[Federal Register Volume 70, Number 167 (Tuesday, August 30, 2005)]
[Proposed Rules]
[Pages 51542-51553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-17185]



[[Page 51541]]

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Part VI





Department of Labor





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Employee Benefits Security Administration



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29 CFR Part 2520



Electronic Filing of Annual Reports; Proposed Rule

  Federal Register / Vol. 70, No. 167 / Tuesday, August 30, 2005 / 
Proposed Rules  

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2520

RIN 1210-AB04


Electronic Filing of Annual Reports

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Proposed regulation.

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SUMMARY: This document contains a proposed regulation that, upon 
adoption, would establish an electronic filing requirement for certain 
annual reports required to be filed with the Department of Labor by 
plan administrators and other entities. The Employee Retirement Income 
Security Act of 1974 (ERISA) and the Internal Revenue Code (the Code), 
and the regulations issued thereunder, impose certain annual reporting 
obligations on pension and welfare benefit plans, as well as on certain 
other entities. These annual reporting obligations generally are 
satisfied by filing the Form 5500 Series. Currently, the Department of 
Labor, the Pension Benefit Guaranty Corporation, and the Internal 
Revenue Service (the Agencies) use an automated document processing 
system--the ERISA Filing Acceptance System--to process the Form 5500 
Series filings. As part of the Department's efforts to update and 
streamline the current processing system, the Department has determined 
that improvements and cost savings in the filing processes can best be 
achieved by adopting a wholly electronic filing processing system and 
eliminating the currently accepted paper filings. The Department 
believes that a wholly electronic system will result in, among other 
things, reduced filer errors and, therefore, reduced correspondence and 
potential for filer penalties; more timely data for public disclosure 
and enforcement, thereby enhancing the protections for participants and 
beneficiaries; and lower annual report processing costs, benefiting 
taxpayers generally. As part of the move to a wholly electronic filing 
system, the regulation contained in this document would, upon adoption, 
require Form 5500 filings made to satisfy the annual reporting 
obligations under Title I of ERISA to be made electronically. In order 
to ensure an orderly and cost-effective migration to an electronic 
filing system by both the Department and Form 5500 filers, under the 
proposal the requirement to file electronically would not apply until 
plan years beginning on or after January 1, 2007, with the first 
electronically filed forms due in 2008. Upon adoption, this regulation 
would affect employee pension and welfare benefit plans, plan sponsors, 
administrators, and service providers to plans subject to Title I of 
ERISA.

DATES: Written comments must be received by the Department of Labor on 
or before October 31, 2005.

ADDRESSES: Comments should be addressed to the Office of Regulations 
and Interpretations, Employee Benefits Security Administration (EBSA), 
Room N-5669, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210. Attn: Form 5500 E-filing regulation (RIN 1210-
AB04). Comments also may be submitted electronically to [email protected] 
or by using the Federal eRulingmaking Portal: http://www.regulations.gov (follow instructions provided for submission of 
comments). EBSA will make all comments available to the public on its 
Web site at http://www.dol.gov/ebsa. The comments also will be 
available for public inspection at the Public Disclosure Room, N-1513, 
EBSA, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Yolanda R. Wartenberg, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

    Sections 104(a) and 4065 of the Employee Retirement Income Security 
Act of 1974, as amended (ERISA), and sections 6057(b) and 6058(a) of 
the Internal Revenue Code of 1986, as amended (the Code), and the 
regulations issued under those sections, impose certain annual 
reporting and filing obligations on pension and welfare benefit plans, 
as well as on certain other entities.\1\ 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 attachments and schedules for 
the particular plan (Form 5500).\2\
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    \1\ Other filing requirements may apply to employee benefit 
plans under ERISA or to other benefit arrangements under the Code, 
and such other filing requirements are not within the scope of this 
proposal. For example, Code sec. 6033(a) imposes an additional 
reporting and filing obligation on organizations exempt from tax 
under Code sec. 501(a), which may be related to retirement trusts 
that are qualified under sec. 401(a) of the Code. Code sec. 6047(e) 
also imposes an additional reporting and filing obligation on 
pension benefit plans that are employee stock ownership plans 
(ESOPs).
    \2\ For purposes of the annual reporting requirements under the 
Code, certain pension benefit arrangements that cover only business 
owners or partners (and their spouses), which are not employee 
benefit plans under Title I of ERISA, are permitted to file the Form 
5500-EZ to satisfy filing requirements under the Code. See 
instructions to the Form 5500-EZ to determine who may currently file 
the Form 5500-EZ.
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    Currently, the Department of Labor, the Pension Benefit Guaranty 
Corporation, and the Internal Revenue Service (the Agencies) use an 
automated document processing system--the ERISA Filing Acceptance 
System (EFAST)--maintained by the Department of Labor (the Department) 
to process annual reports. Using the EFAST system, the Department 
annually receives and processes approximately 1.4 million filings. For 
the 2002 plan year, these filings translated into approximately 25 
million paper pages.
    Developed in 1998 and 1999, the EFAST system relies on a mixture of 
filing and processing methods to accept, compile, and monitor the Form 
5500 filings. The EFAST system currently accepts filings generated 
using any of three different formats: (1) Government printed ``hand-
print'' forms, which must be filed on paper; (2) computer-generated 
paper forms identical in format to government-printed hand-print forms, 
which also must be filed on paper and are treated in processing the 
same as hand-print forms; and (3) computer-generated forms in which 2D 
bar code technology is used to encode filer data (known as the 
``machine-print'' version of the forms), which may be filed either on 
paper or electronically. As indicated, only the computer-generated 
machine-print forms may be filed electronically, and the Agencies 
currently accept machine-print filings through any of the following 
electronic methods of transmission: (1) Via modem using file transfer 
protocol (FTP), or (2) on magnetic or optical media, such as CD-ROM, 
computer diskette, or magnetic tape. To process the different filing 
formats, the system uses a variety of computer technologies, such as 
optical character recognition technology to read data from the hand-
print forms; 2D bar-coding technology to read coded filer information 
printed on the ``machine-print'' forms submitted on paper; scanning 
technology to retain images of paper filings; etc.
    A private contractor performs the EFAST processing under a time-
limited contract with EBSA. The end of the time-limited contracting 
cycle and the

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beginning of another contracting cycle present a significant 
opportunity for EBSA to evaluate the system and to make changes to take 
advantage of technological advances. In connection with that process, 
in March, 2004, the Department posted a request for public comments 
(Request for Comment) on its website relating to updating the current 
EFAST processing system.\3\
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    \3\ The Request for Comment may be reviewed at: http://www.efast.dol.gov/efastrfc.html.
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    The Request for Comment set out the Department's preference for 
enhanced electronic filing and described in detail its understanding of 
the deficiencies in the EFAST design that impede use of the current 
electronic filing option. The Request for Comment stated that the 
Department's goal in developing a new processing system is to make it 
``more accessible to its user base through Internet and Web-based 
technology, devoid of paper to the greatest extent possible, faster, 
less expensive, and more accurate'' and to ensure that ``electronic 
filing becomes more convenient and beneficial for all users and 
stakeholders.'' The Department noted that ``[t]he full benefits of 
electronic processing have not * * * been realized * * * because 
[EFAST's] electronic filing option has been underutilized.'' \4\ The 
Request for Comment noted the benefits to be gained from electronic 
filing, explaining that, compared with electronic filings, using paper-
based forms is less accurate in terms of data capture and less 
efficient in terms of processing--paper filings take three times as 
long as electronic filings to process and have nearly twice as many 
errors, which often trigger follow-up letters from the Agencies seeking 
corrections or clarifications concerning the filed information. Such 
filings may also result in the imposition of penalties under ERISA and 
the Code.
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    \4\ The Department specifically identified technical 
deficiencies involving the process for obtaining and using 
electronic signatures, the use of outdated transmission methods, and 
the continued use of paper for post-filing communications. The 
Request for Comment suggested various technical design changes to 
address these and other deficiencies, including creating an 
Internet-based method of filing; requiring that approved software be 
designed only for Internet transmission of computer-generated 
filings; adopting improved data exchange technology based on widely-
accepted standards, such XML; improving the technical handling of 
third-party attachments and attestations; and eliminating 
differences in treatment between paper and electronic filings with 
respect to acceptance and rejection.
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    Signaling the Department's interest in moving to an electronic 
filing system for the Form 5500 Series, the Request for Comment 
specifically requested comment on whether a reduction in the available 
filing methods, up to and including adoption of an electronic filing 
mandate, would be an appropriate solution to the problems caused by 
underutilization of electronic filing.
    In response to the Request for Comment, the Department received 
many constructive and useful comments from a diverse group of 
interested parties, including small business owners, sponsors and 
administrators of small and large plans, actuaries, accountants, 
entrepreneurs involved in the development and sale of EFAST-approved 
software, and firms that prepare Form 5500 filings for a wide variety 
of employee benefit plans.\5\ Public comment was largely in accord with 
the Department's analysis of EFAST's technical deficiencies as laid out 
in the Request for Comment.
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    \5\ Comments received in response to the Request for Comment may 
be reviewed at: http://www.dol.gov/ebsa/regs/cmt_efastrfc.html.
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    Based on what appears to be a consensus as to the current technical 
deficiencies of EFAST, the Department has begun the technical process 
necessary for the development of a new processing system. At the same 
time, the Agencies separately are undertaking a comprehensive review of 
the Form 5500 Series in an effort to determine what, if any, design or 
data changes should be made, in anticipation of the new processing 
system. Neither the technical project for development of a new 
processing system, nor the Form 5500 Series project, however, is the 
subject of this proposal.\6\ Any Form or related regulation changes 
will be proposed for public comment as part of a separate rulemaking.
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    \6\ In connection with this proposal, the Department is 
providing in this document further information respecting the 
technical design and Form 5500 content projects underway within the 
Department concerning the Form 5500 Series. The Department believes 
the information about those two other projects will assist the 
public in evaluating this proposal; however, the Department notes 
that it is not asking for public comment at this time on those two 
separate projects. The proposal contained in this notice concerns 
only the mandate of electronic filing. The public will have adequate 
separate opportunity for public comment on the Form 5500 regulatory 
initiative prior to its finalization and ample time to make 
necessary practical changes prior to implementation of the new 
processing system.
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    The subject of this proposal is the Department's determination that 
any new processing system designed to replace EFAST must have as its 
core component a requirement that all Form 5500s be submitted through 
electronic means. The Department's determination that electronic filing 
must be the sole method available under the new processing system is 
not dependent on the extent or type of data that will be required of 
filers or the form or forms in which it must be provided; nor is it 
dependent on the exact software or hardware that will ultimately be 
devised to accommodate electronic filing, either by the Federal 
government or by the private sector. Rather, this determination arises 
from the Department's conclusion that electronic filing will benefit 
plan sponsors, participants and beneficiaries, and the taxpayer, based 
on the Department's investigation and analysis, described more fully 
below, of the practical alternatives. The proposal for an electronic 
filing requirement contained in this notice is therefore being 
published in advance of the other projects related to the Form 5500 
Series and processing because the Department has concluded, based on 
considerations explained more fully below, that it is essential to the 
success of any redesign of EFAST that it provide filers and other 
affected parties adequate time to make the transition to a fully 
electronic method of filing the Form 5500 Series. Given the importance 
of the contemplated transition, the Department is publishing this 
proposal separately to describe the reasoning behind its conclusion and 
to solicit public comment on how best to proceed with the transition to 
electronic filing.

B. Public Comment and Alternatives

    Virtually all of the public comments submitted in response to the 
Request for Comment recognized the value of electronic filing over 
paper filing and expressed support for increasing the use of electronic 
filing. The majority of comments also endorsed the concept of a gradual 
transition to 100 percent electronic filing. A clear consensus among 
commenters further favored the development of a secure Internet website 
on which a filer could file the Form 5500 through direct input of data, 
provided it was cost-free to the filer. Nonetheless, the commenters 
opposed an immediate mandate of electronic filing as the next step in 
EFAST development. The commenters argued that an immediate mandate 
would impose economic burdens on small businesses and small plans, 
which may not have easy access to the Internet. The commenters urged 
the Department to make only incremental changes, building on the 
current system and taking into account the substantial investments that 
the filing public has already made to accommodate EFAST. One 
representative commenter, speaking on behalf of a large number of large 
employers and service providers to employers of all sizes, suggested 
that, although electronic filing provides

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many advantages to both the public and the government, the Department 
should phase in any mandate over time by market segment, starting first 
with the largest employers who are already familiar with electronic 
filing, such as is required by the Securities and Exchange Commission. 
Other commenters asked the Department to allow sufficient time for 
experimentation and testing before inaugurating a mandate.
    In developing this proposed regulation, the Department sought to 
advance two main goals. One was to maximize the speed, efficiency, and 
accuracy with which annual reports are transmitted, accepted, and 
processed, thereby enhancing the protection of participants' rights. 
The other was to minimize the burden placed on filers. In pursuit of 
these goals, the Department considered and analyzed several 
alternatives, taking into account the costs and benefits attendant to 
each. These included the following: (1) Creating a new processing 
system that could continue to process both electronic and paper 
submissions without limitation; (2) continuing the present, primarily 
paper-based processing system on an interim basis alongside a new, 
solely electronic processing system; (3) developing a new, primarily 
electronic processing system with a temporary capacity to process a 
limited number of paper filings, which would be made available under 
criteria targeting those filers most likely to desire a longer 
transition period; and (4) transitioning to a new, solely electronic 
processing system under a uniformly applicable requirement to file 
electronically.
    The Department considered the costs and benefits of each of these 
alternatives, and its economic analysis is described below under the 
heading ``Regulatory Impact Analysis.'' Based on its analysis of the 
alternatives, the Department has concluded that the maintenance of any 
paper filing system, even on a reduced scale and/or for limited periods 
of time, which would be required under any of the first three 
alternatives, would be inherently inefficient and unnecessarily costly. 
It is also the Department's view that any economic benefit that might 
accrue to some class of filers under those alternatives would be 
outweighed by the benefits to participants and beneficiaries at large, 
and to the Department and taxpayers generally, of implementing a 
single, wholly electronic system. Accordingly, the Department has 
decided to propose adoption of a uniform requirement to file 
electronically, as detailed further below.\7\
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    \7\ This approach is congruent with recommendations of the 
Government Accountability Office, which, in a June, 2005, Report to 
Congressional Committees, stated that ``[g]iven the improved 
timeliness and reduced errors associated with electronic filing, 
Labor, IRS and PBGC should require the electronic filing of the Form 
5500.'' See Private Pension--Government Actions Could Improve the 
Timeliness and Content of Form 5500 Pension Information (GAO-05-491) 
at 44. The Report went on to state ``[i]n doing so, Labor should 
also make improvements to the current electronic filing process to 
make it less burdensome, such as revising the procedure for signing 
and authenticating an electronic filing.''
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    In so doing, the Department believes that transitioning to a new 
wholly electronic processing system will not present the problems 
suggested by the public responses to the Request for Comment. First, as 
explained more fully below, the Department intends to ensure that the 
new processing system will remedy the existing technical difficulties 
that underlie the perceived limitations of EFAST's current electronic 
filing design and will provide an electronic filing process that will 
be simpler, easier, and more attractive to filers.
    Second, the Department does not believe that transitioning to the 
new processing system will impose undue burdens on small plans or small 
employers. Rather, the Department's analysis indicates that filers' 
costs of transitioning from paper filing to electronic transmission 
will be relatively modest and surpassed by benefits that will accrue in 
subsequent years.
    Finally, the Department intends to delay implementation of any 
electronic mandate until the due date for the filing of Form 5500 
Series for the plan year beginning in 2007, generally July 2008 or 
later. The Department believes that this substantial time delay of the 
proposed full electronic mandate will provide the public with adequate 
time to make adjustments in advance of the implementation of the new 
filing system.
    The Department's conclusions concerning the public comments and 
alternatives are grounded in the Regulatory Impact Analysis presented 
below.
    The Department invites comment on the need for an exception to 
accommodate any potentially significant impediments to some filers' 
transition to electronic filing. Commenters are encouraged to provide 
specific examples of such impediments, as well as to address the 
specific conditions for, and necessary scope of, relief under a 
hardship exception.

C. Electronic Filing

    After careful consideration of the comments on the Request for 
Comment, as well as the need to develop a more efficient, cost-
effective processing system for annual return/reports, the Department 
has determined, consistent with the goals of E-government, as 
recognized by the Government Paperwork Elimination Act \8\ and the E-
Government Act of 2002,\9\ to require electronic filing of the Form 
5500 to satisfy the reporting requirements of section 104(a) of Title I 
of ERISA. A mandate of electronic filing of benefit plan information, 
among other program strategies, will facilitate EBSA's achievement of 
its Strategic Goal of ``enhancing pension and health benefits of 
American workers.'' EBSA's strategic goal directly supports the 
Secretary of Labor's Strategic Goals of ``protecting workers benefits'' 
and of ``a competitive workforce,'' as well as promoting job 
flexibility and minimizing regulatory burden.\10\ A cornerstone of our 
enforcement program is the collection, analysis, and disclosure of 
benefit plan information. Requiring electronic filing of benefit plan 
information, with the resulting improvement in the timeliness and 
accuracy of the information, would, in part, assist EBSA in its 
enforcement, oversight, and disclosure roles, which ultimately enhance 
the security of plan benefits. As the Government Accountability Office 
noted in its June, 2005, report on the Form 5500 Series,\11\ the 
current necessity for handling paper filings under EFAST creates a 
substantial delay between receipt of a filing and the availability of 
its information for any enforcement and oversight purposes. Stating 
that ``the abundance of paper filings results in long processing 
times,'' the GAO estimated, for purposes of illustration, that the 
processing time for a paper filing under EFAST averages 90 days from 
date of receipt where no filing errors are detected.\12\ Electronic 
filing would eliminate virtually all of this processing time, improving 
outcomes for all of the users of the Form 5500 information. In this 
regard, the PBGC has advised the Department that

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electronic filing will enable PBGC to receive important information 
about defined benefit plans more quickly and efficiently, improving the 
PBGC's ability to monitor plan funding; calculate bankruptcy claims; 
estimate the impact of non-bankruptcy reportable events; evaluate 
exposure and expected claims; study plan formation and termination 
trends; and assess compliance with PBGC premium requirements.
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    \8\ Title XVII, Pub. L. 105-277, 112 Stat. 2681 (Oct. 21, 1998).
    \9\ Pub. L. 107-347, 116 Stat. 2899 (Dec. 17, 2002).
    \10\ For further information on the Department of Labor's 
Strategic Plan and EBSA's relationship to it, see http://www.dol.gov/_sec/stratplan/main.htm.
    \11\ See fn. 7, above.
    \12\ See Private Pensions--Government Actions Could Improve the 
Timeliness and Content of Form 5500 Pension Information (GAO-05-491) 
at 28, fig. 9 at 32. GAO also noted that, where errors in a filing 
are detected, additional processing delays of up to 120 more days 
occur.
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    In order to ensure an orderly and cost-effective migration to an 
electronic filing requirement and a new processing system, the 
requirement to file the Form 5500 electronically would apply only to 
annual return/reports required to be filed under ERISA section 104(a) 
for plan years beginning on or after January 1, 2007.
    For purposes of the annual reporting requirements under section 
4065 of Title IV of ERISA, the Pension Benefit Guaranty Corporation 
(PBGC) has advised the Department that a plan administrator's 
electronic filing of a Form 5500 for purposes of ERISA section 104(a), 
together with the required attachments and schedules and otherwise in 
accordance with the instructions to the Form, will be treated as 
satisfying the administrator's annual reporting obligation under 
section 4065 of Title IV of ERISA.\13\ Similarly, for purposes of the 
annual filing and reporting requirements of the Code, the Internal 
Revenue Service (IRS) has advised the Department that, although there 
are no mandatory electronic filing requirements for a Form 5500 under 
the Code or the regulations issued thereunder, the electronic filing of 
a Form 5500 by plan administrators, employers, and certain other 
entities for purposes of ERISA section 104(a), together with the 
required attachments and schedules and otherwise in accordance with the 
instructions to the Form, will be treated as satisfying the annual 
filing and reporting requirements under Code sections 6058(a) and 
6059(a). The IRS intends that plan administrators, employers, and 
certain other entities that are subject to various other filing and 
reporting requirements under Code sections 6033(a), 6047(e), and 
6057(b) must continue to satisfy these requirements in accordance with 
IRS revenue procedures, publications, forms, and instructions.
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    \13\ It should be noted that all administrators of plans 
required to file reports under ERISA sec. 4065 also are required to 
file reports for purposes of sec. 104(a) of ERISA.
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    With respect to annual reporting and filing obligations imposed by 
the Code but not required under section 104(a) of ERISA, such as are 
currently satisfied by the filing of the Form 5500-EZ, the IRS has 
advised the Department that it is currently working with taxpayers to 
explore how best to make a transition from paper filing to electronic 
filing in a manner that minimizes the burdens on taxpayers and 
practitioners. In this regard, the IRS has promulgated regulations 
mandating or permitting electronic filing of certain returns filed by 
pension and welfare benefit plans.\14\
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    \14\ See, e.g., 26 CFR 301.6033-4T (mandating electronic filing 
of certain corporate income tax returns and returns of organizations 
required to be filed under Code sec. 6033); 26 CFR 1.6033-4T 
(returns required to be filed on magnetic media under 26 CFR 
301.6033-4T must be filed in accordance with IRS revenue procedures, 
publications, forms, or instructions).
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    With regard to the development of a new annual return/report 
electronic processing system, the Department is committed to resolving 
the electronic filing impediments identified by commenters on the 
Request for Comment, in particular those impediments relating to 
electronic signatures, attachments, and attestations furnished by third 
parties (e.g., accountants, actuaries, etc.).
    It is anticipated that the new electronic filing system will 
incorporate the Internet as the sole medium for transmission of all 
filings and that the system will incorporate immediate validity and 
accuracy checks that will reduce both the error and rejection rate of 
filings and eliminate much of the costly post-filing paper 
correspondence and related potential penalties. The Department does not 
anticipate charging any filing fees in connection with the new system.
    It is intended that the new electronic filing system will provide 
more than one vehicle for the electronic submission of annual return/
reports. First, it is intended that the new filing system will offer 
users of approved, privately developed Form 5500 computer software 
(service providers to plans as well as plan administrators) a secure 
Internet-based method for transmission of Form 5500s created through 
the use of the software. This Internet-based transmission process will 
supercede all of the other currently available methods of transmitting 
machine-print versions of the Form 5500, including use of computer 
diskette, CD-ROM, magnetic tape, and modem. As the Department made 
clear in the Request for Comment, in making a transition to 100 percent 
electronic filing, the Department does not intend to supplant private 
software developers, vendors, or service providers to plans. Rather, it 
is contemplated that the new system will continue to provide support to 
these private industries, and the Department believes that filers will 
continue to rely on a variety of privately developed software products 
and services to facilitate plan administration, including the 
preparation and filing of the annual return/report. Indeed, it is 
expected that third-party software will remain the primary means of 
producing Form 5500s, with the simple difference that the reports will 
be filed electronically rather than through the use of paper. It is 
intended that service providers and software developers that provide 
value-added services for plan sponsors will be able to incorporate the 
new system's method of transmission into their services effectively and 
efficiently. Software file specifications will be non-proprietary so 
that users of different software may freely share information across 
different platforms. In this regard, the Department specifically 
invites public comment on how best to configure the new electronic 
filing architecture to provide the necessary flexibility to accommodate 
the needs of the diverse community of employee benefit plans.
    Second, the Department also intends to include in the new system, 
as a separate filing method, a dedicated, secure Internet website 
through which plan administrators (or other return/report preparers) 
will be able to input data and to complete and submit Form 5500 filings 
on an individual plan-by-plan basis. It is anticipated that the 
Internet website will provide the filer with the capability of entering 
and saving data for an individual filing through multiple sessions, 
authorizing input for that filing from multiple parties (service 
providers, accountants, actuaries, etc.), uploading attachments, saving 
return/reports to a repository, and retrieving, updating, and editing 
stored filings, as well as creating and submitting amended filing data 
to EBSA.
    As mentioned above, in connection with implementation of the 
redesign of EFAST, the Department, in coordination with the IRS and the 
PBGC, is conducting a thorough content review of the Form 5500. This 
review will be conducted as a three-agency regulatory initiative and 
will provide notice and comment opportunities for the public. The 
Department intends to consider, in conducting the content review of the 
Form 5500, changes that would facilitate electronic filing, as well as 
recommendations made by the ERISA Advisory Council on electronic 
reporting and on reporting by health

[[Page 51546]]

and welfare plans.\15\ That regulatory project will undertake to 
produce revised forms to be used for annual return/reports for the 2007 
plan year, which will be due to be filed in 2008, when the new 
processing system will be implemented and the electronic filing 
requirement will begin to apply. Within the next few months, the 
Department intends to publish a separate notice inviting public comment 
on proposed changes to the Form 5500 and related rules.
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    \15\ See, e.g., Report of the ERISA Advisory Council Working 
Group on Electronic Reporting (Nov. 8, 2002), at http://www.dol.gov/ebsa/publications/AC_1108a02_report.html.
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D. Proposed Rule

    The proposed rule contained in this notice is necessary to 
establish a requirement for the electronic filing of the Form 5500 for 
purposes of the annual reporting provisions of Title I of ERISA. 
Although at this time it is not possible to provide full technical 
details regarding the new electronic filing system, as many of the 
technological aspects of the redesign are still in development, filing 
requirements and compliance instructions will be provided to filers in 
advance of any due date for filing the Form 5500 under a final 
regulation requiring electronic submissions.
    The proposal, upon adoption, would add a new section 2520.104a-2, 
Electronic Filing of Annual Reports, to Subpart E of Part 2520 of Title 
29 of the Code of Federal Regulations. The proposal provides that any 
Form 5500 Annual Return/Report to be filed with the Secretary of Labor 
(Secretary) for any plan year beginning on or after January 1, 2007, 
shall be filed electronically in accordance with instructions and such 
other guidance as the Secretary may provide, applicable to such annual 
report. Because the Form 5500 is also filed by certain non-plan 
entities, such as common or collective trusts, pooled separate 
accounts, and entities described in 29 CFR 2520.103-12, which file for 
the fiscal year ending with or within the plan year for which a plan's 
annual report is filed, the proposal makes further reference to the 
first ``reporting year'' beginning on or after January 1, 2007, for 
such entities.
    The proposal is intended to ensure that all Form 5500s filed with 
the Department, as well as any statements or schedules required to be 
attached to the report, including those filed by administrators (29 CFR 
2520.103-1(a)(2) and (e)), group insurance arrangements (29 CFR 
2520.103-2), common or collective trusts and pooled separate accounts 
(29 CFR 2520.103-3, 2520.103-4, and 2520.103-9), and entities described 
in 29 CFR 2520.103-12, are required (to the extent of the Department's 
authority) to be filed electronically. Following the development of a 
new electronic filing system, the Department intends to provide 
specific instructions and guidance concerning methods of filing in the 
instructions for the annual report form(s) and via its website.
    As indicated above in the discussion under ``Electronic Filing,'' 
the proposal would not apply to any reporting requirements imposed 
solely under the Code (i.e., not required under section 104(a) of 
ERISA). As discussed above, issues relating to transition from paper 
filing to electronic filing for such reporting requirements are under 
consideration at the IRS. Accordingly, the regulation would not apply 
to any attachment, schedule, or report required to be completed by a 
tax-qualified pension benefit plan solely in order to provide the IRS 
with information concerning compliance with Code section 410(b) for a 
plan year, even if such attachment, schedule, or report is required to 
accompany the Form 5500 Annual Report/Return for that year. The 
proposal also would not apply to attachments, schedules, or reports 
that the IRS requires (1) under Code section 6033(a) to be filed by a 
trustee of a trust created as part of an employee benefit plan 
described in Code section 401(a) or by a custodian of a custodial 
account described in Code section 401(f), or (2) under Code section 
6047(e) to be filed with respect to an employee stock ownership plan 
(ESOP).
    The proposal, at 29 CFR 2520.104a-2(b), makes clear that the 
requirement to file annual reports electronically does not affect a 
person's record retention or disclosure obligations. In other words, 
the obligations of persons to retain records for purposes of sections 
107 and 209 of ERISA would not be altered by the fact that the annual 
report would be required to be filed in electronic form. Similarly, a 
plan administrator's obligation to make the latest annual report 
available for examination and to furnish copies upon request, in 
accordance with sections 104(b)(2) and 104(b)(4) of ERISA, will not be 
affected by an electronic filing requirement.
    Conforming changes are being proposed to 29 CFR 2520.103-1(f) 
[contents of the annual report], 2520.103-2(c) [contents of the annual 
report for a group insurance arrangement], 2520.103-9(d) [direct filing 
for bank or insurance carrier trusts and accounts], and 2520.103-12(f) 
[limited exception and alternative method of compliance for annual 
reporting of investments in certain entities].

E. Regulatory Impact Analysis

Summary

    The Department has considered the potential costs and benefits of 
this proposed regulation. Costs to plans would consist mainly of a one-
time, transition or start-up cost to make the change to electronic 
filing, generally to be incurred in 2008, which is estimated to be $23 
million. Benefits to plans would include ongoing savings on material 
and postage and efficiency gains from the early detection and 
correction of more potential filing errors in the course of electronic 
filing, estimated to total $10 million annually, and realized each 
succeeding year beginning in 2008. Over time the ongoing savings 
attributable to this proposed regulation are expected to outweigh its 
one-time transition costs. Aggregate savings are estimated to exceed 
aggregate costs by $23 million over the first five years (discounting 
future savings at a rate of 7 percent).
    Additional benefits are expected to accrue to the government and 
the public in the forms of substantially reduced processing costs and 
more timely availability of accurate filing data for use in enforcement 
and for other purposes of benefit to plans and participants.

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
a 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) of the Executive 
Order, a ``significant regulatory action'' is 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

[[Page 51547]]

Order. OMB has determined that this action is significant under section 
3(f)(4) because it raises novel legal or policy issues arising from the 
President's priorities. Accordingly, the Department has undertaken 
below an analysis of the costs and benefits of the proposed regulation.

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, EBSA 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 ERISA, which permits the Secretary to prescribe simplified 
annual reports for pension plans that cover fewer than 100 
participants. Under section 104(a)(3) of ERISA, 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 CFR 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 that cover fewer than 100 participants and 
satisfy certain other requirements.
    Further, while some large employers may have small plans, in 
general small employers maintain most small plans. Thus, EBSA believes 
that assessing the impact of these proposed rules 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 that 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.). EBSA therefore requests comments on the appropriateness of the 
size standard used in evaluating the impact of these proposed rules on 
small entities.
    These proposed rules may have a significant impact on a substantial 
number of small entities. The Department has therefore prepared an 
initial regulatory flexibility analysis, presented below under the 
heading ``Small Plans.'' Additional relevant material also appears 
below under the heading ``Alternatives Considered.''

Costs and Benefits

    The Department has considered the potential costs and benefits of 
this proposed regulation. Costs to plans would include a one-time 
transition or start-up cost to make the change to electronic filing, 
estimated to be $23 million. Benefits would include ongoing savings on 
material and postage and efficiency gains from the early detection and 
correction of more potential filing errors in the course of electronic 
filing, estimated to total $10 million annually. Over time the ongoing 
savings attributable to this proposed regulation are expected to 
outweigh its one-time transition costs. Aggregate savings are estimated 
to exceed aggregate costs by $23 million over the first five year 
(discounting future savings at a rate of 7 percent). Additional 
benefits are expected to accrue to the government and the public in the 
forms of reduced processing costs and more timely availability of 
accurate filing data. Beyond that, it is not immediately clear how the 
costs and benefits of mandatory electronic filing will compare with 
that of current filing modes, and the Department invites comments on 
this point.
    The costs and benefits of this proposed regulation would accrue 
primarily to 832,000 plans that file Form 5500.\16\ Non-plan entities 
that file Form 5500 generally do so in their capacity as service 
providers to plans and therefore are expected to pass their own costs 
and benefits from the regulation on to the plans they serve.\17\
---------------------------------------------------------------------------

    \16\ The economic analysis of the proposed regulation pertains 
only to those plans that file a Form 5500 to satisfy filing 
requirements under Title I of ERISA. Because the Form 5500-EZ is 
filed to satisfy filing requirements under the Code, data related to 
Form 5500-EZ filers is not included in this analysis.
    \17\ Economy theory predicts that producers in competitive 
markets pass costs and savings on to buyers.
---------------------------------------------------------------------------

Transition Costs

    The proposed regulation would entail some one-time transition 
costs, incurred in making the transition to electronic filing. The 
magnitude of the transition costs is likely to vary with filers' 
previous filing methods, reflecting the extent to which their existing 
filing infrastructure supports electronic filing. It is also expected 
that different filers will make the transition to electronic filing in 
different ways, depending on their circumstances and preferences. It is 
intended that all filers will have a number of methods of electronic 
filing from which to choose. For example, filers may enter information 
directly into a government-provided web site (using their own Internet 
service or one available for a fee at a local business center or free 
of charge at a public library or other facility). They may use 
commercial software equipped for electronic filing. They may hire a 
service provider (or rely on an existing relationship with a service 
provider) to provide electronic filing services.
    In 2002, the bulk of all filings, 87 percent, were submitted on 
machine-print forms; 12 percent were submitted on hand-print forms; and 
1 percent were submitted electronically.
    Hand-print Filers--Hand-print filers as a group are likely to face 
larger transition costs than others. These filers by and large 
currently file government printed forms, filled out by hand or by using 
a typewriter.\18\ Like all other filers, they will have the option of 
preparing and submitting their filings via a government provided web 
site. It is likely that many (but not all) already have the electronic 
infrastructure (mainly a personal computer and Internet service) to 
support electronic filing. It is also likely that others will have 
access to the Internet at no charge at a local library or other 
location.\19\ Nonetheless, hand-print filers are likely to incur some 
expense to learn about the new requirement, and some will incur 
additional costs, such as in locating and becoming familiar with 
Internet access,

[[Page 51548]]

as well as in establishing a secured filing account.
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    \18\ A very small fraction of all hand-print filers, typically a 
few percent, files computer-generated forms that are similar to and 
processed in the same way as government printed forms. These filers 
might tend to incur smaller transition costs than other hand-print 
filers. Because of their small numbers and the difficulties in 
separately identifying them in the data used for this analysis, the 
Department did not attempt to adjust its estimates to reflect this 
possible difference. This omission may slightly bias upwards the 
estimated aggregate transition cost for hand-print filers.
    \19\ This assumption is consistent with observations made by the 
ERISA Advisory Council Working Group on Electronic Reporting in its 
Nov. 8 Report. See fn. 15, above.
---------------------------------------------------------------------------

    For the 104,000 current hand-print filers, the Department estimates 
a one-time, aggregate transition cost to electronic filing of $12 
million. This assumes that a professional-level employee, who costs the 
plans on average $58.80 per hour in wages, benefits, and overhead,\20\ 
would require on average two hours to make the transition to electronic 
filing. The cost might be devoted to one or more one-time, transition 
activities such as learning about the electronic filing system, 
registering for a secure filing account, selecting and acquiring 
software, selecting and hiring a service provider, or locating an 
Internet access site and becoming familiar with a web-based interface. 
Different types of transition activities will have different costs. 
Selecting and hiring a service provider might be an example of a 
potential activity that would cost more than average, while registering 
for a secure account might be an example of one that would cost less. 
The activities and the cost will vary from filer to filer. For example, 
transition activities might be limited and costs low for a filer that 
is a highly experienced Internet user already carrying out other 
aspects of business management (such as buying supplies and selling 
products, reporting wages to SSA, etc.) on line. Activities might be 
more extensive and costs higher for a filer lacking Internet and 
computing expertise who needs to acquire a computer and Internet 
connection or select and hire a service provider. The Department 
invites comments on transitional activities and costs.
---------------------------------------------------------------------------

    \20\ The total labor cost is derived from wage and compensation 
data from the Bureau of Labor Statistics' (BLS) 2004 National 
Occupational Employment and Wage Estimates from the Occupational 
Employment Survey and BLS 2004 Employment Cost for Compensation. 
This data can be found at: http://www.bls.gov/news.release/ocwage.t01.htm and http://www.bls.gov/news.release/archives/ecec_09152004.pdf. The estimate assumes a 3 percent annual rate of 
compensation growth and includes an overhead component which is a 
multiple of compensation based on the Government Cost Estimate.
---------------------------------------------------------------------------

    Machine-print Filers--Machine-print filers as a group are likely to 
incur smaller transition costs than hand-print filers. It is likely 
that a large proportion of machine-print filings are prepared by 
service providers, while the remainder are prepared by filers using 
commercial software. Filers that currently rely on service providers to 
prepare and submit their filings may opt to continue in this manner, 
relying on the service provider to file electronically. Service 
providers' transition costs will be passed back to and spread across 
the filers they serve. Other machine-print filers may rely on the 
vendors of their software to incorporate electronic filing features 
into the 2007 plan-year software (probably as part of an otherwise 
normal annual software update typically carried out to incorporate any 
form and instruction changes). It is likely that a majority already 
have the Internet service required for such software features to 
function, and some that currently do not have such service would have 
acquired it by the time the plan-year 2007 filings are due (for reasons 
unrelated to this regulation). For many machine-print filers the 
transition to electronic filing will be largely transparent, but will 
nonetheless entail at least some activities, such as registration for a 
secure filing account.
    For the 726,000 current machine-print filers, the Department 
estimates a one-time, aggregate transition cost to electronic filing of 
$11 million. This assumes that one-half of machine-print filers will 
rely entirely on their existing service providers to make the 
transition and that the service providers will spread their own 
transition costs across the filers they serve. The Department, lacking 
data on the number of affected service providers, did not attempt to 
estimate their transition cost, and such costs are not included here. 
Because these costs would be spread across filers, the amount passed on 
to any single filer is expected to be minimal. The remaining one-half 
of machine-print filers are assumed to shoulder the transition costs 
themselves. The Department's estimate assumes that these filers will 
require on average thirty minutes of a professional-level employee's 
time to make the transition to electronic filing. The Department 
invites comments on these transition costs.

Ongoing Costs and Benefits

    Preparation Costs--This proposed regulation pertains to the filing, 
and not to the preparation, of the Form 5500. However, it is possible 
that, for some filers, mandatory electronic filing would prompt changes 
in preparation methods. For example, hand-print filers may currently 
prepare their filings using a government printed form and a typewriter. 
Such filers might prepare future filings by entering information into a 
government website. The Department considered the cost of making such 
transitions in preparation methods to be part of the overall transition 
cost of the proposed regulation, included in the estimates presented 
above.
    With respect to ongoing preparation costs, it is likely that some 
filers will incur higher costs in connection with new preparation 
methods prompted by this regulation and enabled by the new electronic 
filing system than with their current methods, but that others will 
incur lower costs. For example, it is not immediately determinable 
whether entering information into a website will take more or less time 
than typing it onto a paper form. The Department expects that 
commercial preparation software will incorporate features that ease 
preparation, such as integrated access to form instructions and 
automatic filling of data fields based on entries in other fields or in 
prior filings. The Department also intends that the new government 
filing website interface will be designed with attention to ease of 
preparation. Lacking an immediate basis to quantify the magnitude or 
costs and savings from possible changes in preparation methods, the 
Department did not attribute any such costs or savings to this proposed 
regulation, but invites comments on the potential magnitude of any such 
costs and benefits.
    Filing Cost Savings--Filing costs generally are expected to be 
reduced by the implementation of this proposed regulation. Savings are 
foreseen from the elimination of materials and mailing costs and from a 
reduction in filing errors and subsequent corrections.
    Electronic transmission will eliminate certain costs otherwise 
attendant to paper filing, including materials and postage. The 
Department estimates that, by changing to electronic filing, 829,000 
plans will benefit from approximately $900,000 in cost-savings 
annually, assuming savings of $0.0167 per sheet of paper and $0.57 for 
postage per filing.
    In addition, automated checks for errors and omissions upon 
electronic transmission, together with automated error checks and 
integrated instructions common to filing preparation software, will 
ease compliance with reporting requirements. Importantly, these 
features will reduce the need for subsequent amendments to submitted 
filings, as well as helping to avoid reporting penalties that might 
otherwise be assessed for deficient filings.
    Historically, filers that use a software-based system generally 
have fewer filing errors. In 2002, 7 percent and 16 percent of 
electronic and machine-print filings, respectively, had filing errors 
compared to 40 percent of hand-print filings. The filing errors include 
items such as missing signatures, attestations, schedules, or back-up 
documents that resulted in an incomplete filing. As a result of filer 
errors and the need for

[[Page 51549]]

additional information or clarifications about Form 5500 filings for 
the 2002 plan year, the Department mailed 160,000 letters to filers 
requesting corrections or additions. This process ultimately delays the 
final submission and requires plans to incur additional costs to 
address deficiencies. The electronic filing system's intended error 
detection capability may largely eliminate the Department's need to 
forward correspondence to plans with deficient filings. This 
enhancement is likely to save time for filers. If the need for 
correspondence can be eliminated, the aggregate annual cost savings to 
affected filers could be as high as $10 million, assuming elimination 
of correspondence with the Department saves an average of one hour of a 
professional's time, at an average of $58.80 per hour, plus the value 
of associated postage and materials. A disproportionate share of this 
savings, estimated at $2.4 million, would accrue to current hand-print 
filers (reflecting their historically higher filing error rates), while 
$7.1 million would accrue to machine-print filers. The Department (and 
by extension taxpayers) would realize additional savings from this 
reduced need to correct filing errors.

Societal Benefits

    Additional benefits are expected to accrue to the government and 
the public in the forms of reduced processing costs and more timely 
availability of accurate filing data.
    Participants will benefit from the transition to a fully electronic 
method of filing. The new filing procedures will provide participants 
and beneficiaries with access to more accurate plan information since 
software-based forms are generally less prone to error, the new system 
will process filings more quickly, and reports disclosing information 
about plans' administrative and financial status will be available to 
the public sooner than would otherwise be possible. This improved 
access can enhance the quality of interaction between plans, 
participants, and beneficiaries.
    The Federal government and the public at large will also benefit 
from the change to electronic filing. The decrease in correspondence 
will constitute immediate savings to the Federal government that will, 
in turn, yield savings to the taxpayers. Finally, improvements in the 
accuracy of the data contained in submitted filings and the expected 
acceleration in processing may make possible more timely production of 
reliable national statistics on private employee benefit plans. Such 
statistics historically have been produced at a substantial lag of up 
to four years after the end of the filing year.

Additional Considerations

    Proliferation of Technology--In proposing this regulation, and in 
assessing its economic impacts, the Department took into consideration 
the high and increasing rates of use of electronic information 
technologies by businesses, including by small businesses in 
particular. Such technologies include office computing hardware and 
software that process, organize, store, and transmit information 
electronically. The proliferation of such technologies, and of 
expertise and familiarity with using them, is expected to moderate the 
cost of compliance with this proposed regulation.
    The Department believes that most filers already have access to a 
computer and the Internet. The use of computers and the Internet has 
become the norm among U.S. businesses. Most or all industries in the 
economy are beginning to use the Internet as a means of conducting at 
least some of their daily operations and to remain competitive. 
Moreover, it is possible that plan sponsors as a group are more likely 
than other companies to be using information technologies. The 
Department believes that few, if any, plan sponsors will purchase a 
computer or subscribe to Internet service for the sole purpose of 
electronically filing their Form 5500. (If some do, they may realize 
collateral benefits as they put their newly acquired technologies to 
additional uses.) Furthermore, the Department believes that the number 
of firms offering pension and welfare plans that do not have a computer 
and/or Internet access is a relatively small number, especially given 
the substantial growth of computer and Internet usage over the past 
decade. The Department also believes that the number of plans that will 
not have a computer or Internet access by the year 2008 will be small.
    The Department's views on the proliferation of technologies are 
grounded in its review of various studies of the topic.
    According to a 2002 study for the SBA,\21\ the Internet offers 
unparalleled new opportunities for small businesses. Fifty-seven 
percent of small businesses already used the Internet; of those most 
had their own websites; and more than one-third were selling their 
products on line.\22\ Of those not using the Internet, two-thirds did 
use computers.\23\
---------------------------------------------------------------------------

    \21\ Joanne H. Pratt, ``E-Biz: Strategies for Small Business 
Success'' 32 (2002) (prepared for the SBA Office of Advocacy), 
available at http://www.sba.gov/advo/research/rs220tot.pdf.
    \22\ Id. at 6.
    \23\ Id.
---------------------------------------------------------------------------

    The most popular uses of the Internet among small firm users were 
communicating with customers and suppliers (83 percent), gathering 
business information (80 percent), and purchasing goods and services 
(61 percent).\24\ Some also used the Internet to conduct banking or 
other financial transactions (27 percent) or bid on contracts (21 
percent). Most firms with websites either broke even financially or 
made money through use of the sites.
---------------------------------------------------------------------------

    \24\ Id. at 6-8.
---------------------------------------------------------------------------

    Also according to this study, use of Internet technology is 
growing. Among small firms with websites, two-thirds had been operating 
the site for less than one year.\25\ Business use of on-line 
technologies is being driven up by increasing use of such technologies 
by consumers. Increasing availability and use of affordable, fast 
broad-band Internet services is helping to drive both trends. Market 
forecasters predicted rapid growth in world e-commerce, reaching as 
much as several trillion dollars by 2004.\26\
---------------------------------------------------------------------------

    \25\ Id. at 11.
    \26\ Id. at 23-24.
---------------------------------------------------------------------------

    A 2003 report by SBA \27\ found that self-employed computer users 
numbered 10.5 million in 2000, up from 9.2 million two years earlier. 
Over the same two years, self-employed individuals' access to the 
Internet increased by 50 percent, reaching 83 percent of all such 
individuals.
---------------------------------------------------------------------------

    \27\ SBA Office of Advocacy, ``Self Employment and Computer 
Usage,'' 3 (2003), available at http://www.sba.gov/ADVO/stats/sepc.pdf.
---------------------------------------------------------------------------

    A 2004 study for SBA \28\ of small firms with fewer than 500 
employees found that only 27 percent did not currently subscribe to 
Internet service.
---------------------------------------------------------------------------

    \28\ Stephen B. Pociask, TeleNomic Research, LLC, ``A Survey of 
Small Businesses' Telecommunications Use and Spending'' 71 (2004) 
(prepared for SBA Office of Advocacy), available at http://www.sba.gov/advo/research/rs236tot.pdf.
---------------------------------------------------------------------------

    Benefits of E-government--The proposed regulation will advance the 
goals of administration articulated in the Government Paperwork 
Elimination Act and the E-Government Act of 2002.
    The Department expects this proposed regulation to advance the 
general trend toward the efficiencies of E-government. Federal, State, 
and local government agencies have already implemented numerous E-
government initiatives.\29\ These initiatives reduce

[[Page 51550]]

the government's burden on businesses by eliminating redundant 
collection of data. Citizens receive faster, more convenient services 
from a more responsive and informed government.\30\ According to one 
study, citizens see the most important benefits of E-government as 
increased government accountability to citizens (36 percent), greater 
public access to information (23 percent), and more efficient/cost-
effective government (21 percent).\31\ The GAO has indicated that 
government agencies that reported using the Internet as a medium for 
core business operations delivered information and services more 
quickly, less expensively, and to wider groups of users.\32\
---------------------------------------------------------------------------

    \29\ See, e.g., ``Electronic Government: Challenges Must Be 
Addressed with Effective Leadership and Management,'' Hearing on 
S.803 Before the Senate Comm. in Governmental Affairs, 106th Cong. 1 
(July 11, 2001) (statement of David McClure, Director, Information 
Technology Management Issues, GAO), available at http://www.gao.gov/new.items/d01959t.pdf.
    \30\ Susie Trinkle, Capella Univ., ``Moving Citizens from in 
line to Online: How the Internet is Changing How Government Serves 
its Citizens'' (Sept. 10, 2001, available at http://oma.od.nih.gov/ma/bps/bpkm/Resource/Y_MovingCitizensFromLineOn.doc doc.
    \31\ Hart-Teeter, ``E-Government: the Next American Revolution'' 
(Sept. 28, 2000) available at http://www.excelgov.org/displaycontent.asp?keyword=mReleases&NewsItemID=2559 2559.
    \32\ Testimony of David A. McClure, GAO, before the Subcommittee 
on Government Management, Information and Technology, Committee on 
Government Reform, House of Representatives (2000), as reported in 
Karen Laynea and Jungwoo Leeb, Government Information Quarterly 18 
(2001), 122-136.
---------------------------------------------------------------------------

    Another study suggests that one of the most powerful ways to reduce 
compliance costs is through E-government. Web-enabling can save 
businesses and citizens a considerable amount of time and money, as the 
following examples demonstrate: (1) The State of Oregon's on-line 
permitting and reporting process for building construction approvals 
saved Oregon's construction industry $100 million annually. Deloitte's 
estimate suggests that if governments at all levels were to follow 
Oregon's lead, the United States' construction industry, as a whole, 
could save in the range of $15 billion to $20 billion annually. (2) The 
SBA's Business Compliance One Stop website saves businesses about $526 
million a year, by helping them find, understand, and comply with 
regulations. (3) In Canada, the province of British Columbia's 
OneStopBC website cuts down on government paperwork costs for 
businesses by allowing on-line business license registrations. The cost 
savings to businesses are estimated to be in the range of $14 million 
to $27 million annually.\33\
---------------------------------------------------------------------------

    \33\ William D. Eggers, Global Director, Deloitte Research-
Public Sector, ``Citizen Advantage: Enhancing Economic 
Competitiveness Through e-Government'' 1 (2004).
---------------------------------------------------------------------------

    Time Rebates--Time considerations affect all interactions and 
activities in business. When citizens and businesses can go on line, 
instead of waiting in line, they can obtain faster, more convenient 
access to government services.\34\ E-government can provide what has 
come to be described as a ``time rebate''--cutting down on the time it 
takes to comply with government regulations and to complete 
transactions.
---------------------------------------------------------------------------

    \34\ Gassan Al-Kibsi; Kito de Boer; Mona Mourshed; Nigel P. Rea; 
``Putting citizens on-line, not in line,'' McKinsey Quarterly 2001 
no. 2.
---------------------------------------------------------------------------

    For example, the Commonwealth of Pennsylvania's ``PA Open for 
Business'' website allows a business to enter all the information 
needed to register with the State in one place, instead of having to go 
to five different agencies. A process that once took days or weeks has 
been reduced to one hour.\35\
---------------------------------------------------------------------------

    \35\ See Eggers, supra note 25 at 7, 14.
---------------------------------------------------------------------------

    The Department intends that the new electronic filing system will 
be equipped to streamline submissions and reduce time and burden on 
filers. The proposed regulation should benefit all parties because the 
information contained in the Form 5500 would be directly entered into 
the Department's records. This would improve transaction accuracy, 
reduce cycle times, improve cost efficiencies, enhance information 
accessibility, and provide more timely availability of the information 
contained in the Form 5500 return/reports.

Alternatives Considered

    As noted earlier in this preamble, before electing to pursue the 
approach taken in this proposed regulation, the Department considered 
alternative options for reconfiguring the filing methods for the Form 
5500 Series, focusing in particular on the gradual approach advocated 
generally in the public comments. The following discusses three such 
alternatives that the Department considered but rejected, along with 
the reasons why each was rejected in favor of a uniform requirement to 
file electronically beginning with filings for the 2007 plan year. 
Fuller discussion of the third alternative, which would provide a time-
limited exception from mandatory electronic filing for certain small 
plans, follows under the heading ``Small Plans.''
    First, the Department considered developing a new processing system 
that could continue to process both electronic and paper submissions 
without limitation. Such a system might be popular with the filing 
public and might result over time in virtually complete conversion to 
electronic filing, provided that the new system successfully 
incorporated the contemplated technological advances. Such a ``dual 
method'' processing system would permit filers to choose between 
electronic and paper filing. It therefore would likely appear to some 
filers to be more cost-efficient than the uniform requirement to file 
electronically that the Department is proposing. However, while a 
``dual method'' processing system might be popular with some filers, 
such a system would perpetuate the inefficiencies inherent in paper 
filings--larger number of filing errors, required correspondence with 
filers, increased likelihood of civil penalties, delays in reviews of 
filings, and increased risks to participants and beneficiaries 
resulting from erroneous data or delayed enforcement. It therefore does 
not appear to be in the interest of plans or participants to maintain 
such a system. In addition, the maintenance of such a system would 
entail additional costs for the Federal government (and by extension 
taxpayers) because it would be necessary to incorporate into the system 
the ability to receive and process a potentially large number of paper 
filings. In the Department's view, the additional costs for such a 
complex processing system would be virtually prohibitive for the 
Federal government in light of current budgetary constraints on the 
Federal government generally and on the Department in particular. Under 
such constraints, maintaining a paper filing system would consume 
resources that would be better devoted to enhancing the system's 
electronic filing capabilities or carrying out other Department 
functions.
    Second, the Department considered the alternative of continuing the 
present paper processing system on a short-term interim basis during 
the initial years of operating a new, solely electronic processing 
system. This alternative would enable filers to gain familiarity with 
the new paperless system as part of the transition process. As with the 
prior approach, this approach would continue, albeit for a limited 
period, the current inefficiencies of a paper system and the 
substantial costs of maintaining tandem operations, particularly since 
continuing the old processing system would require ``sole source'' non-
competitive yearly contractual negotiations with the current 
contractor, with ever increasing additional costs. For example, in 
fiscal year 2006 the Department requested an additional $2.1 million to 
maintain current

[[Page 51551]]

operations in the first year of a sole source contract.
    Third, the Department considered developing a new processing system 
that would have the temporary capacity to process paper filings from a 
targeted group of filers under an exception from the electronic filing 
requirement. For reasons described below under ``Small Plans,'' the 
Department considered it appropriate to limit the exception to small 
plans that had previously filed government printed ``hand-print'' forms 
and that are not subject to the audit requirement. The Department 
believes that making such an exception available, at least for the 
first few years of operating the new processing system, might provide a 
small net benefit to at least some proportion of this class of filers. 
However, the Department believes this potential benefit, which could 
amount (as explained further below) to as little as $14 per plan on 
average for 74,000 plans or as much as $249 per plan on average for 
7,400 plans, is outweighed by the benefits to participants and 
beneficiaries at large, and to the Department and taxpayers generally, 
of implementing a single, wholly electronic filing system beginning 
with reports for the 2007 plan year. The maintenance of any paper 
system, even on a reduced scale, is inherently inefficient and 
unnecessarily costly and could undermine full realization of the 
potential benefits of electronic filing for ERISA compliance and 
enforcement, thereby exposing some plans and participants to 
unnecessary risk. Accordingly, the Department rejected this 
alternative, along with the other two considered alternatives, in favor 
of a uniform requirement to file electronically.
    The Department's consideration of this third alternative, and its 
basis for rejecting it in favor of a uniform requirement to file 
electronically, is detailed below under the heading ``Small Plans.''

Small Plans

    The Department believes this regulation may have a significant 
impact on a substantial number of small plans. As for all other plans, 
costs and benefits for small plans are expected to vary with the plans' 
circumstances. Most will likely incur moderate transition costs and 
subsequently realize moderate ongoing savings. Some, however, may 
experience larger impacts, including both larger transition costs and/
or ongoing net cost increases rather than ongoing net savings. For 
example, some small plans may lack experience with or easy access to 
the Internet. Such plans may incur larger than typical transition costs 
to gain access to the Internet (or to enlist a service provider with 
access) and may find it more time consuming, and therefore more costly, 
to prepare their filing on a government website (or to interact with a 
service provider) than to prepare their filing using a government 
printed form that is completed ``by hand'' and filed on paper through 
the mails. The Department expects that only a minority of plans might 
be so affected, but that minority might nonetheless represent a 
substantial number.
    The Department therefore conducted an initial regulatory 
flexibility analysis, repeating the above analysis while limiting the 
scope to include only small plans--that is, those with fewer than 100 
participants. On that basis, it is estimated that 667,000 small plans 
will incur one-time transition costs of $18 million, including $9 
million for 78,000 current hand-print filers and $9 million for 589,000 
current machine-print filers. It is further estimated that small plans 
would realize ongoing materials and postage savings of approximately 
$700,000 annually and could realize up to $7 million in savings 
annually from the elimination of the need to correct deficient filings 
(including $2 million accruing to hand-print filers and $5 million to 
machine-print), for a total of approximately $8 million in annual 
savings. As with all other plans, over time the aggregate ongoing 
savings realized by small plans are expected to outweigh their 
aggregate one-time transition costs. Over five years, savings are 
estimated to exceed costs by $17 million (discounting future savings at 
a rate of 7 percent). The Department believes that impacts may vary 
among small plans, depending for example on their (or their service 
providers') access to and familiarity with associated technologies, and 
possibly on their size. The Department, however, lacks a basis on which 
to estimate such variations. The Department invites comments on this 
assessment of the impact of the proposed regulation on small plans.
    The Department also assessed the costs and benefits of alternative 
approaches. As noted above, the Department considered proposing a 
temporary exception from the requirement to file electronically for 
certain small plans. The Department undertook to develop as an 
alternative to a uniform electronic filing requirement an exception 
provision that would maximize benefits and minimize costs to affected 
parties including plans, participants, and taxpayers.
    The Department first considered the criteria that should be adopted 
to designate filers eligible to continue to file on paper under the 
exception. The Department selected as the first criterion plan size. 
Small plans (and the small businesses that sponsor them) may be less 
likely than large ones to use computers and the Internet or to have 
current expertise in such usage. They may be harder pressed to devote 
resources to making a transition to electronic filing. Moreover, 
transition costs may be largely fixed costs (invariant to plan size) 
and therefore more burdensome to small than to large plans. The 
Department considered alternative plan size thresholds, including plans 
with fewer than 100, fewer than 25, or fewer than 10 participants. The 
threshold of fewer than 100 participants seemed most desirable. It is 
consistent with the threshold used for other distinctions in annual 
reporting requirements and therefore would not add additional 
complexity to reporting requirements. In addition, the overall systems 
requirements associated with an exception for plans with fewer than 100 
participants would be expected to differ little from those associated 
with an exception limited to smaller plans. The cost of building, 
maintaining and periodically updating a system capable of accepting and 
processing paper filings is largely invariant to the number of paper 
filings to be accepted. Moreover, the number of plans eligible for the 
exception would not vary much across the thresholds considered. Among 
plans not subject to the audit requirement and filing by the hand-print 
method, the Department estimates that 74,000 have fewer than 100 
participants, 59,000 fewer than 25, and 46,000 fewer than 10.
    The second criterion identified by the Department was past filing 
method. As noted above, it is likely that hand-print filers will 
confront higher average transition costs than machine-print filers. 
Machine-print filers currently prepare their filings electronically, 
even if they do not file them electronically. In contrast, some 
fraction of hand-print filers may be entirely without computing 
infrastructure.
    A third criterion identified by the Department was potential risk 
to participants. As noted above, hand-print filings are more prone to 
error than machine-print or electronic filings. In addition, processing 
of paper filings is inherently slower than processing of electronic 
filings. Therefore, continued acceptance of paper filings has the 
potential to slow both detection of ERISA violations and enforcement

[[Page 51552]]

actions to address such violations.\36\ The Department therefore 
considered approaches that would limit the exception to situations 
where risks of violations (and associated threats to participants) were 
less, such as in connection with plans that, because of the presence of 
other safeguards and/or absence of certain risks, were not required to 
provide financial audits with their annual reports.
---------------------------------------------------------------------------

    \36\ This concerns not merely reporting violations, but all 
potential ERISA violations, including those which might directly 
jeopardize plan assets or participants' benefits.
---------------------------------------------------------------------------

    Finally, the Department considered the appropriate duration of such 
an exception. To accommodate such an exception, the Department's new 
processing system would need to incorporate an ability to receive and 
process some number of paper filings. The incorporation of this ability 
into the system would entail a relatively large, up-front development 
cost, followed by smaller but substantial ongoing costs to process 
paper filings. It therefore seemed reasonable to consider as the 
duration of such an exception the expected minimum ``lifetime'' of the 
new system (which corresponds to the expected duration of the contract 
that will develop and maintain it), which is five years. The Department 
next considered whether a five-year exception would be sufficient to 
accomplish the exception's goal of easing small plans' transition to 
electronic filing. Assuming continued rapid proliferation of computer 
and Internet usage, it seems likely that five years would be sufficient 
to accomplish this goal.
    Based on this reasoning, the Department considered, as an 
alternative to a uniform 100 percent electronic filing requirement, a 
five-year exception for plans that: (1) Have fewer than 100 
participants, (2) previously filed their annual reports using 
government printed ``hand-print'' forms, and (3) are not subject to the 
audit requirement for annual reporting under Title I of ERISA. The 
Department estimates that use of these criteria would create a class of 
74,000 filers eligible for the temporary exception from electronic 
filing.
    As noted above, small plans are estimated to face an aggregate 
transition cost of $18 million, followed by ongoing annual savings of 
$8 million. Over time the aggregate savings will outweigh the cost. 
But, also as noted above, a disproportionate share of the transition 
cost, $9 million, is estimated to accrue to the small minority of small 
plans that file via the hand-print method. The savings accruing to 
these filers, being attributable to reduced materials and postage and, 
more important, reduced filing errors, if proportionate to their 
numbers, will amount to $2 million.
    The Department undertook to carefully consider the potential costs 
and benefits to small plans of the exception defined above. 
Approximately 74,000 plans could be eligible for the exception. The 
Department considered two potential scenarios.
    In the first scenario, the Department assumed that all eligible 
plans would file on paper, for an average of three of the five years 
for which paper filings would be permitted. The Department assumed 
further that these plans' average transition costs and ongoing savings 
would be the same as the average assumed earlier for all small plan 
hand-print filers.\37\ The Department also assumed that, by taking 
advantage of the exception, these filers would reduce their transition 
cost to the level assumed earlier to be incurred by machine-print 
filers, but would delay commencement of the ongoing savings available 
through electronic filing until they began filing electronically (on 
average after three years). In this scenario, the 74,000 filers taking 
advantage of the exception would reduce their transition costs by $6.5 
million on aggregate, while sacrificing $5.5 million in potential 
ongoing savings, thereby realizing a net benefit of approximately $1 
million, or $14 per filer.
---------------------------------------------------------------------------

    \37\ This assumption seems reasonable insofar as an estimated 94 
percent of all small hand-print filers were not subject to the audit 
requirement and therefore would be eligible for the exception.
---------------------------------------------------------------------------

    In the second scenario, the Department considered the possibility 
that the transition cost might vary widely across filers. The 
Department assumed that just 10 percent of eligible filers would take 
advantage of the exception (again for an average of three years), but 
that these filers would face a transition cost (absent the exception) 
of three times the average assumed for all hand-print filers. Other 
assumptions were the same as in the first scenario. In this scenario, 
7,400 filers taking advantage of the exception would reduce their 
transition costs by $2.4 million on aggregate, while sacrificing 
$550,000 in potential ongoing savings, thereby realizing a net benefit 
of approximately $1.8 million, or $249 per filer.
    On the basis of these scenarios, the Department believes that some 
filers would likely benefit from the exception. However, as noted 
above, the potential net benefit to a given filer from the exception 
would be modest. In the first scenario, the average net benefit would 
amount to just $12 per plan using the exception; in the second, $249 
per plan. Further, the availability of the exception would create 
significant risks to participants and costs to the government (and 
taxpayers). As discussed above, the maintenance of any paper system, 
even on a relatively small scale, is inherently inefficient and costly. 
Also, as discussed above, paper filings take longer to process and 
therefore pose unnecessary compliance risks. Therefore, the Department 
concluded that the potential benefit of a limited exception would be 
outweighed by the associated cost to the government (and to taxpayers) 
and the potential risks to participants and that adoption of a limited 
exception could not be justified. For these reasons, the Department 
rejected the alternative of providing an exception in favor of a 
uniform requirement to file electronically.

Paperwork Reduction Act

    This proposed regulation does not introduce, or materially modify, 
any information collection requirement, but furthers the Department's 
goal of automating the submission of the Form 5500 return/report. As 
such, this notice of proposed rulemaking is not subject to the 
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.) because it does not contain a ``collection of information'' as 
defined in 44 U.S.C. 3502(3).

Congressional Review Act

    The notice of proposed rulemaking being issued here is subject to 
the provisions of the Congressional Review Act provisions of the Small 
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et 
seq.) and, if finalized, will be transmitted to the Congress and the 
Comptroller General for review.

Unfunded Mandates Reform Act

    Pursuant to provisions of the Unfunded Mandates Reform Act of 1995 
(Pub. L. 104-4), this rule does not include any Federal mandate that 
may result in expenditures by State, local, or tribal governments, or 
the private sector, which may impose an annual burden of $100 million 
or more.

List of Subjects in 29 CFR Part 2520

    Employee benefit plans, pensions, reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, the Department proposes 
to amend 29 CFR part 2520 as follows:

[[Page 51553]]

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

    Authority: 29 U.S.C. 1021-1025, 1027, 1029-31, 1059, 1134, and 
1135; Secretary of Labor's Order 1-2003, 68 FR 5374 (Feb. 3, 2003). 
Sec. 2520.101-2 also issued under 29 U.S.C. 1132, 1181-1183, 1181 
note, 1185, 1185a-b, 1191, and 1191a-c. Secs. 2520.102-3, 2520.104b-
1, and 2520.104b-3 also issued under 29 U.S.C. 1003, 1181-1183, 1181 
note, 1185, 1185a-b, 1191, and 1191a-c. Secs. 2520.104b-1 and 
2520.107 also issued under 26 U.S.C. 401 note, 111 Stat. 788.

    2. Add Sec.  2520.104a-2 after Sec.  2520.104a-1 to read as 
follows:


Sec.  2520.104a-2  Electronic Filing of Annual Reports.

    (a) Any Form 5500 Annual Return/Report (including accompanying 
statements or schedules) to be filed with the Secretary for any plan 
year (or reporting year, in the case of common or collective trusts, 
pooled separate accounts, and similar non-plan entities) beginning on 
or after January 1, 2007, shall be filed electronically in accordance 
with the instructions, and such other guidance as the Secretary may 
provide, applicable to such report.
    (b) Nothing in paragraph (a) of this section is intended to alter 
or affect the duties of any person to retain records or to disclose 
information to participants, beneficiaries, or the Secretary.
    3. Amend Sec.  2520.103-1 by revising paragraph (f) as follows:


Sec.  2520.103-1  Contents of the annual report.

* * * * *
    (f) Electronic filing. Except as provided in Sec.  2520.104a-2 of 
this chapter, the Form 5500 ``Annual Return/Report of Employee Benefit 
Plan'' may be filed electronically or through other media in accordance 
with the instructions accompanying the form, provided the plan 
administrator maintains an original copy, with all required signatures, 
as part of the plan's records.
    4. Amend Sec.  2520.103-2 by revising paragraph (c) as follows:


Sec.  2520.103-2  Contents of the annual report for a group insurance 
arrangement.

* * * * *
    (c) Electronic filing. Except as provided in Sec.  2520.104a-2 of 
this chapter, the Form 5500 ``Annual Return/Report of Employee Benefit 
Plan'' may be filed electronically or through other media in accordance 
with the instructions accompanying the form, provided the trust or 
other entity described in Sec.  2520.104-43(b) maintains an original 
copy, with all required signatures, as part of the trust's or entity's 
records.
    5. Amend Sec.  2520.103-9 by revising paragraph (d) as follows:


Sec.  2520.103-9  Direct filing for bank or insurance carrier trusts 
and accounts.

* * * * *
    (d) Method of filing. Except as provided in Sec.  2520.104a-2 of 
this chapter, the Form 5500 ``Annual Return/Report of Employee Benefit 
Plan'' may be filed electronically or through other media in accordance 
with the instructions accompanying the form, provided the bank or 
insurance company which maintains the common or collective trust or 
pooled separate account maintains an original copy, with all required 
signatures, as part of its records.
    6. Amend Sec.  2520.103-12 by revising paragraph (f) as follows:


Sec.  2520.103-12  Limited exemption and alternative method of 
compliance for annual reporting of investments in certain entities.

* * * * *
    (f) Method of filing. Except as provided in Sec.  2520.104a-2 of 
this chapter, the Form 5500 ``Annual Return/Report of Employee Benefit 
Plan'' may be filed electronically or through other media in accordance 
with the instructions accompanying the form provided the entity 
described in paragraph (c) of this section maintains an original copy, 
with all required signatures, as part of its records.

    Signed at Washington, DC, this 23d day of August, 2005.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration.
[FR Doc. 05-17185 Filed 8-29-05; 8:45 am]
BILLING CODE 4510-29-U