In general

(A) System (i) In general In carrying out the supplemental nutrition assistance program, the Secretary shall carry out a system that enhances payment accuracy and improves administration by establishing fiscal incentives that require State agencies with high payment error rates to share in the cost of payment error. (ii) Tolerance level for excluding small errors The Secretary shall set the tolerance level for excluding small errors for the purposes of this subsection— (I) for fiscal year 2014, at an amount not greater than $37; and (II) for each fiscal year thereafter, the amount specified in subclause (I) adjusted by the percentage by which the thrifty food plan is adjusted under section 2012(u)(3) of this title between June 30, 2013 , and June 30 of the immediately preceding fiscal year.

(B) Quality control system integrity (i) In general Not later than 180 days after December 20, 2018 , the Secretary shall issue interim final regulations that— (I) ensure that the quality control system established under this subsection produces valid statistical results; (II) provide for oversight of contracts entered into by a State agency for the purpose of improving payment accuracy; (III) ensure the accuracy of data collected under the quality control system established under this subsection; and (IV) for each fiscal year, to the maximum extent practicable, provide for the evaluation of the integrity of the quality control process of not fewer than 2 State agencies, selected in accordance with criteria determined by the Secretary. (ii) Debarment In accordance with the nonprocurement debarment procedures under part 417 of title 2, Code of Federal Regulations, or successor regulations, the Secretary shall debar any person that, in carrying out the quality control system established under this subsection, knowingly submits, or causes to be submitted, false information to the Secretary.

(C) Establishment of liability amount for fiscal year 2003 and thereafter With respect to fiscal year 2004 and any fiscal year thereafter for which the Secretary determines that, for the second or subsequent consecutive fiscal year, a 95 percent statistical probability exists that the payment error rate of a State agency exceeds 105 percent of the national performance measure for payment error rates announced under paragraph (6), the Secretary shall establish an amount for which the State agency may be liable (referred to in this paragraph as the “liability amount”) that is equal to the product obtained by multiplying— (i) the value of all allotments issued by the State agency in the fiscal year; (ii) the difference between— (I) the payment error rate of the State agency; and (II) 6 percent; and (iii) 10 percent.

(D) Authority of Secretary with respect to liability amount With respect to the liability amount established for a State agency under subparagraph (C) for any fiscal year, the Secretary shall— (i) (I) require that a portion, not to exceed 50 percent, of the liability amount established for the fiscal year be used by the State agency for new investment, approved by the Secretary, to improve administration by the State agency of the supplemental nutrition assistance program (referred to in this paragraph as the “new investment amount”), which new investment amount shall not be matched by Federal funds; (II) designate a portion, not to exceed 50 percent, of the amount established for the fiscal year for payment to the Secretary in accordance with subparagraph (E) (referred to in this paragraph as the “at-risk amount”); or (III) take any combination of the actions described in subclauses (I) and (II); or (ii) make the determinations described in clause (i) and enter into a settlement with the State agency, only with respect to any new investment amount, before the end of the fiscal year in which the liability amount is determined under subparagraph (C).

(E) Payment of at-risk amount for certain States (i) In general A State agency shall pay to the Secretary the at-risk amount designated under subparagraph (D)(i)(II) for any fiscal year in accordance with clause (ii), if, with respect to the immediately following fiscal year, a liability amount has been established for the State agency under subparagraph (C). (ii) Method of payment of at-risk amount (I) Remission to the Secretary In the case of a State agency required to pay an at-risk amount under clause (i), as soon as practicable after completion of all administrative and judicial reviews with respect to that requirement to pay, the chief executive officer of the State shall remit to the Secretary the at-risk amount required to be paid. (II) Alternative method of collection (aa) In general If the chief executive officer of the State fails to make the payment under subclause (I) within a reasonable period of time determined by the Secretary, the Secretary may reduce any amount due to the State agency under any other provision of this section by the amount required to be paid under clause (i). (bb) Accrual of interest During any period of time determined by the Secretary under item (aa), interest on the payment under subclause (I) shall not accrue under section 2022(a)(2) of this title .

(F) Use of portion of liability amount for new investment (i) Reduction of other amounts due to State agency In the case of a State agency that fails to comply with a requirement for new investment under subparagraph (D)(i)(I) or clause (iii)(I), the Secretary may reduce any amount due to the State agency under any other provision of this section by the portion of the liability amount that has not been used in accordance with that requirement. (ii) Effect of State agency’s wholly prevailing on appeal If a State agency begins required new investment under subparagraph (D)(i)(I), the State agency appeals the liability amount of the State agency, and the determination by the Secretary of the liability amount is reduced to $0 on administrative or judicial review, the Secretary shall pay to the State agency an amount equal to 50 percent of the new investment amount that was included in the liability amount subject to the appeal. (iii) Effect of Secretary’s wholly prevailing on appeal If a State agency does not begin required new investment under subparagraph (D)(i)(I), the State agency appeals the liability amount of the State agency, and the determination by the Secretary of the liability amount is wholly upheld on administrative or judicial review, the Secretary shall— (I) require all or any portion of the new investment amount to be used by the State agency for new investment, approved by the Secretary, to improve administration by the State agency of the supplemental nutrition assistance program, which amount shall not be matched by Federal funds; and (II) require payment of any remaining portion of the new investment amount in accordance with subparagraph (E)(ii). (iv) Effect of neither party’s wholly prevailing on appeal The Secretary shall promulgate regulations regarding obligations of the Secretary and the State agency in a case in which the State agency appeals the liability amount of the State agency and neither the Secretary nor the State agency wholly prevails.

(G) Corrective action plans The Secretary shall foster management improvements by the States by requiring State agencies, other than State agencies with payment error rates of less than 6 percent, to develop and implement corrective action plans to reduce payment errors.