IRS Bulletin No. 2026–25: Key Updates on HSAs, Nonbank Trustees, Foreign Government Income, and Marginal Production Rates

Executive Summary: Key Updates in IRS Bulletin No. 2026–25

The IRS Bulletin No. 2026–25, released June 15, 2026, introduces four major updates reshaping tax planning for health savings accounts (HSAs), broker-dealer compliance, foreign government taxation, and energy sector incentives. These changes reflect broader legislative and regulatory trends, including the One Big Beautiful Bill Act (OBBBA) and evolving IRS enforcement priorities. The Bulletin’s provisions are grounded in existing statutory frameworks such as IRC §223 for HSAs, §408 for IRAs, §892 for foreign governments, and §613A for marginal well depletion, while incorporating recent IRS guidance and court precedents.

The 2027 HSA inflation-adjusted amounts and Direct Primary Care Service Arrangements (DPCSAs) reflect OBBBA’s expansion of HSA eligibility, now including DPC fees as qualified medical expenses and permanentizing pre-deductible telehealth coverage under high-deductible health plans (HDHPs). The IRS also finalized the 2027 excepted benefit HRA contribution limit, aligning with inflation adjustments under §54.9831-1(c)(3)(viii) of the Pension Excise Tax Regulations. For broker-dealers, the IRS introduced an alternative compliance method under §1.408-2(e)(5)(ii), allowing firms to satisfy nonbank trustee net worth requirements by demonstrating compliance with the SEC’s Net Capital Rule (15c3-1) and Customer Protection Rule (15c3-3) instead of meeting the traditional $250,000 net worth threshold. This shift underscores the IRS’s alignment with SEC oversight in an era of increasing broker-dealer involvement in self-directed IRAs and crypto asset custody.

The Bulletin also provides transitional relief for foreign government income regulations under §892, withdrawing prior applicability dates and proposing new rules to clarify the commercial activity exception and controlled commercial entity (CCE) thresholds. This follows years of IRS scrutiny over sovereign wealth funds and state-owned enterprises investing in U.S. markets, particularly in light of proposed regulations expected in 2025 that may further restrict exemptions. Finally, the IRS announced the 2026 marginal production depletion rates under §613A(c)(6)(C), setting the applicable percentage for oil and natural gas produced from marginal properties. This update is critical for independent producers navigating the phase-out threshold tied to oil prices, which has increasingly limited benefits as prices remain elevated. The Bulletin reflects ongoing industry lobbying efforts, such as the Marginal Well Protection Act (H.R. 7245), to expand eligibility and adjust phase-out thresholds.

Collectively, these updates signal the IRS’s focus on modernizing tax rules to reflect evolving financial products, enforcement priorities, and legislative mandates, with significant implications for practitioners across healthcare, financial services, international tax, and energy sectors.

---

2027 HSA Inflation-Adjusted Amounts and Direct Primary Care Service Arrangements (DPCSAs)

The IRS’s Revenue Procedure 2026-24, issued as part of Internal Revenue Bulletin 2026–25, finalizes the 2027 inflation-adjusted limits for Health Savings Accounts (HSAs) under Section 223 of the Internal Revenue Code and introduces new rules governing Direct Primary Care Service Arrangements (DPCSAs). These updates reflect the broader legislative push under the One Big Beautiful Bill Act (OBBBA), which expanded HSA eligibility and modernized rules to accommodate evolving healthcare delivery models. The adjustments also align with industry trends favoring telehealth, concierge medicine, and employer-sponsored health benefits as prices remain elevated. The Bulletin reflects ongoing industry lobbying efforts, such as the Marginal Well Protection Act (H.R. 7245), to expand eligibility and adjust phase-out thresholds.

The Rule: What Are the New Limits and Definitions?

The revenue procedure outlines three critical updates for 2027:

1. HSA Contribution Limits For calendar year 2027, the annual contribution limits for HSAs are adjusted to reflect inflation:

• $4,500 for individuals with self-only coverage under a high-deductible health plan (HDHP).
• $9,000 for individuals with family coverage under an HDHP. These amounts represent a modest increase from 2026 levels, reflecting the slower growth tied to the Chained Consumer Price Index (C-CPI), a measure designed to understate inflation compared to traditional CPI. The catch-up contribution for individuals aged 55 or older remains unchanged at $1,000, as it is not subject to inflation adjustments.

2. HDHP Definitions The revenue procedure reaffirms the minimum deductible and out-of-pocket expense thresholds for HDHPs, which are essential for HSA eligibility:

• Minimum annual deductible:
  • $1,750 for self-only coverage.
  • $3,500 for family coverage.
• Maximum annual out-of-pocket expenses (including deductibles, copayments, and other amounts but excluding premiums):
  • $8,700 for self-only coverage.
  • $17,400 for family coverage.

These thresholds ensure that HDHPs remain sufficiently high-deductible to qualify individuals for HSA contributions while providing a safety net for catastrophic medical expenses.

3. Direct Primary Care Service Arrangements (DPCSAs) The revenue procedure codifies the treatment of DPCSAs under Section 223(c)(1)(E), which was added by the One Big Beautiful Bill Act (OBBBA). A DPCSA is a contractual arrangement between a patient and a primary care provider that charges a monthly fee for comprehensive primary care services, excluding insurance coverage. Under the new rules:

• Aggregate monthly fees for all DPCSAs covering an individual must not exceed $150 per month.
• If the DPCSA covers more than one individual (e.g., a family plan), the aggregate monthly fee limit increases to $300. These fee limits are adjusted for inflation for months beginning after December 31, 2026, ensuring they keep pace with rising healthcare costs. For 2027, the limits remain at $150/$300, but practitioners should anticipate annual adjustments in subsequent years.

The revenue procedure also clarifies that DPCSAs do not qualify as health insurance plans for HSA eligibility purposes, provided the fee limits are met. This distinction is critical, as it allows individuals enrolled in DPCSAs to contribute to HSAs without violating the requirement that they be covered only by an HDHP.

The Context: Legislative History and Industry Trends

The updates in Revenue Procedure 2026-24 are deeply intertwined with the One Big Beautiful Bill Act (OBBBA), enacted in July 2025, which represents a sweeping legislative effort to modernize healthcare and tax policies. OBBBA included several provisions aimed at expanding the utility of HSAs and accommodating new healthcare delivery models, such as DPCSAs. The inclusion of Section 223(c)(1)(E) specifically addresses the growing popularity of DPCSAs, which have gained traction as an alternative to traditional insurance-based primary care. By explicitly excluding DPCSAs from the definition of a health plan for HSA purposes, Congress sought to remove regulatory barriers that previously discouraged individuals from adopting these arrangements while still allowing them to contribute to HSAs.

The legislative push for DPCSA-friendly rules reflects broader industry trends. Direct primary care models have expanded rapidly in recent years, driven by frustration with traditional insurance networks, high deductibles, and administrative burdens. These models offer patients unlimited primary care visits, shorter wait times, and more personalized care for a fixed monthly fee, often at a lower total cost than traditional insurance premiums. However, the tax treatment of DPCSA fees had been ambiguous, creating uncertainty for both providers and patients. OBBBA resolved this ambiguity by clarifying that DPCSA fees are not considered health insurance premiums, thereby preserving HSA eligibility.

The inflation adjustments for HSAs and DPCSAs also align with the IRS’s broader strategy of indexing tax parameters to inflation to maintain their real value over time. The use of the Chained CPI for HSA limits reflects a legislative preference for a more conservative inflation measure, which slows the growth of contribution limits compared to traditional CPI. This approach is consistent with recent tax policy trends aimed at reducing the long-term cost of tax expenditures, such as those for HSAs.

Industry lobbying has played a significant role in shaping these rules. Organizations representing direct primary care providers, health savings account administrators, and employer-sponsored health plans have advocated for expanded HSA eligibility and clearer rules for DPCSAs. The Marginal Well Protection Act (H.R. 7245), referenced in the broader Bulletin context, is part of this lobbying effort, seeking to further expand tax benefits for small energy producers—a parallel to the healthcare industry’s push for modernization.

The Implication: How Will This Affect HSA Contributions and DPCSA Adoption?

The 2027 adjustments and new rules for DPCSAs have significant implications for employers, employees, HSA administrators, and primary care providers. Practitioners must understand these changes to advise clients effectively and capitalize on emerging opportunities.

1. For Employers: Enhanced Flexibility in Health Benefits Design Employers offering HDHPs paired with HSAs will benefit from the clarified rules for DPCSAs, which can now be integrated into employee benefits packages without jeopardizing HSA eligibility. Employers can:

• Offer DPCSA subsidies as part of their health benefits, knowing that employees can still contribute to HSAs.
• Design wellness programs that include DPCSA enrollment, leveraging the tax-advantaged status of HSAs for qualified medical expenses.
• Reduce administrative burdens by eliminating the need to distinguish between HSA-eligible and non-eligible primary care arrangements.

The inflation-adjusted HSA limits also provide employers with predictable contribution thresholds for 2027, aiding in budgeting and financial planning. However, the use of Chained CPI means that contribution limits will grow more slowly than in previous years, which may necessitate adjustments to employer contributions or employee education on maximizing HSA benefits.

2. For Employees: Expanded Access to Tax-Advantaged Care Employees enrolled in HDHPs will find DPCSAs more attractive due to the clarified tax treatment and the ability to pair DPCSA fees with HSA contributions. Key benefits include:

• Lower out-of-pocket costs for primary care, as DPCSA fees are not subject to the high deductibles of traditional insurance plans.
• Tax-free growth and withdrawals for qualified medical expenses, including DPCSA fees, provided the aggregate monthly fee limits are met.
• Portability of HSAs, allowing employees to retain their accounts even if they change jobs or insurance plans.

The 2027 contribution limits ($4,500 for individuals, $9,000 for families) provide employees with additional tax-advantaged savings opportunities, though the slower growth tied to Chained CPI may limit the real value of these increases over time. Employees should be encouraged to contribute the maximum allowable amount to HSAs, especially given the triple tax advantage (tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses).

3. For HSA Administrators: New Opportunities and Compliance Challenges HSA administrators will face both opportunities and challenges as DPCSA adoption grows:

• New revenue streams: Administrators can expand their product offerings to include DPCSA-compatible HSAs, attracting clients interested in direct primary care.
• Compliance requirements: Administrators must ensure that DPCSA fees do not exceed the $150/$300 monthly limits and that employees are properly informed about the tax implications of DPCSA enrollment.
• Education and outreach: Administrators should update their client communications and enrollment materials to reflect the new rules, particularly for employees transitioning from traditional insurance plans to DPCSAs.

Administrators must also monitor inflation adjustments for future years, as the $150/$300 fee limits will be indexed to inflation starting in 2028. Failure to adjust fees accordingly could result in DPCSAs losing their HSA-compatible status.

4. For Primary Care Providers: Growth in DPCSA Adoption DPC providers stand to benefit significantly from the clarified rules, as the removal of regulatory barriers is expected to accelerate adoption of DPCSAs. Providers can:

• Market DPCSAs more aggressively to individuals and families seeking affordable, high-quality primary care.
• Partner with employers to offer DPCSAs as part of their health benefits packages, leveraging the tax advantages for employees.
• Expand service offerings to include additional wellness and preventive care services, which can be bundled into the monthly fee.

However, providers must ensure that their fee structures comply with the $150/$300 monthly limits and that they clearly communicate these limits to patients. Providers should also be aware of potential state-level regulations that may impose additional restrictions on DPCSAs, as some states have not yet fully aligned their laws with federal tax rules.

5. For Tax Practitioners: Advising Clients on HSA and DPCSA Strategies Tax practitioners must stay abreast of these changes to provide accurate advice to clients. Key considerations include:

• HSA contribution strategies: Clients should be advised to contribute the maximum allowable amount to HSAs, especially given the tax advantages. Practitioners should also highlight the catch-up contribution for clients aged 55 or older.
• DPCSA integration: Clients enrolled in DPCSAs should be counseled on how to maximize HSA contributions while ensuring that DPCSA fees remain within the allowed limits.
• Recordkeeping and documentation: Practitioners should recommend that clients maintain detailed records of DPCSA fees and HSA contributions to substantiate tax deductions and withdrawals.
• State tax implications: Some states do not conform to federal HSA rules, meaning that contributions may not be deductible for state tax purposes. Practitioners should advise clients on the state-specific tax treatment of HSAs and DPCSAs.

6. Long-Term Outlook: The Future of HSAs and DPCSAs The 2027 adjustments and new rules for DPCSAs are likely just the beginning of broader reforms in healthcare and tax policy. The Primary Care Enhancement Act (H.R. 365), currently pending in Congress, proposes the creation of separate DPCSAs with contribution limits of $1,800 per year, further expanding the utility of direct primary care. If enacted, this legislation would provide additional tax incentives for individuals and families to enroll in DPCSAs, potentially accelerating their adoption.

Additionally, the IRS’s continued focus on modernizing tax rules to reflect evolving healthcare delivery models suggests that further guidance on HSAs, DPCSAs, and other innovative care arrangements is likely. Practitioners should monitor IRS notices, revenue procedures, and proposed regulations for updates that may impact their clients.

---

Conclusion: A Step Forward for HSAs and DPCSAs

The 2027 inflation-adjusted amounts for HSAs and the new rules for DPCSAs represent a significant step forward in aligning tax policy with the realities of modern healthcare. By clarifying the treatment of DPCSAs and adjusting HSA limits for inflation, the IRS and Congress have removed regulatory barriers that previously discouraged individuals from adopting these arrangements. For employers, employees, HSA administrators, and primary care providers, these changes offer new opportunities to reduce costs, improve access to care, and maximize tax advantages.

However, practitioners must remain vigilant in monitoring inflation adjustments, state-level regulations, and legislative developments to ensure compliance and capitalize on emerging opportunities. As the healthcare landscape continues to evolve, so too will the tax rules governing HSAs and DPCSAs, making ongoing education and adaptation essential for tax professionals.

---

Excepted Benefit HRAs: 2027 Inflation-Adjusted Maximum Contribution

The IRS’s Revenue Procedure 2026-24, released in IRB 2026–25, establishes the 2027 inflation-adjusted maximum contribution for excepted benefit health reimbursement arrangements (HRAs) under §54.9831-1(c)(3)(viii) of the Pension Excise Tax Regulations. This adjustment reflects the IRS’s ongoing commitment to aligning HRA contribution limits with inflation, ensuring these tax-advantaged accounts remain viable for employers seeking flexible, cost-effective health benefits. The 2027 limit is set at $2,100, a modest increase from the 2026 figure of $2,050, underscoring the IRS’s methodical approach to inflation indexing under the Affordable Care Act’s framework.

Excepted benefit HRAs, distinct from traditional HRAs, are designed to supplement—not replace—primary health coverage. They are not tied to high-deductible health plans (HDHPs) and can be paired with any employer-sponsored health plan, including group health insurance. Unlike traditional HRAs, which are often used to reimburse medical expenses under an HDHP, excepted benefit HRAs are limited to $2,100 in 2027 and may only reimburse limited medical expenses, such as dental and vision care, short-term limited-duration insurance premiums, and COBRA premiums. This structure makes them particularly attractive for employers seeking to provide additional benefits without the administrative complexity of traditional HRAs or the high-deductible requirements of HSAs.

The IRS’s inflation adjustments for excepted benefit HRAs are part of a broader regulatory trend favoring flexible, employer-sponsored health benefits that can adapt to rising healthcare costs. This shift aligns with the growing adoption of HRAs in the post-ACA landscape, where employers increasingly seek alternatives to traditional group health insurance. The 2027 limit of $2,100 is calculated using the Chained Consumer Price Index (C-CPI-U), a slower inflation measure than the traditional CPI, reflecting Congress’s preference for more stable, predictable adjustments. This approach contrasts with the more volatile adjustments seen in HSAs, where limits are tied to the traditional CPI and have historically seen larger annual increases.

For employers and plan administrators, the 2027 excepted benefit HRA limit presents both opportunities and challenges. On the one hand, the modest increase to $2,100 allows employers to continue offering these benefits without significant cost escalation. On the other hand, the relatively low contribution limit may constrain the utility of excepted benefit HRAs for employees with high out-of-pocket medical expenses. Employers must carefully balance the benefits of offering excepted benefit HRAs with the need to provide meaningful financial support to employees. Plan administrators should also ensure that their HRA designs comply with the IRS’s strict rules on reimbursable expenses, avoiding the pitfalls of disqualification under the Pension Excise Tax Regulations.

The IRS’s guidance also serves as a reminder of the importance of staying ahead of regulatory changes. Employers that fail to adjust their HRA contribution limits in line with inflation risk noncompliance, while those that proactively communicate these changes to employees can enhance benefit satisfaction and retention. As the healthcare landscape continues to evolve, with rising costs and shifting employee expectations, excepted benefit HRAs remain a valuable tool for employers seeking to provide affordable, flexible health benefits. However, practitioners must remain vigilant in monitoring inflation adjustments, state-level regulations, and legislative developments to ensure compliance and capitalize on emerging opportunities. The 2027 limit of $2,100 is a small but critical piece of this puzzle, reflecting the IRS’s ongoing efforts to balance flexibility with fiscal responsibility.

---

Broker-Dealers as Nonbank Trustees: Alternative Compliance with SEC Rules

The IRS’s Notice 2026-32, issued in Bulletin No. 2026–25, introduces a critical alternative compliance pathway for broker-dealers acting as nonbank trustees of Individual Retirement Accounts (IRAs). This guidance, effective for tax years beginning after December 31, 2026, allows carrying broker-dealers—those that hold customer funds or securities—to satisfy the IRS’s fiduciary conduct requirements under §1.408-2(e)(5)(ii) by demonstrating compliance with the SEC’s Net Capital Rule (15c3-1) and Customer Protection Rule (15c3-3) instead of meeting the traditional net worth adequacy standard. The change reflects a convergence of regulatory objectives between the IRS and the SEC, streamlining compliance for entities already subject to stringent federal oversight while preserving the integrity of IRA trustee standards.

The Rule: What is the alternative compliance method?

Under §1.408-2(e)(5)(ii) of the Income Tax Regulations, nonbank trustees of IRAs must demonstrate “adequacy of net worth,” a requirement that generally mandates a minimum net worth exceeding the greater of a specified dollar amount or a percentage of fiduciary account assets. For broker-dealers, this often meant maintaining substantial capital reserves to offset the risks associated with holding customer assets. However, Notice 2026-32 introduces an alternative: a carrying broker-dealer may now satisfy this requirement by demonstrating compliance with the SEC’s Net Capital Rule (17 CFR 240.15c3-1) and Customer Protection Rule (17 CFR 240.15c3-3). These rules, enforced by the SEC and monitored by FINRA, are designed to ensure broker-dealers maintain sufficient liquidity and segregate customer assets from proprietary business activities.

The SEC Net Capital Rule requires broker-dealers to maintain a minimum level of net capital, adjusted for illiquid assets and proprietary positions, to prevent insolvency. The Customer Protection Rule compels broker-dealers to segregate customer funds and securities, maintain physical control over fully paid and excess margin securities, and deposit customer cash in a reserve account at a third-party bank. Together, these rules aim to protect customer assets and ensure the orderly liquidation of a failed broker-dealer. By allowing broker-dealers to rely on SEC compliance as a substitute for the IRS’s net worth requirement, Notice 2026-32 leverages existing regulatory infrastructure to achieve the same fiduciary objectives with reduced administrative burden.

The Context: Why was this change needed?

The IRS’s nonbank trustee rules under §408(a)(2) and §1.408-2(e) were designed to ensure that IRA trustees—whether banks or nonbank entities—possess the financial stability and operational capacity to act in a fiduciary capacity. Historically, the adequacy of net worth requirement served as a proxy for this stability, particularly for nonbank trustees that lacked the federal oversight inherent to banks. However, for broker-dealers, which are already subject to the SEC’s comprehensive regulatory framework, the net worth requirement created duplicative compliance obligations.

The SEC’s rules are not merely administrative formalities; they are robust mechanisms for safeguarding customer assets and maintaining systemic financial stability. The Customer Protection Rule, for instance, ensures that customer funds and securities are isolated from a broker-dealer’s proprietary activities, reducing the risk of misappropriation or loss in the event of insolvency. Similarly, the Net Capital Rule imposes strict liquidity requirements to prevent broker-dealers from overextending their financial commitments. Given that carrying broker-dealers already undergo regular examinations by FINRA and the SEC to verify compliance with these rules, the IRS’s alternative compliance pathway eliminates redundant oversight while preserving the protective intent of the nonbank trustee standards.

This change also aligns with broader trends in regulatory coordination. The IRS has increasingly recognized that overlapping regulatory regimes—particularly in highly regulated industries like securities—can be streamlined without compromising fiduciary standards. The authority for this approach is found in §1.408-2(e)(6)(ii), which permits the IRS to accept evidence of compliance with other regulatory standards in lieu of specific proofs required under §1.408-2(e), provided those standards are “consonant with the requirements of section 408.” The SEC’s rules meet this threshold by addressing the same core concerns—solvency and asset protection—that underpin the IRS’s net worth requirement.

The Implication: How will this affect broker-dealers and IRA trustees?

For broker-dealers, Notice 2026-32 presents a significant compliance advantage. By substituting SEC compliance for the net worth requirement, these entities can avoid the administrative and financial burdens of maintaining separate capital reserves solely for IRA trustee purposes. This is particularly beneficial for firms with substantial customer account holdings, as it reduces the need for redundant capital allocations. Moreover, the alternative compliance method simplifies the IRS approval process for nonbank trustee status, as broker-dealers can leverage existing SEC and FINRA examinations as evidence of their financial responsibility.

For IRA custodians and retirement plan administrators, the implications are equally consequential. The IRS’s acceptance of SEC compliance as a substitute for net worth adequacy means that broker-dealers acting as IRA trustees will face fewer operational hurdles in maintaining their status. This could encourage greater participation by broker-dealers in the IRA market, particularly for self-directed IRAs where nonbank trustees are common. However, administrators must remain vigilant in verifying that broker-dealers seeking to rely on this alternative compliance method are indeed subject to the SEC’s Net Capital and Customer Protection Rules and are not operating under exemptions that would disqualify them.

Practitioners should also note that this alternative compliance method does not absolve broker-dealers of all fiduciary obligations under §408(a)(2). The IRS retains the authority to review the operational and recordkeeping practices of nonbank trustees, and broker-dealers must still demonstrate that their administration of IRA assets is consistent with the requirements of section 408. The alternative merely streamlines the financial responsibility prong of the nonbank trustee rules, not the broader fiduciary conduct standards outlined in §1.408-2(e)(2).

Additionally, the notice invites public comments on related topics, suggesting that further refinements to this alternative compliance method may be forthcoming. Practitioners should monitor these developments closely, as additional guidance could clarify the scope of eligible broker-dealers or introduce new procedural requirements. In the interim, broker-dealers and IRA administrators should update their compliance frameworks to incorporate this alternative method, ensuring that their documentation reflects SEC compliance as a substitute for the net worth requirement where applicable.

---

Transitional Relief for Foreign Government Income Regulations

The IRS’s withdrawal of portions of its December 2025 proposed regulations under Section 892 marks a significant pivot in the taxation of foreign governments’ U.S. investments, particularly for sovereign wealth funds and state-owned enterprises. The move responds to industry pushback over the retroactive application of rules governing commercial activity and effective control, replacing them with a phased transition period that preserves existing tax treatment for legacy holdings. This shift underscores the Treasury’s balancing act between curbing perceived abuses and maintaining the U.S. as an attractive destination for foreign capital.

The Rule: New Applicability Dates and Transitional Relief

The IRS’s proposed regulations under Section 892 withdraw the applicability dates of the December 2025 proposed rules and introduce a 90-day transition period (or until the start of the first taxable year after final regulations are published) for two critical determinations: (1) whether an acquisition of debt constitutes commercial activity and (2) whether a foreign government has effective control of an entity. The new framework applies the final regulations only to debt acquired or interests granted after the transition period, while preserving the existing rules for holdings acquired before the transition period or pursuant to a binding commitment entered into before the transition period ends.

For debt acquisitions, proposed §1.892-4(d)(4) clarifies that the existing rules continue to apply if the debt is acquired before the end of the transition period or pursuant to a binding commitment entered into before the transition period ends. The IRS emphasizes that the acquisition of debt, not its mere holding, triggers the commercial activity analysis, meaning a foreign government holding debt acquired in a prior year is not retroactively deemed engaged in commercial activity in subsequent years solely by reason of continued ownership. Similarly, for effective control determinations under proposed §1.892-5(e)(2)(ii), the final regulations will not apply to existing interests unless the foreign government acquires new interests after the transition period that, on their own, confer effective control under the final rules.

The transitional relief also includes a binding commitment rule, which preserves the application of existing rules for debt acquired after the transition period if the acquisition is pursuant to a binding commitment entered into before the transition period ends. This provision is designed to protect foreign governments from being forced to renegotiate or restructure legacy holdings solely due to the finalization of the regulations.

The Context: Why This Change Was Needed

The December 2025 proposed regulations under Section 892 sought to tighten the rules governing foreign governments’ U.S. investments by clarifying two contentious areas: (1) the commercial activity exception and (2) the effective control standard. The commercial activity exception under Section 892(a) exempts income derived from U.S. investments unless the foreign government is engaged in commercial activity in the United States. The IRS proposed a narrower definition of commercial activity, focusing on whether the acquisition of debt or the exercise of control over an entity constituted active business operations. For example, the proposed rules would have treated the acquisition of certain debt instruments as commercial activity if the debt was acquired in the ordinary course of a trade or business, even if the debt was held passively.

The effective control rule, outlined in proposed §1.892-5(c)(2), would have expanded the definition of a controlled commercial entity (CCE) to include entities where a foreign government held interests that, when aggregated with other holdings, provided effective control. This change threatened to ensnare sovereign wealth funds and state-owned enterprises that held minority stakes in U.S. entities but exercised no operational control.

The proposed regulations drew immediate criticism from industry groups, including sovereign wealth funds and asset managers, who argued that the rules would retroactively penalize existing investments and disrupt long-standing tax planning strategies. Commenters also highlighted the potential chilling effect on U.S. investment flows, particularly from countries with significant sovereign wealth funds, such as Norway, Singapore, and the United Arab Emirates. The Treasury and IRS’s decision to withdraw the applicability dates and introduce transitional relief reflects a recognition of these concerns, as well as a broader policy goal of supporting current and future sovereign wealth fund investment in the United States.

The Implication: How This Affects Foreign Governments and Their U.S. Investments

The transitional relief provisions provide foreign governments with breathing room to adapt their investment strategies without facing immediate tax consequences. For sovereign wealth funds and state-owned enterprises, the new rules mean that existing U.S. debt holdings and equity interests will continue to benefit from Section 892’s exemption unless they are restructured or new investments are made after the transition period. This is particularly significant for funds that have historically invested in U.S. Treasury securities, corporate bonds, or real estate, as these investments will remain tax-exempt under the existing rules.

However, the transitional relief does not eliminate the need for foreign governments to monitor the finalization of the regulations. The IRS has indicated that it is evaluating comments on the substantive aspects of the 2025 proposed regulations, including the debt acquisition and effective control rules, and may issue further guidance in the future. Practitioners should advise clients to review their U.S. investment portfolios to determine whether any holdings may be subject to the final regulations and to consider restructuring strategies if necessary.

For foreign governments with legacy holdings in U.S. entities, the binding commitment rule provides a pathway to maintain tax-exempt status for debt acquired after the transition period if the acquisition was pursuant to a binding commitment entered into before the transition period ends. This rule is designed to prevent the IRS from imposing retroactive tax liability on investments that were made in good faith under the existing rules.

The broader policy implications of this shift are significant. By introducing transitional relief, the Treasury and IRS signal a more measured approach to regulating foreign government investments, balancing the need to prevent abuse with the goal of maintaining the U.S. as a welcoming environment for foreign capital. This approach aligns with the Biden administration’s broader economic policy, which seeks to attract foreign investment while ensuring fair tax treatment. However, the IRS’s ongoing evaluation of the substantive rules suggests that further changes may be on the horizon, particularly as the Treasury seeks to address concerns raised by industry stakeholders.

Practitioners should monitor developments closely, as the final regulations may introduce additional nuances or refinements that could impact foreign governments’ tax planning strategies. In the interim, foreign governments and their advisors should update compliance frameworks to reflect the new transition rules and ensure that documentation supports the preservation of existing tax-exempt status for legacy holdings.

---

2026 Marginal Production Depletion Rates: Applicable Percentage Announced

The IRS, in Notice 2026-35, has formally published the applicable percentage under §613A(c)(6)(C) of the Internal Revenue Code for determining percentage depletion for oil and natural gas produced from marginal properties in calendar year 2026. This percentage, set at 15%, remains unchanged from the prior year but is now locked in for 2026 operations. The calculation method for this percentage is governed by §613A(c)(6)(C), which ties the applicable percentage to the reference price of crude oil under §45K(d)(2)(C). Specifically, the applicable percentage is determined based on whether the reference price for the preceding year exceeds the statutory phase-out threshold, which for 2026 is $50.19 per barrel (adjusted for inflation). Since the 2025 reference price did not trigger the phase-out, the 15% rate remains in effect.

The applicable percentage is a critical component of the percentage depletion allowance under §611, which allows independent producers to deduct a fixed percentage of gross income from oil and gas production. For marginal properties—defined as those producing less than 15 barrel equivalents per day or 90 MCF of natural gas per day—the 15% rate provides a significant tax incentive compared to the standard 10% depletion rate applicable to non-marginal wells. The IRS’s announcement ensures continuity for producers who rely on this deduction to offset the high costs of operating lower-producing wells, particularly in mature oil and gas fields.

Historically, the applicable percentage for marginal production has fluctuated in response to oil price dynamics and legislative changes. The table below illustrates the evolution of the applicable percentage from 1991 to 2026:

Year	Applicable Percentage	Reference Price (Crude Oil, $/barrel)	Phase-Out Threshold	Triggered Phase-Out?
1991	15%	$20.50	$28.00	No
2000	15%	$28.50	$28.00	Yes
2005	15%	$56.64	$34.00	Yes
2010	15%	$79.48	$44.00	Yes
2015	15%	$48.66	$47.00	Yes
2020	15%	$39.16	$46.00	No
2021	15%	$68.17	$46.00	Yes
2022	15%	$94.53	$46.00	Yes
2023	15%	$71.65	$46.00	Yes
2024	15%	$71.65	$50.19	Yes
2025	15%	$72.34	$50.19	Yes
2026	15%	Pending	$50.19	No

The phase-out mechanism, which reduces the applicable percentage when oil prices exceed the threshold, has been a recurring feature since the mid-2000s. The threshold itself is adjusted annually for inflation, reflecting the IRS’s commitment to maintaining the real value of the depletion allowance. In 2026, the threshold remains at $50.19 per barrel, meaning that if the 2025 reference price (as defined under §45K(d)(2)(C)) had exceeded this amount, the applicable percentage would have been reduced. However, the IRS’s determination that the phase-out was not triggered ensures that marginal producers retain the full 15% depletion rate for 2026.

The implications for oil and gas producers operating marginal properties are significant. The 15% depletion allowance provides a substantial tax benefit, particularly for small and independent producers who operate in regions with declining production, such as the Permian Basin or Appalachian shale plays. For these producers, the depletion deduction can represent a critical cash flow advantage, allowing them to reinvest in operations or offset other tax liabilities. However, the phase-out mechanism also serves as a reminder of the volatility inherent in the oil and gas industry, where prices can swing dramatically from year to year, impacting tax planning strategies.

Practitioners advising clients in the oil and gas sector should note that the 2026 applicable percentage is now finalized, and producers should incorporate this into their tax planning for the year. The IRS’s announcement provides clarity for those who rely on the depletion allowance to manage their tax burden, particularly in an environment where oil prices have been historically volatile. Additionally, producers should monitor legislative developments, such as the Marginal Well Protection Act (H.R. 7245), which proposes to increase the phase-out threshold to $75 per barrel and expand eligibility to offshore marginal wells. While this legislation remains pending, its potential passage could further enhance the tax benefits for marginal producers in future years.

For practitioners, the key takeaway is the importance of staying abreast of IRS announcements and legislative changes that impact the depletion allowance. The applicable percentage for 2026 is now set, but the broader context of oil price dynamics and potential legislative reforms means that tax planning for marginal properties must remain flexible and forward-looking.

---

Industry Impact: Winners and Losers in IRS Bulletin No. 2026–25

The latest Internal Revenue Bulletin introduces several consequential updates that reshape the tax landscape for key stakeholders. From expanded health savings opportunities to tightened compliance for retirement account custodians, these changes create clear winners and losers across industries. Practitioners must act swiftly to capitalize on benefits while mitigating exposure to new regulatory burdens.

The 2027 HSA inflation-adjusted amounts and Direct Primary Care Service Arrangements (DPCSAs) represent a significant win for both employees and employers. The IRS’s Revenue Procedure 2026-24 increases HSA contribution limits to $4,500 for individuals and $9,000 for families, with an additional $1,000 catch-up for those 55 and older. These adjustments, tied to the Chained Consumer Price Index under the One Big Beautiful Bill Act of 2023, reflect a slower growth trajectory than traditional CPI indexing, but still provide meaningful tax-advantaged savings opportunities. The inclusion of DPC fees as qualified medical expenses under Section 223 further enhances the utility of HSAs for employees utilizing concierge medicine models. Employers benefit from higher contribution limits that can be used as a competitive recruitment tool, while employees gain expanded access to tax-free healthcare financing. The practical implication is clear: employers should update plan documents to reflect these inflation adjustments and educate their workforce on the expanded eligibility for DPC services. Failure to do so risks leaving tax-advantaged dollars on the table and undermining employee retention strategies.

The excepted benefit HRAs also emerge as winners in this Bulletin, with the maximum contribution limit rising to $2,100 for 2027. These arrangements, governed by Section 54.9831-1(c)(3)(viii) of the Pension Excise Tax Regulations, allow employers to offer limited additional health benefits without violating HSA eligibility rules. The inflation-adjusted increase provides employers with a flexible, tax-efficient tool to supplement employee healthcare benefits, particularly for those not enrolled in high-deductible plans. The clear winner here is mid-sized employers seeking to enhance their benefits packages without triggering ACA penalties or HSA disqualification risks.

Broker-dealers, however, face a mixed outcome with the IRS’s alternative compliance pathway for nonbank trustees under Notice 2026-32. The Bulletin permits broker-dealers subject to the SEC’s Net Capital Rule (Rule 15c3-1) and Customer Protection Rule (Rule 15c3-3) to demonstrate compliance with these regulations in lieu of the traditional IRS net worth requirements under Section 1.408-2(e)(5)(ii). This development represents a significant regulatory relief for major brokerage firms that already maintain substantial capital reserves to meet SEC standards. The winners are clearly the large broker-dealers and their affiliated IRA custodians, who can avoid duplicative regulatory burdens while maintaining their nonbank trustee status. However, smaller nonbank trustees without SEC oversight face intensified scrutiny, as the IRS may now expect equivalent compliance standards without the benefit of SEC examinations. Retirement plan administrators must carefully assess whether their custodial arrangements qualify for this alternative compliance method, as missteps could trigger revocation of their nonbank trustee status and jeopardize IRA operations.

The transitional relief for foreign government income regulations under proposed changes to Section 892 delivers a temporary reprieve to sovereign wealth funds and state-owned enterprises, but the long-term outlook remains uncertain. The IRS’s withdrawal of certain applicability dates and proposal of new ones, as outlined in CC-00349656-26, provides existing holdings with breathing room until final regulations are issued. The winners in this scenario are foreign governments currently invested in U.S. assets who would otherwise face immediate tax exposure under stricter commercial activity tests. However, the relief is transitional by nature, and the proposed regulations signal an impending crackdown on exemptions for sovereign wealth funds engaged in active U.S. business operations. Practitioners advising foreign government clients must urgently model the potential tax impact of these changes and consider restructuring strategies, such as shifting investments to portfolio holdings or utilizing treaty benefits where available. The losers in this context are those foreign entities that fail to adapt their investment structures before the final regulations take effect, potentially facing retroactive tax liabilities.

The 2026 marginal production depletion rates, announced under Section 613A(c)(6)(C), present a nuanced outcome for oil and gas producers. The applicable percentage for marginal wells remains at 15%, but the continued phase-out threshold—now hovering around $50 per barrel due to inflation adjustments—means many producers will see reduced benefits as oil prices fluctuate. The winners are marginal producers operating in low-cost basins who can still claim the full 15% depletion allowance without triggering the phase-out. However, high-cost producers in mature fields face diminishing returns as prices approach the threshold. The practical implication for practitioners is the need for dynamic tax planning that accounts for oil price volatility and potential legislative reforms. While pending legislation such as the Marginal Well Protection Act (H.R. 7245) could enhance benefits in future years, the current Bulletin underscores the importance of flexibility in depletion allowance strategies. Producers must document their independent status rigorously to avoid IRS challenges, particularly in cases involving private equity ownership structures.

The broader industry impact reveals a clear bifurcation between entities that can leverage regulatory compliance to their advantage and those that face heightened operational burdens. Financial services firms with robust compliance infrastructure emerge as winners, particularly those that can navigate the SEC-IRA custodian nexus efficiently. The IRS’s willingness to accept SEC compliance as sufficient for nonbank trustee purposes signals a preference for harmonized regulatory standards, benefiting large, well-capitalized institutions. Conversely, smaller financial services providers and alternative investment platforms face increased compliance costs as they struggle to meet equivalent standards without SEC oversight.

For multinational corporations and foreign government investors, the Bulletin serves as a cautionary tale about the evolving nature of U.S. tax exemptions. The transitional relief for Section 892 provides temporary comfort, but the direction of travel is unmistakably toward stricter enforcement and narrower exemptions. Companies with U.S. operations tied to sovereign entities must prepare for a regulatory environment where passive investment income is no longer sacrosanct.

Practitioners should prioritize several immediate actions to navigate this Bulletin effectively. Employers must update their HSA and HRA plan documents to reflect the new inflation-adjusted limits and DPC eligibility rules, ensuring compliance with Section 223 while maximizing employee benefits. Broker-dealers and IRA custodians should assess their eligibility for the alternative compliance pathway under Notice 2026-32, documenting their SEC compliance to support their nonbank trustee status. Foreign government investors need to conduct urgent tax modeling exercises to evaluate the impact of proposed Section 892 regulations, exploring restructuring options before final rules take effect. Oil and gas producers should implement real-time monitoring of oil prices relative to the phase-out threshold, preparing to adjust depletion strategies dynamically while advocating for legislative relief.

The losers in this Bulletin are those who fail to act with urgency. Employers that neglect to update their HSA contribution limits risk leaving tax-advantaged dollars unclaimed, undermining their benefits competitiveness. Broker-dealers that do not document their SEC compliance risk losing their nonbank trustee status, potentially disrupting IRA operations. Foreign government investors that ignore the transitional relief window may face retroactive tax liabilities when final regulations are issued. Marginal oil producers that do not adapt their tax planning to price volatility may see their depletion benefits evaporate.

The Bulletin’s publication coincides with a period of heightened regulatory scrutiny across financial services and energy sectors, reinforcing the need for proactive compliance and strategic tax planning. As legislative reforms continue to shape the tax landscape, practitioners must maintain vigilance, ensuring their clients remain positioned to capitalize on emerging opportunities while mitigating exposure to regulatory pitfalls.