April 29, 1999

Highlights of the Final TANF Regulations(1)
Liz Schott, Ed Lazere, Heidi Goldberg, and Eileen Sweeney



Table of Contents

I.   Definition of "assistance"

II.   Separate state programs

III.  TANF work requirements

IV.  Waivers

V.  Refundable EITCs

VI. Issues related to MOE spending

VII. Data Collection

The 1996 law that created the Temporary Assistance for Needy Families block grant gave states both extraordinary flexibility and greater responsibility for designing and implementing programs to help poor families with children move from welfare to work. As caseloads have declined, the amount of TANF funds needed to provide cash assistance payments to the remaining TANF recipients has also declined, leaving many states with TANF surpluses. These TANF surpluses provide states with even greater opportunities to design and implement programs that are responsive to the needs of low-income working parents and to families relying on cash assistance that may require substantial assistance to prepare for work.(2)

Some states have taken advantage of the new flexibility and substantial TANF resources to design strong, innovative programs. Other states have been more reluctant to move in this direction, or have committed some resources to these activities but continue to hold substantial amounts in reserve. One of the reasons given for this reluctance has been concern that the final federal regulations for TANF had not been published. Based on the proposed TANF regulations issued in November, 1997, states were concerned that the final regulations, when issued, would limit their flexibility.

On April 12, 1999, the Department of Health and Human Services issued the final TANF regulations.(3) They include many provisions, some of which reflect significant changes from the proposed regulations, that affirm and enhance the flexibility of states to determine how best to use TANF funds to assist low-income families. The regulations, together with the already-existing substantial TANF reserves in many states, provide strong support for states to re-visit their welfare reform approaches and include improvements targeted on both families receiving TANF who so far have not been able to work and on families that are working but continue to have low incomes.

It is important to understand that HHS's authority to regulate implementation of the TANF provisions of the 1996 welfare law is limited. The design of the federal regulations reflects these limits. The federal welfare law restricts HHS's authority to regulate state conduct or enforce any TANF provision except to the extent expressly provided in the law. The federal law expressly provides that HHS will impose penalties if a state fails to comply with requirements of the law in a number of areas. For example, a state can be subject to penalties if it uses federal TANF funds improperly, if it fails to expend the amount of state funds required under maintenance-of-effort provisions, if it fails to meet work participation rates, or if it fails to comply with time limits applicable to federal TANF funds. As a result, these regulations largely address the circumstances under which HHS will enforce (or provide relief from) penalties by explaining the criteria HHS will use to evaluate compliance. The regulations also address areas where Congress has explicitly directed HHS to regulate. In this context HHS has provided states with considerable information and guidance on how it will interpret requirements of the federal welfare law.

The final TANF regulations will take effect on October 1, 1999. Until then, states are free to continue applying reasonable interpretations of the statute, the rule under which states have been operating since passage of the 1996 law.

Definition of "assistance"
(Section 260.31 and preamble discussion at 64 FR 17754-63)

In both the TANF guidance issued in January 1997 and in the proposed regulations, HHS made clear that key TANF requirements — namely the 60-month time limit, the assignment of a recipient's child support to the state, work participation, and data collection on recipient families — do not apply to all uses of TANF funds. Instead, these rules apply when TANF funds are used to provide "assistance." The welfare law allows states to spend TANF funds on a broad range of activities, some of which closely resemble traditional welfare programs and some of which do not. For example, one of the purposes of the law is to reduce out-of-wedlock pregnancy. While a state can use TANF funds on pregnancy prevention programs, Congress did not intend that such help would count against a family's lifetime time limit. HHS thus faced the task of setting the definition of "assistance" to cover activities that serve purposes similar to traditional welfare programs.

The significance of the consequences that follow receipt of "assistance" means that the definition of "assistance" is one of the most important elements of the TANF regulations. A state's decision to support various benefits and services with federal TANF funds is affected greatly by whether the program in mind would be considered "assistance." For example, states likely would be unwilling to use TANF to fund a transportation program for low-income working families if it were to count against a family's time limit, among other requirements. The state would be much more likely to provide this support if it were not considered "assistance."

The definition of "assistance" in the final TANF rules makes it clear that states can use TANF funds to provide a very broad range of benefits and services without triggering time limit, work participation, detailed data reporting or child support assignment consequences.

Under the final regulations, "assistance" includes cash payments, vouchers and other forms of benefits designed to meet a family's ongoing basic needs (i.e., for food, clothing, shelter, utilities, household goods, personal care items, and general incidental expenses), although there are significant exclusions as described below. Thus, benefits and services that serve the same purpose as a welfare check — helping a family meet basic needs on an ongoing basis — are counted against the family's time limit and trigger work participation and related requirements.

There are several types of benefits and services excluded from the definition of "assistance." These exclusions refine the definition in ways that make it more consistent with the law's goal of moving families to work. The exclusions include:

The final regulations thus establish a framework under which benefits and services that support work, as well as benefits and services that do not provide support for basic needs on an ongoing basis — either because the benefit is short-term or has no income effect — are not considered assistance. By contrast, all forms of ongoing aid for basic needs that either serve non-working families or that go to working families but would not be considered a work support are considered assistance. This framework is substantially different from that in the proposed regulations which, for example, explicitly included child care, transportation and wage subsidies within the proposed definition of assistance.

The final definition of assistance allows states to use federal TANF funds to provide a range of supports to low-income families that do not otherwise receive cash assistance without running the family's 60-month TANF time clock, without triggering assignment and retention of child support and without triggering the work requirements or data collection requirements that apply to TANF "assistance." For example, a state could create a monthly transportation allowance program that serves low-income working families with earnings above the income eligibility levels for ongoing TANF cash assistance without triggering TANF "assistance" consequences for those families.

The definition of short-term benefits also is more expansive in the final regulations than in the proposed regulations. The preamble to the final regulations explains that the key element to defining short-term aid is that the service or benefit must address a crisis or "episode of need" and not a recurring or ongoing need. To clarify what is meant by "episode of need," the regulations note that the aid cannot be provided for more than four months. The preamble clarifies that short-term aid can cover past debts — even if the debts had accumulated for more than four months — and that families can get short-term assistance more than once per year if they experience more than one crisis or episode of need. Should an episode of need become longer term, the preamble indicates that while the case could be converted to a TANF assistance case, HHS would not require the state to re-define the initial aid as assistance and retroactively subject the family to TANF requirements.


Separate state programs
(Preamble discussion at 64 FR 17727-31)

Under the federal welfare law, states have flexibility to support programs using only state maintenance-of-effort (MOE) funds, i.e. without any TANF funds. Expenditures on these so-called "separate state programs" can help states meet the MOE requirement, but none of the basic requirements that attach to use of TANF funds — time limits, work participation requirements, and child support assignment — apply because the programs include no TANF funding.(4) There are many cases in which a separate state program might better meet the needs of the families while advancing welfare reform goals. For example, a state may use a separate state program to serve recipients with disabilities or elderly caretaker relatives for whom the TANF work requirements and time limits may not be appropriate.

The final TANF regulations express support for creation of separate state programs and make it more likely states will be interested in exercising this kind of flexibility. By contrast, the proposed regulations would have discouraged the use of separate state programs somewhat. They indicated a concern that states would use separate state programs to avoid work participation requirements or to avoid sharing child support collections with the federal government. For these reasons, the proposed regulations would have denied penalty relief or penalty reduction to states in which there was a "significant pattern of diversion of families to a separate state program that achieves the effect of..." avoiding work rates or diverting the federal share of child support collections.

The final regulations do not limit a state's ability to get penalty relief or reduction on the basis of operating separate state programs. In describing these changes, the preamble to the regulations explains that state practice in developing separate state programs generally has reflected useful policy initiatives that further the goals of welfare reform.

The regulations require states to collect and submit family-level data for separate state programs providing "assistance" — just as states must do for TANF-funded programs providing "assistance" — if they wish to receive a high performance bonus or caseload reduction credit.(5) While this may appear to be a restriction on the use of separate state programs, it is not different from the rules governing TANF funds. It reflects the position that caseload decline and overall work performance are best measured when all TANF and MOE-funded programs providing assistance are considered.

Finally, the preamble still reflects some concern for potential abuse of separate state programs to avoid work participation and child support requirements. Thus, the preamble notes that HHS will monitor such programs carefully.

Child-only cases
(Preamble discussion at 64 FR 17739-41)

States historically served a substantial number of "child-only" cases under AFDC. In some child-only cases, the parent was present in the home but ineligible for assistance, e.g., when the parent received SSI. Other child-only cases included children who were not living with a parent but with another relative — often a grandparent — and that caretaker relative did not receive AFDC for herself.

Under TANF, time limits and work participation requirements apply to a family that includes an adult. These requirements do not apply to child-only cases. While the proposed regulations would have allowed states to serve child-only cases, they would have discouraged states from doing so. Specifically, if HHS determined that a state had created child-only cases as a way of avoiding penalties for failure to meet time limit or work participation requirements, then child-only cases would have been included when calculating whether states met those requirements.

The final rules give states significant freedom to serve child-only cases without a threat of incurring penalties. The provision in the proposed regulations that would have required states to count child-only cases under some circumstances when calculating whether work participation and time limit requirements are met was taken out. The final rule thus reflects a recognition of the appropriate role child-only cases can serve in a state's welfare program.

At the same time, the preamble also indicates that HHS will continue to track the trend in child-only cases in each state — including adding a new element to the data collection requirements — so as to monitor how states are using the option to serve child-only cases and whether those uses are intended to avoid TANF requirements.


TANF time limits
(Sections 264.1-264.3 and preamble discussion at 17845-49)

The proposed and final regulations largely restate the TANF statutory provision on time limits with some additional explication. A state cannot use federal TANF funds to provide assistance to a family that includes an adult head-of-household (or spouse of head-of-household) who has received federal TANF "assistance" for a total of 60 months, except that states may continue benefits beyond 60 months for up to 20 percent of the caseload based on hardship or domestic violence. The 20 percent limit on extensions is measured based on the average monthly number of all families that received assistance during the current fiscal year or during the prior fiscal year. To the extent that the state exceeds the 20 percent limit on extensions because of federally recognized good cause domestic violence waivers, it will not be penalized.

The regulations specify that extensions are granted only when the head-of-household or spouse has received 60 months of assistance. In other words, the 20 percent exception from the 60-month time limit only relates to extensions of assistance for families that have already reached the federal 60-month time limit. The 20 percent exception does not allow a state to decide on a monthly basis that TANF time clocks should not run for up to 20 percent of the caseload.

This does not mean, however, that a state cannot stop the federal TANF time clock from running on a family. The regulations specify that only months of assistance that are paid for (in whole or part) with federal TANF funds count toward the 60-month limit. Thus the TANF 60-month time clock does not run when a state provides assistance to a family using solely state maintenance-of-effort funds — whether such assistance is provided by state funds that are segregated from federal TANF funds in a TANF-funded program or through a separate state program.

The preamble discussion contains a series of questions and answers about running of TANF time clocks. HHS clarifies that states cannot count months toward the federal TANF time clock in various situations. For example, the federal TANF time clock cannot run when a family is subject to a full-family sanction or when an adult is removed from the grant due to a partial sanction. HHS notes that states may, if they wish, count such months of sanction toward a state time limit, but a state cannot count them toward the federal time limit. States also cannot count any month in which an adult receives assistance while living in Indian country where at least 50 percent of the adults are not employed.

The regulations set forth the relationship of receipt of Welfare-to-Work grant funds and TANF time clocks, essentially restating the statutory provisions. A month in which a family that includes an adult head-of-household receives cash assistance under WtW that meets the TANF definition of "assistance" counts toward the TANF time limit. A month in which an individual receives noncash assistance under WtW cannot count toward the TANF time limit. A state may, however, provide cash assistance or non-cash assistance under WtW to a family that is ineligible for TANF assistance because it has reached the 60-month limit.


TANF work requirements
(Sections 261.30-261.36 and preamble discussion at 64 FR 17776-83;
Section 260.35(b) and preamble discussion at 64 FR 17747-8)

Under the federal welfare law, states are required to ensure that a set percentage of recipients participate in work activities. The federal law sets forth detailed provisions concerning the types and amount of work activities for which an individual's participation will count toward meeting a state's required work participation rate. The final regulations, with little change from the proposed regulations, largely set forth the statutory requirements. The regulation lists the 12 types of work activities that the law allows to count toward meeting the participation rate but does not further define each activity.(6) HHS thus leaves the states the discretion to define each category of activity and requires states to provide HHS with the definitions as well as a description of any work activities required in separate state programs.

The proposed and final regulations clarify that the required hours of participation in a work activity can be a monthly average of a participant's weekly hours. For example, an individual who works 20 hours in two weeks of a month and 30 hours in the other two weeks can be considered to be participating for 25 hours per week.

In the preamble to these provisions, HHS extensively discusses the importance of educational activities and encourages states to adopt program designs to take advantage of existing educational opportunities. HHS notes that both post-secondary education and English-as-a-second-language classes can fit within the definition of one or more of the 12 countable activities. The regulations implement the limits on counting participation in vocational education set by the federal law — participation in vocational education can count toward a state's work participation rate for up to 12 months for any individual and for no more than 30 percent of the caseload. HHS suggests, however, that states can benefit from allowing families to participate in vocational education even if such participation may not count toward the work rates, noting that the increased earnings and improved job retention that may result from vocational education can assist a state in reducing caseload and in qualifying for a high performance bonus.

The final TANF regulations specify that worker protections under other federal laws apply to TANF recipients. The proposed regulations did not include this provision. Specifically, the final regulations indicate that the TANF statutory limitation on HHS's regulatory and enforcement authority does not limit the effect of other federal laws including federal employment laws such as the Fair Labor Standards Act, the Occupational Health and Safety Act, unemployment insurance and nondiscrimination laws. This regulatory section also states that other nondiscrimination laws that are not only workplace protection laws apply to TANF-funded programs and activities, specifically listing the Age Discrimination Act, the Americans with Disabilities Act, Section 504 of the Rehabilitation Act and Title VI of the Civil Rights Act.


Relief from penalties for failure to meet work participation rates
(Sections 261.50-261.53 and preamble discussion at 64 FR 17788-93)

If a state does not meet its work participation rates, it will be subject to a penalty. Under the federal welfare law, the base penalty is five percent of the state's adjusted TANF block grant and this penalty increases with consecutive years of noncompliance. The federal law also states that HHS must reduce this penalty based on the "degree of noncompliance." In other words, a state that has failed to meet the work rates by a significant amount should be subject to a full penalty but a state that has failed to meet the work participation rates by a small amount should receive a smaller penalty. The final regulations implement this provision by reducing the penalty if a state fails to meet only the two-parent participation rate or if a state achieves substantial compliance.

Under the federal welfare law, states must meet two separate work participation rates, one that applies to all families and a higher one that applies only to two-parent families. Penalty reduction is available if a state fails to meet its two-parent participation rate only but does meet the all-parent rate. In such a case, the penalty will be prorated based on the proportion of the two-parent cases in the state's caseload. While this provision was in the proposed regulations, the preamble to the final rules makes clear that the prorated penalty for failing the two-parent work participation rate is always available, even if the state does not qualify for any other penalty relief.

Additional penalty reduction is available to a state that achieves substantial compliance. In the proposed regulations, HHS would have required that a state achieve 90 percent of the required work participation rate (after adjustment for a caseload reduction credit) in order to qualify for penalty relief under this provision. The final regulations substantially lower this threshold, requiring that a state achieve 50 percent compliance with the required work participation rate (after adjustment for a caseload reduction credit) while also requiring that the state increase the number of recipients engaged in work in the penalty year relative to the previous year. A state that meets this two-pronged test will receive penalty reduction based on a formula that considers the extent to which the state exceeds the 50 percent threshold and the increase in the number of recipients engaged in work activities. Other factors, such as whether the state failed one or both participation rates and the number of consecutive years the state has not achieved the work participation rates also affect the penalty amount. If a state is subject to a penalty for failure to meet one or both work rates for three or more successive years, it will not receive any penalty reduction under this provision. The state will, however, still qualify for a proration of the penalty if it fails only the two-parent work rate.

Additional discretionary reductions of the penalty amount may be available if a state's failure to meet the work participation rate is due to extraordinary circumstances such as natural disaster, regional recession or substantial caseload increase. Such discretionary reductions also may be available if a state meets the definition of a needy state for purposes of accessing the contingency fund, which is based on high (and recently increased) unemployment or a significant recent increase in food stamp participation.

HHS may waive penalties for a state's failure to meet the work participation rates if a state has reasonable cause. Reasonable cause is available if a state's failure is attributable to federally recognized good cause domestic violence waivers, provision of assistance to refugees in certain alternative projects, or under general circumstances set forth in section 262.5 (natural disasters, formal federal guidance providing incorrect information, or isolated problems). In addition, a state may receive relief from a penalty by achieving significant compliance under a corrective action plan.


Caseload reduction credit
(Sections 261.40-261.44 and preamble discussion at 64 FR 17783-88)

The federal regulations provide states the opportunity to reduce their effective work participation rates based on welfare caseload declines. This is done through "caseload reduction credits" that lower the basic rates set in the law. The caseload reduction credit allows states to reduce the required participation rate based on the percentage decline in welfare caseloads between federal fiscal year 1995 and the fiscal year most recently completed. The welfare law specifies, however, that caseload reductions due to state eligibility changes or federal eligibility requirements do not count toward a state's caseload reduction credit. For example, if a state's total caseload declined from 25,000 in fiscal year 1995 to 20,000 in fiscal year 1998, and none of the caseload decline was due to state or federal eligibility changes, the caseload reduction credit for that state for fiscal year 1999 would be the percentage decline, or 20 percent. The credit amount would then be subtracted from the federally required work participation rate to yield an effective work participation rate for that state. For fiscal year 1999, the required work participation rate for all families is 35 percent. Thus the effective work participation rate for the state would be 15 percent for fiscal year 1999 (35 percent minus 20 percent).

In order to qualify for the reduction, each state must specify the eligibility changes that may have affected the caseload, provide its own estimate of how each eligibility change has affected the caseload, and describe the methods by which it arrived at these estimates. They also must provide data on separate state MOE-funded programs to ensure that caseload reductions are not a result of moving recipients from TANF-funded programs into these programs. HHS will then review the methodology to determine whether it is reasonable and appropriate and, if necessary, may require adjustments to the caseload reduction credit that the state will receive.

The final regulations make several important clarifications in how the caseload reduction credit will be determined for each state. The regulations set forth a process for how states should estimate the numbers of cases that are excluded from the caseload decline calculation due to eligibility changes. The process requires each state to certify that it has given the public an opportunity to comment on the methodology and the estimates. This public comment requirement is a new provision of the final regulations. To allow for public comment at the state level, HHS has extended the deadline for filing the Caseload Reduction Report to December 31 of each year. The report must include a summary of the public's input.

The types of caseload reductions that can be counted toward the caseload reduction credit are clarified in the final regulation. In particular, the final regulations clarify that full family sanctions are an eligibility change and thus that sanction-related caseload declines can not be counted when determining the caseload reduction credit.

The final rules also introduce a new concept of "net" eligibility changes in the calculation of what cases are excluded from the caseload reduction credit due to state or federal eligibility changes. Under this concept, the eligibility changes that led to caseload decreases are offset by eligibility changes that may have expanded caseloads in determining the amount of caseload reduction that is excluded in the calculation of a state's credit. For example, suppose a state's caseload declined from 100,000 in fiscal year 1995 to 75,000 in fiscal year 1998, a total of 25,000 cases or 25 percent. If the state estimates that 15,000 of those cases were closed as a result of a new state-imposed time limit, and at the same time, 10,000 cases were added due to an expanded earned income disregard that allowed more families to remain eligible for assistance, then the net caseload change due to eligibility changes would be 5,000 cases. Therefore, 20,000 out of the actual decline of 25,000 cases would count toward the credit. The caseload reduction credit for fiscal year 1999 for that state would then be 20 percentage points.

The final regulations also give states two options in applying the caseload reduction credit to the two-parent work participation rate. A state can choose whether to base its caseload reduction credit for two-parent families on its overall caseload reduction or on the caseload reduction within the two-parent caseload. Thus a state can choose whichever decrease is more substantial in order to reduce the two-parent work rate as much as possible. This is a new option under the final regulations.


Sanctions imposed on individuals for noncompliance with work requirements
(Sections 261.54-261.57 and preamble discussion at 64 FR 17793-97;
Sections 261.13-261.16 and preamble discussion at 64 FR 17776)

The welfare law imposes two possible penalties on states relating to the requirement that states impose sanctions on individuals for refusal to work. First, a state is subject to a penalty if it does not properly impose sanctions on individuals who refuse to participate in work. In the preamble discussion, HHS notes that this penalty applies both to a state's failure to sanction when it should have done so and to its imposition of a sanction when it should not have imposed one. In the regulation addressing a possible reduction of any penalty incurred, HHS indicates that it will consider whether the state has established any control mechanism to ensure that individuals are appropriately sanctioned for refusing to work.

The welfare law also imposes a penalty on states for violating the prohibition on sanctioning a single parent caring for a child under age six if the parent demonstrates an inability to obtain child care. The regulations require the state TANF agency to define relevant terms and to inform parents about the sanction exception and the state's procedures for determining a family's inability to obtain child care (including appeal procedures). This is a change from the proposed regulations which only required that the state child care agency, rather than the TANF agency, provide such information. Both the proposed and the final regulations set forth criteria that affect the amount of the penalty imposed. These include whether the state has a statewide process to inform parents about this exception to the work requirement and whether there is a pattern of substantiated complaints that the state has violated this requirement.

The final regulations reflect the statutory provision that a state must, subject to good cause or other exceptions that a state may establish, reduce or terminate assistance to a family if an individual refuses to engage in work activities. The regulation repeats statutory language that a state must, at a minimum, impose a pro rata sanction on a family. In the preamble discussion of this provision, HHS indicates that there is no single prescribed method for a pro rata sanction and that a state may make a pro rata reduction based on any reasonable method.


(Sections 260.70-260.76 and preamble discussion at 64 FR 17731-39)

Under the federal welfare law, states that had received waivers of the prior AFDC law may follow their waiver-based reforms instead of provisions in the federal law that are inconsistent with the waiver, for the duration of the waiver. Nevertheless, several aspects of the proposed regulations would have discouraged states from continuing waivers. For example, the proposed regulations would have denied penalty relief that might otherwise be available if a state continued its waiver provisions rather than apply the TANF provisions. In addition, the proposed regulations would not have recognized the exemptions from work requirements that were part of a state's waiver in the calculation of a state's compliance with the TANF work participation rates, with the result that families exempted under state rules still would be considered in federal work participation calculations for the state.

The final regulations contain significant changes from the proposed regulations; a state that wishes to continue its waiver-based approaches to welfare reform will be able to do so without detriment. The final regulations no longer deny relief from penalties to a state that has continued its waiver-based policies. Moreover, the final regulations more closely reflect the congressional mandate that states, if they choose, be allowed to continue their waiver-based approaches rather than being required to comply with inconsistent TANF provisions. The final regulations do this largely through identifying how HHS will evaluate compliance with time limit restrictions or work participation rates when a state has continued a waiver-based reform.

For time limits, a state can follow its waiver in lieu of the TANF requirements if the waiver-based approach terminates assistance to families or individuals when the time limit is reached. The 60-month federal TANF clock generally will run for families for whom the state's waiver-based time limit clock runs. However, a state need not count toward the federal five-year time limit any month in which assistance is provided with TANF funds while an adult is exempt from the state's time limit under the waiver. For example, if a state's waiver-based time limit does not apply to families in which the adult is disabled, then any assistance provided to these families with TANF funds during the period of the waiver will not count toward the family's federal 60-month time limit.

Additionally, in a notable change from the proposed regulations, the final regulations indicate that a state with an adult-only time limit — under which benefits continue for the children when the state time limit is reached — need not count any months during which the adult receives assistance under the waiver toward the federal TANF time limit. (And once the adult is removed from the grant due to the state time limits on an adult's receipt of assistance, the months in which only the children receive assistance do not count toward the federal TANF time limits because no adult is receiving assistance.) Consider, for example, a state that imposes a 24-month time limit on adults but continues benefits for the children when the state 24-month time limit is reached. During the period of the waiver, none of the months of assistance provided to the family with federal TANF funds — neither the first 24 months during which the adult and the children receive assistance nor the subsequent months during which only the children receive assistance — count toward the federal 60-month time clock.

The regulations also allow a state to provide assistance to families with TANF funds beyond 60 months in accordance with its waiver-based extension policies even if the extensions are provided to more than 20 percent of the caseload (which is the limit on the number of extensions set by the federal welfare law).

The final regulations allow a state to follow its waiver-based work policies in lieu of the work requirements of section 407 of the Social Security Act if the state had a waiver of some aspect of the work policies of the prior welfare law. The state must still meet the work participation rates of the federal welfare law, but three provisions in the final regulations give states some flexibility in meeting those requirements. First, the state can count participation in activities included under its waiver policies even if they are different from the limited list of countable work activities in the federal law. Second, the state also can use the hours of participation required under the waiver rather than the number of hours required under the federal welfare law in determining whether an individual may be counted as participating in work activities. Most significantly, the state can exclude from the calculation of its work participation rate all families that are exempt from participation under the state's waiver-based program and, if applicable, experimental and control cases not otherwise exempted. Allowing the exclusion of exempt families is a significant change from the proposed rules. Recently, before the final regulations were issued, several states proposed to eliminate or narrow work exemptions under their waiver-based program in order to meet federal participation rates. Given the final regulations, these states do not need to change their exemptions to assist in meeting participation rates.

The regulations require that a state must have maintained its waiver continuously in order to follow waiver provisions rather than following different TANF provisions. But, they clarify that a state can continue to follow its general waiver policies while at the same time modifying the state's policies to make them closer to TANF requirements. The regulations set forth very detailed requirements governing the certification that a state if it plans to follow its waiver rules. This certification should eliminate some of the current confusion about whether a state has decided to follow its waiver policies rather than implement TANF provisions.


Family violence option
(Sections 260.50-260.58 and preamble discussion at 64 FR 17741-47)

The Family Violence Option (FVO) offers states the opportunity to screen, provide services to, and when appropriate, waive TANF program requirements for victims of domestic violence. A key FVO issue in the regulations is how to ensure that states will not be penalized for failure to meet time limit requirements or work participation rates because of waivers granted under the Family Violence Option. Both the proposed and final regulations address this issue through a penalty relief structure which ensures that states providing "federally recognized good cause domestic violence waivers" (meaning they comply with the rules set in the FVO) are not penalized for exempting domestic violence victims from time limits and work requirements. For example, if the amount by which a state exceeds the 20 percent limit on families assisted beyond 60 months is attributed to domestic violence waivers, the state will not be penalized. In cases where a state can attribute some, but not all of its failure to meet the requirements to domestic violence waivers, the waivers still will be taken into consideration and the penalty may be reduced.

In order to benefit from the penalty relief or reduction, the state must adopt the FVO. To fulfill the basic requirements of the FVO, states must certify that they have the standards and procedures in place for (a) screening recipients to identify a history of domestic violence, while at the same time maintaining confidentiality; (b) referring recipients to supportive services; and (c) providing waivers of program requirements for as long as necessary when compliance would make it more difficult to escape violence or would unfairly penalize the domestic violence victim. A state can grant a good cause domestic violence waiver that does not meet FVO requirements, but such waivers will not be considered for penalty relief. To be "federally recognized," a good cause domestic violence waiver must have the following three qualities: (a) the program requirements that are waived must be identified; (b) waivers must be granted appropriately based on need as determined by a person trained in domestic violence who makes a formal assessment; (c) they must be accompanied by a service plan that is developed by a person trained in domestic violence and, when appropriate, is designed to lead to work. Finally, in order to receive penalty relief, states must report to HHS on their strategies and procedures, as well as the aggregate number of FVO waivers that they grant.

The final regulations contain several changes from the proposed regulations concerning the Family Violence Option. One change relates to the time period that a waiver can be granted. The final regulations allow states to grant waivers of program requirements for "as long as necessary." (However, redeterminations must be made every six months.) The proposed regulations would have limited waivers to only six months.

The final regulations also expand the circumstances under which an extension of a time limit can qualify as a federally recognized good cause domestic violence waiver. Although the final regulations do not allow an FVO waiver to "stop the TANF clock" as a number of advocates had urged, the regulations recognize that the basis for time limit extensions can include the recipient's past domestic violence circumstances as well as the situation at the time the limit is reached. Also under the final regulations, an individual can receive a time limit extension without having to demonstrate an inability to work. In the proposed regulations, recipients would have been required to demonstrate current inability to work in order to receive a time limit extension.

The final regulations also changed the requirements for the service plans states are required to develop with domestic violence victims. The proposed regulations emphasized that the principal goal of the service plan is to "lead to work." The final regulations acknowledge that while work still is an important goal, not all victims of domestic violence may be ready to move toward employment during a time of crisis. The final regulations allow the service plan to set forth activities that move the recipient toward safety and not necessarily toward immediate employment, depending on the circumstances.

Another change from the proposed regulations is the requirement that the service plan must be developed by staff who have had training in domestic violence. In the preamble, HHS acknowledges that "staff need some level of special knowledge and expertise in order to make appropriate decisions in these highly sensitive case situations." HHS indicates that states can choose to offer trainings for their caseworkers on this issue, or they can contract with outside domestic violence agencies to provide these services.


EITC and other refundable tax credits
(Section 260.33 and preamble discussion at 64 FR 17764;
Section 260.31(b)(4) and preamble discussion at 64 FR 17763)

The final TANF regulations note that state earned income tax credits meet the purposes of the welfare law and thus TANF or MOE funds can be used to support state EITCs. The federal EITC, upon which state EITCs are based, targets low- and moderate-income working families with children and can be especially helpful to families making the transition to work. Moreover, the regulations specifically exclude state EITCs from the definition of "assistance," which means that time limit and other requirements do not apply to recipients of such credits.

The final rule allows states to use TANF or MOE funds only for refundable EITCs. These are credits that provide families a refund when the credit amount is greater than a family's tax bill. State EITCs that are non-refundable — those that only reduce or eliminate state income taxes that low-income families otherwise would owe but do not provide refunds — are not allowable under the final rule. More specifically, states can count only the portion of an EITC that provides a refund in excess of tax liability to families that are considered TANF-eligible.

During the development of the final TANF regulations, some commenters argued that non-refundable state EITCs also should be allowed to count as MOE expenditures. They claimed that non-refundable EITCs have the effect of increasing the after-tax income of low-income families with children and thus should be considered allowable for MOE purposes.

In the preamble to the final regulations, HHS explains that non-refundable EITCs can not be considered a "qualified state expenditure," as is required in the statute to be counted toward MOE, because they provide tax relief only. Tax relief results in foregone revenue, not outlays. When families receive a refund because a refundable tax credit exceeds their tax liability, on the other hand, the refunded portion of the credit is in essence an income supplement and equivalent to an expenditure of funds. The preamble also notes that if non-refundable EITCs could be counted toward MOE, then states would be allowed to count any form of tax relief, such as broad-based tax rate cuts, which is not the intent of the MOE provision.

The final regulations also note that other refundable tax credits that meet one of the purposes of the law, such as refundable dependent care credits, can be supported with TANF or MOE funds. Again, only the refunded amount for TANF-eligible families would be counted. The preamble to the final regulations state that TANF or MOE funds cannot be used, however, for refundable sales tax and property tax credits. In some states, these credits appear on the income tax form for the purpose of administrative convenience, and families receive a refund if the amount of the credit exceeds their income tax liability. In other states, families claim these credits by filing a separate form. Regardless of the form of administration, these credits are intended only to offset a part of the burden of state sales taxes or property taxes. No state sales tax credit or property tax credit is designed to provide relief in excess of the amount of the tax paid by a family. For these reasons, the preamble indicates that these credits only provide tax relief and are not considered qualified expenditures for MOE purposes.


Transfers of TANF funds to the social services or child care block grants
(Preamble discussion at 64 FR 17840-41)

The preamble to the final regulations notes that states can spend funds carried over from previous years only on "assistance." This means that states spending a substantial amount of TANF funds on activities not considered assistance — such as work supports for employed families — must serve those families with current-year TANF funds and not with funds carried over from previous years.

Another implication is that states cannot carry over unused authority to transfer funds to other block grants from prior years. Consider, for example, a state that transfers a combined total of 15 percent of its TANF block grant funds to the child care block grant and the social services block grant (also known as Title XX) in fiscal year 1999. This is less than the 30 percent limit on such transfers. Also assume that the state does not spend all of its fiscal year 1999 TANF funds during the year and therefore carries forward some unspent funds. In considering how to spend its remaining fiscal year 1999 block grant funds in fiscal year 2000 and beyond, the state would be allowed to spend those funds only on activities considered "assistance." This means the state could not transfer any of those funds to the child care block grant or social services block grant, even though it had not utilized all of its transfer authority for fiscal year 1999.

Many states have transferred funds to these block grants in order to provide support that is not counted toward families' TANF time limit or incur other TANF-related restrictions. This is because transferred funds are governed by the respective rules of the child care and social services block grants, which do not have time limit restrictions, rather than TANF rules. Because the final regulations exclude from the definition of "assistance" a number of services that states have been supporting through transfers to CCDBG or SSBG — including child care and transportation for working families — states now have less need to transfer funds out of TANF. As noted above, states can use TANF funds directly for those services, as long as they come from the state's current-year block grant allocation. Nevertheless, there still are likely to be circumstances under which a state wishes to make such transfers. The final regulations make clear that states must determine the need to transfer funds from a given block grant allocation and complete such transfers before the fiscal year ends.

Note that because the regulations do not take effect until October 1, 1999, a state may still transfer unspent TANF funds from its fiscal year 1997 or fiscal year 1998 block grant to SSBG or CCDBG until that time, under the reasonable interpretation rule.


Issues related to MOE spending
(Sections 263.2 and 263.5 and preamble discussion at 64 FR 17825-27)

Under the welfare law, states must spend a specified amount of their own funds in order to receive their federal TANF block grant funds. The state spending requirement is a maintenance-of-effort (MOE) requirement. States must spend an amount equal to at least 80 percent of the amount they spent in fiscal year 1994 on AFDC-related programs. States that meet the work participation requirements in the welfare law are allowed to meet the MOE requirement by spending a minimum of 75 percent of their fiscal year 1994 spending.

The welfare law includes several provisions related to the types of expenditures that are considered "qualified state expenditures" for MOE purposes. One of the significant issues related to when state expenditures on a given program can be counted toward the MOE requirement has been the definition of "TANF-eligible" families. Among other provisions, the welfare law requires that state-funded benefits or services can be counted toward MOE only if the benefit is provided to or on behalf of families that are "eligible for TANF assistance."(7) The proposed regulations defined TANF-eligible families to be families with related children that are financially eligible under a state's TANF income and resource eligibility rules.

Because financial eligibility rules for MOE programs are linked to a state's TANF financial eligibility rules, the preamble section on MOE spending begins with a discussion of how states set TANF eligibility rules. The preamble notes that states can establish different financial eligibility rules for the various TANF programs they operate. For example, the preamble notes that "a state could establish different financial criteria for families no longer receiving TANF cash assistance in order that family members may receive transitional services." The preamble and the regulations also make clear that financial eligibility for TANF programs can be based solely on income and does not have to include an asset eligibility limit.

The preamble then discusses how the TANF eligibility rules affect how states identify MOE eligibility rules. When a state has varying financial eligibility rules in its TANF programs, the preamble notes that eligible families for MOE purposes are those who meet "the financial criteria (income and resource requirements, when applicable) corresponding to the particular activity (i.e., service or assistance provided) as described in the State plan." As this indicates, states must include the financial eligibility rules for all TANF benefits and services in their state TANF plan if they will be used to define TANF-eligible families for MOE purposes.

These provisions appear to mean, for example, that state expenditures on child care can count toward MOE if they are made on behalf of families that have incomes and assets below the financial eligibility rules for TANF child care. If a state has no TANF child care program, the final regulations may mean that child care expenditures could be counted toward MOE if the state includes in its state TANF plan a set of general TANF financial eligibility rules that cover all activities not specifically addressed elsewhere. The eligible families provisions of the regulations also mean that MOE-funded programs do not have to include an asset limit, as long as the corresponding TANF activity has no asset test.

Another MOE provision addressed in the final regulations is the "new spending" test. This provision is intended to ensure that states make a meaningful financial commitment to welfare reform efforts. To this end, the statute notes two rules governing when expenditures from a program that serves TANF-eligible families can be counted toward MOE. First, states can count toward MOE all expenditures that would have qualified for federal matching funds under the state's prior AFDC program, such as a basic cash assistance program. Second, for programs that were not part of the state's AFDC system, expenditures can be counted toward MOE only to the extent that they are higher than state spending on that program in fiscal year 1995. This helps ensure that expenditures counted toward MOE represent either spending on traditional welfare programs or other new investments in low-income families. This second element is commonly referred to as the "new spending test."

The final regulations interpret the new spending test for non-AFDC programs to mean that states must compare current-year spending on TANF-eligible families with total program expenditures in fiscal year 1995. The increase since fiscal year 1995 is the amount that can be counted toward MOE. This interpretation may limit the extent to which states can count expenditures from pre-existing programs that had been outside of AFDC. This is because such programs may serve a mix of families that are TANF- eligible and families that are not eligible. Consider, for example, a job training program that serves adults both with and without children. Only low-income families with children could be considered TANF-eligible for MOE purposes. In determining fiscal year 1999 expenditures that count toward MOE, the state would have to identify the portion of 1999 spending that reflected services on behalf of TANF-eligible families, and then compare that amount with total expenditures for that program in fiscal year 1995. This method results in counting a smaller amount toward MOE than if the state were to compare current year spending on TANF-eligible families with just the portion of fiscal year 1995 expenditures that benefitted TANF-eligible families.


Data collection(8)
(Sections 265.1-265.10, appendices A through I,
and preamble discussion at 64 FR 17857-73)

The final regulations require states to collect and submit data about spending in their TANF- and MOE-funded programs, and about families who are receiving "assistance" in their TANF-funded programs. If a state wishes to qualify for either the caseload reduction credit or the high performance bonus, it must also submit data on families receiving assistance in its MOE-funded programs. The data states are required to collect and report on families and on spending are the primary mechanism by which states will be held accountable for meeting the specific requirements set forth in the welfare law, and the broader welfare reform goals such as helping parents find employment. The regulations seek to ensure that states report comparable data so that families, programs, and outcomes can be compared across states.

States are required to collect three types of data: disaggregated case record data, which is specific demographic and other information about each individual and family unit; aggregated data, which describes aspects of states' total caseloads such as total number of single parent or two parent families; and financial data on both TANF- and MOE-funded programs. The disaggregated data can be collected either on all cases, or the state can use a sample as long as they use a scientific sampling method that is approved by HHS. States must provide these data to HHS on a quarterly basis through the following reports(9):

Quarterly reports

1) TANF Data Report
This report includes three sections: disaggregated case record data on families receiving assistance including demographics, employment status, work participation activities, and other related information; disaggregated case record data on families no longer receiving assistance, including reasons for case closure; and aggregated data on the number of applications submitted and approved, the number of recipients, and the number of closed cases.

2) TANF Financial Report
This includes information on the state expenditures of federal TANF funds and state MOE funds.

3) SSP—MOE Data Report
This report is only required of states that wish to receive the caseload reduction credit and the high performance bonus. It includes data elements similar to those in the TANF report, but it covers participants in separate state MOE-funded programs. Like the TANF data report, it includes disaggregated and aggregated case data on families receiving assistance and families no longer receiving assistance. Data is only required on families receiving services that meet the federal definition of "assistance."

Annual report

In addition to the quarterly data required, states must file an annual report that includes more detailed information on TANF-funded and MOE-funded programs, including the state's definition of each work activity; a description of its sanction procedures; the number of child care payments it made; and descriptions of other aspects of the states' TANF policy including the Family Violence Option procedures (if the state has adopted it).(10) The annual report must also contain a description of any non-recurrent, short-term benefits provided, including the eligibility criteria for such benefits and any limits on duration or frequency. The state must also describe any policies that limit such payments to TANF-eligible families or that have the effect of delaying or suspending a family's eligibility for assistance.

In addition, HHS requires states to report any procedures or activities developed to ensure that individuals diverted from TANF through receiving short-term assistance are provided information about, referrals to, or access to other program benefits (such as Medicaid and food stamps) that could assist them to make the transition from welfare to work. In the preamble, HHS discusses the "tremendous importance of Medicaid and Food Stamps as supports to working families," encouraging states to maintain critical linkages to these programs. HHS states that it "strongly believe(s) that effective procedures to ensure that diverted individuals access Medicaid, Food Stamps, or other programs are critical to the success of TANF programs in achieving lasting employment for the families they serve." HHS notes that states may be in violation of Medicaid or food stamp requirements governing applications for assistance if they delay action on the Medicaid or food stamp application or require a re-application for food stamps or Medicaid if the TANF portion of a joint application is denied.

Some data collection requirements in the final rule have decreased relative to the proposed regulations. One reason for this is that the number of programs for which family-level data collection is required has decreased due to the narrowing of the definition of "assistance." (States must report only on those families receiving assistance.) This means that states can offer various services such as counseling, transportation assistance, and short-term help that do not meet the definition of assistance, and there is no requirment to collect data on those families. HHS also reduced the required number of data elements for the family-level reports. In each area, data elements that did not meet the statutory purposes for the TANF program were removed. At the same time, in some areas, data elements have been added or expanded. For example, the data required on reasons why cases have been closed has expanded. HHS also clarified that data collected on case closures be based only on the last month the family received assistance.

The TANF and MOE financial reports concerning how money is spent and on which programs and activities are more detailed under the final regulations. For example, the financial report form (Appendix D) includes new lines to report spending on diversion payments and refundable tax credits. In addition, states will be required to submit a separate annual report identifying and describing all programs that are supported wholly or in part with MOE funds.

Each state is required to submit the quarterly reports within 45 days following the end of the quarter. The annual report is due at the same time as the fourth quarterly report. The first quarterly reports are due on February 14, 2000. This report will provide data on the first quarter of implementation under the final regulations, the first quarter of fiscal year 2000, October 1999 through December 1999. HHS provides extra time to file the first report for a state experiencing problems arising from the state's computer systems' inability to properly identify the year 2000. If a state submits its missing data by June 30, 2000 and can demonstrate that its tardiness is a result of the year 2000 problems, the state may claim reasonable cause and not be subject to a penalty.


1. This is the first in a series of papers the Center on Budget and Policy Priorities will publish related to the new TANF regulations. This paper describes selected requirements of the new regulations. Future papers will address the policy choices and opportunities available to states as they design and refine welfare policies that assist families move to work. In addition, a few areas of interest are omitted from this paper because further clarification is needed; these include the rules that apply to providing benefits and services, including assistance, to noncustodial parents.

2. For examples of ways in which states can use these funds, see Reinvesting Welfare Savings: Aiding Needy Families and Strengthening State Welfare Reform, Center on Budget and Policy Priorities (March 1998), available at www.cbpp.org. For information on the size of state TANF surpluses, see Lazere, Unspent TANF Funds at the End of Federal Fiscal Year 1998, also available at the Center's web site.

3. The final regulations are published at 64 Federal Register 17719-17931 (April 12, 1999). The regulations, an index, a fact sheet, and HHS's executive summary are available at the HHS ACF Office of Family Assistance web site at http://www.acf.dhhs.gov/programs/ofa/.

4. States can fund welfare-related programs with TANF funds alone, with a mixture of TANF and MOE funds, or, as noted, with MOE funds alone. When states support programs with a combination of TANF and MOE funds, the two sources can be commingled — which means there is no distinction between the two funding streams — or the funds can be segregated — which means the state accounts separately for the uses of the two funds within the same program. When a program is funded with commingled funds, all TANF-related rules apply to all families receiving assistance. When the TANF and MOE funds are segregated, families supported with the MOE funds are not subject to the 60-month time limit, but they are required to assign child support, they are considered for work participation purposes, and TANF-related data collection requirements apply.

5. The welfare law makes $1 billion available through the "high performance bonus" to reward states that are successful in moving families from welfare to work. The bonus is based on the share of recipients who become employed, on the rate job retention, and on gains in earnings over time. The caseload reduction credit, discussed in detail later in this analysis, reduced the required percentage of families a state must have engaged in work activities. The credit amount is based on caseload decline.

6. The 12 work activities listed in the federal law are unsubsidized employment, subsidized private sector employment, subsidized public sector employment, work experience, on-the-job training, job search and job readiness assistance, community service programs, vocational education training, job skills training directly related to employment, education directly related to employment for a recipient lacking a high school diploma or GED, secondary school or a GED preparation course for a recipient lacking a high school diploma or GED, and child care services provided to an individual participating in a community service program.

7. The welfare law explicitly states that MOE funds also can be spent on families that are not eligible for TANF-funded assistance because of the welfare law's restrictions providing benefits to certain immigrants who are lawfully present in the United States or because they have reached the 60-month time limit.

8. In the preamble to the final regulations, HHS indicated that the Office of Management and Budget still is receiving comments on the data collection portion of the final regulations, pursuant to the Paperwork Reduction Act. 64 Federal Register 17875. Comments must be submitted by May 11, 1999. However, comments on the financial reporting form (the ACF-196 form) must be submitted by April 30, 1999.

9. The forms for these reports can be found in Appendices A through I of the final regulations (64 FR 17903-28).

10. The Caseload Reduction Credit Report, which describes any changes in the caseload resulting from eligibility factors, must also be submitted annually if the state wishes to utilize the credit.