021) (available at https://www.cms.gov/files/document/03092020-covid-19-faqs-508.pdf ).

3. https://www.medpac.gov/wp-content/uploads/2025/03/Mar25_MedPAC_ReportToCongress_SEC.pdf .

4. https://www.federalregister.gov/citation/70-FR-47923 .

5. https://www.federalregister.gov/citation/70-FR-47927 .

6. https://www.federalregister.gov/citation/70-FR-47880 .

7. Items may also be referred to as “data elements.”

8. As noted in section VII.C of the proposed rule and section VIII.C of this final rule, hospitals are required to report whether they have screened patients for five standardized SDOH categories: housing instability, food insecurity, utility difficulties, transportation needs, and interpersonal safety.

9. Office of the Assistant Secretary for Planning and Evaluation (ASPE). Second Report to Congress on Social Risk and Medicare's Value-Based Purchasing Programs. June 28, 2020. Available at: https://aspe.hhs.gov/reports/second-report-congress-social-risk-medicares-value-based-purchasing-programs .

10. World Health Organization. Social determinants of health. Available at: https://www.who.int/health-topics/social-determinants-of-health#tab=tab_1 .

11. Using Z Codes: The Social Determinants of Health (SDOH). Data Journey to Better Outcomes. https://www.cms.gov/files/document/zcodes-infographic.pdf .

12. Improving the Collection of Social Determinants of Health (SDOH) Data with ICD-10-CM Z Codes. https://www.cms.gov/files/document/cms-2023-omh-z-code-resource.pdf .

13. CMS.gov. Measures Management System (MMS). CMS Focus on Health Equity. Health Equity Terminology and Quality Measures. https://mmshub.cms.gov/about-quality/quality-at-CMS/goals/cms-focus-on-health-equity/health-equity-terminology .

14. Centers for Disease Control and Prevention. Social Determinants of Health (SDOH) and PLACES Data. https://www.cdc.gov/places/social-determinants-of-health-and-places-data/ .

15. “U.S. Playbook To Address Social Determinants Of Health” from the White House Office Of Science And Technology Policy (November 2023).

16. These SDOH data are also collected for purposes outlined in section 2(d)(2)(B) of the Improving Medicare Post-Acute Care Transitions Act (IMPACT Act). For a detailed discussion on SDOH data collection under section 2(d)(2)(B) of the IMPACT Act, see the FY 2020 IRF PPS final rule ( 84 FR 39149 through 39161 ).

17. Social Determinants of Health. Healthy People 2020. https://www.healthypeople.gov/2020/topics-objectives/topic/social-determinants-of-health . (February 2019).

18. National Academies of Sciences, Engineering, and Medicine. 2020. Leading Health Indicators 2030: Advancing Health, Equity, and Well-Being. Washington, DC: The National Academies Press. https://doi.org/10.17226/25682 .

19. Centers for Medicare & Medicaid Services. “A Guide to Using the Accountable Health Communities Health-Related Social Needs Screening Tool: Promising Practices and Key Insights.” August 2022. Available at: https://www.cms.gov/priorities/innovation/media/document/ahcm-screeningtool-companion .

20. Berkowitz, S.A., T.P. Baggett, and S.T. Edwards, “Addressing Health-Related Social Needs: Value-Based Care or Values-Based Care?” Journal of General Internal Medicine, vol. 34, no. 9, 2019, pp. 1916-1918, https://doi.org/10.1007/s11606-019-05087-3 .

21. Hugh Alderwick and Laura M. Gottlieb, “Meanings and Misunderstandings: A Social Determinants of Health Lexicon for Health Care Systems: Milbank Quarterly,” Milbank Memorial Fund, November 18, 2019, https://www.milbank.org/quarterly/articles/meanings-and-misunderstandings-a-social-determinants-of-health-lexicon-for-health-care-systems/ .

22. American Hospital Association. (2020). Health Equity, Diversity & Inclusion Measures for Hospitals and Health System Dashboards. December 2020. Accessed: January 18, 2022. Available at: https://ifdhe.aha.org/system/files/media/file/2020/12/ifdhe_inclusion_dashboard.pdf .

23. In October 2023, we released two new annual Health Equity Confidential Feedback Reports to IRFs: The Discharge to Community (DTC) Health Equity Confidential Feedback Report and the Medicare Spending Per Beneficiary (MSPB) Health Equity Confidential Feedback Report. The PAC Health Equity Confidential Feedback Reports stratified the DTC and MSPB measures by dual-enrollment status and race/ethnicity. For more information on the Health Equity Confidential Feedback Reports, please refer to the Education and Outreach materials available on the IRF QRP Training web page at https://www.cms.gov/medicare/quality-initiatives-patient-assessment-instruments/irf-quality-reporting/irf-quality-reporting-training .

24. Brooks-LaSure, C. (2021). My First 100 Days and Where We Go from Here: A Strategic Vision for CMS. Centers for Medicare & Medicaid. Available at: https://www.cms.gov/blog/my-first-100-days-and-where-we-go-here-strategic-vision-cms .

25. The Biden-Harris Administration's strategic approach to addressing health related social needs can be found in The U.S. Playbook to Address Social Determinants of Health (SDOH) (2023): https://www.whitehouse.gov/wp-content/uploads/2023/11/SDOH-Playbook-3.pdf .

26. The AHC Model was a five-year demonstration project run by the Centers for Medicare & Medicaid Innovation between May 1, 2017 and April 30, 2023. For more information go to https://www.cms.gov/priorities/innovation/innovation-models/ahcm .

27. More information about the AHC HRSN Screening Tool is available on the website at https://innovation.cms.gov/Files/worksheets/ahcm-screeningtool.pdf .

28. Centers for Medicare & Medicaid Services, FY2023 IPPS/LTCH PPS final rule ( 87 FR 49191 through 49194).

29. Centers for Medicare & Medicaid Services, FY2024 Inpatient Psychiatric Prospective Payment System—Rate Update ( 88 FR 51107 through 51121 ).

30. https://health.gov/healthypeople/priority-areas/social-determinants-health .

31. Healthy People 2030 is a long-term, evidence-based effort led by the U.S. Department of Health and Human Services (HHS) that aims to identify nationwide health improvement priorities and improve the health of all Americans.

32. Kushel, M.B., Gupta, R., Gee, L., & Haas, J.S. (2006). Housing instability and food insecurity as barriers to health care among low-income Americans. Journal of General Internal Medicine, 21 (1), 71-77. doi: https://doi.org/10.1111/j.1525-1497.2005.00278.x .

33. Homelessness is defined as “lacking a regular nighttime residence or having a primary nighttime residence that is a temporary shelter or other place not designed for sleeping.” Crowley, S. (2003). The affordable housing crisis: Residential mobility of poor families and school mobility of poor children. Journal of Negro Education, 72 (1), 22-38. doi: https://doi.org/10.2307/3211288 .

34. The 2023 Annual Homeless Assessment Report (AHAR) to Congress. The U.S. Department of Housing and Urban Development 2023. https://www.huduser.gov/portal/sites/default/files/pdf/2023-AHAR-Part-1.pdf .

35. Baggett, T.P., Hwang, S.W., O'Connell, J.J., Porneala, B.C., Stringfellow, E.J., Orav, E.J., Singer, D.E., & Rigotti, N.A. (2013). Mortality among homeless adults in Boston: Shifts in causes of death over a 15-year period. JAMA Internal Medicine, 173(3), 189-195. doi: https://doi.org/10.1001/jamainternmed.2013.1604 . Schanzer, B., Dominguez, B., Shrout, P.E., & Caton, C.L. (2007). Homelessness, health status, and health care use. American Journal of Public Health, 97(3), 464-469. doi: https://doi.org/10.2105/ajph.2005.076190 .

36. U.S. Department of Health & Human Services (HHS), Call to Action, “Addressing Health Related Social Needs in Communities Across the Nation.” November 2023. https://aspe.hhs.gov/sites/default/files/documents/3e2f6140d0087435cc6832bf8cf32618/hhs-call-to-action-health-related-social-needs.pdf .

37. Henderson, K.A., Manian, N., Rog, D.J., Robison, E., Jorge, E., AlAbdulmunem, M. “Addressing Homelessness Among Older Adults” (Final Report). Washington, DC: Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services. October 26, 2023.

38. More information about the AHC HRSN Screening Tool is available on the website at https://innovation.cms.gov/Files/worksheets/ahcm-screeningtool.pdf .

39. The AHC HRSN Screening Tool Living Situation item includes two questions. In an effort to limit IRF burden, we are only proposing the first question.

40. National Association of Community Health Centers and Partners, National Association of Community Health Centers, Association of Asian Pacific Community Health Organizations, Association OPC, Institute for Alternative Futures. “PRAPARE.” 2017. https://prapare.org/the-prapare-screening-tool/ .

41. U.S. Department of Agriculture, Economic Research Service. (n.d.). Definitions of food security. Retrieved March 10, 2022, from https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-u-s/definitions-of-food-security/ .

42. Hernandez, D.C., Reesor, L.M., & Murillo, R. (2017). Food insecurity and adult overweight/obesity: Gender and race/ethnic disparities. Appetite, 117, 373-378.

43. Banerjee, S., Radak, T., Khubchandani, J., & Dunn, P. (2021). Food Insecurity and Mortality in American Adults: Results From the NHANES-Linked Mortality Study. Health promotion practice, 22(2), 204-214. https://doi.org/10.1177/1524839920945927 .

44. National Center for Health Statistics. (2022, September 6). Exercise or Physical Activity. Retrieved from Centers for Disease Control and Prevention: https://www.cdc.gov/nchs/fastats/exercise.htm .

45. Ziliak, J.P., & Gundersen, C. (2019). The State of Senior Hunger in America 2017: An Annual Report. Prepared for Feeding America. Available at https://www.feedingamerica.org/research/senior-hunger-research/senior .

46. Ziliak, J.P., & Gundersen, C. (2019). The State of Senior Hunger in America 2017: An Annual Report. Prepared for Feeding America. Available at: https://www.feedingamerica.org/research/senior-hunger-research/senior .

47. The Malnutrition Quality Collaborative. (2020). National Blueprint: Achieving Quality Malnutrition Care for Older Adults, 2020 Update. Washington, DC: Avalere Health and Defeat Malnutrition Today. Available at: https://defeatmalnutrition.today/advocacy/blueprint/ .

48. Food Research & Action Center (FRAC). “Hunger is a Health Issue for Older Adults: Food Security, Health, and the Federal Nutrition Programs.” December 2019. https://frac.org/wp-content/uploads/hunger-is-a-health-issue-for-older-adults-1.pdf .

49. The White House Challenge to End Hunger and Build Health Communities (Challenge) was a nationwide call-to-action released on March 24, 2023, to stakeholders across all of society to make commitments to advance President Biden's goal to end hunger and reduce diet-related diseases by 2030—all while reducing disparities. More information on the White House Challenge to End Hunger and Build Health Communities can be found: https://www.whitehouse.gov/briefing-room/statements-releases/2023/03/24/fact-sheet-biden-harris-administration-launches-the-white-house-challenge-to-end-hunger-and-build-healthy-communities-announces-new-public-private-sector-actions-to-continue-momentum-from-hist/ .

50. Schroeder K, Smaldone A. Food Insecurity: A Concept Analysis. Nurse Forum. 2015 Oct-Dec;50(4):274-84. doi: 10.1111/nuf.12118. Epub 2015 Jan 21. PMID: 25612146; PMCID: PMC4510041.

51. Tsega M, Lewis C, McCarthy D, Shah T, Coutts K. Review of Evidence for Health-Related Social Needs Interventions. July 2019. The Commonwealth Fund. https://www.commonwealthfund.org/sites/default/files/2019-07/COMBINED_ROI_EVIDENCE_REVIEW_7.15.19.pdf .

52. More information about the HFSS tool can be found at https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-u-s/survey-tools/ .

53. Hernández D. Understanding `energy insecurity' and why it matters to health. Soc Sci Med. 2016 Oct; 167:1-10. Doi: 10.1016/j.socscimed.2016.08.029. Epub 2016 Aug 21. PMID: 27592003; PMCID: PMC5114037.

54. US Energy Information Administration. “One in Three U.S. Households Faced Challenges in Paying Energy Bills in 2015.” 2017 Oct 13. https://www.eia.gov/consumption/residential/reports/2015/energybills/ .

55. Hernández D. “Understanding `energy insecurity' and why it matters to health.” Soc Sci Med. 2016; 167:1-10.

56. Hernández D. Understanding `energy insecurity' and why it matters to health. Soc Sci Med. 2016 Oct; 167:1-10. doi: 10.1016/j.socscimed.2016.08.029. Epub 2016 Aug 21. PMID: 27592003; PMCID: PMC5114037.

57. Hernández D. “What `Merle' Taught Me About Energy Insecurity and Health.” Health Affairs, VOL.37, NO.3: Advancing Health Equity Narrative Matters. March 2018. https://doi.org/10.1377/hlthaff.2017.1413 .

58. US Energy Information Administration. “One in Three U.S. Households Faced Challenges in Paying Energy Bills in 2015.” 2017 Oct 13. https://www.eia.gov/consumption/residential/reports/2015/energybills/ .

59. Hernández D. Understanding `energy insecurity' and why it matters to health. Soc Sci Med. 2016 Oct; 167:1-10. doi: 10.1016/j.socscimed.2016.08.029. Epub 2016 Aug 21. PMID: 27592003; PMCID: PMC5114037.

60. Hernández D, Siegel E. Energy insecurity and its ill health effects: A community perspective on the energy-health nexus in New York City. Energy Res Soc Sci. 2019 Jan; 47:78-83. doi: 10.1016/j.erss.2018.08.011. Epub 2018 Sep 8. PMID: 32280598; PMCID: PMC7147484.

61. https://www.fcc.gov/broadbandbenefit .

62. National Council on Aging (NCOA). “How to Make It Easier for Older Adults to Get Energy and Utility Assistance.” Promising Practices Clearinghouse for Professionals. Jan 13, 2022. https://www.ncoa.org/article/how-to-make-it-easier-for-older-adults-to-get-energy-and-utility-assistance .

63. This validated survey was developed as a clinical indicator of household energy security among pediatric caregivers. Cook, J.T., D.A. Frank., P.H. Casey, R. Rose-Jacobs, M.M. Black, M. Chilton, S. Ettinger de Cuba, et al. “A Brief Indicator of Household Energy Security: Associations with Food Security, Child Health, and Child Development in US Infants and Toddlers.” Pediatrics, vol. 122, no. 4, 2008, pp. e874-e875. https://doi.org/10.1542/peds.2008-0286 .

64. In October 2023, we released two new annual Health Equity Confidential Feedback Reports to IRFs: The Discharge to Community (DTC) Health Equity Confidential Feedback Report and the Medicare Spending Per Beneficiary (MSPB) Health Equity Confidential Feedback Report. The PAC Health Equity Confidential Feedback Reports stratified the DTC and MSPB measures by dual-enrollment status and race/ethnicity. For more information on the Health Equity Confidential Feedback Reports, please refer to the Education and Outreach materials available on the IRF QRP Training web page at https://www.cms.gov/medicare/quality-initiatives-patient-assessment-instruments/irf-quality-reporting/irf-quality-reporting-training .

65. National Academies of Sciences, Engineering, and Medicine. 2016. Accounting for Social Risk Factors in Medicare Payment: Identifying Social Risk Factors. Washington, DC: The National Academies Press. https://doi.org/10.17226/21858 .

66. National Academies of Sciences, Engineering, and Medicine. 2020. Leading Health Indicators 2030: Advancing Health, Equity, and Well-Being. Washington, DC: The National Academies Press. https://doi.org/10.17226/25682 .

67. https://nam.edu/standardized-screening-for-health-related-social-needs-in-clinical-settings-the-accountable-health-communities-screening-tool/ .

68. Billioux, A., Verlander, K., Anthony, S., & Alley, D. (2017). Standardized Screening for Health-Related Social Needs in Clinical Settings: The Accountable Health Communities Screening Tool. NAM Perspectives, 7(5). Available at: https://doi.org/10.31478/201705b . Accessed on June 9, 2024.

69. Billioux, A., Verlander, K., Anthony, S., & Alley, D. (2017). Standardized Screening for Health-Related Social Needs in Clinical Settings: The Accountable Health Communities Screening Tool. NAM Perspectives, 7(5). Available at: https://doi.org/10.31478/201705b . Accessed on June 9, 2024.

70. Centers for Medicare & Medicaid Services. (2021). Accountable Health Communities Model. Accountable Health Communities Model | CMS Innovation Center. Available at: https://innovation.cms.gov/innovation-models/ahcm . Accessed on February 20, 2023.

71. https://www.cms.gov/priorities/innovation/data-and-reports/2023/ahc-second-eval-rpt-fg .

72. https://www.cms.gov/priorities/innovation/data-and-reports/2023/ahc-second-eval-rpt-fg .

73. Accountable Health Communities (AHC) Model Evaluation, Second Evaluation Report. May 2023. This project was funded by the Centers for Medicare & Medicaid Services under contract no. HHSM-500-2014-000371, Task Order75FCMC18F0002. https://www.cms.gov/priorities/innovation/data-and-reports/2023/ahc-second-eval-rpt .

74. In October 2023, we released two new annual Health Equity Confidential Feedback Reports to IRFs: The Discharge to Community (DTC) Health Equity Confidential Feedback Report and the Medicare Spending Per Beneficiary (MSPB) Health Equity Confidential Feedback Report. The PAC Health Equity Confidential Feedback Reports stratified the DTC and MSPB measures by dual-enrollment status and race/ethnicity. For more information on the Health Equity Confidential Feedback Reports, please refer to the Education and Outreach materials available on the IRF QRP Training web page at https://www.cms.gov/medicare/quality-initiatives-patient-assessment-instruments/irf-quality-reporting/irf-quality-reporting-training .

75. Brooks-LaSure, C. (2021). My First 100 Days and Where We Go from Here: A Strategic Vision for CMS. Centers for Medicare & Medicaid. Available at https://www.cms.gov/blog/my-first-100-days-and-where-we-go-here-strategic-vision-cms .

76. The Biden-Harris Administration's strategic approach to addressing health related social needs can be found in The U.S. Playbook to Address Social Determinants of Health (SDOH) (2023): https://www.whitehouse.gov/wp-content/uploads/2023/11/SDOH-Playbook-3.pdf .

77. Medicare Benefit Policy Manual (100-2). Chapter 1, Section 110.2. Available at: https://www.cms.gov/regulations-and-guidance/guidance/manuals/downloads/bp102c01.pdf .

78. World Health Organization. Social determinants of health. Available at https://www.who.int/health-topics/social-determinants-of-health#tab=tab_1 .

79. These cue cards are currently available on the IRF QRP Training web page at https://www.cms.gov/medicare/quality/inpatient-rehabilitation-facility/irf-quality-reporting-training .

80. Haff, N, Choudhry, N.K., Bhatkhande, G., Li, Y., Antol, D., Renda, A., Laufffenburger, J. Frequency of Quarterly Self-reported Health-Related Social Needs Among Older Adults, 2020. JAMA Network Open. 2022;5(6):e2219645. Doi:101001/jamanetworkopen.2022.19645. Accessed June 9, 2024.

81. Gundersen C, Engelhard E, Crumbaugh A, Seligman, H.K. Brief assessment of Food insecurity Accurately Identifies High0Risk US Adults. Public Health Nutrition, 2017. Doi: 10.1017/S1368980017000180. https://childrenshealthwatch.org/wp-content/uploads/brief-assessment-of-food-insecurity-accurately- identifies-high-risk-us-adults.pdf. Accessed July 2, 2024.

82. Haff, N, Choudhry, N.K., Bhatkhande, G., Li, Y., Antol, D., Renda, A., Laufffenburger, J. Frequency of Quarterly Self-reported Health-Related Social Needs Among Older Adults, 2020. JAMA Network Open. 2022;5(6):e2219645. Doi:101001/jamanetworkopen.2022.19645. Accessed June 9, 2024.

83. The seven SDOH items are ethnicity, race, preferred language, interpreter services, health literacy, transportation, and social isolation ( 84 FR 39149 through 39161 ).

84. Centers for Medicare & Medicaid Services, FY2024 Inpatient Psychiatric Prospective Payment System—Rate Update ( 88 FR 51107 through 51121 ).

85. Centers for Medicare & Medicaid Services, FY2023 IPPS/LTCH PPS final rule ( 87 FR 49202 through 49215 ).

86. Centers for Medicare & Medicaid Services, FY2024 Inpatient Psychiatric Prospective Payment System—Rate Update ( 88 FR 51107 through 51121 ).

87. Haff, N, Choudhry, N.K., Bhatkhande, G., Li, Y., Antol, D., Renda, A., Laufffenburger, J. Frequency of Quarterly Self-reported Health-Related Social Needs Among Older Adults, 2020. JAMA Network Open. 2022;5(6):e2219645. Doi:101001/jamanetworkopen.2022.19645. Accessed June 9, 2024.

88. The Post-Acute Care (PAC) and Hospice Quality Reporting Program Cross-Setting TEP summary report will be published in early summer or as soon as technically feasible. IRFs can monitor the Partnership for Quality Measurement website at https://mmshub.cms.gov/get-involved/technical-expert-panel/updates for updates.

89. Centers for Medicare & Medicaid Services. Aligning Quality Measures Across CMS—the Universal Foundation. November 17, 2023. https://www.cms.gov/aligning-quality-measures-across-cms-universal-foundation .

90. A composite measure can summarize multiple measures through the use of one value or piece of information. More information can be found at https://www.cms.gov/medicare/quality-initiatives-patient-assessment-instruments/mms/downloads/composite-measures.pdf .

91. CMS Measures Inventory Tool. Adult immunization status measure found at https://cmit.cms.gov/cmit/#/FamilyView?familyId=26 .

92. CMS Measures Inventory Tool. Clinical Depression Screening and Follow-Up measure found at https://cmit.cms.gov/cmit/#/FamilyView?familyId=672 .

93. Patient reported outcome measures are tools used to collect patient-reported outcomes (PRO). CMS defines a PRO as any report of the status of a patient's health condition or health behavior coming directly from the patient, without interpretation of the patient's response by a clinician or anyone else. Available at: https://mmshub.cms.gov/sites/default/files/Patient-Reported-Outcome-Measures.pdf .

94. The Patient Health Questionnaire (PHQ)-2 to -9 (PHQ-2 to -9) screening tool is used as the initial screening test for depression. The items were adopted as standardized patient assessment data elements in the FY 2020 IRF PPS final rule ( 84 FR 39119 through 39121 ) and are collected on all patients admitted to an IRF.

95. The Patient Activation Measure (PAM®) is a 10- or 13-item survey that assesses an individual's knowledge, skills and confidence integral to managing one's own health and healthcare. Available at: https://www.insigniahealth.com/pam/ .

96. FY 2020 IRF PPS final rule ( 84 FR 39161 through 39162 ).

97. Due to data availability of IRF SDOH standardized patient assessment data elements, this is based on three quarters of Transportation data.

98. The analysis is limited to patients who responded to the Transportation item at both admission and discharge.

99. https://prapare.org/faq/ .

100. Feltner C WI, Berkman N, et al. Screening for Intimate Partner Violence, Elder Abuse, and Abuse of Vulnerable Adults: An Evidence Review for the U.S. Preventive Services Task Force Agency for Healthcare Research and Quality. 2018. Available at https://www.ncbi.nlm.nih.gov/books/NBK533720/ .

101. National Academy of Science EaM. A Roadmap to Reducing Child Poverty. The National Academies; 2019.

102. Wise PH. Child poverty and the promise of Human Capacity: childhood as a foundation for healthy aging. Acad Pediatr. 2016;16(suppl 3):S37-S45.

103. Boch S, Keedy H, Chavez L, et al. An integrative review of social determinants of health screenings used in primary care settings. J Health Care Poor Underserved. 2020;31:603-622.

104. Halpin, K, Colvin, JD, Clements, MA, et al. Outcomes of Health-Related Social Needs Screening in a Midwest Pediatric Diabetes Clinic Network. Diabetes. 2023; Vol. 72; Iss: Supplement 1.

105. Nerlinger, AL, Kopsombut, G. Social determinants of health screening in pediatric healthcare settings. Curr Opin Pediatr. 2023 Feb 1;35(1):14-21. Doi: 10.1097/MOP.0000000000001191.

106. Gray, T.W., Podewils, L.J., Rasulo, R.M., Weiss, R.P., Tomcho M.M. Examining the Implementation of Health-Related Social Need (HRSN) Screenings at a Pediatric Community Health Center. Journal of Primary Care & Community Health. 2023. Volume 14: 1-8. https://doi.org/10.1177/21501319231171519 .

107. In the FY 2010 IRF PPS final rule ( 74 FR 39798 through 39800 ), CMS revised the regulation text in §§ 412.604, 412.606, 412.610, 412.614, and 412.618 to require that all IRFs submit IRF-PAI data on all of their Medicare Part C patients.

108. In the FY 2023 IRF PPS final rule ( 87 FR 47073 through 47092 ), CMS revised the regulation text in §§ 412.604, 412.606, 412.610, 412.614, and 412.618 to require that all IRFs submit IRF-PAI data on each patient receiving care in an IRF, regardless of payer.

109. https://www.reginfo.gov/public/do/DownloadNOA?requestID=494186 .

110. U.S. Bureau of Labor Statistics' (BLS) May 2022 National Occupational Employment and Wage Estimates. https://www.bls.gov/oes/current/oes_nat.htm .

111. FY 2016 IRF PPS proposed rule https://www.federalregister.gov/citation/80-FR-23390 ( 80 FR 23390 ).

112. FY 2016 IRF PPS proposed rule ( 80 FR 23390 ).

113. U.S. Bureau of Labor Statistics' (BLS) May 2022 National Occupational Employment and Wage Estimates. https://www.bls.gov/oes/current/oes_nat.htm .

114. U.S. Bureau of Labor Statistics' (BLS) May 2022 National Occupational Employment and Wage Estimates. https://www.bls.gov/oes/current/oes_nat.htm .

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Violation of the Assignment-In-Gross Rule for Trademarks
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Violation of the Assignment-In-Gross Rule for Trademarks
Failure to actually transfer the goodwill associated with a trademark is deemed an "assignment in gross" and renders the assignment invalid. More than a century ago, in United Drug Co.. Theodore Rectanus Co., 248 U.S. 90 (1918), Justice Pitney explained the theory behind the prohibition against "assignments in gross" for trademarks.
Avoiding Illegal Trademark Transfers: Introducing the Assignment-in-Gross
The statutory basis for the assignment-in-gross is §1060 of the Lanham Trademark Act, 15 U.S.C. §1060. 7 In interpreting the statute, courts have consistently stated that the policy basis for invalidating illegal trademark assignments is the need to protect the public from being misled or confused about the source and nature of the goods and ...
An assignment in gross, or not? What happened to the goodwill?
An "assignment in gross" can take one of two forms - the owner of goodwill purports to grant to a third party the bare right to use a mark, there being no connection between the two which would justify use by the assignee. Alternatively, an assignor may purport to assign the goodwill without the assignee taking any relevant interest in ...
Violation of the Assignment-In-Gross Rule for Trademarks
The Anti-Assignment in Gross Rule. The owner of trademark rights can assign those rights to other persons or entities. The ability to assign trademark rights is significant because between ...
Trademark Assignments: Keeping it Valid
In contrast, if an assignment of a trademark is made without the mark's accompanying goodwill, then it is considered an assignment "in gross" — and the assignment is invalid under U.S. law ...
Trademark Assignment
The anti-assignment in gross rule precludes a purchaser from benefiting from the goodwill of the seller if the purchaser applies the mark to different goods. Courts strictly require goods to be very similar in order to uphold an assignment. As such, even if an assignment expressly assigns the goodwill associated with the trademark, the ...
Anti-Assignment-in-Gross Rule Law and Legal Definition
Anti assignment in gross rule is a principle of trademarks law whereby assignment of a mark without the goodwill symbolized by the mark is invalid. Even though the trademark rights are not destroyed when a mark is assigned in gross, the failure of the assignor to continue to use the mark, together with an ineffective transfer, may result in ...
Trademarks
An assignment in gross is where someone assigns (that is, sells) their trademark without including the underlying goodwill (the value and name recognition) associated with that mark. Such an assignment in gross is not considered enforceable or valid and where there's such an assignment in gross, the trademark will be deemed abandoned and neither party will have any rights in the mark.
Assignment in Gross Law and Legal Definition
Assignment in Gross Law and Legal Definition. Assignment in Gross is a transfer of a company's trademark separately from the goodwill of the business. Courts often hold that such an assignment passes nothing of value to the transferee. Assignment in Gross. Attorney Help.
Assignment, in gross
Assignment, in gross Assignment of a mark without the necessary transfer of goodwillassociated with the mark. Such assignments are invalid, and result inabandonment of the trademark. If so, the person to whom the mark was assigned will no longer have the benefit of the assignor's earlier first use date to establish priority.
anti-assignment-in-gross rule definition · LSData
The anti-assignment-in-gross rule is a legal doctrine that states that an assignment of a trademark without the goodwill associated with it is invalid. This means that if a company transfers its trademark to another party without transferring the business's goodwill, the assignment is not legally valid.
Calboli on Trademark Assignment in Gross
My colleague Irene Calboli has written a paper on trademark assignment in gross entitled Trademark Assignment With Goodwill: A Concept Whose Time Has Gone, scheduled to be published in the Florida Law Review later this year.She thoroughly recounts the history of, and policy debates about, the assignment in gross rule and offers her solutions. Trademark assignments create both practical and ...
assignment in gross
The "assignment in gross" problem. To the extent that a domain name constitutes a trademark, it is subject to what is call "the anti-assignment in gross" rule. This rule is based on the notion that a trademark is really the embodiment of the goodwill relating to a business. As such, it cannot be transferred apart from this goodwill.
Assignment in Gross
An assignment of a trademark that does not also transfer the assignor's goodwill associated with the mark. The related rules section is for members only and includes a compilation of all the rules of law in Quimbee's database relating to this key term. To access the related rules, please or .
The Assignability of Easements in Gross
THE ASSIGNABILITY OF EASEMENTS IN GROSS. to great lengths to find the easement involved in the particular case to be an easement appurtenant, and, if unable to do so, have proceeded to create an exception or to find a reason for not following the alleged rule. The origin of the so-called rule was an early English case, Ackroyd v.
CCH AnswerConnect
Version: 9.5.9. A comprehensive Federal, State & International tax resource that you can trust to provide you with answers to your most important tax questions.
Guiding Clients Through the Transfer-for-Value Maze
However, clients should be advised that, under Sec. 2035, the death proceeds of the policy transferred to an irrevocable trust are fully included in the decedent's gross estate for transfer tax purposes if ownership of the policy was transferred by the insured to the ILIT within three years of the insured's date of death.
Publication 525 (2023), Taxable and Nontaxable Income
Gross income doesn't include any amount arising from the forgiveness of a Paycheck Protection Program (PPP) loan, effective for taxable years ending after March 27, 2020. ... Assignment of income. ... Special valuation rules. Generally, you can use a special valuation rule for a fringe benefit only if your employer uses the rule. ...
Assignment Order Law and Legal Definition
An assignment order is a court order that requires a judgment debtor to assign certain rights to the judgment creditor. Such assignment orders are obtained through a noticed motion. And the procedure involved in obtaining such an order is comparatively complicated. This is a powerful judgment collection technique that allows a judgment ...
United States
Trademark assignments not accompanied by the goodwill of the business conducted under the trademark are "assignments in gross" or "naked transfers" that are null and void. Violation of this rule results in serious consequences for the assignee - the assignee will acquire no title in the trademark, leaving it powerless to sue a third party for ...
What is "Assignment of Income" Under the Tax Law?
The doctrine is frequently applied to assignments to creditors, controlled entities, family trusts and charities. A taxpayer cannot, for tax purposes, assign income that has already accrued from property the taxpayer owns. This aspect of the assignment of income doctrine is often applied to interest, dividends, rents, royalties, and trust income.
Gross Income: Tax Benefit, Claim of Right and Assignment of Income
Abstract. The Bloomberg Tax Portfolio, Gross Income: Tax Benefit, Claim of Right and Assignment of Income, No. 502, addresses three areas of gross income that are substantially judicial in origin and nature. It analyzes in depth the nature, concept, scope, and application of the tax benefit doctrine, the claim of right doctrine, and the ...
What are the rules of assignment?
In model theory / the semantics of first-order logic, an assignment has a specific meaning. It is a mapping from free variables to their denotations. You need this map in order to define the notion of truth in a model. For example, here is one such rule, giving the meaning of the existential quantifier.
H.J.Res.198
Summary of H.J.Res.198 - 118th Congress (2023-2024): Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by the Department of the Treasury relating to "Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions".
PDF Adopted Review of Chapter 231
Chapter 231, Requirements for Public School Personnel Assignments, pursuant to Texas Government Code (TGC), §2001.039. The SBEC proposed the review of 19 TAC Chapter 231 in the May 31, 2024 issue of the Texas Register (49 TexReg 3937). Relating to the review of 19 TAC Chapter 231, the SBEC finds that the reasons for the adoption continue to exist
Federal Register :: Medicare Program; Inpatient Rehabilitation Facility
This final rule also finalizes a proposal with modification to remove one assessment item from the IRF-PAI. In addition, this final rule provides a summary of the information received on our Request for Information on quality measure concepts for the IRF QRP in future years and an IRF star rating system. B. Summary of Major Provisions

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