# Proposed Revision of Annual Information Return/Reports > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-14893 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** July 21, 2016 - **Citation:** 81 FR 47534 ## Text DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Parts 2520 and 2590 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301 PENSION BENEFIT GUARANTY CORPORATION 29 CFR Part 4065 RIN 1210-AB63 Proposed Revision of Annual Information Return/Reports AGENCY: Employee Benefits Security Administration, Labor, Internal Revenue Service, Treasury, Pension Benefit Guaranty Corporation. ACTION: Notice of proposed forms revisions. SUMMARY: This document contains proposed changes to the Form 5500 Annual Return/Report forms, including the Form 5500, Annual Return/Report of Employee Benefit Plan (Form 5500 Annual Return/Report), and the Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan (Form 5500-SF). The annual returns/reports are filed for employee pension and welfare benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code). The proposed revisions in this Notice reflect efforts of the Department of Labor, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation (collectively Agencies) to improve employee benefit plan reporting for filers, the public, and the Agencies by modernizing financial information filed regarding plans; updating fee and expense information on plan service providers with a focus on harmonizing annual reporting requirements with the Department of Labor's final disclosure requirements enhancing mineability of data filed on annual return/reports; requiring reporting by all group health plans covered by Title I of ERISA, including adding a new Schedule J (Group Health Plan Information); and improving compliance under ERISA and the Code through selected new questions regarding plan operations, service provider relationships, and financial management of the plan. These revisions, which are being proposed in conjunction with a recompete of the ERISA Filing and Acceptance System (EFAST2) contract, if adopted, generally would apply for plan years beginning on or after January 1, 2019. EFAST2 is expected to begin processing the Plan Year 2019 Form 5500 Annual Return/Report beginning January 1, 2020. The proposed revisions would affect employee pension and welfare benefit plans, plan sponsors, administrators, and service providers to plans subject to annual reporting requirements under ERISA and the Code. DATES: Written comments must be received by the Department of Labor on or before October 4, 2016. ADDRESSES: To facilitate the receipt and processing of written comment letters on the proposed regulation, EBSA encourages interested persons to submit their comments electronically. You may submit comments, identified by RIN 1210-AB63, by any of the following methods: Federal eRulemaking Portal: http://www.regulations.gov . Follow instructions for submitting comments. Email: e-ORI@dol.gov . Include RIN 1210-AB63 in the subject line of the message. Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: RIN 1210-AB63; Annual Reporting and Disclosure, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210. Hand Delivery/Courier: Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: RIN 1210-AB63; Annual Reporting and Disclosure, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210. Instructions: All comments received must include the agency name and Regulatory Identifier Number (RIN) for this rulemaking (RIN 1210-AB63). Persons submitting comments electronically are encouraged not to submit paper copies. All comments received will be made available to the public, posted without change to http://www.regulations.gov and http://www.dol.gov/ebsa , and made available for public inspection at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210, including any personal information provided. FOR FURTHER INFORMATION CONTACT: Mara S. Blumenthal, Employee Benefits Security Administration (EBSA), U.S. Department of Labor, (202) 693-8523, for questions relating to changes to the Form 5500, Form 5500-SF, Schedules A, C, D, G, and H, as well as the general reporting requirements under Title I of ERISA; Suzanne Bach, EBSA, U.S. Department of Labor, 202-693-8440, for questions relating to the collection of group health plan information; Leslie Larson, Internal Revenue Service (IRS), at the IRS taxpayer assistance answering service at 1-877-829-5500 (a toll-free number), for questions relating to Schedule R, Schedule E, as well as the general reporting requirements under Internal Revenue Code (Code); Steven Klubock, IRS, at 1-877-829-5500, for IRS questions relating to the Schedules MB and SB; and Grace Kraemer or Theresa Anderson, Pension Benefit Guaranty Corporation (PBGC), (202) 326-4000 for questions relating to Schedules MB and SB of the Form 5500, and Lines 14 and 19 of Schedule R, as well as questions relating to the general reporting requirements under Title IV of ERISA. For further information on an item not mentioned above, contact Ms. Blumenthal. The telephone numbers referenced above are not toll-free numbers, except as otherwise provided. Customer service information: Individuals interested in obtaining information from the DOL concerning Title I of ERISA may call the EBSA Toll-Free Hotline at 1-866-444-EBSA (3272) or visit the DOL's Web site ( www.dol.gov/ebsa ). SUPPLEMENTARY INFORMATION: Sections 101 and 104 of Title I and section 4065 of Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) and sections 6057(b), 6058(a), and 6059(a) of the Internal Revenue Code of 1986 (Code), and related regulations, impose annual reporting and filing obligations on pension and welfare benefit plans, as well as on certain other entities. Plan administrators, employers, and others generally satisfy these annual reporting obligations by filing the Form 5500, Annual Return/Report of Employee Benefit Plan together with any required schedules and attachments (Form 5500 Annual Return/Report), or Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan (Form 5500-SF). 1 Specifically, filing of the Form 5500 or, for eligible filers the Form 5500-SF, with any required schedules and attachments in accordance with the instructions and related regulations, constitutes compliance under Title I of ERISA with the applicable limited exemption, alternative method of compliance, and simplified reporting prescribed in 29 CFR 2520.103-1, et seq. Such filings will also satisfy an applicable plan administrator's annual reporting obligation under section 4065 of Title IV of ERISA. Filing of a Form 5500 or Form 5500-SF, together with the required attachments and schedules in accordance with the instructions, by plan administrators, employers, and certain other entities also satisfies the annual filing and reporting requirements under Code sections 6057(b), 6058(a) and 6059(a). 2 1 Certain one-participant plans and foreign plans that are not subject to the requirements of section 104(a) of ERISA are required to file Form 5500-EZ with the IRS on paper, or voluntarily file electronically using Form 5500-SF to satisfy certain annual reporting and filing obligations imposed by the Code. Beginning with the 2015 plan year, however, some filers are required to file their annual returns electronically using Form 5500-SF instead of filing a paper Form 5500-EZ if the filer is required to file at least 250 returns of any type with the IRS. See Treasury Regulations section 301.6058-2 for more information on mandatory electronic filing of employee retirement benefit plan returns. 2 Some filing requirements under these provisions are not within the scope of this Notice. For example, multiple employer welfare arrangements and certain entities claiming exception are required to file with the DOL the Form M-1 (Report for Multiple Employer Welfare Arrangements (MEWAs) and Certain Entities Claiming Exception (ECEs)). The Form 5500 Annual Return/Report serves as the principal source of information and data available to the DOL, the IRS, and the PBGC (collectively the Agencies) concerning the operations, funding, and investments of approximately 806,000 pension and welfare benefit plans. These plans cover roughly 143 million workers, retirees, and dependents of private sector pension and welfare plans 3 with estimated assets of $8.7 trillion. 4 Accordingly, the Form 5500 Annual Return/Report is essential to each Agency's enforcement, research, and policy formulation programs. They are also an important source of information and data for use by other federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies. The Form 5500 Annual Return/Report also serves as the primary means by which the operations of plans can be monitored by plan participants and beneficiaries and by the general public. 3 Source: U.S. Department of Labor, EBSA calculations using the March 2014 Current Population Survey Annual Social and Economic Supplement and the 2013 Medical Expenditure Panel Survey. 4 EBSA projected ERISA covered pension, welfare, and total assets based on the 2013 Form 5500 Annual Return/Report filings with the U.S. Department of Labor (DOL), reported SIMPLE assets from the Investment Company Institute (ICI) Report: The U.S. Retirement Market, Second Quarter 2015, and the Federal Reserve Statistical Release Z.1 Financial Accounts of the United States (Sept. 18, 2015). Generally, the Agencies have conducted a notice and comment rulemaking initiative to implement significant overhauls of the structure of the forms and schedules coincident with changes to the EFAST system. Past revisions to the forms and schedules have addressed changes to applicable law, changes in employee benefit plans and financial markets, and corresponding shifts in agency priorities and needs. The Agencies have also made changes to reduce costs and make filing and processing more efficient. In interim years, the Agencies have made other discrete changes as set forth annually in the “Changes to Note” section in the instructions, some of which have involved targeted rulemaking activity to implement reporting changes required by law. 5 The Agencies' last major tri-agency revision to the Form 5500 Annual Return/Report was proposed in 2006, 71 FR 41615 (Jul. 21, 2006), and finalized in 2007, effective for the 2009 form series. 72 FR 64731 (Nov. 16, 2007). 5 See, e.g., Revisions to Annual Return/Report—Multiple-Employer Plans, Interim Final Rule, 79 FR 66617 (Nov. 10, 2014); Filings Required of Multiple Employer Welfare Arrangements and Certain Other Related Entities, Final Rule, 78 FR 13781 (Mar. 1, 2013). This forms revision proposal generally is being coordinated with a recompete of the contract for the ERISA Filing Acceptance System II (EFAST2)—the wholly electronic system operated by a private-sector contractor for the processing of Form 5500 Annual Return/Report. The majority of proposed forms revisions are currently targeted for implementation in the Plan Year 2019 Form 5500 Annual Return/Report. Development of EFAST changes pursuant to a new contract could begin in spring 2018, with processing under the new contract starting on January 1, 2020. However, this planned implementation timeline may be impacted if there are modifications to the recompete contract acquisition plan. As a result, some forms revisions may be implemented in earlier or later form years, including but not limited to the IRS and PBGC changes for 2016 as shown in the proposed data elements in Appendix A. To the extent changes are made separately from a more general implementation of the proposed revisions, the Agencies will seek appropriate clearance under the Paperwork Reduction Act of 1995 (PRA) to implement the changes in connection with any given year's forms. The Agencies expect that the EFAST2 recompete would continue to deliver a user-friendly Web site, filing applications and web services, and contact center services similar to what is currently being provided. The existing EFAST2 web-based filing search application is expected to be enhanced and provided by EBSA. The Agencies expect that EFAST2 would continue to have the same or improved functionality and web services and is expected primarily to rely on existing EFAST2 software, components and logic. EFAST2 would continue to include a user-friendly web portal that provides registration, filing submission, filing acceptance, filing data dissemination, and help desk services. As part of the comprehensive review of how well the Form 5500 Annual Return/Report serves to implement the existing employee benefit plan filing requirements under Titles I and IV of ERISA and under the Code, the Agencies have considered intervening changes to the legal and regulatory environment for employee benefit plans, plan sponsors, plan service providers and others since the last major revision of the Form 5500 Annual Return/Report. This includes implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, (Jul. 21, 2010); statutory changes to ERISA and the Code relating to defined benefit pension plans in the Moving Ahead for Progress in the 21st Century Act (MAP 21) (Pub. L. 112-141); the Cooperative and Small Employer Charity Pension Flexibility Act (CSEC Act) (Pub. L. 113-98); the Highway and Transportation Funding Act (HATFA) (Pub. L. 113-159); the Multiemployer Pension Reform Act of 2014, Division O of the Consolidated and Further Continuing Appropriations Act, 2015, (Pub. L. 113-235) (MPRA), and various regulatory actions adopted by the Agencies since the last major changes to the forms and instructions, including the DOL's final regulations at 29 CFR 2550.404a-5, 404c-5, and 408b-2. In addition, the enactment of the Patient Protection and Affordable Care Act (Affordable Care Act) 6 expanded DOL's already growing oversight responsibilities with respect to the provision of group health benefits to workers in private sector employer-sponsored plans that provide group health benefits (also referred to herein as “group health plans”). In that regard, the DOL has re-evaluated the existing reporting scheme for group health plans, which scheme was established well before the enactment of the Health Insurance Portability and Accountability Act of 1996, Public Law 104-191, 110 Stat. 1936 (Aug. 21, 1996); Title I of the Genetic Information Nondiscrimination Act of 2008, Public Law 110-233, 122 Stat. 881 (May 21, 2008); the Mental Health Parity Act of 1996, Public Law 104-204, 110 Stat. 2944 (Sept. 26, 1996) and the Mental Health Parity and Addiction Equity Act of 2008, Public Law 110-343, 122 Stat. 3881 (Oct. 3, 2008); the Newborns' and Mothers' Health Protection Act of 1996, Public Law 104-204, 110 Stat. 2935 (Sept. 26, 1996); the Women's Health and Cancer Rights Act of 1998, Public Law 105-277, 112 Stat. 2681-436 (Oct. 21, 1998); and Michelle's Law, Public Law 110-381, 122 Stat. 4081 (Oct. 9, 2008), as well as the Affordable Care Act. 6 The Patient Protection and Affordable Care Act, Public Law 111-148, was enacted on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152, was enacted on March 30, 2010. These statutes generally are collectively known as the “Affordable Care Act.” After reviewing the existing reporting scheme and the DOL's experience with oversight and enforcement, the DOL determined that, in order for it to more effectively fulfill its responsibilities under the expanded requirements under these laws, all plans that provide group health benefits should be subject to some level of annual reporting, with a focus on compliance issues. As described in more detail below, under the proposal, those plans that provide group health benefits that are already required to file a Form 5500 Annual Return/Report—generally all large plans and small plans that are funded with a trust or that are otherwise not eligible for the annual reporting relief for unfunded and insured plans—would have to file group health plan information on a new separate schedule (Schedule J (Group Health Plan Information)), as well as complete those elements of the Form 5500 and schedules that those plans are already required to complete, as modified by this proposal. Plans that provide group health benefits that have fewer than 100 participants currently exempt from filing an annual report under 29 CFR 2520.104-20 because they are either completely “unfunded” or partially insured and partially unfunded now would be required to file a Form 5500 (except for those questions applicable only to pension plans) and the new Schedule J. Under the proposal, plans that provide group health benefits that have fewer than 100 participants that currently are exempt from annual reporting under 29 CFR 2520.104-20 because they are fully insured would be required to file with answers to certain questions on the Form 5500 and the Schedule J. Certain information collection requirements imposed under the Code, but not required under ERISA, had to be removed from the Form 5500 Annual Return/Report when DOL implemented its EFAST2 electronic filing requirement beginning with the 2009 Form 5500 Annual Return/Report. The Code did not permit the IRS to mandate electronic filing of “IRS-only” components of the Form 5500 Annual Return/Report with respect to filers of fewer than 250 returns, and regulations did not mandate such electronic filing with respect to any filers. Specifically, Schedules E, P, SSA, and T were not included in the 2009 Form 5500 Annual Return/Report. Some of those information collection requirements can now be added back to the Form 5500 Annual Return/Report. On September 29, 2014, the Treasury Department issued final regulations under Code sections 6058 and 6059 mandating electronic filing of the Form 5500 Annual Return/Report (including actuarial schedules) for certain filers. T.D. 9695, 79 FR 58256 (Sept. 29, 2014). In general, 26 CFR 301.6058-2 provides that, in order to satisfy the filing requirements of Code section 6058, a Form 5500 Annual Return/Report must be filed electronically if the filer is required to file at least 250 returns of any type during the calendar year that includes the first day of the applicable plan year. Similarly, 26 CFR 301.6059-2 provides in general that, in order to satisfy the filing requirements of Code section 6059, actuarial reports filed with a Form 5500 Annual Return/Report must be filed electronically by filers required to file at least 250 returns during that calendar year. The regulations are generally effective for plan years beginning on or after January 1, 2015, but only for filings with a filing deadline (not taking into account filing extensions) after December 31, 2015. Finally, the Agencies took into account recommendations in reports from the Government Accountability Office (GAO), the DOL's Office of Inspector General (DOL-OIG), the United States Treasury Inspector General for Tax Administration (TIGTA), and the ERISA Advisory Council that have been issued since the last major revision of the Form 5500 Annual Return/Report information collection requirements in connection with the 2009 return/report. See, e.g., U.S. Gov't Accountability Office, GAO-10-54, Private Pensions: Additional Changes Could Improve Employee Benefit Plan Financial Reporting (2009) (available at www.gao.gov/assets/300/298052.pdf ); U.S. Gov't Accountability Office, GAO-14-441, Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 Information (2014) (available at www.gao.gov/products/GAO-14-441 ); 2013 ERISA Advisory Council Report: Private Sector Pension De-risking and Participant Protections, Dep't of Labor, (available at www.dol.gov/ebsa/publications/2013ACreport2.html ); Dep't of Labor Office Of Inspector Gen., 05-14-003-12-12, EBSA Could Improve Its Usage of Form 5500 Data (2014) (available at www.oig.dol.gov/public/reports/oa/2014/05-14-003-12-121.pdf ); U.S. Gov't Accountability Office, GAO-14-92, Private Pensions: Clarity of Required Reports and Disclosures Could Be Improved (2013) (available at www.gao.gov/assets/660/659211.pdf ); U.S. Gov't Accountability Office, GAO-14-92, Private Pensions: Clarity Of Required Reports And Disclosures Could Be Improved, Report to Congressional Requesters (2013) (available at www.gao.gov/assets/660/659211.pdf ); U.S. Dep't of Labor Office of Inspector Gen., 09-13-001-12-121, Employee Benefits Security Administration Needs to Provide Additional Guidance And Oversight to ERISA Plans Holding Hard-to-Value Alternative Investments (2013) (available at www.oig.dol.gov/public/reports/oa/2013/09-13-001-12-121.pdf ); U.S. Gov't Accountability Office, GAO-12-665, Private Sector Pensions: Federal Agencies Should Collect Data and Coordinate Oversight of Multiple-employer Plans (2012) (available at www.gao.gov/assets/650/648285.pdf ); U.S. Dep't of Labor Office Of Inspector Gen., 09-12-002-12-121, Changes Are Still Needed In The ERISA Audit Process To Increase Protections For Employee Benefit Plan Participants (2012) (available at www.oig.dol.gov/public/reports/oa/2012/09-12-002-12-121.pdf ); U.S. Gov't Accountability Office, GAO-12-325, 401(K) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees (2012) (available at www.gao.gov/products/GAO-12-325 ); U.S. Gov't Accountability Office, GAO-08-692, Defined Benefit Plans: Guidance Needed to Better Inform Plans of the Challenges and Risks of Investing in Hedge Funds and Private Equity (2012) (available at www.gao.gov/products/GAO-08-692 ); Treasury Inspector Gen. for Tax Administration, The Employee Plans Function Should Continue Its Efforts to Obtain Needed Retirement Plan Information (2011) (available at www.treasury.gov/tigta/auditreports/2011reports/ 201110108fr.pdf ); 2011 ERISA Advisory Council Report: Hedge Funds and Private Equity Investments, Dep't of Labor, (available at www.dol.gov/ebsa/publications/2011ACreport3.html ); 2013 ERISA Advisory Council Report: Locating Missing and Lost Participants, Dep't of Labor, (available at www.dol.gov/ebsa/publications/2013ACreport3.html#2 ); 2010 ERISA Advisory Council Report: Employee Benefit Plan Auditing and Financial Reporting Models, Dep't of Labor, (available at www.dol.gov/ebsa/publications/2010ACreport2.html ); 2008 ERISA Advisory Council Report: Working Group on Hard-to-Value Assets and Target Date Funds, Dep't of Labor, (available at www.dol.gov/ebsa/publications/2008ACreport1.html .) The DOL also is publishing elsewhere in today's Federal Register a Notice of Proposed Rulemaking with proposed amendments to the annual reporting regulations at Part 2520 of Chapter XXV of Title 29 of the Code of Federal Regulations to implement certain proposed Form 5500 Annual Return/Report changes under Title I of ERISA. To avoid unnecessary duplication of effort, public comments submitted in response to this Notice of Proposed Forms Revisions will be treated as public comments on the Notice of Proposed Rulemaking to the extent they include information relevant to the proposed regulatory amendments. Although the Agencies' historical practice of undertaking major updates of the Form 5500 Annual Return/Report generally has coincided with the move to and upgrades of the EFAST processing system, the Agencies also engage in an annual update process of the forms, schedules, and instructions. Some annual changes that are anticipated to be implemented by the IRS and the PBGC in connection with the 2016 plan year forms are discussed below. Those changes and other annual updates have involved, or may in the future involve, separate public notice and comment processes, for example, under the Paperwork Reduction Act (PRA). The Agencies intend that any annual update changes adopted during the pendency of the changes proposed in this Notice will be incorporated into what is published as part of the Notice of Final Forms Revisions as part of this process. 7 7 Minor changes not requiring notice and comment rulemaking or system changes or changes required by enactment of new laws may also be made between the publication of the Notice of Final Forms Revisions and the date when the revised forms, schedules, and instructions are available for e-filing through EFAST2. As with previous major forms revisions cycles, the Agencies anticipate actively engaging in outreach and education regarding the forms revisions well in advance of the plan year for which the majority of the revisions would be effective. II. Appendices A. Data Elements for Forms and Schedules Appendix A shows the questions/data elements that are on each form and schedule in the line-by-line sequence the items would appear on that form and schedule, as well as newly “structured” attachments, rather than showing mock-ups of “final” forms, schedules, and structured attachments. The Agencies expect that the final forms and schedules will have substantially the same format as the existing forms and schedules. 8 The lists of data elements for each individual form, schedule, and “structured” attachment to the Schedule H, show all of the questions that would appear on that form, schedule, or attachment—current questions, renumbered questions, revised questions, and new questions. The data elements are numbered in the sequence that the Agencies would expect to use in the final version of the forms and schedules. Next to the data elements, the Agencies have, to the extent feasible, indicated in brackets: 8 The Agencies intend to publish mock-ups of the forms on the DOL's Web site as part of the third party software developer certification process and in furtherance of public education efforts about the changes to be implemented. (1) “[Current]” if it is the same question with the same line number on both the proposal and the current form or schedule; 9 “[Current (2016)]” indicates IRS changes and/or PBGC changes that would first be made part of the forms and schedules for the 2016 form year, respectively. 9 The Agencies used the 2015 forms, schedules, and instructions as the “current” form version. With respect to IRS-only changes, the changes for 2016 that appear in the notice published by the IRS under the PRA, 81 FR 18687 (Mar. 31, 2016), are used in the proposed data elements and instructions and are so labeled, instead of showing the changes in the information collection under the Code that appear on the 2015 Form 5500 series, which the IRS has directed filers not to answer. See IRS Compliance Questions on the 2015 Form 5500 Series Returns ( https://www.irs.gov/Retirement-Plans/IRS-Compliance-Questions-on-the-2015-Form-5500-Series-Returns ). (2) “[Current Line X]” if the item is already on the form or schedule, but is renumbered in the proposal, to show where the item appears on the current form or schedule; (3) “[Current with revisions]” to indicate, with a short explanation, that the item is already on the form or schedule, but would be revised; and (4) “[New]” if the item is a new question or new to that form or schedule. Dates generally are shown in the data element sheets (as well as the instructions) as “20XX” for the Form filing year; “20XX-1” for the prior year, etc. The Agencies believe this approach of showing the intended changes to the wording of the data elements, but not providing a “mock up” of the forms and schedules, will reduce costs associated with publication of the proposed form changes in the Federal Register and provide greater flexibility for the related EFAST2 development processes. The Agencies also believe that this approach ( i.e., taking the questions out of the disclosable form structure), gives a better opportunity to review the format, sequencing, and grouping of how the information would be asked and entered on each of the forms and schedules and how it ultimately could potentially be better presented for disclosure purposes. The Agencies seek comments on whether reordering or regrouping questions on the Form 5500 and schedules could enhance presentation of the information for disclosure purposes or minimize burden from a data-gathering, data-entry, recordkeeping, or other perspective, as well as suggestions on the structure or appearance of the forms as both on-line and printed documents. B. Proposed Instructions for Form 5500 Annual Return/Report Appendix B to this document shows the proposed instructions for the Form 5500 and its schedules. The proposed instructions include possible additional instructions and definitions for existing line items, as well as instructions for new items, and the proposed instructions reflect the elimination of current instructions for existing line items or schedules that would be deleted under the proposal. The Agencies expect that the revised instructions for the year in which the majority of the proposed forms changes are implemented, which will be generally coincident with the contracting and procurement process for EFAST2, will also reflect changes in intervening years, changes to law, and any needed additional clarifications and interpretations to the instructions for existing and proposed line items, as well as changes made in response to comments on the proposal. For ease of use by the different types of filers and to eliminate the need for the footnotes and exceptions in the current single “Quick Reference Chart,” the Agencies propose separate charts for the various types of filers (pension plans, direct filing entities (DFEs), group health plans, and welfare plans other than group health plans). These charts appear at the end of Appendix B (Form 5500 Annual Return/Report Instructions). The Agencies believe this proposed change should help filers focus on the specific requirements applicable to the type of plan or entity for which the Form 5500 Annual Return/Report is being filed. OMB Control Numbers, PRA Notice, and up to date Business Codes are not shown here, but will continue to be included in both the Form 5500 Annual Return/Report and Form 5500-SF instructions published on the EFAST2 Web site for the form year(s) in which the changes are implemented. C. Proposed Instructions for Form 5500-SF Appendix C to this document shows the proposed instructions for the Form 5500-SF. III. Request for Comments The Agencies believe that the modernization and restructuring of the Form 5500 Annual Return/Report being proposed in this Notice would support the Agencies' ability to implement strong and effective enforcement programs and better respond to inquiries from plan participants and beneficiaries, employers, other plan sponsors, and the public regarding employee benefit plans. Further, the Agencies believe that the proposed revisions would help them more effectively develop and implement regulations and other compliance assistance guidance, and use data for purposes of economic research, policy formulation, and monitoring benefits related developments and activities among ERISA-covered employee benefit plans. The Agencies generally invite comments and suggestions as to other alternative solutions and whether and how such alternatives would be more, or less, beneficial compared to the proposed changes to the forms, schedules, and instructions. Commenters are asked to take into account the costs and burdens to plans, participants and beneficiaries, plan fiduciaries, plan service providers, and other affected parties, in commenting on the proposed annual reporting changes, including any suggested alternatives. The request for comments includes areas on the existing forms, schedules, and instructions that the Agencies have not proposed changing, but which may benefit from further guidance, especially with regard to how an existing provision or instruction would apply for a particular segment of the filing population. IV. Discussion of Proposed Changes The proposed revisions in this Notice reflect priorities of and efforts by the DOL, IRS, and PBGC to improve reporting for filers and the public, other governmental users, as well as the Agencies by: (1) Modernizing financial information filed regarding plans; (2) updating fee and expense information on plan service providers, with a focus on harmonizing annual reporting requirements with the DOL's final disclosure requirements at 29 CFR 2550.408b-2; (3) enhancing mineability of data filed on annual return/reports; (4) requiring reporting by all group health plans covered by Title I of ERISA, including adding a new Schedule J (Group Health Plan Information); and (5) improving compliance under ERISA and the Code through selected new questions regarding plan operations, service provider relationships, and financial management of the plan. The changes in this proposal to the forms, schedules, instructions, and DOL regulatory exemptions and requirements are intended to further these objectives. A. Modernize Financial and Plan Operations Information An overriding objective of these proposed forms revisions is to modernize the Form 5500 Annual Return/Report financial information collection so that the presentation of plan trust financial and balance sheet information better reflects the investment portfolios and asset management practices of employee benefit plans. The basic objective of general purpose financial reporting is to provide information about the reporting entity for the Agencies' enforcement, research, and policy formulation programs; to assist other federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies; and to assist plan participants and beneficiaries and the general public in better monitoring the activities and investments of employee benefit plans. The financial statements contained in the current Schedule H (Large Plan Financial Information) and Schedule I (Small Plan Financial Information) are based on data elements that have remained largely unchanged since the Form 5500 Annual Return/Report was established in 1975. Over the past four decades, the U.S. private pension system has shifted from defined benefit (DB) pension plans toward defined contribution (DC) pension plans, often participant-directed 401(k)-type DC pension plans. The financing of retirement benefits has changed dramatically coincident with the shift from DB to DC pension plans. In 1978, when legislation was enacted authorizing 401(k) plans that allow employees to contribute to their own retirement plan on a pre-tax basis, participants contributed only 29 percent of the contributions to DC pension plans and only 11 percent of total contributions to both DB and DC pension plans. “In the years following 1978, employee contributions to DC pension plans steadily rose to a peak of approximately 60 percent in 1999, where it has remained.” See Dep't of Labor, Private Pension Plan Bulletin Abstract of 2012 Form 5500 Annual Reports, at 1 (2015). Simultaneously, the number of single-employer DB pension plans has decreased from 92,000 in 1990 to just under 29,000 single-employer pension plans in 2009. See U.S. Gov't Accountability Office, GAO-09-291, Defined Benefit Pensions: Survey Results of the Nation's Largest Private Defined Benefit Plan Sponsors Highlights (2009) (available at http://www.gao.gov/new.items/d09291.pdf ). The shift from DB pension plans to DC pension plans has led to increased responsibility for participants to manage their own retirement savings, which includes having to select among investment options in their retirement plans. See Private Pension Plan Bulletin Abstract Of 2012 Form 5500 Annual Reports, at 2 (Of the 516,000 section 401(k)-type plans in 2012, 87.8 percent allowed participants to direct investment of all of their assets, and 3.1 percent allowed participants to direct investment of a portion of their assets.) The need for more relevant and comparable financial information is not limited to 401(k) and other DC pension plans; it also extends to DB pension plans. Reports from GAO, the DOL-OIG, the ERISA Advisory Council, and the TIGTA also have focused on the need for increased transparency and accountability generally in connection with employee benefit plan investments in hard-to-value and alternative assets, as well as assets held through pooled investment vehicles. 1. Changes to Schedule H (Financial Information)—Balance Sheet and Income Statement Section 103 of ERISA requires plans to include in their annual report a statement of assets and liabilities of the plan, aggregated by categories and reported at current value. It also requires plans to report a statement of earnings (losses) and expenses. Although the Form 5500 Annual Return/Report has undergone major revisions since its initial implementation in 1975, there has been little change to the basic balance sheet and income statement information on the Form 5500 Annual Return/Report since the return/report was first established. Under the proposal, Schedule H, Parts I and II, would retain the essential asset/liability and income/expense structure of the current reporting requirement. The Agencies are proposing, however, to modify the asset breakouts on the balance sheet component of the Schedule H to enable more accurate and detailed reporting on the types of assets held by a plan, including alternative investments, hard-to-value assets, and investments through collective investment vehicles. The proposed changes take into account the fact that many of these more sophisticated and complex investments do not fit neatly into any of the existing reporting categories. As a result, filers inconsistently report on the various existing categories, and important financial information is obscured by consolidation of many diverse investments into the catch-all “other” category on the balance sheet on the Schedule H. The proposal would also update the income/expense statement of the Schedule H to get a better picture of earnings and expenses associated with plan investments and operations. In addition to the Agencies' assessment that Form 5500 Annual Return/Report financial reporting would benefit from improved transparency and accountability, the proposal to change the asset categories on the Schedule H balance sheet is supported by recent reports from both the GAO and the DOL-OIG. The GAO has noted that the plan asset categories on the Schedule H are not representative of current plan investments and provide little insight into the investments themselves, the level of associated risk, or the structures of these investments. GAO-14-441, Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 Information, at 11-12. The proposed changes to the Schedule H also are consistent with the DOL-OIG recommendation that the Form 5500 Annual Return/Report be revised to improve reporting of hard-to-value and alternative investments. U.S. Dep't of Labor Office of Inspector Gen., 09-13-001-12-121, Employee Benefits Security Administration Needs to Provide Additional Guidance And Oversight to ERISA Plans Holding Hard-To-Value Alternative Investments, at 4, 19. Accordingly, the Agencies are proposing the following changes to the Schedule H balance sheet and income statement. Current Line 1a, “total noninterest bearing cash,” would be reported as a breakout element under General Investments. This would also result in Line 1b “Receivables” and Line 1c “General Investments” being renumbered as Lines 1a and 1b respectively. Participant loans would continue to be reported as a separate line item, but would be reported as a breakout element under renumbered Line 1a as a “receivable” rather than under its current reporting classification under the heading “General Investments.” This change is responsive to amendments made to “Generally Accepted Accounting Principles” (GAAP) by the Financial Accounting Standards Board (FASB), which required participant loans to be classified as notes receivable from participants. See Financial Accounting Standards Board, No. 2010-25, Plan Accounting—Defined Contribution Pension Plans (Topic 962) (2010). As notes receivable, participant loans would continue to be reported at their unpaid principal balance plus any accrued but unpaid interest. Under proposed Line 1b (currently Line 1c) “General Investments,” the Agencies would add both new categories and new breakouts within existing categories. Cash and cash equivalents would be the first category under “General Investments.” As indicated above, “noninterest bearing cash (such as cash on hand or cash in a non-interest bearing checking account)” would no longer be separated from “General Investments.” Instead it would be a sub-breakout under “cash and cash equivalents.” The category would also have sub-breakouts for interest bearing cash (assets that earn interest in a financial institution account such as interest bearing checking accounts, passbook savings accounts, or money market bank deposit accounts). While the breakouts are new, the information is already required to be reported on current Line 1c(1). The next category under “General Investments,” would continue to be for reporting “Debt Interests/Obligations.” The Form 5500 Annual Return/Report currently provides little in the way of detail or transparency about the range of plan investments in bonds, loans, and other debt instruments and obligations. For example, a single line item for “other loans” on the Schedule H currently covers, as indicated in the Form 5500 Annual Return/Report instructions, the value of loans for construction, securities loans, commercial and/or residential mortgage loans that are not subject to Code section 72(p), and other miscellaneous loans. See, e.g., 2015, Schedule H, Form 5500 Annual Return/Report Instructions. The general debt heading, as proposed, would keep the existing breakout for corporate debt instruments. Breakouts under that category, however, would be investment grade debt and high-yield debt, rather than “preferred” and “all other,” as on the current Schedule H. This change is intended to have the Schedule H financial information for all reporting plans regarding corporate debt instruments correspond to the more detailed financial information on Schedule R for defined benefit pension plans that have 1,000 participants or more. In addition, U.S. government securities would be broken out from other government securities. The instructions for the current forms advise filers to report such investments on the Schedule H financial statements in “Other” debt instruments. This proposal, however, includes more investment categories on the Schedule H to improve transparency from the current “other” categories. For example, there would be a breakout for other loans (other than loans to participants), exchange traded notes, and asset backed securities (other than real estate), 10 and debt obligations associated with real property would be reported under the real property category, rather than generally under “Other Debt Obligations.” Thus, with respect to reporting such leveraged or collateralized transactions on the balance sheet portion of Schedule H, filers would be advised in the instructions to account for such transactions in the appropriate asset category in accordance with the individual characteristics of the investment. 10 The SEC similarly is working towards more transparency with regard to some of these assets. See Securities and Exchange Commission, Asset-backed Securities Disclosure and Registration, 79 FR 57,184 (Sept. 24, 2014). FINRA has also published an Investor Alert related on exchange traded notes to increase investor awareness of the associated risks. See Exchange-Traded Notes: Avoid Unpleasant Surprises, FINRA, www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262 . See also U.S. Gov't Accountability Office, GAO-12-324, Recent Developments Highlight Challenged Of Hedge Fund And Private Equity Investing (2012) (discussing plan investment in distressed debt). The next category under “General Investments” would continue to be “Corporate Stocks.” Under the corporate securities category, filers would still distinguish between “preferred” and “common” stock for reporting direct holdings of corporate securities. There would be new breakouts, however, for “publicly traded” and “non-publicly traded” securities under both the “preferred” and “common” stock elements. This proposed change is intended to present a more complete picture of plan investments in hard-to-value assets. The existing reporting line items for certain collective investment vehicles that are treated as holding plan assets under the DOL's plan asset regulation at 29 CFR 2510.3-101 ( i.e., bank common or collective trusts (CCTs), insurance company pooled separate accounts (PSAs), entities meeting the conditions of DOL regulation 29 CFR 2510.103-12 (103-12 IEs), and master trusts) generally would be retained, but grouped together for reporting under a new category entitled “Eligible Pooled Investment Funds (Other Than Registered Investment Companies).” To increase transparency and improve the quality of data collected across various components of the Form 5500 Annual Return/Report, the proposal would significantly reconfigure existing reporting of assets held through the various types of pooled investment vehicles that have plan assets. Under the proposal, a plan's investments in CCTs and PSAs would be reported in the aggregate on single line items for each vehicle type on the Schedule H Line 1b balance sheet information regardless of whether the CCT or PSA files a Form 5500 Annual Return/Report as a DFE. This is a change from the current rule that has filers break out the underlying assets in the respective line items on the Schedule H balance sheet under “general investments” if the CCT or PSA has not filed a Form 5500 Annual Return/Report and in the aggregate on the CCT or PSA line if the Form 5500 Annual Return/Report has been filed. Instead, as discussed in more detail below, the Line 4i(1) Schedule of Assets held for Investment of either the plan or the CCT or PSA, depending on whether the CCT or PSA has filed, would be where the breakout of underlying assets would be reported. With respect to 103-12 IE reporting on Schedule H, the proposal generally continues the existing reporting requirements. Specifically, similar to the requirements for plans that invest in CCTs and PSAs, a plan that invests in an entity that files as a 103-12 IE would, in identifying each individual 103-12 IE on the Line 4i Schedules of Assets, have to include the value of the plan's investment in each 103-12 IE. Reporting regarding investments in master trusts by plans and reporting by master trusts, as described in more detail below, would be substantially revised, including reporting on the plan's asset and liability statements on Schedule H, Part I. Specifically, as they did prior to 1999, plans would report their total holdings in master trusts on Schedule H, Line 1b, on an aggregate basis, and the reporting concept of the master trust investment account (MTIA) would be eliminated. The participating plans' fractional interest in the various holdings of the master trust (which currently are reflected in the MTIA Form 5500 Annual Return/Report) now would be shown on the various plans' Schedule H, Line 4i(1) Schedule of Assets Held for Investment at End of Year and Line 4i(2) Schedule of Assets Disposed of During the Plan Year, as well as on the filings by the master trust itself. The DOL views the proposed changes to annual reporting regarding these pooled investment vehicles as important and necessary in light of the large amount of plan assets (an estimated $1.1 trillion) held by CCTs, PSAs, master trusts, and 103-12 IEs. See U.S. Gov't Accountability Office, GAO 12-121, Limited Scope Audits Provide Inadequate Protections To Retirement Plan Participants, at 1 (2014). As part of the focus on better reflecting and understanding how plans are investing, the Agencies also propose to replace the single line existing category entitled “Value of Interest in Funds Held in Insurance General Accounts (Unallocated Contracts)” by adding breakouts of various types of unallocated contracts. The proposal would add to the existing general category breakouts for deposit administration, immediate participation guarantees, guaranteed investment contracts, and “other” unallocated insurance contracts. These classes of contracts parallel the existing Schedule A reporting on insurance contracts with unallocated funds. Comments are specifically solicited on whether this breakout is sufficient or whether the value of investments in other or additional classes of insurance contracts, such as variable annuity contracts, 11 should be listed on the Schedule H. 11 As discussed below, the proposal would add new questions to Schedule A regarding variable annuities. The Agencies are also proposing changes to the existing category entitled, “Partnership/Joint Venture Interests.” To clarify the reporting of these general partnership and joint venture investments, new sub-categories are being added to report the value of interest in “limited partnerships,” “venture capital operating companies (VCOCs),” “private equity,” “hedge funds,” and “other partnership/joint venture interests.” The Agencies' proposal was informed by the GAO's findings that there was a need for more detail on plan investment in hedge funds and private equity funds due to substantial increases in the percentage of plans investing in hedge funds and private equity. U.S. Gov't Accountability Office, GAO-12-324, Recent Developments Highlight Challenges With Hedge Fund And Private Equity Investing, at 19 (2012). In making this recommendation, GAO acknowledged that although there is no universally accepted definition, the term “hedge fund” is commonly used to describe pooled investment vehicles that are privately organized and administered by professional managers who engage in active trading of various types of securities, commodity futures, options contracts, and other investment vehicles, including relatively illiquid and hard-to-value investments. Similarly, “private equity fund” is commonly used to describe privately managed pools of capital that invest in companies that typically are not listed on a stock exchange. See, e.g., 2011 ERISA Advisory Council Report: Hedge Funds and Private Equity Investments (noting that plan sponsors have increased investment of defined benefit pension plan assets in hedge funds and/or private equity funds due to the need to increase diversification, decrease volatility, and enhance the plan's overall performance). The Agencies specifically invite comments on whether these definitions are adequate for purposes of Form 5500 Annual Return/Report financial reporting. In addition, because investments in the “Partnership/Joint venture interests” may or may not be holding plan assets under the DOL's plan asset regulation at 29 CFR 2510.3-101, the Agencies are proposing an off-balance sheet item in this category where filers would indicate the total value of such investments that are plan asset vehicles and those that are not. The real estate category on the Schedule H balance sheet would be expanded and include sub-categories to include investments in particular types of assets or pooled investment funds designed to invest primarily in real estate or real estate mortgages. In the Agencies' view, the current reporting requirements do not accurately reveal the extent and type of a plan's real estate and related holdings. The proposed new breakouts are: Developed real property (other than employer real property), undeveloped real property (other than employer real property), real estate investment trusts (REITs), mortgage-backed securities (including collateralized mortgage obligations (CMOs)), real estate operating companies (REOCs), and “Other” real estate related investments. Adding these breakouts is consistent with the Agencies' objective of improving reporting on investments that constitute alternative or hard-to-value assets. See OECD/IOPS Good Practices on Pension Funds' Use of Alternative Investments and Derivatives, OECD, (available at http://www.oecd.org/finance/private-pensions/oecdiopsgoodpracticesonpensionfundsuseofalternativeinvestmentsandderivatives.htm .) Creating more specific categories also should help address concerns about inconsistencies in real property reporting cited by the report, GAO Targeted Revisions Could Improve Usefulness Of Form 5500 Information, at 10. A significant new reporting category is for investments in derivatives. The sub-categories in the derivatives category would be futures, forwards, options, swaps, and “Other.” As in the other general categories, filers would enter a description for assets listed as “Other.” Obtaining more specific information about the extent to which plans are engaged in hedging or in the listed types of derivative transactions would help address concerns raised by the GAO about limitations on usefulness of data on investments in derivatives under the current reporting structure. See generally U.S. Gov't Accountability Office, GAO-08-692, Defined Benefit Plans: Guidance Needed To Better Inform Plans Of The Challenges And Risks Of Investing In Hedge Funds And Private Equity, at 25, 42-43 (expressing specific concerns about the way in which pension plans report investments in derivatives and suggesting that plan sponsors are currently reporting these types of investments in various different categories on the Schedule H, limiting the usefulness of the data.) The Agencies are also proposing a new category for foreign investments with breakouts to separately report holdings of foreign equities and debt interests. The Agencies propose that, for this reporting purpose, foreign equities would include American Depository Receipts, U.S.-traded foreign stocks and stocks traded on foreign markets. Foreign debt would include both long-term and short-term foreign debt investments, but would not include for purposes of a Form 5500 Annual Return/Report such foreign securities held through U.S. registered investment funds or exchange traded funds, CCTs, PSAs, 103-12 IEs, or master trusts. There also would be subcategories for foreign real estate, currency, and “Other,” with a description required for anything reported in the “Other” category. The Agencies also are proposing a new asset category on the Schedule H, “Tangible Personal Property,” which category currently appears on the Schedule I, but not on the Schedule H. Under the proposal, the Schedule H would list on its face the main types of assets as reportable in this category, i.e. direct investments in tangible personal property, with sub-categories for collectibles, precious metals, and “Other.” There would also be a separate breakout category for commodities, which would be divided into “Precious Metals” and “Other.” Moving this category from the Schedule I to the Schedule H for all filers required to complete the Schedule H, including former Schedule I filers, would add transparency to these plan investment holdings. To the extent plans have direct investments in tangible personal property and commodities (as opposed to futures contracts or exchange traded funds), they are likely to be reported unhelpfully from a transparency perspective as “Other” on the existing Schedule H. Finally, the Agencies propose making reporting more transparent for assets held through participant-directed brokerage accounts. The proposal generally follows the same breakout requirements as the current rules. The current rules provide that assets held through participant-directed brokerage accounts may be reported either: (1) As individual investments in the applicable asset and liability categories in Part I and the income and expense categories in Part II, or (2) by including on the “Other” lines (Line 1c(15) on the balance sheet and 2c on the income statement) the total aggregate value of the assets and the total aggregate investment income (loss) before expenses, provided the assets are not loans, partnership or joint venture interests, real property, employer securities, or investments, including derivatives, that could result in a loss in excess of the account balance of the participant or beneficiary who directed the transaction. Under the proposal, filers would provide the total current value of all assets held through participant-directed brokerage accounts, except there would be separate sub-totals for brokerage account investments in tangible personal property, loans, partnership or joint venture interests, real property, employer securities, and investments that could result in a loss in excess of the account balance of the participant or beneficiary who directed the transaction. The current Form 5500 Annual Return/Report reporting rules already require that these types of assets be reported separately from other participant-directed brokerage account assets, similar to the reporting rules for investments in CCTs and PSAs that do not file their own Form 5500 Annual Return/Report. On the proposed Line 4i Schedules of Assets, assets held through a participant-directed brokerage account would be permitted to be reported in the aggregate as a single asset held directly by the plan. The broker would be identified as the issuer/borrower/etc. In the element requiring the filer to indicate on what line the assets were reported on Line 1b, the filer would enter all the subcategories for types of investments held through a participant-directed brokerage account. The Agencies considered requiring filers to break out all assets held through a participant-directed brokerage account on the Line 4i Schedules of Assets. The Agencies also considered continuing to require filers to break out those specific assets that are currently required to be broken out on Line 1c. For example, the Agencies considered requiring a breakout of information on whether participants are investing in alternative and hard-to-value assets through participant-directed brokerage accounts. The Agencies determined, on balance, considering the benefits to the information and the relative potential burden, that having on the proposed balance sheet (Line 1b) a general breakout of asset types held through participant-directed brokerage accounts would be sufficient, and that details of each individual asset so held would not be required. The proposal to continue to allow filers to report assets held in participant-directed brokerage accounts in the aggregate is intended to be responsive to comments on the DOL's Request for Information, Question 38, 79 FR 49469, 49473 (Aug. 14, 2014) (RFI), which specifically asked whether changes should be made to the Schedule H to require more detail about investments made through brokerage windows. While some commenters on the RFI thought it made sense for the DOL to consider changes to the Form 5500 Annual Return/Report with respect to brokerage windows, others were concerned about the burden and costs such changes would impose on sponsors and participants and were unclear about the relative benefit of more information. The Agencies do not believe that there would be a substantial additional burden imposed by requiring aggregate participant-directed brokerage account assets to be reported separately instead of the current practice of reporting such assets in the catch-all “Other” category. Similarly, the Agencies believe that there would not be a substantial burden change in the proposed requirement to break out, on the Line 4i Schedules of Assets, the types of investments held in participant-directed brokerage accounts that are not eligible for aggregated reporting under current annual reporting rules. One of the goals of the proposed change is to get better information on securities lending 12 practices and how they impact plan finances and operations. As indicated in the Financial Stability Oversight Council's (FSOC) Annual Report for 2014 (available at http://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202014%20Annual%20Report.pdf ), the global value of securities loans was approximately $1.8 trillion in 2013. Pension plans are a large segment of the entities engaged in such transactions. Accordingly, the Agencies believe that more precise information is needed to understand how these transactions impact plans and how plans fit into the overall markets. The Agencies explored adding new breakout line items on the asset/liability and income expense statements to identify in more detail securities lending transactions. It is the understanding of the Agencies, however, that filers are reporting securities lending arrangements and similar transactions on the financial statements in various different ways, depending on whether the plan is borrowing or lending securities and the structure of the arrangement or transaction, including transactions such as repurchase agreements and sell/buy-back transactions where, technically, the plan no longer owns the securities. Accordingly, the Agencies believe that the best way to get information on securities financing transactions, without creating particularized line items that might not work for all types of transactions, is to instruct filers to report assets in the appropriate categories on the Schedule H and then identify the transactions in response to the newly proposed compliance questions. The new compliance question would ask whether the plan has investment acquisitions that are leveraged, including assets subject to collateralized lending activities ( e.g., securities lending arrangements, repurchase agreements (repos), etc.). If “Yes,” the plan would be required to identify whether the plan engaged in securities lending arrangements, including repurchase agreements or sell/buy-backs, or other transactions that subjected plan assets to a mortgage, lien, or other security interest, and to describe the arrangement. The plan would then have to report, as a total, the amount of cash obligated in connection with collateralized lending activities at end of year, the value of securities obligated in connection with collateralized lending activities at end of year, the value of other assets obligated in connection with collateralized lending activities at end of year, and the approximate ratio of collateralized/leveraged investments to total plan assets at end of year. The Agencies specifically request comments on whether there could be effective breakout line items on the balance sheet that would more clearly show assets that are subject to securities lending or similar arrangements or whether there are specific instructions that would be helpful for filers to know where to categorize the various components of such transactions on both the balance sheet and earnings statements on the Schedule H. 12 The term “securities loans” generally refers to the collateralized loan of a security from one party to another. Such a loan can have a pre-specified term, such as one business day, one week, or one month, or it can be “open.” An open loan is ongoing until one of the parties to the trade decides to end it. Under the “Income and Expense” statement in Part II of the Schedule H, the Agencies propose retaining the same basic structure for reporting income as on the current Schedule H, but with additional breakout categories. Notably, the “interest” income category includes a new breakout for government securities other than U.S. government securities, and the unrealized appreciation (depreciation) of assets category would be broken out to report separately partnership/joint venture interests, commodities investments, derivatives, employer securities, foreign investments (other than those held through U.S. registered investment funds), and employer real property, in addition to the existing breakouts for real estate, CCTs, PSAs, MTIAs, 103-12 IEs, and registered investment companies. These proposed changes are intended to better support investment monitoring by asset class and provide more consistent data for research and policy purposes. The proposal would also add new breakout categories to the “Administrative Expenses” category of the Income and Expenses section of the balance sheet. The Agencies have determined that to get a better picture of plan expenses, particularly those related to service providers, more detail in this category is warranted. Accordingly, data elements would be added for “Salaries and allowances,” “Independent Qualified Public Accountant (IQPA) Audit fees,” “Recordkeeping and Other Accounting Fees,” “Bank or Trust Company Trustee/Custodial Fees” “Actuarial fees” “Legal fees,” “Valuation/appraisal fees,” and “Trustee fees/expenses (including travel, seminars, meetings.” 13 13 Other than IQPA Audit Fees and Bank or Trust Company Trustee/Custodial Fees, these questions were on the Form 5500 prior to 1999. See 1998 Form 5500, Line 32(g). The Agencies are also proposing to change administrative expense reporting to identify when participant accounts are charged directly. The Agencies believe that this information is important to better understand how compensation arrangements impact participants, especially in defined contribution pension plans. The Agencies considered requiring filers to break out direct expenses on a service provider by service provider basis on Schedule C to show how and when they are charged to participant accounts rather than at the plan level. To minimize reporting burden under the proposal, however, the information would be reported only in the aggregate. Therefore, instead of requesting this information on the Schedule C, the Agencies have proposed revising the expense information on Schedule H. Specifically, the “Total” administrative expense line item on Schedule H would now require that administrative expenses charged directly against participant accounts be separately reported from those direct expenses charged to other plan asset sources. Filers would separate transaction-based charges to individual participant accounts and plan level expenses apportioned among participant accounts. With respect to the latter, filers would indicate whether the expenses were apportioned per capita, pro rata by account balance, or “Other” apportionment method that they would describe. This would give the Agencies and other users of the Form 5500 Annual Return/Report data a better idea of how and when participants are being charged administrative expenses, which is particularly important for defined contribution pension plans. 2. Proposed Changes to Schedule H, Line 4i Schedules of Assets As indicated above, the proposed modernization of the financial reporting required on the Schedule H would include structural, data element, and instruction changes to the Line 4i Schedules of Assets. The current Line 4i Schedules (“Schedule of Assets Held for Investment at End of Year” and “Schedule of Assets Acquired and Disposed Within Year”) are required under section 103 of ERISA to be included in the annual report, as currently implemented in the DOL's regulations at 29 CFR 2520.103-11. 14 These schedules are filed by plans required to file the Schedule H and by certain DFEs. The schedules are a central element of the financial disclosure structure of ERISA because they are the only place in the Form 5500 Annual Return/Report where plans are required to list individual plan investments, identified by major characteristics, such as issue, maturity date, rate of interest, cost, and current value. Accordingly, these schedules are the only part of the Form 5500 Annual Return/Report that can be used to evaluate the year-to-year performance of a plan's individual investments. The reported information, however, suffers from several shortcomings. 14 To see the proposed changes to the DOL's regulations to implement these data element and instruction revisions, please see the DOL's Notice of Proposed Rulemaking—Annual Reporting, published elsewhere today in the Federal Register . Perhaps most fundamentally, this information currently is not reported in a data-capturable format. Thus, although an image or picture of the attachments that are currently filed as non-standard attachments to filers' electronic Form 5500 Annual Return/Report filings is available through the EFAST2 public disclosure function, it is not viewable as part of the Schedule H, nor is the information included in the data sets that DOL prepares from the return/report filing data and publishes on its Web site ( www.dol.gov/ebsa/foia/foia-5500.html ). Also, the Line 4i Schedules of Assets are not always found in the same place in each Form 5500 Annual Return/Report filing. For example, the Line 4i Schedules of Assets are often incorporated in the larger audit report of the plan's IQPA that itself is filed as a nonstandard attachment to the Form 5500 Annual Return/Report. 15 The schedules also do not require standardized methods for identifying and describing assets on the Line 4i Schedules of Assets. Under the current reporting rules, the same stock or mutual fund may be identified with various different names or by use of different abbreviations. The creation of more detailed and structured Line 4i Schedules of Assets is a specific recommendation of both the DOL-OIG and the GAO. See DOL Inspector Gen. EBSA Needs To Provide Additional Guidance And Oversight To ERISA Plans Holding Hard-To-Value Alternative Investments, at 4-5; GAO Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 Information, at 37. 15 See EFAST2 FAQ 24a, (available at www.dol.gov/ebsa/faqs/faq-EFAST2.html ) (advising filers of options in EFAST2 for filing the accountant's opinion and accompanying financial statements, indicating that they do not need to be “tagged” separately for filing purposes.) The first proposed improvement would require filers to complete standardized Line 4i Schedules of Assets in a data-capturable format. The Agencies anticipate that EFAST2 would have separate “structured” locations for entering the data into the Form 5500 Annual Return/Report filing, using a standardized format that would enable incorporation of the Line 4i Schedules of Assets information into the datasets that EFAST and EBSA make available from each year's Form 5500 Annual Return/Report and Form 5500-SF filings and enable DOL to more readily disclose the information, as required under Title I of ERISA. As under the current reporting structure, there would continue to be two separate schedules of assets. 16 The first would be the existing Schedule of Assets Held for Investment at End of Year. The second would modify the existing “Schedule of Assets Acquired and Disposed of Within Year” to a “Schedule of Assets Disposed of During the Plan Year.” The objective of the current Schedule of Assets Acquired and Disposed of Within Year was to ensure that the Form 5500 Annual Return/Report (which generally captures financial information at the beginning and the end of the plan year) captured information on assets that may not have been held either at the beginning of the year or end of year because they were bought and sold within the same year. That structure, however, suffers from a significant gap in information about alternative investments and hard-to-value assets because neither of the current Schedules of Assets provides information on the sale of such assets if purchased in one year and sold in the middle of a subsequent year. The change in the Schedule of Assets Disposed of During the Plan Year to cover all investment assets disposed of during the plan year would close that gap, while continuing to capture transactions that involve the purchase and sale of investment assets within the same plan year. 16 The current Line 4i question generally asks whether the plan held assets for investment, referring to both Schedules of Assets. Because all filers, except filers for terminated plans, answer “Yes” to indicate that they have assets held at end of year, answers to the current question do not reveal whether the plan also had assets acquired and disposed of during the plan year. The proposal would separate the question into two parts: Line 4i(1) asking whether the plan held investments at the end of the year; and Line 4i(2) asking whether the plan disposed of assets during the plan year. If the answer was “Yes” to either question, the corresponding Schedule of Assets would need to be attached. Both of the proposed Line 4i Schedules of Assets would continue to require filers to enter, as applicable, the existing data elements (1) identifying the issuer, borrower, lessor, or similar party; (2) describing the investment and identifying, as applicable, the issue, maturity date, rate of interest, par, or maturity value, including whether the asset/investment is subject to surrender charge; (3) reporting the cost of the asset; and (4) reporting the current value of the asset. A new data element on the Line 4i(1) Schedule of Assets Held for Investment would require the filer to indicate whether the plan or reporting DFE held the investments directly, through a master trust, CCT, PSA, or a 103-12 IE. If the assets are held through a DFE, the filer (whether a plan or an investing DFE) would be required to list each DFE as an investment and enter for each DFE in which the filer was invested, the name, employer identification number (EIN), and plan number (PN) used by the DFE on its own Form 5500. If a PSA or CCT in which the reporting plan or DFE invests has not filed a Form 5500 Annual Return/Report, the filer would have to check a box to indicate that the CCT or PSA has not filed a Form 5500 Annual Return/Report, and the investing plan or DFE would have to break out the underlying assets of the CCT or PSA on its own Line 4i(1) Schedule of Assets Held for Investment at End of Year. This aspect of the proposal is intended better to coordinate the information currently reported by plans and investing DFEs on Schedule D and on the Line 4i(1) Schedule of Assets Held for Investment at End of Year. The current instructions tell filers to use an asterisk to identify investments that involved a party-in-interest on the Line 4i Schedule of Assets Held for Investment at End of Year. Review of Form 5500 Annual Return/Report data, however, suggests that many filers may not be aware of the requirement, which is currently explained only in the instructions for Schedule H of the Form 5500 Annual Return/Report. Identification of the involvement of a party-in-interest, therefore, has been inconsistent and incomplete. To address the issue, the proposal would replace the current requirement to include an asterisk with a check box to indicate whether the investment involved a party-in-interest. To indicate the type of asset generally, filers generally would be required to indicate on the Line 4i Schedule of Assets the category under which the value of the asset was included on the Schedule H asset statement (proposed Line 1b), or if held through a CCT or PSA that has not filed, where the individual assets would have been included on Line 1b if not held through the CCT or PSA. The proposal would add to the Line 4i(1) Schedule of Assets Held for Investment at End of Year a requirement to report investment identifiers such as CUSIP (Committee on Uniform Securities Identification Procedures), CIK (Central Index Key), and LEI (Legal Entity Identifier), if applicable, for each asset. Filers would also be expected to provide any other uniform number applicable to the entity or asset being reported, such as the Financial Instrument Global Identifier (FIGI), which is now coming into more common usage. 17 The use of CUSIP in particular has been recognized by the GAO as a way to improve end-users' ability to aggregate analyses of the information contained on the Schedules of Assets. GAO Private Pensions: Targeted Revisions Could Improve Usefulness Of Form 5500 Information, at 17. 17 See U.S. Bank Adopts Bloomberg's New Industry-standard for Trustee Reporting, Bloomberg, (available at http://www.bloomberg.com/company/announcements/u-s-bank-adopts-bloombergs-new-industry-standard-for-trustee-reporting/ ) (reporting that U.S. Bank is the first corporate trustee to adopt Bloomberg's transparent, open-source methodology.) The Agencies recognize that some identifiers, particularly the LEI, are not yet widely used. The LEI is included in the proposal in anticipation of increased use by the time the rule becomes final. The LEI is intended to identify legally distinct entities that engage in a financial transaction. It has support from both industry and government agencies who view having a universal identifier of parties to financial transactions, such as the LEI, as an important response to the 2008 financial crisis and the best way to track and understand the true nature of risk exposures across the financial system. See, e.g., Statement on Legal Entity Identification for Financial Contracts, 75 FR 74146, 74147 (Nov. 30, 2010) (noting that precise and accurate identification of legal entities engaged in financial transactions is important to private markets and government regulation); Executive Office of the President of the United States, Nat'l Science and Technology Council, Smart Disclosure and Consumer Decision-making: Report of the Task Force on Smart Disclosure, at 13 (2013) (noting that the Administration is working to promote a LEI system). The use of LEI to identify pension plan transactions is particularly important because pension plan investments make up a large percentage of all investment assets and, as previously discussed, plans are increasingly invested in alternative investments that involve complicated financial structures and transactions. Under the proposal, filers would continue to be required to set forth the current value of each investment asset listed on the Line 4i Schedules of Assets. To improve reporting on hard-to-value assets where the current value is by definition not readily available, filers would be required to check a box for each individual investment listed to indicate whether the asset is “hard-to-value.” This requirement is meant to supplement the current compliance question on the Schedule H that asks whether the plan held any investment assets whose value was not readily determinable on an established market or set by a third party independent appraisal. See, e.g., 2015 Form 5500 Annual Return/Report Instructions for Schedule H. The aggregate compliance question, by itself, does not provide particularly useful information on hard-to-value assets. An examination of Form 5500 Annual Return/Report filings suggests substantial non-compliance or inaccurate reporting in the ways plans answer the question. See also DOL-OIG EBSA Needs To Provide Additional Guidance And Oversight To ERISA Plans Holding Hard-To-Value Alternative Investments, at 4-5, 18, and 19 (recognizing that the Form 5500 Annual Return/Report has a “limited ability to capture information on hard-to-value investments” and recommending that EBSA “improve Form 5500 [Annual Return/Report] data collection, analysis, and targeting of plans with hard-to-value investments.”). The Agencies believe that the requirement for filers to indicate for each specific investment asset whether the asset is hard-to-value is in keeping with the goals of obtaining better information regarding plan assets. The instructions would also include a clearer definition of hard-to-value assets for this purpose. Specifically, assets that are not listed on any national exchanges or over-the-counter markets, or for which quoted market prices are not available from sources such as financial publications, the exchanges, or the National Association of Securities Dealers Automated Quotations System (NASDAQ), would be required to be identified as hard-to-value assets on the Line 4i Schedules of Assets. CCTs and PSAs that are invested primarily in hard-to-value assets must themselves be identified as hard-to-value assets, regardless of whether they are valued at least annually. Similar to the existing treatment in the instructions for registered investment companies, CCTs, and PSAs under the current rules, those registered investment companies, CCTs, and PSAs that are valued at least annually and are invested primarily in assets that are listed on any national exchanges or over-the-counter markets, or for which quoted market prices are available from sources such as financial publications, the exchanges, or the NASDAQ, however, would not need to be identified as hard-to-value assets on the Line 4i Schedules of Assets. A non-exhaustive list of examples of assets that would be required to be identified as hard-to-value on the proposed Schedules of Assets includes: Non-publicly traded securities, real estate, private equity funds; hedge funds; and real estate investment trusts (REITs). The Agencies believe this definition is generally consistent with the FASB audit and accounting requirements defining assets with a readily determinable fair value. See, e.g., FASB Accounting Standards Codification TM (ASC) (Topic 820). As discussed above, filers generally would be permitted to aggregate participant-directed brokerage account reporting on the Line 4i Schedules of Assets by indicating the value of all the brokerage account investments as a single entry (identifying the brokerage account information). In the element requiring filers to indicate the location where the asset was aggregated for purposes of balance sheet reporting on Line 1b, the filer would have to indicate all of the following applicable categories of investments: Tangible personal property, loans, partnership or joint venture interests, real property, employer securities, investments that could result in a loss in excess of the account balance of the participant or beneficiary who directed the transaction, and any asset that would be categorized as “Other.” For the second of the Line 4i Schedules of Assets, which would correlate under the proposal to Schedule H, Line 4i(2), as noted above, the Agencies propose to change “Schedule of Assets Acquired and Disposed Within Year” to “Schedule of Assets Disposed of During the Plan Year.” Filers currently report some information regarding the disposal of hard-to-value assets and alternative investments either on the Schedule H, Line 4i Schedule of Assets if the assets were both acquired and disposed of during the plan year, or, if the value of the transaction was five percent or more of total plan assets, on the Schedule H, Line 4j “Schedule of Reportable Transactions.” The Agencies believe, however, that requiring reporting of hard-to-value assets and alternative investments acquired in one year and disposed of in another year, including investments that fall under the five percent limit of Line 4j, 18 would provide the Agencies with a more complete report of the plan's annual investments. The limitations on what assets need to be reported on the Schedule of Assets Disposed of During the Plan Year would remain unchanged from the current exceptions from reporting on the Schedules of Assets not held at the end of the plan year. Thus, the following would continue to be excluded from the Line 4i(2) Schedule of Assets Disposed of During the Plan Year: 18 Title I of ERISA contemplates reporting transactions involving three percent or more of plan assets. ERISA section 103(b)(3)(H). By prior rulemaking, the DOL has limited that reporting requirement to transactions involving five percent or more of plan assets. The Agencies continue to believe that generally keeping the limit at transactions involving five percent or more of plan assets, with this change to the Line 4i schedules, will provide sufficient information about significant transactions during the plan year. 1. Debt obligations of the U.S. or any U.S. agency. 2. Interests issued by a company registered under the Investment Company Act of 1940 ( e.g., a mutual fund). 3. Bank certificates of deposit with a maturity of one year or less. 4. Commercial paper with a maturity of 9 months or less if it is valued in the highest rating category by at least two nationally recognized statistical rating services and is issued by a company required to file reports with the Securities and Exchange Commission under section 13 of the Securities Exchange Act of 1934. 5. Participations in a bank common or collective trust (CCT). 6. Participations in an insurance company pooled separate account (PSA). 7. Securities purchased from a broker-dealer registered under the Securities Exchange Act of 1934 and either: (1) Listed on a national securities exchange and registered under section 6 of the Securities Exchange Act of 1934 or (2) quoted on NASDAQ. Likewise, assets disposed of during the plan year would continue to exclude any investment that was not held by the plan on the last day of the plan year if that investment is reported in the annual report for that plan year in any of the following schedules: 1. The schedule of loans or fixed income obligations in default required by Schedule G, Part I; 2. The schedule of leases in default or classified as uncollectible required by Schedule G, Part II; 3. The schedule of nonexempt transactions required by Schedule G, Part III; or 4. The schedule of reportable transactions required by Schedule H, line 4j. The new proposed Line 4i(2) Schedule of Assets Disposed of Within Year, generally would have the same data elements as the current Schedule of Assets Acquired and Disposed of Within Year. To implement the change in the schedule from “acquired and disposed of during the plan year” to “disposed of during the plan year,” however, filers would have to indicate the acquisition date. Basic parallel changes would be made to the Line 4i(2) Schedule to keep it generally consistent with the Line 4i(1) Schedule. Under the proposal, the Line 4j Schedule of Reportable (5%) Transactions would remain essentially unchanged. The current schedule of reportable transactions requires the filer to include information on the identity of the party involved in the reportable transaction or series of transactions. Consistent with the Line 4i Schedules of Assets, a checkbox is being added to this schedule to indicate whether the reportable transaction or series of transactions involved a person known to be a party-in-interest. Under the proposal, the Line 4j Schedule of Reportable (5%) Transactions would be structured in a standard format for data input and collection purposes; filers would not be able to use a nonstandard attachment. 3. Proposed Changes to DFE Reporting As described in parts A.1 and A.2 above in the context of the new Schedule H balance sheet information and the updated schedules of assets, respectively, the proposal includes changes as to what information about DFEs and their underlying investments needs to be reported by both the plan and the DFE. The proposal includes correlative changes to the Schedule D that are described below, including the elimination of the requirement of plans to complete Schedule D. The Agencies considered a number of alternatives in developing a proposal to address problems and concerns with regard to the consistency and quality of the reporting of assets held through collective investment vehicles, including DFEs. The Agencies considered whether both DFEs and plans should be required, on their Line 4i Schedule of Assets, to show the underlying investments of DFEs. The Agencies also considered eliminating filings for PSAs, CCTs, and 103-12 IEs and simply requiring plans to report on the Line 4i Schedules of Assets the plan's proportionate share of each of the underlying assets held by each PSA, CCT, or 103-12 IE in which the plan is invested. The Agencies invite comments on the most effective and efficient way to address the inconsistent and limited reporting of information invested through DFEs. The Agencies are particularly interested in information on how investments in DFEs relate to investment alternatives in participant-directed accounts and how much of the underlying assets of DFEs consist of hard-to-value and alternative investments. This revised reporting structure for both the Schedule H and the Line 4i Schedules of Assets for reporting investments through pooled investment vehicles is intended to enable the Agencies, plan fiduciaries and service providers, and other users of the data to have a better and more complete picture of the investments of plans. For nearly 44 percent of all assets held by large pension plans, the public information on plans' investments on the Form 5500 Annual Return/Report is limited to the class of the pooled investment arrangements rather than the financial class of the underlying investments (including hard-to-value and alternative investments). See Dep't of Labor, 2010 Form 5500 Direct Filing Entity Bulletin: Abstract of 2010 Form 5500 Annual Reports (2013), at 6. The proposed changes to reporting information about assets held through DFEs on the Line 4i Schedules of Assets, as well as the proposed changes to the Schedule H balance sheet information, is also supported by the GAO's recommendation that the Agencies take steps to reduce the difficulty associated with matching a plan's investments with those reported in the DFE's filing. GAO Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 Information, at 14-15. The proposed filing requirements for master trusts, CCTs and PSAs, 103-12 IEs, group insurance arrangements (GIAs), and the plans that invest through these vehicles and the proposed revisions to Schedule D reporting are described more fully below. a. DFE Reporting—Master Trusts Some plans participate in certain trusts, accounts, and other investment arrangements that file the Form 5500 Annual Return/Report as a DFE. In general, a master trust for Form 5500 Annual Return/Report filing purposes is a trust maintained by a bank or similar institution to hold the assets of more than one plan sponsored by a single employer or by a group of employers under common control. Unlike CCTs and PSAs, not every plan participating in the master trust necessarily has a proportionate share of all of the assets of the master trust. To get information about each plan's holdings within the master trust, the annual return/report has historically asked for information about so-called MTIAs. The Agencies understand that the MTIA reporting requirements are unique to the Form 5500 Annual Return/Report, do not fully correspond to actual trust accounting practices used for master trusts, and may not be well understood or consistently complied with by plans that use master trusts for investment and reinvestment of assets. Accordingly, the proposal would eliminate MTIA reporting and replace it with what is intended to be a simpler approach. Under the MTIA reporting concept, each pool of assets held in a master trust is treated as a separate MTIA if: (1) Each plan that has an interest in the pool has the same fractional interest in each of the assets in the pool as its fractional interest in the pool, and (2) each such plan cannot dispose of its interest in any asset in the pool without disposing of its interest in the pool. Under this test, it is possible for a single asset to be an MTIA if ownership of the asset meets the above test. Currently, a separate Form 5500 Annual Return/Report must be filed for each MTIA, among other things, listing the underlying assets of the MTIA on Schedule H and the aggregate value of each investing plan's ownership interest in the MTIA on Schedule D. The filing of each MTIA is deemed to be part of the Form 5500 Annual Return/Report of the investing plan, and the plan administrator is, therefore, ultimately responsible for MTIAs filing their Form 5500 Annual Return/Report, even if the bank or other third party is the person that files for the MTIA. According to GAO, MTIAs account for roughly 20.4% of the total assets of large defined contribution pension plans. See Private Pensions: Targeted Revisions Could Improve Usefulness Of Form 5500 Information, at 14. Accuracy of filings showing investments in master trusts (regardless of reporting structure) is therefore important to have a complete picture of plan investments. To facilitate consistent reporting, the Agencies now propose to eliminate the concept of a separate MTIA filing as part of the changes to Schedules D and H and the Line 4i Schedules of Assets. Prior to 1999, master trusts were required to file the Form 5500 Annual Return/Report; information about MTIAs was provided in an attachment to the consolidated master trust filing. See, e.g., 1998 Form 5500 Annual Return/Report and Instructions. Under the proposal, master trust filing would return to something closer to the pre-1999 structure. Specifically, a Form 5500 Annual Return/Report would be required to be filed for each master trust in which a plan has an interest. The master trust, like a MTIA under the current rules, would be required to include as part of its Form 5500 Annual Return/Report, a Schedule D to list all participating plans. The Schedule D listing of participating plans would include the requirement to report the total value of each participating plan's investment assets in the master trust. Plans would report their investments in master trusts in detail on their Schedule H, Line 4i(1) Schedule of Assets Held for Investment at End of Year, including the name and EIN of the master trust used on the master trust's Form 5500 Annual Return/Report. Plans would also list the aggregate value of their investment in master trusts on the Schedule H balance sheet. The proposal also would change the instructions to address what the Agencies understand to be inconsistency in the way master trust expenses are reported. Specifically, under the proposal, the master trust's report would include expenses that are allocable equally to all plans investing in the master trust. All other expenses would have to be allocated to the individual participating plans and reported at the individual plan level. Finally, the regulations and instructions would provide that to be a master trust for reporting purposes, either the master trust must operate on a calendar year or the master trust and all of the plans invested in the master trust must operate on the same fiscal year. Where the master trust is on a calendar year and a participating plan on a fiscal year other than a calendar year, similar to Schedule A reporting of insurance contracts, the information reported by the plan would be for the master trust year ending within the plan year. The combined changes for reporting by both investing plans and master trusts on both the Schedule H balance sheet and the Line 4i Schedules are intended better to effectuate the purposes underlying the current combination of MTIA, Schedule H (including the Line 4i Schedules), and Schedule D reporting. This should make it easier to understand the finances of the master trust as a whole, as well as the finances of the plans investing through a master trust. The Agencies invite comments to provide alternative suggestions on how to improve the transparency and accuracy of reporting plans' proportionate ownership of interests in assets held through a master trust. b. DFE Reporting—CCTs and PSAs As with the existing rules, under the proposal, a Form 5500 Annual Return/Report may be, but is not required to be, filed for a CCT or a PSA. The proposal would change the filing requirements with respect to CCTs and PSAs as follows. As discussed above, regardless of whether a CCT or PSA in which the plan invests files a Form 5500 Annual Return/Report as a DFE, the plan would report the interests in the CCT or PSA on the CCT or PSA line of the Schedule H balance sheet (Part I, Line 1b), although there would be breakouts within those categories to give a general idea of the types of assets held through the CCT or PSA. The changes should result in a clearer statement of total plan assets invested through these collective investment vehicles. The current requirement to break out the assets of non-filing CCTs or PSAs would be retained, but the proposal would shift the details of the underlying investments to the newly structured Line 4i(1) Schedule of Assets. Under the proposed revisions, investing plans, on their own Line 4i Schedules of Assets, would be required to list each underlying investment, identifying that the investment was held through a non-filing CCT or PSA, including the CCT's or PSA's name and other identifying information, as well as the information on the underlying asset. 19 19 As discussed above, if the CCT or PSA files a Form 5500 Annual Return/Report, the holdings in the CCT or PSA could be listed on the plan's Line 4i(1) Schedule of Assets at the CCT/PSA level (corresponding to the breakout categories on the balance sheet statement). Thus, the PSA or CCT filing of a Form 5500 Annual Return/Report, including the Line 4i(1) Schedule of Assets Held for Investment, would relieve each participating plan from reporting detailed information regarding the underlying investments. In this regard, the Agencies note that under current DOL regulations CCTs and PSAs are required to provide information about the underlying assets of the CCT or PSA to participating plans and provide plans with relief from reporting the underlying assets of the CCT or PSA if the CCT or PSA files the Form 5500 Annual Return/Report, but that CCTs and PSAs are not required themselves to file the Schedules of Assets. The regulation would be amended to provide that plans are relieved from breaking out the individual assets on the Schedule H, Line 4i Schedules of Assets, if the CCT or PSA instead files its own Form 5500, including the Schedule H and the Schedule of Assets Held for Investment. Also, the regulation would indicate that providing the information needed for a plan to complete the Line 4i Schedules of Assets constitutes compliance with the requirement to transmit information regarding the assets held by the CCT or PSA. With this change, information regarding the underlying investments of CCTs and PSAs, which have been provided only to plan fiduciaries, will now be part of the annual return/report data set; it will be filed either by the participating plans or by the CCT or PSA. c. DFE Reporting—103-12 IE The DOL's regulation at 29 CFR 2520.103-12 provides that an entity in which two or more unrelated plans invest that is not a CCT, PSA, or master trust, and which is deemed to hold plan assets under the DOL's regulations at 29 CFR 2510.3-101 that voluntarily chooses to file a Form 5500 Annual Return/Report for itself on behalf of its investing plans, is treated as a “103-12 IE” filing entity for Form 5500 Annual Return/Report reporting purposes. Under the proposal, reporting for these pooled investment vehicles generally remains unchanged, except to the extent that the data elements for the existing forms and schedules have changed for all filers. For a plan to be able to report investments in such entities as a single investment on the balance sheet portion of Schedule H, as under the current reporting rules, the entity in which the plan invested would have to complete its own Form 5500, together with a Schedule H and Line 4i Schedules of Assets, as well as Schedules A, C, D, G, as revised in the proposal, and the entity's own IQPA report. Under the proposal, similar to reporting assets held through participant-directed brokerage accounts, filers would have to indicate all the Line 1b balance sheet breakout categories for types of underlying investment of each 103-12 IE, but would not have to identify each individual investment. d. DFE Reporting—GIAs The reporting requirements for GIAs would generally remain unchanged, except GIAs would be subject to the same changes in reporting as comparable welfare plans, including the new requirements for welfare plans that provide health benefits. As under the current rules, welfare plans that are fully insured, including group health plans, would still have the exemption from filing the Form 5500 Annual Return/Report if they participate in a GIA that has filed its Form 5500 Annual Return/Report. GIAs would continue to be required to file all the same forms, schedules, and attachments as a large group health plan funded with a trust. GIAs that provide group health coverage would be required to file a separate Schedule J for each separate employer's participating plan. e. DFE Reporting—Changes to Schedule D The Agencies propose to continue the Schedule D requirement for DFEs in which plans invest, but not for plans participating in DFEs. DFEs would continue to report identifying information about the participating plan and the dollar value of each investing plan's interests in the DFE as of the end of the DFE reporting year. Participating plans, because they would now be reporting detailed information about investments in DFEs on their Line 4i Schedules of Assets, would no longer have to complete the Schedule D. 4. Better Information on Plan Terminations, Mergers, and Consolidations The Agencies propose revisions to existing Schedule H and Form 5500-SF questions on plan terminations, mergers, and consolidations. First, the Agencies propose expanding the question that asks whether the plan has adopted a resolution to terminate so that it also asks for the effective date of the plan termination, the year in which assets were distributed to plan participants and beneficiaries, and whether the plan transferred assets or liabilities to another plan. Second, the proposal would add a question asking filers to indicate whether another plan transferred assets or liabilities to the reporting plan (other than pursuant to a direct rollover). If the plan received a transfer of assets or liabilities from another plan, the filer would be asked to provide the date and type of transfer (merger, consolidation, spinoff, other). This new information is intended to provide better information on transfers of participant benefit obligations over the years. Third, if the plan is a defined contribution pension plan that terminated and transferred plan assets to a financial institution and established accounts in the name of missing participants, the filer would be asked to provide the name and EIN of the financial institution, the date the assets were transferred to the institution, the number of accounts established, and the total amount transferred. Although the question would not ask the filer to identify individual affected participants or beneficiaries, this requirement is designed to help missing participants locate information about their accounts, in some cases years after the plan termination when the plan or plan sponsor may no longer exist or have records of the accounts it established. Asking for information about accounts created for missing participants after plan termination would also be responsive to the ERISA Advisory Council's recommendations that the DOL use the Form 5500 Annual Return/Report to obtain more consistent reporting on accounts that hold missing participant plan assets. See 2013 ERISA Advisory Council Report: Locating Missing and Lost Participants, Dep't of Labor (available at www.dol.gov/ebsa/publications/2013ACreport3.html#2 ). In this 2013 report, the Advisory Council noted that another issue with “lost” or “missing” participants for ongoing plans as well as terminating plans, especially 401(k) plans, is “uncashed” checks, particularly checks sent to participants who have left employment where the Code permits the plan to “cash out” the participant. Id. The report noted that a plan was not necessarily able to tell whether uncashed checks were sent to the wrong address (a “lost” or “missing” participant issue) or whether a participant received the check but had not cashed it. To get better information about the magnitude of the problem with respect to defined contribution pension plans and to make plan fiduciaries aware that they should, at a minimum, have procedures in place to verify that a participant's address is good before a check is mailed and to keep track of the number of uncashed checks and the amount involved, the proposal would also add to both the Schedule H and the Form 5500-SF a compliance question for defined contribution pension plans asking whether there were any uncashed checks at the end of the plan year. If there were any uncashed checks at the end of the year, filers would be required to report how many uncashed checks there were and the total dollar value of the uncashed checks. Defined contribution pension plan filers would also be asked to describe briefly in an open text field the procedures that they followed to verify a participant's address and with respect to monitoring the uncashed checks. The proposed instructions provide that for Form 5500 Annual Return/Report reporting purposes, an uncashed check is one that is no longer negotiable or is subject to limited payability. In proposing to add a compliance question instead of telling filers how to account for the assets associated with uncashed checks on the Schedule H, the Agencies recognize that the ERISA Advisory Council indicated that there are questions regarding how the underlying assets represented by uncashed checks should be reported on the Form 5500 Annual Return/Report. Because of the variety of situations that might result in uncashed checks and the different ways uncashed checks might be accounted for in an ongoing plan, the Agencies have chosen to add a compliance question, leaving flexibility in the balance sheet reporting on Schedule H and on the Form 5500-SF and, where applicable, the IQPA report. The ERISA Advisory Council and some of the witnesses who testified recommended that the DOL publish guidance to advise plan fiduciaries how to handle uncashed checks, among other issues regarding missing or lost participants and beneficiaries and how to address the assets associated with those participants or beneficiaries. In making this recommendation, it was recognized that there was a tension between the mandatory distribution requirements under the Code and fiduciary responsibilities. In the absence of further guidance with regard to how to handle uncashed checks, the DOL notes (as stated above) that plans should at least have policies and procedures in place to verify participant addresses, for searching for missing participants and for fiduciaries to keep track of or be made aware of the number of uncashed checks and the total value of such checks that remained uncashed at the end of the plan year. Depending on the type of plan, the terms of the plan, and the status of the plan sponsor, there may be actions needed to satisfy fiduciary obligations with regard to benefit payments. 5. Changes to Financial Reporting for Small Plans a. Changes to Form 5500-SF In general, small plans that are invested only in “eligible” plan assets and otherwise meet the existing requirements for eligibility to file the Form 5500-SF would continue to be able to file the Form 5500-SF. 20 Welfare plans with fewer than 100 participants that do not provide group health benefits and that are required to file an annual return/report and that meet the eligibility requirements for the Form 5500-SF will still be able to use the Form 5500-SF to satisfy their filing requirement. Welfare plans with fewer than 100 participants that provide group health benefits are not eligible to use the Form 5500-SF. 21 For Form 5500-SF filers, there would be a modest additional breakout on the balance sheet information to give a basic picture of the types of eligible assets in which Form 5500-SF eligible small plans are invested. Specifically, filers would have to categorize the plans' investments into one of the following categories: (1) Cash/cash equivalents; (2) money market funds; (3) publicly traded stock (preferred/common); (4) publicly traded bonds, including government securities; (5) interests in registered investment companies (mutual funds, unit investment trusts, closed end funds); (6) interests in PSAs; (7) interests in CCTs; and (8) interests in insurance policies/contracts other than PSAs, e.g. annuity contracts. In contrast to the Schedule H balance sheet financial breakout categories, there would be no “Other” category for the balance sheet financials on the Form 5500-SF. If a small plan were to be invested in any assets other than those in the eight listed categories, it would not be eligible to file the Form 5500-SF. 20 The Form 5500-SF was developed and adopted for 2009 Form 5500 Annual Return/Report in part to provide a simplified report required under the Pension Protection Act of 2006. The DOL continues to believe, as discussed when implementing the 2009 forms revisions, 72 FR 64731 (Nov. 16, 2007), that the requirement in the PPA to provide “'simplified” reporting for plans with fewer than 25 participants is satisfied by making available the simplified reporting in the 5500-SF only to those plans invested in eligible assets—generally easy to value assets. Section 1103(b) of the Pension Protection Act of 2006, (PPA) 120 Stat. 780, 1057, requires the Secretary of the Treasury/IRS and the Secretary of Labor to provide for the filing of a simplified annual return for any retirement plan which covers fewer than 25 participants on the first day of the plan year and which (1) meets the minimum coverage requirements of section 410(b) of the Internal Revenue Code without being combined with any other plan of the business that covers the employees of the business; (2) does not cover a business that is a member of an affiliated service group, a controlled group of corporations, or a group of businesses under common control; and (3) does not cover a business that uses the services of leased employees (within the meaning of section 414(n) of the Code). The PPA provision does not include specific requirements as to the form or content of the simplified filing. 21 Currently welfare plans with fewer than 100 participants, including those that provide group health benefits, that are not exempt from the requirement to file an annual return/report ( e.g., those that are funded with a trust) are permitted to file the Form 5500-SF, if otherwise eligible. As discussed in more detail below, the proposal would eliminate the current Form 5500 and Form 5500-SF line items that require the filer to input “plan characteristics codes” onto the form from a list in the instructions. Instead, the filer would complete a series of separate questions. In general, those changes involve requesting information about plan characteristics as a series of “Yes”/“No” and check box questions to make the forms easier to complete, make the forms more straightforward as a disclosure document, and improve the quality of the data. In addition, as with Form 5500 Schedule H filers, the proposal would require that the Form 5500-SF filed for a participant-directed individual account plan must include an electronic copy of the comparative chart of designated investment alternatives (DIAs) currently required to be provided to participants of such plans under 29 CFR 2550.404a-5. The Agencies believe that although this information would not be filed in a data captured structure and, thus, would not be as readily data mineable, attaching the already required 404a-5 comparison chart would allow participants and beneficiaries in participant-directed individual account plans to access the most recent and prior year comparative charts through the EFAST Form 5500 Annual Return/Report public disclosure feature. It would also enable the Agencies to monitor more effectively compliance by participant-directed individual account plans with this important disclosure requirement. It also would provide important information regarding investment features and investment fees and expenses. We also understand that private third parties would be able to use the copies of the comparative charts to develop more individualized tools to help plan sponsors, plan fiduciaries, and participants and beneficiaries evaluate and compare their plans' investment options. The Agencies believe that a requirement that the plan administrator of a participant-directed individual account plan attach an electronic copy of an existing document should be less burdensome than adding new questions that would require the same data to be entered onto the form or schedules to collect the information. The Agencies seek comment as to whether there would be any real additional burden, other than transition costs to move to the new method, to enter the data in a structured format rather than attaching a copy of the existing document. b. Changes to Filing Exemptions and Requirements for Small Plans Not Eligible To File the Form 5500-SF As discussed above, various oversight and advisory bodies have identified a significant need for better information regarding employee benefit plan investments, in particular regarding plans invested in hard-to-value and alternative investments. In that regard, the Agencies are proposing a number of changes for small plans that are not Form 5500-SF eligible filers. First, the Schedule I would be eliminated. Like the Form 5500-SF, the Schedule I does not require small plan filers to provide detailed plan asset information. Since small plan filers are the majority of annual return/report filers overall (taking into account both Form 5500-SF and Form 5500 filers), this shortcoming impairs the utility of the Form 5500 Annual Return/Report as a tool to obtain a meaningful picture of small plan investments in hard-to-value and other assets. As the GAO has noted, the limited financial information provided on the Schedule I creates a challenge for participants, beneficiaries, oversight agencies, researchers, and other users of the Form 5500 or Form 5500 data. GAO Targeted Revisions Could Improve Usefulness of Form 5500 Information, at 18. Accordingly, under the proposed change, small plans that are not eligible to file the Form 5500-SF and that currently file the Schedule I would be required to complete the Schedule H and the applicable Line 4i Schedules of assets. Small plans with simple investment portfolios would not see a significant increase in their annual reporting burden. Although this would result in additional reporting details for those small plans with complex portfolios that include hard-to-value or alternative investments, the Agencies believe that such small plans should have more transparent financial statements. In light of changes in the financial environment and increasing concern about investments in hard-to-value assets and alternative investments, the Agencies continue to believe that requiring small plans invested in such assets to report separate financial information regarding hard-to-value investments is important for regulatory, enforcement, and disclosure purposes. Although such small plans would be required to complete the Schedule H instead of the Schedule I, including the Line 4i(1) and 4i(2) Schedules of Assets, to minimize increased burden, small plans that meet the specified requirements, as they can under the current rules, would continue to be eligible for a waiver of the annual examination and report of an independent qualified public accountant (IQPA) under 29 CFR 2520.104-46. As is currently the case, under the proposal, all welfare plans with fewer than 100 participants that are required to file an annual return/report are eligible for a waiver of the annual examination and report of an IQPA under 29 CFR 2520.104-46(b)(2). The Agencies are also proposing to change the rules for determining when a plan is exempt from the requirement to include an IQPA report with its filing. In that regard, the Agencies are proposing to add to the Form 5500 a new question, for defined contribution pension plans only, asking for the number of participants with account balances at the beginning of the plan year. Defined contribution pension plans would determine whether they have to file as a large plan and whether they have to attach an IQPA report based on the number of participants with account balances as of the beginning of the plan year, as reported on the face of the Form 5500 or Form 5500-SF. Currently, the IQPA requirement is based on the total number of participants (including those eligible but not participating in a Code section 401(k) or 403(b) plan) at the beginning of the plan year. With the changes in the reporting requirements for small plans (for example, the elimination of the Schedule I), this would minimize burden, but would still provide a picture of the types of investments and fees of small plans (plans with fewer than 100 participants that have an account balance) without requiring them to cover the cost of an audit. For first plan year filings, the plan would have to have fewer than 100 participants with account balances both at the beginning of the plan year and the end of the plan year. The proposal would also require a Schedule C to be filed by small pension plans that are not eligible to file the Form 5500-SF, small welfare plans that provide group health benefits that are not unfunded or insured ( e.g., funded using a trust), and other small welfare plans that are not unfunded or insured plans and are not eligible to file the Form 5500-SF. Currently, only large plans must file a Schedule C, thus excluding a large portion of plans from having to disclose service provider fees. The Agencies recognize the burdens small plans face in complying with disclosure obligations, but requiring certain small plans to file a Schedule C would address some of the GAO's concerns that not all critical information on indirect compensation is being reported to the Agencies. See GAO Targeted Revisions Could Improve Usefulness of Form 5500 Information, at 25-26 (“Given these various exceptions to fee reporting requirements, Schedule C may not provide participants, the government, or the public with information about a significant portion of plan expenses and limits the ability to identify fees that may be questionable.”). In addition, the rule would better align financial information reporting with recently adopted disclosure rules to broaden the fees that are reported by the affected plans. Id. at 50. 6. New Information on Employer Matching Contributions, Employee Participation Rates, and Plan Design for Defined Contribution Pension Plans The Agencies are proposing changes that are intended to collect better information on pension plan coverage and performance as retirement savings vehicles. The focus is on participant-directed defined contribution pension plans, which are becoming the primary source of retirement savings for many of America's workers. Specifically, the proposal would add new questions to the Form 5500, Form 5500-SF, and Schedule R on participation, contributions, and asset allocation by age, and participant-level diversification. The questions ask for the number of participants making catch-up contributions, investing in default investment options, maximizing the employer match, and deferring compensation. Also, questions would be added to the Form 5500 and Form 5500-SF to collect informa [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-14893. Public record. Not legal advice.