[Federal Register Volume 64, Number 230 (Wednesday, December 1, 1999)]
[Proposed Rules]
[Pages 67436-67444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31110]



[[Page 67435]]

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Part III

Department of Labor
_______________________________________________________________________



Pension and Welfare Benefits Administration



_______________________________________________________________________



29 CFR Part 2520



Proposed Small Pension Plan Security Amendments; Proposed Rule

  Federal Register / Vol. 64, No. 230 / Wednesday, December 1, 1999 / 
Proposed Rules  

[[Page 67436]]



DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2520

RIN 1210-AA73


Proposed Small Pension Plan Security Amendments

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: This document contains proposed amendments to the regulations 
governing the circumstances under which small pension plans are exempt 
from the requirements to engage an independent qualified public 
accountant and to include a report of the accountant as part of the 
annual report under Title I of the Employee Retirement Income Security 
Act of 1974, as amended (ERISA). Regulation 29 CFR 2520.104-46 provides 
a waiver of the annual examination and report of an independent 
qualified public accountant for employee benefit plans with fewer than 
100 participants at the beginning of the plan year. The proposed 
amendments are designed to increase the security of assets in small 
pension plans by conditioning the waiver of the requirements concerning 
the engagement of an accountant on enhanced disclosure of information 
to participants and beneficiaries and, in certain instances, improved 
bonding requirements. This regulatory action is being proposed as a way 
of enhancing the security and accountability of small pension plans 
because of recent cases involving embezzlement or other 
misappropriations of pension assets that have focused national 
attention on the potential vulnerability of small pension plans to 
fraud and abuse. The proposed amendments do not affect the exemption 
for small welfare plans (such as group health plans) under 
Sec. 2520.104-46. Conforming amendments are made to the simplified 
annual reporting requirements specified in 29 CFR 2520.104-41. If 
adopted, the proposal would affect participants and beneficiaries 
covered by small pension plans, sponsors and administrators of small 
pension plans, and service providers holding assets of small pension 
plans.

DATES: Written comments concerning the proposed regulations must be 
received by January 31, 2000.

ADDRESSES: Written comments (preferably three copies) should be sent 
to: Office of Regulations and Interpretations, Room N-5669, Pension and 
Welfare Benefits Administration, U.S. Department of Labor, 200 
Constitution Avenue, NW, Washington, DC 20210, Attention: Small Pension 
Plan Security Proposal. All submissions will be open to public 
inspection in the Public Disclosure Room, Pension and Welfare Benefits 
Administration, Room N-5638, 200 Constitution Avenue, NW, Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: John Keene, Office of Regulations and 
Interpretations, Pension and Welfare Benefits Administration, (202) 
219-8521. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

    In general, the administrator of an employee benefit plan required 
to file an annual report under Title I of ERISA must include as part of 
that report the opinion of an independent qualified public accountant 
(IQPA). These annual reporting requirements can be satisfied by filing 
the Form 5500 ``Annual Return/Report of Employee Benefit Plan.'' 
1 The requirements governing the content of the opinion and 
report of the IQPA are set forth in ERISA section 103(a)(3)(A) and 29 
CFR 2520.103-1(b). Section 104(a)(2)(A) permits the Department of Labor 
(Department) to prescribe, by regulation, simplified annual reports for 
pension plans with fewer than 100 participants. Section 104(a)(3) 
permits the Department to prescribe exemptions from the reporting and 
disclosure requirements or simplified reporting and disclosure for 
welfare plans. In accordance with the Department's authority under 
sections 104(a)(2)(A) and 104(a)(3), the Department adopted, at 29 CFR 
2520.104-41, simplified annual reporting requirements for pension and 
welfare benefit plans with fewer than 100 participants. In addition, 
the Department, at 29 CFR 2520.104-46, prescribed for small plans a 
waiver from the requirement of section 103(a)(3)(A) to engage an IQPA 
and to include the opinion of the accountant as part of the plan's 
annual report.
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    \1\ See sections 101(b)(4) and 103 of ERISA, and 29 CFR 
2520.103-1.
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    Since the adoption of Sec. 2520.104-46 in 1976, the amount of 
assets held in small pension plans has increased dramatically and small 
pension plans have become important retirement savings vehicles for an 
increasing number of American workers. Recently, media coverage of a 
case involving misappropriation of pension assets over several years 
focused national attention on the potential vulnerability of small 
pension plans to fraud and abuse. There have been other cases where 
service providers, administrators or other fiduciaries have misused 
retirement savings held in small pension plans and have concealed their 
acts by falsifying financial and other information to plan sponsors, 
trustees, and participants. Although such cases are rare and legal 
remedies often can be pursued in an effort to recover lost assets, the 
Department believes that, given the increasing extent to which workers 
are depending on their employment-based pension plans as a primary 
source of retirement income, it is appropriate to take steps to improve 
the security of pension assets in small pension plans.
    One approach to improving the security of assets in small pension 
plans is to require all such plans to comply with the audit 
requirements of section 103(a)(3)(A). As noted above, the assets of 
plans with fewer than 100 participants, unlike larger plans, are not 
required to be examined by an IQPA. While subjecting the assets of 
small pension plans to an audit would, in the view of the Department, 
provide a high degree of certainty that the assets reported on a plan's 
annual report are actually available to pay benefits, the Department 
recognizes that the costs attendant to such a requirement may be 
significant for many plans and plan sponsors. Consistent with the 
Department's goal of encouraging pension plan establishment and 
maintenance, particularly in the small business community, the 
Department concluded that engaging an accountant should not be the only 
means by which the security of small plan pension assets can be 
improved.
    In assessing alternatives to a mandatory audit requirement, the 
Department concluded that a three-pronged approach--focusing on (1) Who 
holds the plan'' assets, (2) Enhanced disclosure to participants and 
beneficiaries and (3) In limited situations, an improved bonding 
requirement--could enhance the level of security and accountability for 
small pension plan assets, while keeping administrative burdens and 
costs to a minimum by building on current recordkeeping, disclosure and 
bonding requirements and practices. Based on our experience in dealing 
with thousands of inquiries every year from participants regarding 
their plans, we have determined that well informed participants and 
beneficiaries are often in the best position to be watchdogs over their 
own pension plans and can catch problems early. We also have determined 
that, based on industry estimates, the costs of enhancing fidelity bond 
coverage will be nominal for most

[[Page 67437]]

plans and less than the cost of an annual audit by an IQPA.
    The alternative referenced above is set forth as proposed new 
conditions for obtaining a waiver from the requirements concerning the 
engagement of an IQPA under Sec. 2520.104-46. A description of the 
proposal follows.

B. Proposed Amendment to Sec. 2520.104-46

    Currently, the conditions to obtaining a waiver from the 
requirement to engage an accountant under Sec. 2520.104-46 are that a 
pension plan have fewer than 100 participants at the beginning of the 
plan year and the plan administrator properly file the ``Form 5500-C/R 
Return/Report of Employee Benefit Plan (With fewer than 100 
participants).'' As discussed below, the proposal would, upon adoption, 
amend the regulation to further condition eligibility for the waiver on 
additional disclosures to plan participants and beneficiaries 
concerning the assets held by their plans and, in certain instances, an 
increase in the amount of a plan's fidelity bond.2
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    \2\ On September 3, 1997, the Department of Labor, the Internal 
Revenue Service, and the Pension Benefit Guaranty Corporation 
published (62 FR 46556) proposed revisions to the annual return/
report forms filed for employee benefit plans. The Agencies proposal 
replaced the Form 5500, Form 5500-C and Form 5500-R with one Form 
5500 to be used by both large and small plan filers beginning with 
1999 plan year filings. On June 24, 1998 the Agencies published a 
notice of the submission of the revised Form 5500 for OMB review (63 
FR 34493). PWBA received conditional approval for the revised Form 
5500 under OMB control number 1210-0110. The Department also 
published on December 10, 1998 (63 FR 68370) a notice of proposed 
rulemaking to conform its regulations relating to the annual 
reporting and disclosure requirements of Part 1 of Title I of ERISA 
to the revised forms. The proposed amendments to the small pension 
plan IQPA waiver contained in this notice would modify the proposed 
amendments to Sec. 2520.104-41 and Sec. 2520.104-46 published in the 
December 10 notice. The Form 5500 series may need to be adjusted 
following adoption of a final rule in connection with this proposal 
to reflect changes to the small pension plan IQPA waiver.
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    In general, the Department believes that statements of plan assets 
prepared by certain regulated financial institutions (such as banks, 
insurance companies, mutual funds, and securities broker-dealers), if 
made available to participants and beneficiaries, provide a means by 
which participants and beneficiaries can independently confirm that the 
assets reported by the plan to be available to pay benefits as of the 
end of the plan year were, in fact, available according to the books 
and records of the institution holding the assets. Such disclosure, in 
the Department's view, reduces the likelihood of losses over long 
periods due to acts of fraud or dishonesty. The Department also 
believes that supplemental bonding requirements also will serve to 
reduce the risk of loss due to acts of fraud or dishonestly where a 
substantial percentage of a plan's assets are held by entities that may 
not be subject to state or federal regulatory oversight.

1. Qualifying plan assets and bond requirement

    The first part of the proposal, therefore, focuses on the extent to 
which a plan's assets are held by regulated financial institutions. 
See: Proposed Sec. 2520.104-46(b)(1)(i)(A). The proposal uses the term 
``qualifying plan assets'' in applying the conditions of the waiver. 
``Qualifying plan assets'' are defined in the proposal to include any 
assets held by: a bank or similar financial institution, as defined in 
Sec. 2550.408b-4(c); an insurance company qualified to do business 
under the laws of a state; an organization registered as a broker-
dealer under the Securities and Exchange Act of 1934; or any other 
organization authorized to act as a trustee for individual retirement 
accounts under section 408 of the Internal Revenue Code. The term 
``qualifying plan assets'' also includes assets that the Department 
believes present little risk of loss to participants and beneficiaries 
as a result of acts of fraud or dishonesty `` participant loans meeting 
the requirements of ERISA section 408(b)(1) and qualifying employer 
securities, as defined in ERISA section 407(d)(1). See Proposed 
Sec. 2520.104-46(b)(1)(ii).
    The proposal provides that, with respect to each plan year for 
which the waiver is claimed, at least 95% of the assets of the plan 
constitute ``qualifying plan assets'' or any person who handles plan 
funds or other property that do not constitute ``qualifying plan 
assets'' is covered by a bond meeting the requirements of ERISA section 
412, except that the amount of the bond is not less than the value of 
such assets.3 The 95% test is provided in recognition of the 
fact that some small plans may have assets (such as limited partnership 
or real estate interests) held by parties that are not regulated 
financial institutions. It is not the intent of the Department in 
proposing these amendments to directly or indirectly influence how the 
assets of small plans are invested through application of the audit 
requirements. Accordingly, only where more than 5% of a plan's assets 
do not constitute ``qualifying plan assets'' will the bonding component 
of the proposal apply. As noted above, the bonding component of the 
proposal would require a bond meeting the requirements of ERISA section 
412 in an amount equal to 100% of the assets that do not constitute 
``qualifying plan assets.'' Based on industry estimates as detailed 
below, it does not appear that the costs attendant to compliance with 
the proposed bonding requirement will be significant enough to affect 
plan investments in assets that are not ``qualifying plan assets.''
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    \3\ Section 412 of ERISA and the regulations issued thereunder, 
29 C.F.R. Sec. 2580.412-1 et seq., set forth the bonding 
requirements generally applicable to ERISA-covered pension and 
welfare benefit plans.
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    Under the proposal, the percentage of a plan's assets that 
constitute ``qualifying plan assets'' and, as appropriate, the amount 
of supplemental bond coverage necessary to comply with the regulation 
are to be determined for each plan year for which the waiver is 
claimed. Accordingly, the administrator of a plan electing the waiver 
must make the required determinations as of the beginning of the plan 
year. For purposes of this requirement, the required determinations are 
to be made in a manner consistent with the requirements of section 412. 
Inasmuch as a determination that more than 5% of a plan's assets do not 
constitute ``qualifying plan assets'' may necessitate an increase in 
the amount of the plan's section 412 bond, assuming the administrator 
does not elect to engage an accountant, the Department concluded that 
the determination of ``qualifying plan assets'' should be made on the 
same basis as the required bond. In this regard, 29 CFR 2580.412-14 
requires that the amount of the section 412 bond be determined by 
reference to the preceding reporting year. In the case of new plans, 
with respect to which there is no preceding report year, Sec. 2580.412-
15 provides procedures for making estimates for the current year.
    For example, Plan A, which reports on a calendar year basis, has 
total assets of $600,000 as of the end of the 1999 plan year. Plan A's 
assets, as of the end of year, include: investments in various bank, 
insurance company and mutual fund products of $520,000; investments in 
qualifying employer securities of $40,000; participants loans, meeting 
the requirements of ERISA section 408(b)(1) totaling $20,000; and a 
$20,000 investment in a real estate limited partnership. Because the 
only asset of the plan that does not constitute a ``qualifying plan 
asset'' is the $20,000 real estate investment and that investment 
represents less than 5% of the plan's total assets, no bond would be 
required under the proposal as a

[[Page 67438]]

condition for the waiver for the 2000 plan year. By contrast, Plan B 
also has total assets of $600,000 as of the end of the 1999 plan year, 
of which $558,000 constitutes ``qualifying plan assets'' and $42,000 
constitutes non-qualifying plan assets. Because 7%--more than 5%--of 
Plan B's assets do not constitute ``qualifying plan assets,'' Plan B, 
as a condition to electing the waiver for the 2000 plan year, must 
ensure that it has a fidelity bond in an amount equal to at least 
$42,000 covering persons handling non-qualifying plan assets. Inasmuch 
as compliance with section 412 generally requires the amount of bonds 
to be not less than 10% of the amount of all the plan's funds or other 
property handled, the bond acquired for section 412 purposes may be 
adequate to cover the non-qualifying plan assets without an increase 
(i.e., if the amount of the bond determined to be needed for the 
relevant persons for section 412 purposes is at least $42,000). As 
demonstrated by the foregoing example, where a plan has more than 5% of 
its assets in non-qualifying plan assets, the bond required by the 
proposal is for the total amount of the non-qualifying plan assets, not 
just the amount in excess of 5%.

2. Disclosure

    In addition to the bonding requirement, discussed above, the 
proposal further conditions the waiver of the requirement to engage an 
accountant on the disclosure of certain information to participants and 
beneficiaries. Specifically, Sec. 2520.104-46(b)(1)(i)(B) of the 
proposal requires that the summary annual report (SAR) of a plan 
electing the waiver include, in addition to the other information 
required by 29 C.F.R. Sec. 2520.104b-10: (1) The name of each 
institution holding ``qualifying plan assets'' and the amount of such 
assets held by each institution as of the end of the plan year; (2) The 
name of the surety company issuing the bond, if the plan has more than 
5% of its assets in non-qualifying plan assets; (3) A notice indicating 
that participants and beneficiaries may, upon request and without 
charge, examine, or receive copies, of evidence of the required bond 
and statements received from each institution holding qualifying assets 
which describe the assets held by the institution as of the end of the 
plan year; and (4) A notice stating that participants and beneficiaries 
should contact the Regional Office of the U.S. Department of Labor's 
Pension and Welfare Benefits Administration if they are unable to 
examine or obtain copies of statements received from each institution 
holding qualifying assets or evidence of the required bond, if 
applicable. Proposed Sec. 2520.104-46(b)(1)(i)(C) is intended to make 
clear that plan administrators must, without charge, make the required 
documents available for examination and, upon request, provide copies 
of those documents to participants and beneficiaries.
    As indicated earlier, these requirements, in an effort to minimize 
costs to plans, are intended to build on existing recordkeeping and 
disclosure requirements. In this regard, the Department believes that 
all plans will receive year-end statements from institutions holding 
``qualifying plan assets.'' The proposal does not require the year-end 
statements to be in any particular form, but the statements, at a 
minimum, must identify the institution holding the assets and the 
amount of assets held as of the end of the year. Such information is 
typically furnished in the normal course of business and would, 
nonetheless, be necessary for administrators to properly discharge 
their annual reporting obligations under ERISA. Moreover, because 
annual reports generally are not required to be filed earlier than the 
end of the 7th month after the end of plan year and summary annual 
reports are not required to be distributed until 9 months after the 
close of the plan year or, if there is an approved extension of time to 
file, 2 months after the close of the extension period,4 
administrators are afforded ample time to ensure the availability of 
the information necessary to satisfy the disclosure obligation on which 
the waiver is conditioned.
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    \4\ See 29 C.F.R. 2520.104a-5 (regulation on date of filing for 
annual reports), 29 C.F.R. 2520.104a-6 (regulation on date of filing 
for annual reports for plans which are part of a group insurance 
arrangement) and 29 C.F.R. 2520.104b-10(c) (regulation on when to 
furnish summary annual reports)
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3. Limitations

    The proposal would also make clear that this section does not 
affect the obligation of a plan electing a waiver of the audit 
requirement to file a Form 5500 ``Annual Return/Report of Employee 
Benefit Plan,'' including any schedules or statements required by the 
instructions to the form. In addition, the proposal would clarify that 
a plan electing to file a Form 5500 as a small plan pursuant to the 
``80 to 120 rule'' in 29 CFR 2520.103-1(d) may also claim the waiver 
afforded in this section in the same manner as a plan with fewer than 
100 participants. Under the ``80 to 120 rule,'' if the number of 
participants covered under the plan as of the beginning of the plan 
year is between 80 and 120, and an annual report was filed as a small 
plan filer for the prior year, the plan administrator may elect to 
continue to file as a small plan filer and claim the waiver afforded by 
this section even though the plan covered more than 100 participants as 
of the beginning of the plan year. On the other hand, a plan with fewer 
than 100 participants as of the beginning of the plan year that elects 
to continue to file a Form 5500 as a large plan pursuant to the ``80 to 
120 rule'' is not eligible to claim the waiver afforded to small plan 
filers.

C. Conforming Changes to the Simplified Annual Reporting Regulation

    Conforming amendments to the simplified annual reporting provisions 
in Sec. 2520.104-41 would clarify that, although other simplified 
reporting options would continue to be available, if an employee 
benefit plan with fewer than 100 participants does not meet the 
criteria set forth in Sec. 2520.104-46, it would be required to engage 
an IQPA to conduct an examination of the financial statements of the 
plan, include with the plan's annual report the financial statements, 
notes and schedules prescribed in ERISA section 103(b) and 29 CFR 
2520.103-1, and include within the plan's annual report a report of an 
IQPA as prescribed in ERISA section 103(a)(3)(A) and 29 CFR 2520.103-
1(b)(5).

D. Effective Date

    This regulation is proposed to be effective 60 days after 
publication of a final rule in the Federal Register. If adopted, the 
proposed amendments would be applicable to the first plan year 
beginning after the effective date of the final regulations.

E. Request for Public Comments on Alternatives

    During the development of this proposal, small business groups 
expressed concern about the Department taking actions in this area that 
would increase administrative costs for small business owners thinking 
about continuing existing pension plans or offering new ones. The 
Department shares these concerns. Data indicate that more than one half 
of the private sector workforce does not participate in a pension plan, 
and this problem is particularly serious in the small business sector. 
In developing this proposal we attempted to balance the interest in 
providing secure retirement savings for participants and beneficiaries 
with the interest in minimizing costs and burdens on small

[[Page 67439]]

pension plans and the sponsors of those plans.
    To aid in this effort as we develop a final regulation, the 
Department is interested in obtaining views and comments from the 
benefit plan community on whether there are alternative approaches that 
would provide significant enhancements in the security of small pension 
plan assets and the accountability of persons handling those assets 
which would be more effective or involve less cost and burden than this 
proposal. In that regard, the Department specifically invites comments 
on requiring as conditions of being eligible for the audit waiver that 
small pension plans (1) Obtain a fidelity bond covering persons who 
handle plan funds in an amount equal to at least 80% of the value of 
the plan's assets and (2) Make available to participants and 
beneficiaries a schedule of the plan's assets held for investment 
purposes as of the end of the plan year similar to the schedule 
currently required as part of the Form 5500 annual report filed by 
pension plans with 100 or more participants. Additionally, the 
Department requests comments on the investment of small pension plans 
assets; specifically, the proportion of assets that are ``qualifying 
plan assets'' as defined in this proposal.

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule: (1) Having an annual effect on the economy of $100 million 
or more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) Creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) Materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) Raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, it has been 
determined that this action is ``significant'' and subject to OMB 
review under Section 3(f)(4) of the Executive Order. Consistent with 
the Executive Order, the Department has undertaken to assess the costs 
and benefits of this regulatory action. The Department's assessment, 
and the analysis underlying that assessment, is detailed below.

Overview

    In the Department's view, the benefits of the proposed additional 
requirements for the IQPA waiver outweigh the costs. The enhanced 
accountability and security of small pension plans resulting from 
additional IQPA waiver conditions will benefit plan participants who 
are counting on these pensions for retirement security. Given the more 
than $300 billion in small pension plan assets, any increase in 
security and accountability is valuable. The additional conditions will 
also strengthen confidence in the pension system as a whole, and this 
added confidence may encourage more employers to offer pension plans, 
as well as additional workers to participate in pension plans that are 
offered. The costs to small pension plans will not be large `` it is 
estimated to be less than 1% of total annual administrative costs for 
all small pension plans. Estimates from Form 5500 data indicate that 
most small pension plans (as quantified below) would meet the 
requirement that at least 95% of their assets be ``qualifying plan 
assets.'' For the few plans not meeting this requirement, the cost of 
obtaining fidelity bonds to enable them to meet the conditions required 
for the waiver are low. The statements required from qualifying 
financial institutions will impose no additional costs on plans because 
these records are kept as part of usual and customary business 
practices as the information is necessary for administrators to 
properly discharge their annual reporting obligations under ERISA. 
Finally, the cost of meeting disclosure requirements is small because 
after an initial start up cost to modify the SAR, no additional 
preparation costs are associated with SAR disclosure beyond the SAR 
statutory requirements. Additionally, no preparation is associated with 
distributing the statements and evidence of fidelity bonds that 
participants may request under the proposal.
    The total costs imposed by the additional conditions this proposal 
would place on the small plan audit waiver are expected to be a one 
time cost of $5.9 million, plus $9.0 million annually.5 This 
is composed of a $5.9 million start up cost to include summary language 
on the financial statements and bonds in the SAR, an $8.0 million cost 
for the estimated 37,000 plans not meeting the 95% test to obtain a 
bond, and a $995,000 cost to plans for providing copies of the 
statements and bonds upon request.
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    \5\ The cost estimates are derived from 1995 data on pension 
plans (the latest available) and 1997 BLS data on occupational 
wages.

                        Costs Imposed by Proposed Small Pension Plan Security Amendments
----------------------------------------------------------------------------------------------------------------
                                                                                                      Provide
                                                                                                     requested
      Proposed regulatory provision          SAR summary language            Obtain a bond           copies of
                                                                                                  statements and
                                                                                                       bonds
----------------------------------------------------------------------------------------------------------------
Number of plans impacted................  605,000...................  37,000....................         605,000
Total Cost..............................  $5.9 million..............  $8.0 million..............        $995,000
Cost per plan...........................  $10.......................  $220......................           $1.64
----------------------------------------------------------------------------------------------------------------

Statement of Need for Proposed Action

    As noted earlier, recent cases involving embezzlement or other 
misappropriations of pension assets have focused national attention on 
the potential vulnerability of small pension plans to fraud and abuse. 
As a result, the Department has determined that modifications to the 
small plan audit waiver would enhance pension plan security. Imposing 
the additional conditions on the audit waiver would

[[Page 67440]]

help reduce the risk of loss due to acts of fraud or dishonesty with 
small plan assets. It would also provide participants with more 
information about their pension plans, thus better enabling them to 
help provide the checks and balances needed to ensure the integrity of 
the pension plan.

Examination of Alternative Approaches

    To improve the security of pension plan assets, and to better 
provide participants and other parties to the plan the ability to 
verify and monitor the existence of small pension plan assets, various 
alternatives to the proposal were considered. The voluntary nature of 
the private pension system requires the Department to be particularly 
sensitive to costs imposed by regulations and to avoid, when possible, 
any action that would negatively impact small pension plan formation or 
maintenance. The Department therefore consulted industry groups and 
associations regarding alternatives available to enhance pension plan 
security and the burdens imposed by these various alternatives. The 
proposed regulation was crafted using these suggestions, and is 
intended to accomplish these goals without imposing significant costs 
on pension plans.
    Among the alternatives considered were on-site inspection, periodic 
reporting, additional compliance penalties, additional bonding 
requirements, and eliminating the existing small plan audit waiver of 
examination and report of an accountant. However, all of these options 
were either extremely expensive (ranging in cost from $200 million to 
$4 billion paid by plans or plan sponsors) and thus conflicted with the 
Department's priority of creating a regulatory environment that 
encourages pension plan formation, not feasible to implement, or would 
not have sufficiently enhanced small pension plan security.

Cost Analysis

    The requirements contained in this proposal were developed to best 
conform to the actual investment patterns of small plans, rather than 
to alter these patterns. To understand the investment patterns of plans 
and the typical percentage of plan assets that would meet the 
``qualifying plan assets'' requirement, we used Form 5500 data to 
examine how pension plans report their allocation of assets among 
various investment categories. Plan asset allocation information on the 
Form 5500 C/R filed by small plans is currently limited to very general 
categories. Because of this lack of detailed financial information, the 
Form 5500 filings of plans with more than 100 participants but less 
than $2 million in assets (within two standard deviations of the mean 
asset value of small plans) were used as a proxy. Data show that within 
this proxy group, the proportion of investments in ``qualifying plan 
assets'' to total investments does not vary with plan size except among 
the largest plans (those with 2,500 or more participants), which 
represent less than 1 percent of the proxy group. We obtained a 
distribution of these plans based upon the proportion of each plan's 
assets that are ``qualifying plan assets.'' We then applied this 
distribution to the actual 1995 count of small plans to estimate a 
distribution of small plans based on the proportion of assets that are 
``qualifying plan assets.'' We assumed that assets reported as cash, 
CD's, U.S. Government Securities, corporate debt and equity, loans, 
employer securities and the value of interest in direct filing 
entities, registered investment companies, and insurance company 
general accounts constitute ``qualified plan assets'' as defined in 
this proposal.
    The chart below shows the results of the analysis of 1995 data (the 
most recent year of available data) using these assumptions, and how 
many plans out of the 605,000 would not meet the ``qualifying plan 
assets'' test if the threshold were set at the various percentages 
outlined in the table. This shows that the vast majority of the assets 
of small plans are ``qualifying plan assets.'' Specifically, for all 
but 6% of small pension plans, at least 95% of plan assets constitute 
``qualifying plan assets.'' Similarly, for all but 3% of plans, at 
least 90% of plan assets constitute ``qualifying plan assets.'' As the 
threshold moves below 90%, very few additional plans are added to the 
list of those having the required percentage of ``qualifying plan 
assets.'' The analysis of the data indicates that the 95% threshold 
represents the point at which most small plans maintain their assets in 
investments which represent minimal risks to their security. 
Consequently, the 95% threshold requirement is the means by which most 
plans will meet the requirement for the audit waiver. The plans that 
will not meet the 95% threshold are atypical of the industry standard, 
impose a greater risk on plan asset security, and are sufficiently few 
in number such that additional conditions for an audit waiver to 
protect participants and plan assets are warranted and are also cost 
effective.

 Estimates of the Number and Percentage of Small Pension Plans (1-99 Participants) Not Meeting the ``Qualifying Plan Assets'' Test at Various Threshold
                                                                         Levels
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                                                                                Alternative Threshold Levels for Qualifying Plan Assets
                                                              ------------------------------------------------------------------------------------------
                                                                   100%         95%          90%          85%          80%          75%          <75%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of plans..............................................      347,148       36,595       18,590       16,218       15,036       13,924           50
Percent of plans.............................................          57%           6%           3%           3%           2%           2%         .01%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Imposing an audit on small pension plans that do not meet the 95% 
requirement was initially considered. However, the audit cost for these 
6% of small pension plans--$230 million annually--was determined to be 
comparatively too great in relation to other alternatives. We 
considered the alternative of adjusting bonding requirements and 
calculated the cost of requiring those plans that do not meet the 95% 
test to obtain fidelity bonds for the funds that are not ``qualifying 
plan assets.'' Our analysis shows that bonding is a substantially less 
costly alternative, lowering aggregate costs by a factor of more than 
20 while similarly accomplishing the goal of enhancing small pension 
plan security.
    This alternative was feasible because for the 6% of plans that do 
not meet the 95% test, nearly all meet the condition that at least 75% 
of assets are ``qualifying plan assets.'' This means that nearly all of 
the affected plans would be able, at a relatively low cost, to purchase 
a fidelity bond in the amount equal to, at most, those 25% of plan 
assets that are not ``qualifying plan assets.'' For the average plan 
with $600,000 in assets, this leaves an upper bound of $150,000 in 
assets that would need to be covered by a bond. Applying

[[Page 67441]]

an annual premium of $200 6 to the 6% of plans with these 
$150,000 in assets needing bonding coverage yields a cost of $7.3 
million. In addition to the average bond premium of $200 per plan, 
obtaining the bond is estimated to involve one-half hour of an 
analyst's time at $39 per hour per small plan, for a cost of $0.7 
million. Summing these costs yields $8.0 million to comply with the 
additional bonding requirement.
---------------------------------------------------------------------------

    \6\ The bonding premium was estimated based on information 
supplied by industry representatives.
---------------------------------------------------------------------------

    To address the need to enhance the ability of participants to 
monitor the financial status of plans that do not receive financial 
audits, the proposed regulation would require that the SAR be modified 
to include summary information describing the statements and fidelity 
bonds and a notice that copies are available upon request. This 
requirement merely involves an initial start up cost to plans to modify 
their automated SAR forms to include the language required by the 
regulation. Similar to the assumptions made for the Form 5500 and SAR 
regulatory analyses, 90% of plans are assumed to use service providers 
for the required SAR modifications, with the remaining plans performing 
the modifications in-house. The one-time cost of modifying the SAR form 
is estimated to be $5.9 million--15 minutes of a professional's time at 
$39 per hour for all small plans. Any preparation burden associated 
with completing the SAR form is not attributable to this proposal, but 
rather, to SAR requirements in general. Another burden associated with 
disclosure requirements is providing copies of the statements and 
bonding information to those participants and beneficiaries who request 
them. The Department assumes that 5% of participants and beneficiaries 
will request this information. Since the documents already have been 
provided by bonding companies and financial institutions, the cost of 
compliance merely involves assembling the appropriate documents and 
photocopying, by a clerical worker at $15 per hour, and mailing costs 
at $.37 per distribution--for an aggregate cost of about $995,000 to 
plans.

Benefits Analysis

    The proposed regulation is intended to accomplish two purposes: to 
limit pension plan fraud and to provide all parties of small pension 
plans with information to monitor their plan assets and plan 
fiduciaries. The benefits of reducing fraud and improving information 
disclosure are numerous. In addition to the benefits listed below, this 
proposal strengthens the self-regulating aspects of ERISA. With minimum 
government intervention, participants and other parties to the plan 
will have an improved ability to verify and monitor plan assets. The 
following bullets highlight the other potential benefits of the 
proposed regulation in a qualitative, and when possible, quantitative, 
way:
     Confidence in the private pension system may be 
strengthened and may result in increased participation among the nearly 
600,000 private wage and salary workers who currently elect not to 
participate in a small plan that is offered;
     In 1998, more than $6 million in pension plans assets were 
recovered as a result of criminal investigations. If new conditions are 
imposed on the small plan audit exemption, fewer assets may be missing 
from plans in the future because of the checks and balances put in 
place by improved information disclosure;
     The investigations and litigation associated with 
recovering assets of small pension plans can be very costly to private 
parties and to the Government. In 1998, nearly 6,000 civil 
investigations were initiated by the Department. If new conditions are 
imposed on the small plan audit exemption, losses will likely decline 
and fewer investigations of small pension plans may be needed. This 
will have the dual effect of lowering investigation-related costs for 
small plans and permitting Federal authorities to enhance the security 
of other participants by directing their efforts elsewhere; and
     When workers discover that their pension plan assets are 
missing or are jeopardized, worker productivity declines. Time at work 
may be spent investigating what happened to plan assets, whether they 
will be restored, and whether retirement will be possible without these 
pension assets. If fewer instances of embezzlement occur as a result of 
additional conditions being imposed on the small plan audit exemption, 
this productivity loss will likely be reduced or eliminated.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency determines that a proposed rule is not 
likely to have a significant economic impact on a substantial number of 
small entities, section 603 of the RFA requires that the agency present 
an initial regulatory flexibility analysis at the time of the 
publication of the notice of proposed rulemaking describing the impact 
of the rule on small entities and seeking public comment on such 
impact. Small entities include small businesses, organizations and 
governmental jurisdictions.
    For purposes of analysis under the RFA, PWBA proposes to continue 
to consider a small entity to be an employee benefit plan with fewer 
than 100 participants. The basis of this definition is found in section 
104(a)(2) of the Employee Retirement Income Security Act of 1974 
(ERISA), which permits the Secretary of Labor to prescribe simplified 
annual reports for pension plans which cover fewer than 100 
participants. Under section 104(a)(3), the Secretary may also provide 
for exemptions or simplified annual reporting and disclosure for 
welfare benefit plans. Pursuant to the authority of section 104(a)(3), 
the Department has previously issued at 29 C.F.R. Secs. 2520.104-20, 
2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10 certain 
simplified reporting provisions and limited exemptions from reporting 
and disclosure requirements for small plans, including unfunded or 
insured welfare plans covering fewer than 100 participants and which 
satisfy certain other requirements.
    Further, while some large employers may have small plans, in 
general most small plans are maintained by small employers. Thus, PWBA 
believes that assessing the impact of this proposed rule on small plans 
is an appropriate substitute for evaluating the effect on small 
entities. The definition of small entity considered appropriate for 
this purpose differs, however, from a definition of small business 
which is based on size standards promulgated by the Small Business 
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business 
Act (15 U.S.C. 631 et seq.). PWBA therefore requests comments on the 
appropriateness of the size standard used in evaluating the impact of 
this proposed rule on small entities.
    On this basis, however, PWBA has preliminarily determined that this 
rule will not have a significant economic impact on a substantial 
number of small entities. In support of this determination, and in an 
effort to provide a sound basis for this conclusion, PWBA has prepared 
the following regulatory flexibility analysis.

[[Page 67442]]

    The amount of assets in small pension plans has grown nearly 
tenfold since 1975, making small pension plans an increasingly 
important retirement savings vehicle for Americans. In light of recent 
cases involving embezzlement or other misappropriations of pension 
assets that have focused national attention on the potential 
vulnerability of small pension plans to fraud and abuse, this 
regulatory action is being considered to enhance the security and 
accountability of small pension plans.
    The objective of the proposed rule is to verify the existence of 
small pension plan assets and to provide information to all parties to 
the plan in order to enhance pension plan security. The requirements 
governing the proposed regulation are set forth in ERISA section 
104(a)(2), in which Congress evidenced specific intent to provide small 
plans with relief from burdensome and expensive reporting requirements, 
and in the regulations Secs. 2520.104-41 and 2520.104-46.
    The proposed regulation amends the Department's existing waiver of 
examination and report of an independent qualified public accountant 
for employee benefit plans with fewer than 100 participants under 
ERISA. In 1995, there were about 605,000 employee pension plans with 
fewer than 100 participants that met the requirements for the audit 
waiver. Under the proposed regulation, an estimated 94% of these plans 
will meet the additional audit waiver requirement that at least 95% of 
plan assets be ``qualifying plan assets.'' This means that only about 
37,000 small plans will be subject to the requirement that the plan 
either purchase fidelity bonds for those assets that are not 
``qualifying plan assets'' or obtain an audit. All 605,000 small 
pension plans will be subject to the disclosure requirement that the 
SAR contain summary information on the financial institution statements 
and bonds, and that the information be provided free of charge upon 
request.
    This proposed rule impacts all classes of small pension plans with 
fewer than 100 participants subject to Title I of ERISA. The proposal 
described here is the one that accomplishes the objective of enhancing 
pension plan security without imposing significant costs via additional 
reporting, recordkeeping, and other compliance requirements. The 6% of 
plans that do not meet the proposed criteria for an audit waiver must 
either purchase a fidelity bond to cover the funds that are not 
``qualifying plan assets'' or obtain an audit. We assume plans will 
choose the less costly alternative--bonding. In addition to the average 
bond premium of $200 per plan, obtaining the bond is estimated to 
involve one-half hour of an analyst's time at $39 per hour per small 
plan, for an aggregate cost of $8 million. Second, the plan 
administrator would have to receive from each qualifying financial 
institution a statement identifying each plan asset held. No cost is 
associated with this requirement because the statements required from 
qualifying financial institutions are records that these institution 
dispense as part of usual and customary business practices and that 
plan administrators must obtain to properly discharge their annual 
reporting obligations under ERISA. Third, the plan's SAR would have to 
include summary information describing the statements and fidelity 
bonds and a notice that copies of the statements and bonds are 
available at no charge. This requirement involves an initial start up 
cost of $5.9 million--15 minutes of a professional's time at $39 for 
all 605,000 small plans to modify their SAR forms to include the 
language required by the regulation. Additionally, plans would be 
required to provide participants and beneficiaries copies of the 
statements and bonding information upon request. The Department assumes 
that 5% of participants and beneficiaries will request this information 
at a cost of $995,000 to plans--assembling and photocopying by a 
clerical worker at $15 per hour for 7 minutes per distribution, and 
mailing costs of $.37 per mailing. The aggregate annual disclosure cost 
of $995,000 translates to only $1.64 per plan and is the only annual 
cost imposed by this regulation on the estimated 568,000 plans meeting 
the 95% test. For the 37,000 plans not meeting the 95% test, they also 
face an annual cost of $8 million for bonding requirements, or an 
additional $220 per plan. Additionally, all 605,000 plans face the one 
time start up cost of $10 per plan.
    When considering any regulatory action, it is important to consider 
the impact on businesses of various sizes. Given that well over half of 
all small pension plans (57%) have between 1 and 10 participants, it is 
important to focus on these small plans in particular.

    Estimates of the Number and Percentage of Very Small Pension Plans (1-9 Participants) Not Meeting the ``Qualifying Plan Assets'' Test at Various
                                                                    Threshold Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Alternative Threshold Levels for Qualifying Plan Assets
                                                              ------------------------------------------------------------------------------------------
                                                                   100%         95%          90%          85%          80%          75%          <75%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of plans..............................................      186,142       20,377       10,771        9,402        8,737        8,100           49
Percent of plans.............................................          54%           6%           3%           3%           3%           2%         .01%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As the above table shows, \7\ the percent of plans with 1-9 
participants that would meet the requirement that 95% of assets be 
``qualifying plan assets'' is the same as that for all small plans with 
fewer than 100 participants. Therefore, the 95% threshold is reasonable 
for all classes of plans within the category of those with fewer than 
100 participants.
---------------------------------------------------------------------------

    \7\ The data in the table was estimated in the same way as that 
for pension plans with more than 100 participants (see Executive 
Order 12866 Statement).
---------------------------------------------------------------------------

    A discussion of alternatives to the proposed rule that the 
Department considered appears above in the ``Examination of Alternative 
Approaches'' section of the Executive Order 12866 Statement.
    No relevant federal rules are anticipated to duplicate, overlap, or 
conflict with this proposed rule.

Paperwork Reduction Act

    The Department of Labor, as part of its continuing effort to reduce 
paperwork and respondent burden, conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. Sec. 3506(c)(2)(A)). This helps to ensure that requested 
data can be provided in the desired format, reporting burden (time and 
financial resources) is minimized, collection instruments are clearly 
understood, and the impact of collection requirements on respondents 
can be properly assessed.

[[Page 67443]]

    Currently, the Pension and Welfare Benefits Administration is 
soliciting comments concerning the proposed revision of the information 
collection request (ICR) included in this Notice of Proposed Small 
Pension Plan Security Amendments. A copy of the ICR may be obtained by 
contacting the office listed in the addressee section of this notice.
    The Department of Labor (Department) has submitted a copy of the 
proposed information collection to the Office of Management and Budget 
(OMB) in accordance with 44 U.S.C. Sec. 3507(d) of PRA 95 for review of 
its information collections. The Department and OMB are particularly 
interested in comments which:
     Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, D.C. 20503; Attention: Desk Officer for 
the Pension and Welfare Benefits Administration. Although comments may 
be submitted through January 31, 2000, OMB requests that comments be 
received within 30 days of publication of the Notice of Proposed 
Rulemaking to ensure their consideration.

ADDRESSEE (PRA 95): Gerald B. Lindrew, Office of Policy and Research, 
U.S. Department of Labor, Pension and Welfare Benefits Administration, 
200 Constitution Avenue, NW, Room N-5647, Washington, D.C. 20210. 
Telephone: (202) 219-4782 (this is not a toll-free number); Fax: (202) 
219-4745.
    The proposed modifications to the small plan audit waiver will 
increase the security and accountability of small pension plans. The 
paperwork burden imposed on plans will be minimal. No paperwork burden 
is associated with two of the three provisions in the regulation--the 
requirement that 95% of plan assets be--qualifying plan assets'' and 
the improved bonding requirement for those plans not meeting the 95% 
test. Paperwork does arise from the third provision--modifying the SAR 
to include summary information describing the statements and bonds and 
noting that copies are available upon request. This requirement 
involves a one-time start up cost to plans to modify their SAR forms to 
include the language required by the regulation. Since 90% of plans are 
assumed to use service providers to comply with ERISA Form 5500 and SAR 
reporting requirements, it is assumed that the modifications to the SAR 
form will be done by service providers for 90% of plans, and in-house 
for the remaining plans. The start up cost (averaged over a three year 
period) is estimated to be $1.8 million for the 90% small plans using 
service providers and 15,000 hours for the remaining plans--15 minutes 
per plan, at $39 per hour (professional's rate) for those plans using 
service providers. Another cost associated with the SAR disclosure 
requirements is providing copies of the statements and bonding 
information to participants and beneficiaries who request them. The 
Department assumes that 5% of participants and beneficiaries will 
request this information. Since the documents already have been 
provided by bonding companies and financial institutions, the cost of 
compliance per distribution merely involves 5 minutes to ready the 
appropriate documents for mailing and 2 minutes of photocopying by a 
clerical worker, at a $15 hourly rate for plans using service 
providers, and mailing costs of $.37 per mailing. The aggregate burden 
is $912,000 and 5,500 hours.
    Type of Review: Revision of an existing information collection.
    Agency: Pension and Welfare Benefits Administration, Department of 
Labor.
    Title: ERISA Summary Annual Report Requirement.
    OMB Number: 1210-0040.
    Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
    Frequency of Response: Annually.
    Total Respondents: 817,000.
    Total Responses: 235,000,000.
    Estimated Burden Hours: 1,390,172 total (1,369,577 for existing 
information collection request, and 20,595 for proposed amendments).
    Estimated Annual Cost (Capital/Startup): $1,770,000 total.
    Estimated Annual Costs (Operating and Maintenance): $112,287,000 
total ($111,375,000 for the existing information collection request, 
and $912,000 for proposed amendments).
    Total Annualized Costs: $114,057,000 total ($111,375,000 for the 
existing information collection request, and $2,682,000 for proposed 
amendments).
    Comments submitted in response to this notice will be summarized 
and/or included in the request for OMB approval of the information 
collection request; they will also become a matter of public record.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, this proposed rule does not 
include any Federal mandate that may result in expenditures by State, 
local or tribal governments, and does not impose an annual burden 
exceeding $100 million on the private sector.

Small Business Regulatory Enforcement Fairness Act

    The rule proposed in this action is subject to the provisions of 
the Small Business Regulatory Enforcement Fairness Act of 1996 (5 
U.S.C. 801, et seq.) (SBREFA) and is a major rule under SBREFA. The 
rule, if finalized, will be transmitted to Congress and the Comptroller 
General for review.

Statutory Authority

    These regulations are proposed pursuant to authority contained in 
section 505 of ERISA (Pub. L. 93-406, 88 Stat. 894, 29 U.S.C. 1135) and 
section 104(a) of ERISA, as amended, (Pub. L. 104-191, 110 Stat. 1936, 
1951, 29 U.S.C. 1024), and under Secretary of Labor's Order No. 1-87, 
52 FR 13139, April 21, 1987.

List of Subjects in 29 CFR Part 2520

    Accountants, Disclosure requirements, Employee benefit plans, 
Employee Retirement Income Security Act, Pension plans, and Reporting 
and recordkeeping requirements.
    For the reasons set out in the preamble, Part 2520 of Chapter XXV 
of Title 29 of the Code of Federal Regulations is proposed to be 
amended as follows:

PART 2520--RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE

PART 2520--[AMENDED]

    1. The authority for Part 2520 continues to read as follows:

    Authority: Secs. 101, 102, 103, 104, 105, 109, 110, 111(b)(2), 
111(c) and 505, Pub. L. 93-406, 88 Stat. 840-52 and 894 (29 U.S.C. 
1021-1025, 1029-31, and 1135); Secretary of

[[Page 67444]]

Labor's Order No. 27-74, 13-76, 1-87, and Labor Management Services 
Administration Order 2-6.
    Sections 2520.102-3, 2520.104b-1 and 2520.104b-3 also are issued 
under sec. 101(a), (c) and (g)(4) of Pub. L. 104-191, 110 Stat. 
1936, 1939, 1951 and 1955, and sec. 603 of Pub. L. 104-204, 110 
Stat. 2935 (29 U.S.C. 1185 and 1191c).

    2. Section 2520.104-41 is amended by revising paragraph (c) as 
follows:


Sec. 2520.104-41  Simplified annual reporting requirements for plans 
with fewer than 100 participants.

* * * * *
    (c) Contents. The administrator of an employee pension or welfare 
benefit plan described in paragraph (b) of this section shall file, in 
the manner prescribed in Sec. 2520.104a-5, a completed Form 5500 
``Annual Return/Report of Employee Benefit Plan,'' including any 
required schedules or statements prescribed by the instructions to the 
form, and, unless waived by Sec. 2520.104-46, a report of an 
independent qualified public accountant meeting the requirements of 
Sec. 2520.103-1(b).
* * * * *
    3. Section 2520.104-46 is amended by revising paragraphs (b)(1) and 
(d) to read as follows:


Sec. 2520.104-46  Waiver of examination and report of an independent 
qualified public accountant for employee benefit plans with fewer than 
100 participants.

* * * * *
    (b) Application. (1)(i) The administrator of an employee pension 
benefit plan for which simplified annual reporting has been prescribed 
in accordance with section 104(a)(2)(A) of the Act and Sec. 2520.104-41 
is not required to comply with the annual reporting requirements 
described in paragraph (c) of this section, provided that with respect 
to each plan year for which the waiver is claimed--
    (A) (1) At least 95 percent of the assets of the plan constitute 
qualifying plan assets within the meaning of paragraph (b)(1)(ii) of 
this section, or
    (2) Any person who handles assets of the plan that do not 
constitute qualifying plan assets is bonded in accordance with the 
requirements of section 412 of the Act and the regulations issued 
thereunder, except that the amount of the bond shall not be less than 
the value of such assets;
    (B) The summary annual report, described in Sec. 2520.104b-10, 
includes, in addition to any other required information:
    (1) The name of each institution holding qualifying plan assets and 
the amount of such assets held by each institution as of the end of the 
plan year;
    (2) The name of the surety company issuing a bond for purposes of 
paragraph (b)(1)(i)(A)(2);
    (3) A notice indicating that participants and beneficiaries may, 
upon request and without charge, examine or receive copies of evidence 
of any bond required by paragraph (b)(1)(i)(A)(2) and copies of 
statements received from each institution holding qualifying assets 
which describe the assets held by the institution as of the end of the 
plan year; and
    (4) A notice stating that participants and beneficiaries should 
contact the Regional Office of the U.S. Department of Labor's Pension 
and Welfare Benefits Administration if they are unable to examine or 
obtain copies of the statements received from each institution holding 
qualifying assets or evidence of the bond, if applicable; and
    (C) In response to a request from any participant or beneficiary, 
the administrator, without charge to the participant or beneficiary, 
makes available for examination, or upon request furnishes copies of, 
evidence of any bond required by paragraph (b)(1)(i)(A)(2) and the 
statement of assets from each financial institution holding qualifying 
assets as of the end of the plan year.
    (ii) For purposes of paragraph (b)(1), the term ``qualifying plan 
assets'' means:
    (A) Qualifying employer securities, as defined in section 407(d)(1) 
of the Act and the regulations issued thereunder;
    (B) Any loan meeting the requirements of section 408(b)(1) of the 
Act and the regulations issued thereunder; and
    (C) Any assets held by the following institutions:
    (1) A bank or similar financial institution as defined in 
Sec. 2550.408b-4(c);
    (2) An insurance company qualified to do business under the laws of 
a state;
    (3) An organization registered as a broker-dealer under the 
Securities and Exchange Act of 1934; or
    (4) Any other organization authorized to act as a trustee for 
individual retirement accounts under section 408 of the Internal 
Revenue Code.
    (iii) For purposes of paragraph (b)(1), the determination of the 
percentage of all plan assets consisting of qualifying plan assets with 
respect to a given plan year shall be made in the same manner as the 
amount of the bond is determined pursuant to Secs. 2580.412-11, 
2580.412-14, and 2580.412-15.
* * * * *
    (d) Limitations. (1) The waiver described in this section does not 
affect the obligation of a plan described in paragraph (b) (1) or (2) 
of this section to file a Form 5500 ``Annual Return/Report of Employee 
Benefit Plan,'' including any required schedules or statements 
prescribed by the instructions to the form. See Sec. 2520.104-41.
    (2) For purposes of this section, an employee pension benefit plan 
for which simplified annual reporting has been prescribed includes an 
employee pension benefit plan which elects to file a Form 5500 as a 
small plan pursuant to Sec. 2520.103-1(d) with respect to the plan year 
for which the waiver is claimed. See Sec. 2520.104-41.
    (3) For purposes of this section, an employee welfare benefit plan 
that covers fewer than 100 participants at the beginning of the plan 
year includes an employee welfare benefit plan which elects to file a 
Form 5500 as a small plan pursuant to Sec. 2520.103-1(d) with respect 
to the plan year for which the waiver is claimed. See Sec. 2520.104-41.
    (4) A plan that elects to file a Form 5500 as a large plan pursuant 
to Sec. 2520.103-1(d) may not claim a waiver under this section.

    Signed at Washington, D.C., this 24th day of November, 1999.
Richard M. McGahey,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S. 
Department of Labor.
[FR Doc. 99-31110 Filed 11-30-99; 8:45 am]
BILLING CODE 4510-29-P