You are given two reports by the government agency.  

Report 1:
The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the U.S. Small Business Administration (SBA) and justified the agency's existence on the grounds that small businesses are essential to the maintenance of the free enterprise system. In economic terms, the congressional intent was to assist small businesses as a means to deter monopoly and oligarchy formation within all industries and the market failures caused by the elimination or reduction of competition in the marketplace. Congress decided to allow the SBA to establish size standards to ensure that only small businesses were provided SBA assistance. Specifically, the Small Business Act of 1953 defines a small business as one that is organized for profit; has a place of business in the United States; operates primarily within the United States or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor; is independently owned and operated; and is not dominant in its field on a national basis. The business may be a sole proprietorship, partnership, corporation, or any other legal form. The SBA conducts an analysis of various economic factors, such as each industry's overall competitiveness and the competitiveness of firms within each industry, to determine its size standards. The analysis is designed to ensure that only small businesses receive SBA assistance and that these small businesses are not dominant in their field on a national basis. The SBA currently uses two types of size standards to determine SBA program eligibility: (1) industry-specific size standards and (2) alternative size standards based on the applicant's maximum tangible net worth and average net income after federal taxes. The SBA's industry-specific size standards are also used to determine eligibility for federal small business contracting purposes. The SBA's industry-specific size standards determine program eligibility for firms in 1,036 industrial classifications (hereinafter industries) in 23 sub-industry activities described in the 2017 North American Industry Classification System (NAICS). Given its mandate to promote competition in the marketplace, the SBA includes an economic analysis of each industry's overall competitiveness and the competitiveness of firms within the industry in its size standards methodology. The size standards are based on four measures: (1) number of employees (505 industries), (2) average annual receipts in the previous three (may soon be the previous five) years (526 industries), (3) average asset size as reported in the firm's four quarterly financial statements for the preceding year (5 industries), or (4) a combination of number of employees and barrel per day refining capacity (1 industry). Overall, about 97% of all employer firms qualify as small. These firms represent about 30% of industry receipts. In the absence of precise statutory guidance and consensus on how to define small, the SBA's size standards have often been challenged, typically by industry representatives seeking to increase the number of firms eligible for assistance. The size standards have also been challenged by Members of Congress concerned that the size standards may not adequately target federal assistance to firms that they consider to be truly small. This report provides a historical examination of the SBA's size standards and assesses competing views concerning how to define a small business. It also discusses P.L. 111-240 , the Small Business Jobs Act of 2010, which authorized the SBA to establish an alternative size standard using maximum tangible net worth and average net income after federal taxes for both the 7(a) and 504/CDC loan guaranty programs; established, until the SBA acted, an interim alternative size standard for the 7(a) and 504/CDC programs of not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application; and required the SBA to conduct a detailed review of not less than one-third of the SBA's industry size standards every 18 months beginning on the new law's date of enactment (September 27, 2010) and ensure that each size standard is reviewed at least once every five years. P.L. 112-239 , the National Defense Authorization Act for Fiscal Year 2013, which directs the SBA not to limit the number of size standards and to assign the appropriate size standard to each NAICS industrial classification. This provision addressed the SBA's practice of limiting the number of size standards it used and combining size standards within industrial groups as a means to reduce the complexity of its size standards and to provide greater consistency for industrial classifications that have similar economic characteristics. P.L. 114-328 , the National Defense Authorization Act for Fiscal Year 2017, which authorizes the SBA to establish different size standards for agricultural enterprises using existing methods and appeal processes. Previously, the small business size standard for agricultural enterprises was set in statute as having annual receipts not in excess of $750,000. P.L. 115-324 , the Small Business Runway Extension Act of 2018, which directs federal agencies proposing a size standard (and, based on report language accompanying the act, presumably the SBA as well) to use the average annual gross receipts from at least the previous five years, instead of the previous three years, when seeking SBA approval to establish a size standard based on annual gross receipts. Legislation introduced during the 112 th Congress ( H.R. 585 , the Small Business Size Standard Flexibility Act of 2011), 113 th Congress ( H.R. 2542 , the Regulatory Flexibility Improvements Act of 2013, and included in H.R. 4 , the Jobs for America Act), 114 th Congress ( H.R. 527 , the Small Business Regulatory Flexibility Improvements Act of 2015, and its Senate companion bill, S. 1536 ), and 115 th Congress ( H.R. 33 , the Small Business Regulatory Flexibility Improvements Act of 2017, and its Senate companion bill, S. 584 , and included in H.R. 5 , the Regulatory Accountability Act of 2017) to authorize the SBA's Office of Chief Counsel for Advocacy to approve or disapprove a size standard requested by a federal agency for purposes other than the Small Business Act or the Small Business Investment Act of 1958. The SBA's Administrator currently has that authority. In 2016 (the most recent available data), there were over 5.95 million employer firms and over 24.8 million nonemployer (self-employed) firms. As Table 1 indicates, there were 5,954,684 employer firms in the United States employing 126,752,238 people and providing total payroll of $6.43 trillion in 2016. Most employer firms (61.6%) had 4 or fewer employees, 78.6% had fewer than 10 employees, 89.1% had fewer than 20 employees, 98.1% had fewer than 100 employees, and 99.7% had fewer than 500 employees in 2016. The table also provides data concerning other economic factors that might be used to define a small business: an employer firm's number of employees as a share (cumulative percentage) of the total number of employer firms, as a share of employer firm total employment, and as a share of employer firm total annual payroll. As will be discussed, the SBA has traditionally applied economic factors to specific industries, not to cumulative statistics for all employer firms, to determine which firms are small businesses. Nonetheless, the data in Table 1 illustrate how the selection of economic factors used to define small business affects the definition's outcome. For example, for illustrative purposes only, if the mid-point (50%) for these three economic factors was used to define what is a small business, three different employee firm sizes would be used to designate firms as small: Businesses would be required to have no more than 4 employees to be defined as small if the definition for small used the mid-point (50%) share of the total number of employer firms (employer firms with no more than four employees accounted for 61.6% of the total number of employer firms in 2016). Businesses would be required to have no more than 999 employees to be defined as small if the definition for small used the mid-point (50%) share of employer firm total employment (employer firms with no more than 999 employees accounted for 52.6% of employer firm total employment in 2016). Businesses would be required to have no more than 1,999 employees to be defined as small if the definition for small used the mid-point (50%) share of employer firm total annual payroll (employer firms with no more than 1,999 employees accounted for 51.8% of employer firm total annual payroll in 2016). Other economic factors that might be used to define a small business include the value of the employer firm's assets or its market share, expressed as a firm's sales revenue from that market divided by the total sales revenue available in that market or as a firm's unit sales volume in that market divided by the total volume of units sold in that market. The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the SBA to establish size standards for determining eligibility for SBA assistance. More than sixty years have passed since the SBA established its initial small business size standards on January 1, 1957. Yet, decisions made then concerning the rationale and criteria used to define small businesses established precedents that continue to shape current policy. Moreover, as mentioned previously, the SBA relies on an analysis of various economic factors, such as each industry's overall competitiveness and the competitiveness of firms within each industry, in its size standards methodology to ensure that businesses receiving SBA assistance are not dominant in their field on a national basis. However, in the absence of precise statutory guidance and consensus on how to define small, the SBA's size standards have often been challenged, typically by industry representatives seeking to increase the number of firms eligible for assistance and by Members of Congress concerned that the size standards do not adequately target the SBA's assistance to firms that they consider to be truly small. Over the years, the SBA typically reviewed its size standards piecemeal, reviewing specific industries when the SBA determined that an industry's market conditions had changed or the SBA was asked to undertake a review by an industry claiming that its market conditions had changed. On five occasions, in 1980, 1982, 1992, 2004, and 2008, the SBA proposed a comprehensive revision of its size standards. The SBA did not fully implement any of these proposals, but the arguments presented, both for and against the proposals, provide a context for understanding the SBA's current size standards, and the rationale and criteria that have been presented to retain and replace them. As mentioned previously, P.L. 111-240 requires the SBA to conduct a detailed review of not less than one-third of the SBA's industry size standards during the 18-month period beginning on the date of enactment (September 27, 2010) and during every 18-month period thereafter. The act also requires the SBA to review each size standard at least once every five years. The SBA completed its first five-year review of all SBA industry size standards in 2016. As a result of its five-year review, the SBA estimates that more than 72,000 small businesses gained SBA eligibility. There is no uniform or accepted definition for a small business. Instead, several criteria are used to determine eligibility for small business spending and tax programs. This was also the case when Congress considered establishing the SBA during the early 1950s. For example, in 1952, the House Select Committee on Small Business reviewed federal statutes, executive branch directives, and the academic literature to serve as a guide for determining how to define small businesses. The Select Committee began its review by asserting that the need to define the concept of small business was based on a general consensus that assisting small business was necessary to enhance economic competition, combat monopoly formation, inhibit the concentration of economic power, and maintain "the integrity of independent enterprise." It noted that the definition of small businesses in federal statutes reflected this consensus by taking into consideration the firm's size relative to other firms in its field and "matters of independence and nondominance." For example, the War Mobilization and Reconversion Act of 1944 defined a small business as either "employing 250 wage earners or less" or having "sales volumes, quantities of materials consumed, capital investments, or any other criteria which are reasonably attributable to small plants rather than medium- or large-sized plants." The Selective Service Act of 1948 classified a business as small for military procurement purposes if "(1) its position in the trade or industry of which it is a part is not dominant, (2) the number of its employees does not exceed 500, and (3) it is independently owned and operated." The Select Committee also found that, for data-gathering purposes, the executive branch defined small businesses in relative, as opposed to absolute, terms within specific industries. For example, the Bureau of Labor Statistics "defined small business in terms of an average for each industry based on the volume of employment or sales. All firms which fall below this average are deemed to be small." The U.S. Census Bureau also used different criteria for different industries. For example, manufacturing firms were classified as small if they had fewer than 100 employees, wholesalers were considered small if they had annual sales below $200,000, and retailers were considered small if they had annual sales below $50,000. According the Census Bureau, in 1952, small businesses accounted for "roughly 92 percent of all business establishments, 45 percent of all employees, and 34 percent of all dollar value of all sales." The Select Committee also noted that in 1951, the National Production Authority's Office of Small Business proposed defining all manufacturing firms with fewer than 50 employees as small and any with more than 2,500 employees as large. Manufacturers employing between these numbers of employees would be considered large or small depending on the general structure of the industry to which they belonged. The larger the percentage of total output produced by large firms, the larger the number of employees a firm could have to be considered small. Using this definition, most manufacturing firms with fewer than 50 employees would be classified as small, but others, such as an aircraft manufacturer, could have as many as 2,500 employees and still be considered small. For procurement purposes, the Select Committee found that executive branch agencies defined small businesses in absolute, as opposed to relative, terms, using 500 employees as the dividing line between large and small firms. Federal agencies defended the so-called 500 employee rule on the grounds that it "had the advantage of easy administration" across federal agencies. In reviewing the academic literature, the Select Committee reported that Abraham Kaplan's Small Business: Its Place and Problems defined small businesses as those with no more than $1 million in annual sales, $100,000 in total assets, and no more than 250 employees. Applying this definition would have classified about 95% of all business concerns as small, and would have accounted for about half of all nonagricultural employees. Based on its review of federal statutes, executive branch directives, and the academic literature, the Select Committee decided that it would not attempt "to formulate a rigid definition of small business" because "the concept of small business must remain flexible and adaptable to the peculiar needs of each instance in which a definition may be required." However, it concluded that the definition of small should be a relative one, as opposed to an absolute one, that took into consideration variations among economic sectors: This committee is also convinced that whatever limits may be established to the category of small business, they must vary from industry to industry according to the general industrial pattern of each. Public policy may demand similar treatment for a firm of 2,500 employees in one industry as it does for a firm of 50 employees in another industry. Each may be faced with the same basic problems of economic survival. Reflecting the view that formulating a rigid definition of small business was impractical, the Small Business Act of 1953 provided leeway in defining small businesses. It defined a small firm as "one that is independently owned and operated and which is not dominant in its field of operation." The SBA was authorized to establish and subsequently alter size standards for determining eligibility for federal programs to assist small business, some of which are administered by the SBA. The act specifies that the size standards "may utilize number of employees, dollar volume of business, net worth, net income, a combination thereof, or other appropriate factors." It also notes that the concept of small is to be defined in a relative sense, varying from industry to industry to the extent necessary to reflect "differing characteristics" among industries. The House Committee on Banking and Currency's report accompanying H.R. 5141, the Small Business Act of 1953, issued on May 28, 1953, provided the committee's rationale for not providing a detailed definition of small: It would be impractical to include in the act a detailed definition of small business because of the variation between business groups. It is for this reason that the act authorizes the Administration to determine within any industry the concerns which are to be designated small-business concerns for the purposes of the act. The report did not provide specific guidance concerning what the committee might consider to be small, but it did indicate that data on industry employment, as of March 31, 1948, "reveals that on the basis of employment, small business truly is small in size. Of the approximately 4 million business concerns, 87.4% had fewer than 8 employees and 95.2% of the total number of concerns, employed fewer than 20 people." Initially, the SBA created two sets of size standards, one for federal procurement preferences and another for the SBA's loan and management training services. At the request of federal agencies, the SBA adopted the then-prevailing small business size standard used by federal agencies for procurement, which was no more than 500 employees. The SBA retained the right to make exceptions to the no more than 500 employee procurement size standard if the SBA determined that a firm having more than 500 employees was not dominant in its industry. For the SBA's loan and management training services, the SBA's staff reviewed economic data provided by the Census Bureau to arrive at what Wendell Barnes, SBA's Administrator, described at a congressional hearing in 1956 as "a fairly accurate conclusion as to what comprises small business in each industry." Jules Abels, SBA's economic advisor to the Administrator, explained at that congressional hearing how the SBA's staff determined what constituted a small business: There are various techniques for the demarcation lines, but in a study of almost any industry, you will find a large cluster of small concerns around a certain figure.... On the other hand, above a certain dividing line you will find relatively few and as you map out a picture of an industry it appears that a dividing line at a certain point is fair. On January 5, 1956, the SBA published a notice of proposed rulemaking in the Federal Register announcing its first proposed small business size standards. During the public comment period, representatives of several industries argued that the proposed standards were too restrictive and excluded too many firms. In response, Mr. Abels testified that the SBA decided to adjust its figures to make them "a little bit more liberal because there was some feeling on the part of certain industries that they were too tight and that they excluded too many firms." The SBA published its final rule concerning its small business size standards on December 7, 1956, and they became effective on January 1, 1957. The SBA decided to use number of employees as the sole criterion for determining if manufacturing firms were small and annual sales or annual receipts as the sole criterion for all other industries. Mr. Abels explained at the congressional hearing the SBA's rationale for using number of employees for classifying manufacturing firms as small and annual sales or annual receipts for all other firms: in the absence of automation which would give one firm in an industry a great advantage over another, roughly speaking if the firms were mechanized to the same extent, a firm with 400 employees would have an output which would be twice as large as the output of a firm with 200 employees.... However when you depart from the manufacturing field and go into, say, a distributive field or trade, it then becomes necessary to discard the number of employees, because it is a matter of judicial notice, that one man for example in the distributive trades can sell as much as 100 men can sell. One small construction firm possibly can do a lot more business than one with a lot more employees. A service trade again has its volume geared to something other than the number of employees. So I think that one can say with reasonable certainty that it is only within the manufacturing field that the employee standard is the uniform yardstick, but that other than manufacturing the dollar volume is the appropriate yardstick. The SBA's initial size standards defined most manufacturing firms employing no more than 250 employees as small. In addition, the SBA considered manufacturing firms in some industries (e.g., metalworking and small arms) as small if they employed no more than 500 employees, and in some others (e.g., sugar refining and tractors) as small if they employed no more than 1,000 employees. To be considered small, wholesalers were required to have annual sales volume of $5 million or less; construction firms had to have average annual receipts of $5 million or less over the preceding three years; trucking and warehousing firms had to have annual receipts of $2 million or less; taxicab companies and most firms in the service trades had to have annual receipts of $1 million or less; and most retail firms had to have annual sales of $1 million or less. Mr. Abels testified that the SBA experienced "continual" protests of its size standards by firms denied financial or support assistance because they were not considered small. He also testified that in each case, the SBA denied the protest and determined, in his words, that the standard was "valid and accurate." In 1977, the U.S. General Accounting Office (GAO, now the U.S. Government Accountability Office) was asked by the Senate Select Committee on Small Business to review the SBA's size standards. At that time, most of the SBA's size standards remained at their original 1957 levels, other than a one-time upward adjustment for inflation in 1975 for industries using annual sales and receipts to restore eligibility to firms that may have lost small-business status due solely to the effect of inflation. GAO's report, issued in 1978, found that the SBA's size standards "are often high and often are not justified by economic rationale." Specifically, GAO reported that many size standards may not direct assistance to the target group described in SBA regulations as businesses "struggling to become or remain competitive" because the loan and procurement size standards for most industries were established 15 or more years ago and have not been periodically reviewed; SBA records do not indicate how most standards were developed; and the standards often define as small a very high percentage of the firms in the industries to which they apply. GAO recommended that the SBA reexamine its size standards "by collecting data on the size of bidders on set-aside and unrestricted contracts, determining the size of businesses which need set-aside protection because they cannot otherwise obtain Federal contracts" and then consider reducing its size standards or "establishing a two-tiered system for set-aside contracts, under which certain procurements would be available for bidding only to the smaller firms and others would be opened for bidding to all businesses considered small under present standards." Citing the GAO report, several Members objected to the SBA's size standards at a House Committee on Small Business oversight hearing conducted on July 10, 1979. Representative John J. LaFalce, chair of the House Committee on Small Business Subcommittee on General Oversight and Minority Enterprise, stated that "what we have faced from 1953 to the present is virtually nothing other than acquiescence to the demands of the special interest groups. That is how the size standards have been set." Representative Tim Lee Carter, the subcommittee's ranking minority member, stated that "it seems to me that we may be fast growing into just a regular bank forum not just to small business but to all business." At that time, approximately 99% of all firms with employees were classified by the SBA as a small business. Roger Rosenberger, SBA's associate administrator for policy, planning and budgeting, testified at the hearing that the SBA would undertake a comprehensive economic analysis of industry data to determine if its size standards should be changed. However, he also defended the validity of the SBA's size standards, arguing that the task of setting size standards was a complicated and difficult one because of "how market structure and size distribution of firms vary from industry to industry." He testified that some industries are dominated by a few large firms, some are comprised almost entirely of small businesses, and others "can be referred to as a mixed industry." He argued that each market structure presents unique challenges for defining small businesses within that industry group. For example, he argued that it was debatable whether the SBA should provide any assistance to any of the businesses within industries where "smaller firms are flourishing." On March 10, 1980, the SBA issued a notice of proposed rulemaking designed to "reduce administrative complexity" by replacing its two sets of size standards, one for procurement preferences and another for its loan and consultative support services, with a single set of size standards for both purposes. The SBA also proposed to use a single factor, the firm's number of employees, for definitional purposes for nearly all industries instead of using the firm's number of employees for some industries, the firm's assets for others, and the firm's annual gross receipts for still others. The SBA argued that when size standards are denominated in dollars, i.e., annual revenues, its ability to help the small business sector is undermined by inflation. Using employment, as opposed to dollar sales, will provide greater stability for SBA and its clients; will remove inter-industry distortions generated by differential inflation rates; and reduce the need for SBA to make frequent revisions in the size standards merely to reflect price increases. In setting its proposed new size standards for each industry (ranging from no more than 15 to no more than 2,500 employees), the SBA first placed each industry into one of three groups: concentrated (characterized by a highly unequal distribution of sales among the firms in the industry), competitive (characterized by a more equal distribution of sales in the industry), or mixed (industries that do not meet the criteria of competitive or concentrated industries). The SBA determined that there were 160 concentrated industries, 317 competitive industries, and 249 mixed industries. The SBA argued that establishing a size standard for the 160 concentrated industries was a "straight-forward task—simply identify and exclude those few firms which account for a disproportionately large share of the industry's sales." For competitive industries, the SBA argued that the size standard should be set "relatively low, so as to support entry and moderate growth." The SBA argued that mixed industries require "relatively high size standards ... to reinforce competition and offset the pressures to increase the degree of concentration in these industries." The proposed new SBA size standards would have had the net effect of reducing the number of firms classified as small by about 225,000. In percentage terms, the number of firms classified as small would have been reduced from about 99% of all employer firms to 96%. Over 86% of the more than 1,500 public comments received by the SBA concerning its proposed new size standards criticized it. Most of the criticism was from firms that would no longer be considered small under the new size standards. In addition, several federal agencies indicated that the proposed size standards in the services and construction industries were set too low, reducing the number of small firms eligible to compete for procurement contracts below levels they deemed necessary to ensure adequate competition to prevent agency costs from rising. On October 21, 1980, Congress required the SBA to take additional time to consider the consequences of the proposed changes to the size standards by adopting the Small Business Export Expansion Act of 1980 ( P.L. 96-481 ). It prohibited "the SBA from promulgating any final rule or regulation relating to small business size standards until March 31, 1981." In the meantime, the Reagan Administration entered office, and, as is customary when there is a change in Administration, replaced the SBA's senior leadership. The SBA's new Administrator, Michael Cardenas, was sympathetic to the concerns of federal agencies that the proposed size standards in the services and construction industries were set too low to meet those agencies' procurement needs. As a result, he indicated that the SBA would modify its size standards proposal by (1) increasing the proposed size standards for 51 industries, mostly in the services and construction industries; (2) lowering the proposed size standards in 157 manufacturing industries (typically from no more than 2,500 employees to no more than 500 employees) to prevent one or more of the largest producers in those industries from being classified as small; and (3) increasing the SBA's proposed lowest size standard from no more than 15 employees to no more than 25 employees (affecting 93 service and trade industries). The net effect of these changes would have restored eligibility for approximately 60,000 of the 225,000 firms expected to lose eligibility under the previous Administration's proposal. The SBA subsequently met with various trade organizations and federal agency procurement officials to discuss the proposal. As these consultations took place, the SBA experienced another turnover in its senior leadership. The SBA, headed by the new appointee, James C. Sanders, issued a notice of proposed rulemaking concerning its size standards on May 3, 1982. The proposal differed from its March 10, 1980, predecessor in three ways: First, the range of size standards was narrowed to a range of 25 employees to 500 employees. This reflected a widespread view that 15 employees was too low a cutoff while 2,500 employees was too high. Second, SBA proposed a 500-employee ceiling, focusing on smaller firms. Third, SBA responded to sentiments within many procurement-sensitive industries that the proposed size standards in some cases were too low to accommodate the average procurement currently being performed by small business. Therefore, SBA proposed higher size standards in a number of procurement-sensitive industries, while maintaining the 500-employee cap. The SBA received over 500 comments on the proposed rule, with about 72% of those comments opposing the rule. Taking those comments into consideration, the SBA reexamined its size standards once again, and, after a year of further consultation with various trade organizations and federal agency procurement officials, issued another notice of proposed rulemaking on May 6, 1983. The 1983 proposal (1) replaced the use of two sets of size standards, one for procurement and another for the SBA's loan and consultative support services, with a single set for all programs; (2) retained most of the size standards that were expressed in terms of average annual sales or receipts; (3) adjusted those size standards for inflation (an upward adjustment of 81%); (4) retained most of the size standards for manufacturing; and (5) made relatively minor changes to the size standards in other industries, with a continued emphasis on a 500-employee ceiling for most industries. The SBA received 630 comments on the proposed rule, with almost 70% supporting it. SBA Administrator Sanders characterized the SBA's revised size standard proposal as "a fine-tuning of current standards which has the basic support of both the private sector and the Federal agencies that use the basic size standards to achieve their set-aside procurement goals." He also added that "since almost no size standard is proposed to decrease, and most will in fact increase, very few firms will lose their small business status. We estimate that about 39,000 firms will gain small business status." He testified that in percentage terms, in 1983, 97.9% of the nation's 5.2 million firms with employees were classified by the SBA as small. Under the SBA's proposal, 98.6% of all firms with employees would be classified as small. The final rule was published in the Federal Register on February 9, 1984. Representative Parren J. Mitchell, chair of the House Committee on Small Business, expressed disappointment in the SBA's final rule, stating at a congressional oversight hearing on July 30, 1985, that "the government and the business community are still victimized by that same ad hoc, sporadic system that the SBA promised to fix some six years ago." He introduced legislation ( H.R. 1178 , a bill to amend the Small Business Act) that would have required the SBA to adjust its size standard for an industrial classification downward by at least 20% if small business' share of that market equaled or exceeded 60%, and at least 40% of the market share was achieved through the receipt of federal procurement contracts. The bill also mandated a minimum 10% increase in the SBA's size standard for an industrial classification if small business' share of that market was less than 20% and less than 10% of the market share was achieved through the receipt of federal procurement contracts. The bill was opposed by various trade associations, the SBA, and federal agency procurement officials, and was not reported out of committee. On December 31, 1992, the SBA issued a notice of proposed rulemaking "to streamline its size standards" by reducing the number of fixed size standard levels from 30 to 9. The nine proposed size standards were no more than 100, 500, 750, 1,000, or 1,500 employees; and no more than $5 million, $10 million, $18 million, or $24 million in annual receipts. The annual receipts levels reflected an upward adjustment of 43% for inflation. The SBA argued that the proposed changes would make the size standards more user-friendly for small business owners and restore eligibility to nearly 20,000 firms that were no longer considered small solely because of the effects of inflation. The proposed rule was later withdrawn as a courtesy to allow the incoming Clinton Administration time to review it. The SBA ultimately decided not to pursue this approach because it felt that converting "receipts based size standards in effect at that time to one of four proposed receipts levels created a number of unacceptable anomalies." Over the subsequent decade, the SBA reviewed the size standards for some industries on a piecemeal basis and, in 1994, adjusted for inflation its size standards based on firm's annual sales or receipts (an upward adjustment of 48.2%). The SBA estimated that the adjustment would restore eligibility to approximately 20,000 firms that lost small-business status due solely to the effects of inflation. In 2002, the SBA adjusted for inflation its annual sales and receipts based size standards for the fourth time (an upward adjustment of 15.8%). The SBA estimated that the adjustment would restore eligibility to approximately 8,760 firms that lost small-business status due solely to the effects of inflation. The rule also included a provision that the SBA would assess the impact of inflation on its annual sales and receipts based size standards at least once every five years. Then, on March 19, 2004, the SBA, once again, issued a notice of proposed rulemaking to streamline its size standards. The proposed rule would have established size standards based on the firm's number of employees for all industries, avoiding the need to adjust for inflation size standards based on sales or receipts. At that time, the SBA size standards consisted of 37 different size levels: 30 based on annual sales or receipts, 5 on the number of employees (both full- and part-time), 1 on financial assets, and 1 on generating capacity. Under the proposed rule, the SBA would use 10 size standards, 5 new employee size standards (adding no more than 50, 150, 200, 300, and 400 employees), and the existing 5 employee size standards (no more than 100, 500, 750, 1,000, and 1,500 employees). The proposed rule would not have changed any existing size standards based on number of employees. The SBA argued that the use of a single size standard would "help to simplify size standards" and "tends to be a more stable measure of business size" than other measures. It added that the proposed rule would change 514 size standards and that, after the proposed conversion to the use of number of employees, of the "approximately 4.4 million businesses in the industries with revised size standards, 35,200 businesses could gain and 34,100 could lose small business eligibility, with the net effect of 1,100 additional businesses defined as small." A majority (51%) of the more than 4,500 comments on the proposed rule supported it, but with "a large number of comments opposing various aspects of SBA's approach to simplifying size standards." In addition, the chairs of the House Committee on Small Business and Senate Committee on Small Business and Entrepreneurship opposed the proposed rule, largely because they were concerned about potential job losses resulting from more than 34,000 small businesses losing program eligibility. The SBA withdrew the proposed rule on July 1, 2004. In 2005, the SBA adjusted for inflation size standards based on firms' annual sales or receipts (an upward adjustment of 8.7%). The SBA estimated that the adjustment restored eligibility to approximately 12,000 firms that lost small-business status due solely to inflation. In 2008, the SBA made another adjustment for inflation to its annual sales and receipts based standards (another upward adjustment of 8.7%). The SBA estimated that the adjustment restored eligibility for approximately 10,400 firms that lost small-business status due solely to inflation. In June 2008, the SBA announced that it would undertake a comprehensive, two-year review of its size standards, proceeding one industrial sector at a time, starting with Retail Trade (NAICS Sector 44-45), Accommodations and Food Services (NAICS Sector 72), and Other Services (NAICS Sector 81). The SBA argued that it was concerned that "not all of its size standards may now adequately define small businesses in the U.S. economy, which has seen industry consolidations, technological advances, emerging new industries, shifting societal preferences, and other significant industrial changes." It added that its reliance on an ad hoc approach "scrutinizing the limited number of specific industries during a year, while worthwhile, leaves unexamined many deserving industries for updating and may create over time a set of illogical size standards." The SBA announced that it would begin its analysis of its size standards by assuming that "$6.5 million [later increased to $7.5 million] is an appropriate size standard for those industries with receipts size standards and 500 employees for those industries with employee size standards." It would then analyze the following industry characteristics: "average firm size; average asset size (a proxy for startup costs); competition, as measured by the market share of the four largest firms in the industry; and, the distribution of market share by firm size—that is, are firms in the industry generally very small firms, or dominated by very large firms." Then, before making its final determination on the size standard, it would "examine the participation of small businesses in federal contracting and SBA's guaranteed loan program at the current size standard level. Depending on the level of small business participation, additional consideration may be given to the level of the current size standard and the analysis of industry factors." In April 2009, the SBA announced that was simplifying the administration and use of its size standards by reducing the number of receipts based size standards from 31 to 8 when establishing a new size standard or reviewing an existing size standard: For many years, SBA has been concerned about the complexity of determining small business status caused by a large number of varying receipts based size standards (see 69 FR 13130 (March 4, 2004) and 57 FR 62515 (December 31, 1992)). At the start of current comprehensive size standards review, there were 31 different levels of receipts based size standards. They ranged from $0.75 million to $35.5 million, and many of them applied to one or only a few industries. The SBA believes that to have so many different size standards with small variations among them is unnecessary and difficult to justify analytically. To simplify managing and using size standards, SBA proposes that there be fewer size standard levels. This will produce more common size standards for businesses operating in related industries. This will also result in greater consistency among the size standards for industries that have similar economic characteristics. Under the current comprehensive size standards review, SBA is proposing to establish eight "fixed-level" receipts based size standards: $5.0 million, $7.0 million, $10.0 million, $14.0 million, $19.0 million, $25.5 million, $30.0 million, and $35.5 million. These levels are established by taking into consideration the minimum, maximum and the most commonly used current receipts based size standards. These eight receipts based size standards were increased to $5.5 million, $7.5 million, $11.0 million, $15.0 million, $20.5 million, $27.5 million, $32.5 million, and $38.5 million in 2014 to account for inflation. The SBA also announced that it would use eight employee based size standards when establishing a new size standard or reviewing an existing size standard (no more than 50, 100, 150, 200, 250, 500, 750, and 1,000 employees) instead of seven (no more than 50, 100, 150, 500, 750, 1,000, and 1,500 employees); and continue to use one asset based size standard, one megawatt hours size standard (based on electrical output over the preceding fiscal year), and one size standard based on a combination of the number of employees and barrel per day refining capacity. The SBA also announced that "to simplify size standards further" it "may propose a common size standard for closely related industries." The SBA argued although the size standard analysis may support a separate size standard for each industry, SBA believes that establishing different size standards for closely related industries may not always be appropriate. For example, in cases where many of the same businesses operate in the same multiple industries, a common size standard for those industries might better reflect the Federal marketplace. This might also make size standards among related industries more consistent than separate size standards for each of those industries. Because SBA size standards remain in force until after they are reviewed, the number of size standards did not immediately drop from 41 to 19 in 2009. Instead, the number of size standards began to decline gradually as new size standard final rules were issued. In addition, from 2010 through 2016, the SBA decided, in most instances, not to lower size standards (which would have made it more difficult for businesses to qualify) even if the data supported lowering them because unemployment at that time was relatively high and doing so would "run counter to numerous Congressional and Administration's initiatives and programs to create jobs and boost economic growth." As a result of this policy decision, several size standards that would have otherwise been eliminated remained in place. Also, in 2016, the SBA added a new employee based size standard (no more than 1,250 employees) and reinstated the use of another (no more than 1,500 employees) when establishing a new, or revising an existing, size standard. The SBA's decisions in 2009 to reduce the number of receipts based size standards and to propose a common size standard for closely related industries were opposed by some industry groups. They argued that these policies could lead to the SBA to classify an industry "for the sake of convenience" into a size standard that the agency's own economic analysis indicates should be in a different (easier to qualify) size standard. Congress adopted legislation in 2013 ( P.L. 112-239 , National Defense Authorization Act for Fiscal Year 2013) that included provisions directing the SBA not to limit the number of size standards and to assign the appropriate size standard to each NAICS industrial classification. The SBA currently has 27 SBA industry size standards in effect (16 receipts based size standards, 9 employee based sized standards, 1 asset based size standard, and 1 size standard based on a combination of the number of employees and barrel per day refining capacity). That number is expected to increase given the SBA's directive not to limit the number of size standards. As mentioned previously, P.L. 111-240 requires the SBA to conduct a detailed review of not less than one-third of the SBA's industry size standards during the 18-month period beginning on the date of enactment (September 27, 2010) and during every 18-month period thereafter. The act directs the SBA to "make appropriate adjustments to the size standards" to reflect market conditions, and to report to the House Committee on Small Business and the Senate Committee on Small Business and Entrepreneurship and make publicly available "not later than 30 days" after the completion of each review information regarding the factors evaluated as part of each review, the criteria used for any revised size standard, and why the SBA did, or did not, adjust each size standard that was reviewed. The act also requires the SBA to ensure that each industry size standard is reviewed at least once every five years. On July 7, 2011, the SBA announced that its "comprehensive review of all small business size standards" would begin with the following six industries: Educational Services (final rule was issued on September 24, 2012); Health Care and Social Assistance Services (final rule was issued on September 24, 2012); Real Estate Rental and Leasing (final rule was issued on September 24, 2012); Administrative and Support, Waste Management and Remediation Services (final rule was issued on December 6, 2012); Information (final rule was issued on December 6, 2012); and Utilities (final rule was issued on December 23, 2013). The SBA subsequently completed size standard reviews for all industries in January 2016 (listed by when the final rule was issued): Professional, Scientific and Technical Services (final rule was issued on February 24, 2012); Transportation and Warehousing (final rule was issued on February 24, 2012); Agriculture, Forestry, Fishing and Hunting (final rule was issued on June 20, 2013); Arts, Entertainment, and Recreation (final rule was issued on June 20, 2013); Finance and Insurance (final rule was issued on June 20, 2013); Management of Companies (final rule was issued on June 20, 2013); Support Activities for Mining (final rule was issued on June 20, 2013); Construction (final rule was issued on December 23, 2013); Wholesale Trade (final rule was issued on January 25, 2016); Industries with Employee Based Size Standards not Part of Manufacturing, Wholesale Trade, or Retail Trade (final rule was issued on January 26, 2016); and Manufacturing (final rule was issued on January 26, 2016). A summary of the final rules issued for each industry is provided in Table A-1 . During the first five-year review cycle, the SBA increased 621 size standards, decreased 3 (to exclude potentially dominant firms from being considered small), and retained 388 at their pre-existing levels. Of the 388 retained size standards, 214 were retained based on the results of the SBA's economic analysis and 174 were retained based on the SBA's policy of generally not lowering any size standard, even though the results of the economic analysis supported lowering them, due to national economic conditions. The SBA has started its second five-year review of its size standards and anticipates issuing its first final rules in the second five-year review cycle in 2019, using new size standard methodology announced in April 2018 (discussed in the next section). The SBA also announced in April 2018 that its policy of generally not lowering size standards when the analysis indicates that a lower standard is justified would no longer be in force, at least initially, during the second five-year review cycle: the decision to raise, lower, or retain a size standard will primarily be driven by analytical results, with due considerations of public comments, impacts of changes on the affected businesses, and other factors SBA considers important. All of these decisions will be detailed in individual rulemakings. It will take several years to complete the five-year review of all size standards … during which the state of the economy may change. It is, therefore, not possible to state now … what impact, if any, the future economic environment would have on the SBA's policy decision regarding size standards. As mentioned earlier, the SBA, relying on statutory language, defines a small business as a concern that is organized for profit; has a place of business in the United States; operates primarily within the United States or makes a significant contribution to the economy through payment of taxes or use of American products, materials, or labor; is independently owned and operated; and is not dominant in its field on a national basis. The business may be a sole proprietorship, partnership, corporation, or any other legal form. The SBA uses two measures to determine if a business is small: industry specific size standards or a combination of the business's net worth and net income. For example, the SBA's Small Business Investment Company (SBIC) program allows businesses to qualify as small if they meet the SBA's size standard for the industry in which the applicant is primarily engaged, or an alternative net worth and net income based size standard which has been established for the SBIC program. The SBIC's alternative size standard is currently set as a maximum net worth of not more than $19.5 million and average after-tax net income for the preceding two years of not more than $6.5 million. All of the company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard. The SBA decided to apply the net worth and net income measures to the SBIC program "because investment companies evaluate businesses using these measures to decide whether or not to make an investment in them." Businesses participating in the SBA's 504/Certified Development Company (504/CDC) loan guaranty program are to be deemed small if they did not have a tangible net worth in excess of $8.5 million and did not have an average net income in excess of $3 million after taxes for the preceding two years. As discussed below, P.L. 111-240 increased these threshold amounts on an interim basis to not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes for the two full fiscal years before the date of the application. All of the company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard. Also, before May 5, 2009, businesses participating in the SBA's 7(a) loan guaranty program, including its express programs, were deemed small if they met the SBA's size standards for firms in the industries described in NAICS. Using authority provided under P.L. 111-5 , the American Recovery and Reinvestment Act of 2009, the SBA temporarily applied the 504/CDC program's size standards as an alternative for 7(a) loans approved from May 5, 2009, through September 30, 2010. Firms applying for a 7(a) loan during that time period qualified as small using either the SBA's industry size standards or the 504/CDC program's size standard. The provision's intent was to enhance the ability of small businesses to access the capital necessary to create and retain jobs during the economic recovery. P.L. 111-240 made the use of alternative size standards for the 7(a) program permanent. The act directs the SBA to establish an alternative size standard for both the 7(a) and 504/CDC programs that uses maximum tangible net worth and average net income as an alternative to the use of industry standards. The act also establishes, until the date on which the alternative size standard is established, an interim alternative size standard for the 7(a) and 504/CDC programs of not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application. The SBA Administrator has the authority to establish and modify size standards for particular industries. Overall, about 97% of all employer firms qualify as small under the SBA's size standards. These firms account for about 30% of industry receipts. The SBA generally "prefers to use average annual receipts as a size measure because it measures the value of output of a business and can be easily verified by business tax returns and financial records." However, historically, the SBA has used the number of employees to determine if manufacturing and mining companies are small. Before a proposed change to the size standards can take effect, the SBA's Office of Size Standards (OSS) undertakes an analysis of the change's likely impact on the affected industry, focusing on the industry's overall degree of competition and the competitiveness of the firms within the industry. The analysis includes an assessment of the following four economic factors: "average firm size, average assets size as a proxy of start-up costs and entry barriers, the 4-firm concentration ratio as a measure of industry competition, and size distribution of firms." The SBA also considers the ability of small businesses to compete for federal contracting opportunities and, when necessary, several secondary factors "as they are relevant to the industries and the interests of small businesses, including technological change, competition among industries, industry growth trends, and impacts of size standard revisions on small businesses." The specifics of SBA's size standards methodology have evolved over the years with the availability of new industry and federal procurement data and staff research. For example, the SBA previously presumed less than $7.0 million (increased to less than $7.5 million in 2014 to account for inflation) as an appropriate "anchor" size standard for the services, retail trade, construction, and other industries with receipts based size standards; 500 or fewer employees as an appropriate anchor size standard for the manufacturing, mining and other industries with employee based size standards; and 100 or fewer employees as an appropriate anchor size standard for the wholesale trade industries. These three anchor size standards were used as benchmarks or starting points for the SBA's economic analysis. To the extent an industry displayed "differing industry characteristics," a size standard higher, or in some cases lower, than an anchor size standard was used. In April 2018, the SBA replaced the "anchor" approach with a "percentile" approach, primarily because the anchors were no longer representative of the size standards being used (just 24% of industries with receipt-based size standards and 22% of those with employee based size standards have the anchor size standards) and the anchor approach entails "grouping industries from different NAICS sectors thereby making it inconsistent with section 3(a)(7) of the [Small Business] Act," which limits the SBA's ability to create common size standards by grouping industries below the 4-digit NAICS level. Specifically, when assessing the appropriateness of the current size standards, the SBA now evaluates the structure of each industry in terms of four economic characteristics or factors, namely average firm size, average assets size as a proxy of start-up costs and entry barriers, the 4-firm concentration ratio as a measure of industry competition, and size distribution of firms using the Gini coefficient. For each size standard type ... SBA ranks industries both in terms each of the four industry factors and in terms of the existing size standard and computes the 20 th percentile and 80 th percentile values for both. SBA then evaluates each industry by comparing its value for each industry factor to the 20 th percentile and 80 th percentile values for the corresponding factor for industries under a particular type of size standard. If the characteristics of an industry under review within a particular size standard type are similar to the average characteristics of industries within the same size standard type in the 20 th percentile, SBA will consider adopting as an appropriate size standard for that industry the 20 th percentile value of size standards for those industries. For each size standard type, if the industry's characteristics are similar to the average characteristics of industries in the 80 th percentile, SBA will assign a size standard that corresponds to the 80 th percentile in the size standard rankings of industries. A separate size standard is established for each factor based on the amount of differences between the factor value for an industry under a particular size standard type and 20 th percentile and 80 th percentile values for the corresponding factor for all industries in the same type. Specifically, the actual level of the new size standard for each industry factor is derived by a linear interpolation using the 20 th percentile and 80 th percentile values of that factor and corresponding percentiles of size standards. Each calculated size standard will be bounded between the minimum and maximum size standards levels [see Table 2 ] ... the calculated value for a receipts based size standard for each industry factor is rounded to the nearest $500,000 and the calculated value for an employee based size standard is rounded to the nearest 50 employees for Manufacturing and industries in other sectors (except Wholesale and Retail Trade) and to the nearest 25 employees for employee based size standards for Wholesale Trade and Retail Trade. The SBA anticipates that its shift from using the anchor approach to the percentile approach will have minimal impact, both in terms of the direction and magnitude of changes, to its industry size standards. Any changes to size standards must follow the rulemaking procedures of the Administrative Procedure Act. A proposed rule changing a size standard is first published in the Federal Register , allowing for public comment. It must include documentation establishing that a significant problem exists that requires a revision of the size standard, plus an economic analysis of the change. Comments from the public, plus any other new information, are reviewed and evaluated before a final rule is promulgated establishing a new size standard. The SBA currently uses employment size to determine eligibility for 505 of 1,036 industries (48.6%), including all 360 manufacturing industries, 24 mining industries, and 71 wholesale trade industries. As of October 1, 2017, 98 manufacturing industries have an upper limit of 500 employees (27.2%); 91 have an upper limit of 750 employees (25.2%); 89 have an upper limit of 1,000 employees (24.7%); 56 have an upper limit of 1,250 employees (15.6%); and 26 have an upper limit of 1,500 employees (7.2%). 3 of the 24 mining industries have an upper limit of 250 employees (12.5%), 7 have an upper limit of 500 employees (29.2%), 7 have an upper limit of 750 employees (29.2%), 2 have an upper limit of 1,000 employees (8.3%), 3 have an upper limit of 1,250 employees (12.5%), and 2 have an upper limit of 1,500 employees (8.3%). 25 of the 71 wholesale trades industries have an upper limit of 100 employees (35.2%), 16 have an upper limit of 150 employees (22.5%), 21 have an upper limit of 200 employees (29.6%), and 9 have an upper limit of 250 employees (12.7%). The SBA currently has nine employee based industry size standards in effect (no more than 100, 150, 200, 250, 500, 750, 1,000, 1,250, and 1,500 employees). The SBA uses average annual receipts over the three (soon to be five) most recently completed fiscal years to determine program eligibility for most other industries (526 of 1,036 industries, or 50.8%). The SBA also uses average asset size as reported in the firm's four quarterly financial statements for the preceding year to determine eligibility for five finance industries, and a combination of number of employees and barrel per day refining capacity for petroleum refineries. The SBA currently has 16 receipts based industry size standards in effect. In some instances, there is considerable variation in the size standards used within each industrial sector. For example, the SBA uses 11 different size standards to determine eligibility for 66 industries in the retail trade sector. In general, most administrative and support service industries have an upper limit of either $15.0 million or $20.5 million in average annual sales or receipts; most agricultural industries have an upper limit of $0.75 million in average annual sales or receipts; most construction of buildings and civil engineering construction industries have an upper limit of $36.5 million in average annual sales or receipts, and most construction specialty trade contractors have an upper limit of $15.0 million in average annual sales or receipts; most educational services industries have an upper limit of either $7.5 million or $11.0 million in average annual sales or receipts; most health care industries have an upper limit of either $7.5 million or $15.0 million in average annual sales or receipts; most social assistance industries have an upper limit of $11.0 million in average annual sales or receipts; there is considerable variation within the professional, scientific, and technical service industries, ranging from an upper limit of $7.5 million in average annual sales or receipts to $38.5 million; there is considerable variation within the transportation and warehousing industrial sector, ranging from an upper limit of $7.5 million in average annual sales or receipts to $38.5 million for 43 industries and from an upper limit of 500 employees to 1,500 employees for 15 industries); and most finance and insurance industries have an upper limit of $38.5 million in average annual sales or receipts. The SBA also applies a $550 million average asset limit (as reported in the firm's four quarterly financial statements for the preceding year) to determine eligibility in five finance industries: commercial banks, saving institutions, credit unions, other depository credit intermediation, and credit card issuing. Many federal statutes provide special considerations for small businesses. For example, small businesses are provided preferences through set-asides and sole source awards in federal contracting and pay lower fees to apply for patents and trademarks. In most instances, businesses are required to meet the SBA's size standards to be considered a small business. However, in some cases, the underlying statute defines the eligibility criteria for defining a small business. In other cases, the statute authorizes the implementing agency to make those determinations. Under current law, a federal agency that decides that it would like to exercise its authority to establish its own size standard through the federal rulemaking process is required to, among other things, (1) undertake an initial regulatory flexibility analysis to determine the potential impact of the proposed rule on small businesses, (2) transmit a copy of the initial regulatory flexibility analysis to the SBA's Chief Counsel for Advocacy for comment, and (3) publish the agency's response to any comments filed by the SBA's Chief Counsel for Advocacy in response to the proposed rule and a detailed statement of any change made to the proposed rule in the final rule as a result of those comments. In addition, the federal agency must provide public notice of the proposed rule and an opportunity for the public to comment on the proposed rule, typically through the publication of an advanced notice of proposed rulemaking in the Federal Register and notification of interested small businesses and related organizations. Also, prior to issuing the final rule, the federal agency must have the approval of the SBA's Administrator. Under current practice, the SBA's Administrator, through the SBA's Office of Size Standards, consults with the SBA's Office of Advocacy prior to making a final decision concerning such requests. The Office of Advocacy is an independent office within the SBA. During the 112 th Congress, H.R. 585 , the Small Business Size Standard Flexibility Act of 2011, was reported by the House Committee on Small Business on November 16, 2011, by a vote of 13 to 8. The bill would have retained the SBA's Administrator's authority to approve or disapprove size standards for programs under the Small Business Act of 1953 (as amended) and the Small Business Investment Act of 1958 (as amended). The Office of Chief Counsel for Advocacy would have assumed the SBA Administrator's authority to approve or disapprove size standards for purposes of any other act. Similar legislative provisions have been introduced during the 113 th Congress ( H.R. 2542 , the Regulatory Flexibility Improvements Act of 2013, and included in H.R. 4 , the Jobs for America Act), 114 th Congress ( H.R. 527 , the Small Business Regulatory Flexibility Improvements Act of 2015, and its Senate companion bill, S. 1536 ), and 115 th Congress ( H.R. 33 , the Small Business Regulatory Flexibility Improvements Act of 2017, and its Senate companion bill, S. 584 , and included in H.R. 5 , the Regulatory Accountability Act of 2017). Advocates of splitting the SBA Administrator's small business size standards' authority between the Office of Chief Counsel for Advocacy and the SBA's Administrator have argued that Should an agency wish to draft a regulation that adopts a size standard different from the one already adopted by the Administrator in regulations implementing the Small Business Act, the agency must obtain approval of the Administrator. However, that requires the Administrator to have a complete understanding of the regulatory regime of that other act—knowledge usually outside the expertise of the SBA. However, the Office of the Chief Counsel for Advocacy, an independent office within the SBA, represents the interests of small businesses in rulemaking proceedings (as part of its responsibility to monitor agency compliance with the Regulatory Flexibility Act, 5 U.S.C. 601-12, (RFA)) does have such expertise. Therefore, it is logical to transfer the limited function on determining size standards of small businesses for purposes other than the Small Business Act and Small Business Investment Act of 1958 to the Office of the Chief Counsel for Advocacy…. the Administrator is not the proper official to determine size standards for purposes of other agencies' regulatory activities. The Administrator is not fluent with the vast array of federal regulatory programs, is not in constant communication with small entities that might be affected by another federal agency's regulatory regime, and does not have the analytical expertise to assess the regulatory impact of a particular size standard on small entities. Furthermore, the Administrator's standards are: very inclusive, not developed to comport with other agencies' regulatory regimes, and lack sufficient granularity to examine the impact of a proposed rule on a spectrum of small businesses. Opponents have argued that When an agency is seeking to use a size standard other than those approved by the SBA, the agency may consult with the Office of Advocacy. Such consultation is sensible, as the Office of Advocacy has significant knowledge of the regulatory environment outside of the canon of SBA law. However, the SBA's Office of Size Standards, with its historical involvement, expertise, and staff resources in this area, remains the appropriate entity to approve such size standards…. While the legislation permits the SBA to continue to approve size standards for its enabling statutes, it removes SBA's authority to do so for other statutes. The result would be to create a duplicate size standard authority in both the SBA and the Office of Advocacy. Both the SBA and the Office of Advocacy would have personnel who would analyze and evaluate size standards. Through the bifurcation of these responsibilities, taxpayers would effectively be forgoing the economies of scale that are currently enjoyed by the operation of a single Office of Size Standards in the SBA…. Having two such entities that have the same mission is not a transfer of function, but an inefficient and duplicative reorganization.… Instead of having one central office, there will now be two—further muddling small businesses' relationship with the federal government. Two bills were introduced during the 114 th Congress ( H.R. 3714 , the Small Agriculture Producer Size Standards Improvements Act of 2015, and H.R. 4341 , the Defending America's Small Contractors Act of 2016) to authorize the SBA to establish size standards for agricultural enterprises not later than 18 months after the date of enactment. The size standard for agricultural enterprises was, at that time, set in statute as having annual receipts not in excess of $750,000. H.R. 4341 , among other provisions, would have also limited an industry category to a greater extent than provided under the North American Industry Classification codes for small business procurement purposes if further segmentation of the industry category is warranted. H.R. 4341 was introduced on January 7, 2016, and ordered to be reported with amendment by the House Committee on Small Business on January 13, 2016. H.R. 3714 was introduced on October 8, 2015, considered by the House under suspension of the rules on April 19, 2016, and agreed to by voice vote. P.L. 114-328 , the National Defense Authorization Act for Fiscal Year 2017, includes a provision which authorizes the SBA to establish different size standards for agricultural enterprises using existing methods and appeal processes. Also, as mentioned previously, P.L. 115-324 , the Small Business Runway Extension Act of 2018, directs federal agencies proposing a size standard (and, based on report language accompanying the act, presumably the SBA as well) to use the average annual gross receipts from at least the previous five years, instead of the previous three years, when seeking SBA approval to establish a size standard based on annual gross receipts. The SBA has not announced if it will continue to use the average annual gross receipts over three years to determine receipts-based size standards or if it will use the average annual gross receipts from the previous five years. Historically, the SBA has relied on economic analysis of market conditions within each industry to define eligibility for small business assistance. On several occasions in its history, the SBA attempted to revise its small business size standards in a comprehensive manner. However, because (1) the Small Business Act provides leeway in how the SBA is to define small business; (2) there is no consensus on the economic factors that should be used in defining small business; (3) federal agencies have generally opposed size standards that might adversely affect their pool of available small business contractors; and (4) the SBA's initial size standards provided program eligibility to nearly all businesses, the SBA's efforts to undertake a comprehensive reassessment of its size standards met with resistance. Firms that might lose eligibility objected. Federal agencies also objected. As a result, in each instance, the SBA's comprehensive revisions were not fully implemented. The SBA's congressionally mandated requirement to conduct a detailed review of at least one-third of the SBA's industry size standards every 18 months was imposed by P.L. 111-240 , the Small Business Jobs Act of 2010, to prevent small business size standards from becoming outdated. More frequent reviews of the size standards were expected to increase their accuracy and, generally speaking, result in (1) increased numbers of small businesses found to be eligible for SBA assistance and (2) an increase in the number and amount of federal contracts awarded to small businesses (primarily by preventing large businesses from being misclassified as small and by increasing the number of small businesses eligible to compete for federal contracts). As expected, the SBA's economic analyses during the recent five-year review cycle often supported an increase in the size standards for many industries. However, the SBA's economic analyses also occasionally supported a decrease in the size standards for some industries. Despite the SBA's decision to, in most circumstances, make no changes when their economic analyses indicated that a decrease was warranted, it could be argued that the increased frequency of the reviews has generally prevented the SBA's size standards from becoming outdated. This, in turn, has, at least to a certain extent, improved the accuracy of the size standards (as measured by the extent to which the size standard is in alignment with the SBA's economic analyses). In a related matter, the SBA continues to adjust its receipts based size standards for inflation at least once every five years, or more frequently if inflationary circumstances warrant, to prevent firms from losing their small business eligibility solely due to the effects of inflation. The most recent adjustment for inflation took place on July 14, 2014. Prior to that, the last adjustment for inflation took place in 2008. The SBA also continues to review size standards within specific industries whenever it determines that market conditions within that industry have changed. Congress has several options related to the SBA's ongoing review of its size standards. For example, as part of its oversight of the SBA, Congress can wait for the agency to issue its proposed rule before providing input or establish a dialogue with the agency, either at the staff level or with Members involved directly, prior to the issuance of its proposed rule. Historically, Congress has tended to wait for the SBA to issue proposed rules concerning its size standards before providing input, essentially deferring to the agency's expertise in the technical and methodological issues involved in determining where to draw the line between small and large firms. Congress has then tended to respond to the SBA's proposed rules concerning its size standards after taking into consideration current economic conditions and input received from the SBA and affected industries. Waiting for the SBA to issue its proposed rule concerning its size standards before providing congressional input has both advantages and disadvantages. It provides the advantage of insulating the proposed rule from charges that it is influenced by political factors. It also has the advantage of respecting the separation of powers and responsibilities of the executive and legislative branches. However, it has the disadvantage of heightening the prospects for miscommunication, false expectations, and wasted effort, as evidenced by past proposed rules concerning the SBA's size standards that were either rejected outright, or withdrawn, after facing congressional opposition. Another policy option that has not received much congressional attention in recent years, but which Congress may choose to address, is the targeting of the SBA's resources. When the SBA reviews its size standards, it focuses on the competitive nature of the industry under review, with the goal of removing eligibility of firms that are considered large, or dominant, in that industry. There has been relatively little discussion of the costs and benefits of undertaking those reviews with the goal of targeting SBA resources to small businesses in industries that are struggling to remain competitive. GAO recommended this approach in 1978 and Roger Rosenberger, then SBA's associate administrator for policy, planning, and budgeting, testified at a congressional hearing in 1979 that it was debatable whether the SBA should provide any assistance to any of the businesses within industries where "smaller firms are flourishing." Revising the SBA's size standards using this more targeted approach would likely reduce the number of firms eligible for assistance. It would also present the possibility of increasing available benefits to eligible small firms in those industries deemed "mixed" or "concentrated" by the SBA without necessarily increasing overall program costs. Perhaps because previous proposals that would result in a reduction in the number of firms eligible for assistance have met with resistance, this alternative approach to determining program eligibility has not received serious consideration in recent years. Nonetheless, it remains an option available to Congress should it decide to change current policy.

 

 Report 2:
Over the last 3 decades employers have shifted away from sponsoring defined benefit (DB) plans and toward DC plans. This shift also transfers certain types of risk—such as investment risk—from employers to employee participants. DB plans generally offer a fixed level of monthly annuitized retirement income based upon a formula specified in the plan, which usually takes into account factors such as a participant’s salary, years of service, and age at retirement, regardless of how the plan’s investments perform. In contrast, benefit levels in DC plans—such as 401(k) plans—depend on the contributions made to the plan and the performance of the investments in individual accounts, which may fluctuate in value. As we have previously reported, some experts have suggested that the portability of DC plans make them better-suited for a mobile workforce, and that such portability may lead to early withdrawals of retirement savings. DOL reported there were 656,241 DC and 46,300 DB plans in the United States in 2016. Tax incentives are in place to encourage employers to sponsor retirement plans and employees to participate in plans. Under the Employee Retirement Income Security Act of 1974 (ERISA), employers may sponsor DC retirement plans, including 401(k) plans—the predominant type of DC plan, in which benefits are based on contributions to and the performance of the investments in participants’ individual accounts. To save in 401(k) plans, participants contribute a portion of their income into an investment account, and in traditional 401(k) plans taxes are deferred on these contributions and associated earnings, which can be withdrawn without penalty after age 59½ (if permitted by plan terms). As plan sponsors, employers may decide the amount of employer contributions (if any) and how long participants must work before having a non-forfeitable (i.e., vested) interest in their plan benefit, within limits established by federal law. Plan sponsors often contract with service providers to administer their plans and provide services such as record keeping (e.g., tracking and reporting individual account contributions); investment management (i.e., selecting and managing the securities included in a mutual fund); and custodial or trustee services for plan assets (e.g., holding the plan assets in a bank). Individuals also receive tax incentives to save for retirement outside of an employer-sponsored plan. For example, traditional IRAs provide certain individuals with a way to save pre-tax money for retirement, with withdrawals made in retirement taxed as income. In addition, Roth IRAs allow certain individuals to save after-tax money for retirement with withdrawals in retirement generally tax-free. IRAs were established under ERISA, in part, to (1) provide a way for individuals not covered by a pension plan to save for retirement; and (2) give retiring workers or individuals changing jobs a way to preserve assets from 401(k) plans by transferring their plan balances into IRAs. The Investment Company Institute (ICI) reported that 34.8 percent of households in the United States owned an IRA in 2017, a percentage that has generally remained stable since 2000. In 2017, IRA assets accounted for almost 33 percent (estimated at $9.2 trillion) of total U.S. retirement assets, followed by DC plans, which accounted for 27 percent ($7.7 trillion). Further, according to ICI, over 94 percent of funds flowing into traditional IRAs from 2000 to 2015 came from rollovers—primarily from 401(k) plans. IRS, within the Department of the Treasury, is responsible for enforcing IRA tax laws, while IRS and DOL share responsibility for overseeing prohibited transactions relating to IRAs. IRS also works with DOL’s Employee Benefits Security Administration (EBSA) to enforce laws governing 401(k) plans. IRS is primarily responsible for interpreting and enforcing provisions of the Internal Revenue Code (IRC) that apply to tax- preferred retirement savings. EBSA enforces ERISA’s reporting and disclosure and fiduciary responsibility provisions, which, among other things, include requirements related to the type and extent of information that a plan sponsor must provide to plan participants. Employers sponsoring employee benefit plans subject to ERISA, such as a 401(k) plans, generally must file detailed information about their plan each year. The Form 5500 serves as the primary source of information collected by the federal government regarding the operation, funding, expenses, and investments of employee benefit plans. The Form 5500 includes information about the financial condition and operation of their plans, among other things. EBSA uses the Form 5500 to monitor and enforce plan administrators and other fiduciaries, and service providers’ responsibilities under Title I of ERISA. IRS uses the form to enforce standards that relate to, among other things, how employees become eligible to participate in benefit plans, and how they become eligible to earn rights to benefits. In certain instances, sponsors of 401(k) plans may allow participants to access their tax-preferred retirement savings prior to retirement. Plan sponsors have flexibility under federal law and regulations to choose whether to allow plan participants access to their retirement savings prior to retirement and what forms of access to allow. Typically, plans allow participants to access their savings in one or more of the following forms: Loans: Plans may allow participants to take loans and limit the number of loans allowed. If the plan provides for loans, the maximum amount that the plan can permit as a loan generally cannot exceed the lesser of (1) the greater of 50 percent of the vested account balance, or $10,000 or (2) $50,000 less the excess of the highest outstanding balance of loans during the 1-year period ending on the day before the day on which a new loan is made over the outstanding balance of loans on the day the new loan is made. Plan loans are generally not treated as early withdrawals unless they are not repaid within the terms specified under the plan. Hardship withdrawals: Plans may allow participants facing a hardship to take a withdrawal on account of an immediate and heavy financial need, and if the withdrawal is necessary to satisfy the financial need. Though plan sponsors can decide whether to offer hardship withdrawals and approve applications for hardship withdrawals, IRS regulations provide “safe harbor” criteria regarding circumstances when a withdrawal is deemed to be on account of an immediate heavy financial need. IRS regulations allow certain expenses to qualify under the safe harbor including: (1) certain medical expenses; (2) costs directly relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses for the participant, and their spouse, children, dependents or beneficiary; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) certain burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence. Plans that provide for hardship withdrawals generally specify what information participants must provide to the plan sponsor to demonstrate a hardship meets the definition of an immediate and heavy financial need. Early withdrawals of retirement savings may have short-term and long- term impacts on participants’ ability to accumulate retirement savings. In the short term, IRA owners and participants in 401(k) plans who received a withdrawal before reaching age 59½ generally pay an additional 10 percent tax for early distributions in addition to income taxes on the taxable portion of the distribution amount. The IRC exempts certain distributions from the additional tax, but the exceptions vary among 401(k) plans and IRAs. Early withdrawals of any type can result in the permanent removal of assets from retirement accounts thereby reducing the amounts participants can accumulate before retirement, including the loss of compounded interest or other earnings on the amounts over the participant’s career. According to DOL’s Bureau of Labor Statistics (BLS), U.S. workers are likely to have multiple jobs in their careers as average employee tenure has decreased. In 2017, BLS reported that from 1978 to 2014, workers held an average of 12 jobs between the ages of 18 and 50. BLS also reported in 2016 that the median job tenure for a worker was just over 4 years. Employees who separate from a job bear responsibility for deciding what to do with their accumulated assets in their former employer’s plan. Recent research estimated that 10 million people with a retirement plan change jobs each year, many of whom faced a decision on how to treat their account balance at job separation. Plan administrators must provide a tax notice detailing participants’ options for handling the balance of their accounts. When plan participants separate from their employers, they generally have one of three options: 1. They may leave the balance in the plan, 2. They may ask their employer to roll the money directly into a new qualified employer plan or IRA (known as a direct rollover), or 3. They may request a distribution. Once the participant receives the distribution he or she can (1) within 60 days, roll the distribution into a new qualified employer plan or IRA (in which case the money would remain tax-preferred); or (2) keep the distributed amount, and pay any income taxes or additional taxes associated with the distribution (known as a cashout). Sponsors of 401(k) plans may cash out or transfer separating participant accounts if an account balance falls below a certain threshold. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) amended the IRC to provide certain protections for separating participants with account balances between $1,000 and $5,000 by requiring, in the absence of participant direction, plan sponsors to either keep the account in the plan or to transfer the account balance to an IRA to preserve its tax-preferred status. Plan sponsors may not distribute accounts with balances of more than $5,000 without participant direction, but have discretion to distribute account balances of $1,000 or less. The IRC imposes an additional 10 percent tax (in addition to ordinary income tax) on certain early withdrawals from qualified retirement plans, which includes IRAs and 401(k) plans in an effort to discourage the use of plan funds for purposes other than retirement and ensure the favorable tax treatment for plan funds is used to provide retirement income. Employers are required to withhold 20 percent of the amount cashed out to cover anticipated income taxes unless the participant pursues a direct rollover into another qualified plan or IRA. Research has found that many employees are concerned about their level of savings and ability to manage their retirement accounts, and some employers provide educational services to improve employees’ financial wellness and financial literacy and encourage them to save for retirement. A 2017 survey on employee financial wellness in the workplace found more than one-half of workers experienced financial stress and that insufficient emergency savings was a top concern for employees. Research has also found that limited financial literacy is widespread among Americans over age 50, and those who lack financial knowledge are less likely to successfully plan for retirement. In 2018, the Federal Reserve reported that three-fifths of non-retirees with participant-directed retirement accounts had little to no comfort managing their own investments. As we have previously reported, some employers have developed comprehensive programs aimed at overall improvement in employees’ financial health. These programs, often called financial wellness programs, may help employees with budgeting, emergency savings, and credit management, in addition to the traditional information and assistance provided for retirement and health benefits. In 2013, individuals ages 25 to 55 withdrew at least $68.7 billion early from their retirement accounts. Of this amount, IRA owners in this age group withdrew the largest share (about 57 percent) and 401(k) plan participants in this age group withdrew the rest (about 43 percent) However, a total amount withdrawn from 401(k) plans cannot be determined due to data limitations. IRA withdrawals were the largest source of early withdrawals of retirement savings, accounting for an estimated $39.5 billion of the total $68.7 billion in early withdrawals made by individuals ages 25 to 55 in 2013. According to IRS estimates, 12 percent of IRA owners in this age group withdrew money early that year from their IRAs in 2013. The amount they withdrew early comprised a small percentage of their total IRA assets. Specifically, in 2013, the amount of early withdrawals was equivalent to 3 percent of the cohort’s total IRA assets and, according to IRS estimates, the total amount withdrawn by this cohort exceeded their total contributions to IRAs in that year. At least $29.2 billion left 401(k) plans in 2013 in the form of hardship withdrawals, cashouts at job separation, and unrepaid plan loans, according to our analysis of 2013 SIPP data and data from DOL’s Form 5500. Specifically, we found that: Hardship withdrawals were the largest source of early withdrawals from 401(k) plans with an estimated 4 percent (+/- 0.25) of plan participants ages 25 to 55 withdrawing an aggregate $18.5 billion in 2013. The amount of hardship withdrawals was equivalent to 0.5 percent (+/- 0.06) of the cohort’s total plan assets and 8 percent (+/- 0.9) of the cohort’s plan contributions made in 2013. Cashouts of account balances of $1,000 or more at job separation were the second largest source of early withdrawals from 401(k) plans. In 2013, an estimated 1.1 percent (+/- 0.11) of plan participants ages 25 to 55 withdrew an aggregate $9.8 billion from their plans that they did not roll into another qualified plan or IRA. Additionally, 86 percent (+/- 2.9) of these participants taking a cashout of $1,000 or more did not roll over the amount in 2013. The amounts cashed out and not rolled over were equivalent to 0.3 percent (+/- 0.05) of the cohort’s total plan assets and 4 percent (+/- 0.75) of the cohort’s total contributions made in 2013. Loan defaults accounted for at least $800 million withdrawn from 401(k) plans in 2013; however, the amount of distributions of unpaid plan loans is likely larger as DOL data cannot be used to quantify plan loan offsets that are deducted from participants’ account balances after they leave a plan. As a result, the amount of loan offsets among terminating participants ages 25 to 55 cannot be determined with certainty. Specifically, DOL’s Form 5500 instructions require plan sponsors to report unpaid loan balances in two separate places on the Form 5500, depending on whether the loan holder is an active or a terminated participant. For active participants, plan sponsors report loan defaults as a single line item on the Form 5500 (i.e., the $800 million in 2013 listed above). For terminated participants, plan sponsors report unrepaid plan loan balances as benefits paid directly to participants—a category that also includes rollovers to employer plans and IRAs. According to a DOL official, as a result of this commingling of benefits on this line item, isolating the amount of loan offsets for terminated participants using the Form 5500 data is not possible. Without better data of the amount of unrepaid plan loans, the amount of loan offsets and the characteristics of plan participants who did not repay their plan loans at job separation cannot be determined. IRA owners and plan participants taking early withdrawals paid $6.2 billion as a result of the additional 10 percent tax for early distributions in 2013, according to IRS estimates. Although the taxes are generally treated separately from the amounts withdrawn, IRA owners and plan participants are expected to pay any applicable taxes resulting from the additional 10 percent tax when filing their income taxes for the tax year in which the withdrawal occurred. Individuals with certain demographic and economic characteristics that we analyzed had higher incidence of early withdrawals of retirement savings, according to our analysis of SIPP data. The characteristics described below reflect statistically significant differences between comparison groups (a full listing of all demographic groups can be found in appendix III). Age. The incidence of IRA withdrawals was higher among individuals ages 45 to 54 (8 percent) than individuals ages 25 to 34 and 35 to 44. Education. Individuals with a high school education or less had higher incidence of cashouts (97 percent) and hardship withdrawals (7 percent) than individuals with some college or some graduate school education. Family size. Individuals in families of seven or more (8 percent) or in families of five to six (7 percent) had higher incidence of hardship withdrawals than individuals in smaller family groups we analyzed. Individuals living alone had higher incidence of IRA withdrawals than individuals living in the larger family groups. Marital status. Widowed, divorced, or separated individuals had higher incidence of IRA withdrawals (11 percent) and hardship withdrawals (7 percent) than married or never married individuals. Race. The incidence of hardship withdrawals among African American (10 percent) and Hispanic individuals (6 percent) was higher than among individuals who were White, Asian, or Other. Residence. The incidence of IRA withdrawals and hardship withdrawals was higher among individuals living in nonmetropolitan areas (7 percent and 6 percent, respectively) than among individuals living in metropolitan areas. Similarly, individuals with certain economic characteristics that we analyzed had higher incidence of early withdrawals of retirement savings, according to our analysis of SIPP data. The characteristics described below reflect statistically significant differences between comparison groups (a full listing of all demographic groups can be found in appendix III). Employer size. Individuals working for employers with fewer than 25 employees had higher incidence of IRA withdrawals (9 percent) than individuals working for employers with higher number of employees. Employment. Individuals working fewer than 35 hours per week had higher incidence of IRA withdrawals (7 percent) than employees working 35 hours or more. Household debt. Individuals with household debt of $5,000 up to $20,000 had higher incidence of IRA withdrawals (14 percent) than individuals with other debt amounts. Household income. Individuals with household income of less than $25,000 or $25,000 up to $50,000 had higher incidence of IRA withdrawals (12 percent and 9 percent, respectively) and hardship withdrawals (9 percent and 7 percent, respectively) than individuals with higher income amounts. Personal cash reserves. Individuals with personal cash reserves of less than $1,000 had higher incidence of IRA withdrawals (10 percent) and hardship withdrawals (6 percent) than individuals with larger reserves. Retirement assets. Individuals with combined IRA and 401(k) plan assets valued at less than $5,000 had higher incidence of hardship withdrawals (7 percent) than individuals with higher valued assets. Tenure in retirement plan. Individuals with fewer than 3 years in their retirement plan had higher incidence of hardship withdrawals (6 percent) than individuals with longer tenures. Stakeholders we interviewed said that plan rules related to the disposition of account balances at job separation can lead participants to remove more than they need, up to and including their entire balance. We previously reported U.S. workers are likely to change jobs multiple times in a career. Plan sponsors may cash out balances of $1,000 or less at job separation, although they are not required to do so. As a result, plan participants with such balances, including younger employees and others with short job tenures, risk having their account balances distributed in full each time they change jobs. As shown in table 1, a separating employee must take multiple steps to ensure that an account balance remains tax-preferred. Participants who take a distribution from a plan with the intent of rolling it into another qualified plan or IRA must acquire additional funds to complete the rollover and avoid adverse tax consequences. Plan sponsors are required to withhold 20 percent of the account balance to pay anticipated taxes on the distribution. As a result, the sponsor then sends 80 percent of the account balance to the participant, who must acquire outside funds to compensate for the 20 percent withheld or forgo the preferential tax treatment of that portion of their account balance. For example, a participant seeking to roll over a retirement account with a $10,000 balance would receive an $8,000 distribution after tax withholding, requiring them to locate an additional $2,000 to complete the rollover within the 60-day period to avoid a taxable distribution of the withheld amount. If participants can replace the 20 percent withheld and complete the rollover within the 60-day period, they do not owe taxes on the distribution. Stakeholders said that the complexity of rolling a 401(k) account balance from one employer to another may encourage participants to take the relatively simpler route of rolling their balance into an IRA or cashing out altogether. They noted that separating participants had many questions when evaluating their options and had difficulty understanding the notice provided. For example, participants may not fully understand how the decisions made at job separation can have a significant impact on their current tax situation and eventual retirement security. One plan sponsor, describing concerns about giving investment advice, said she watched participants make what she judged to be poor choices with their account balances and felt helpless to intervene. Stakeholders also noted that the lack of a standardized rollover process sometimes bred mistrust among employers and complicated separating participants’ ability to successfully facilitate a rollover between plans. For example, one stakeholder told us that some plans were hesitant to accept funds from other employer plans fearing that the funds might come from plans that have failed to comply with plan qualification requirements and could create problems for the receiving plan later on. Another stakeholder suggested that the requirement for plan sponsors to provide a notice to separating participants likely caused more participants to take the distribution. Stakeholders described loans as a useful source of funds in times of need and a way to avoid more expensive options, such as high-interest credit cards. They also noted that certain plan loan policies could lead to early withdrawals of retirement savings. (See fig. 1.) Loan repayment at job separation: Stakeholders said loan repayment policies can increase the incidence of defaults on outstanding loans. When participants do not repay their loan after separating from a job, the outstanding balance is treated as a distribution, which may subject it to income tax liability and, possibly, an additional 10 percent tax for early distributions. According to stakeholders, the process of changing jobs can inadvertently lead to a distribution of a participant’s outstanding loan balance, when the participant could have otherwise repaid the loan. Extended loan repayment periods: Some plan sponsors allow participants to take loans to purchase a home. Stakeholders told us that the amounts of these home loans tended to be larger than general purpose loans and had longer repayment periods that these extended from 15 to 30 years. A stakeholder further noted that these loans could make it more likely that participants would have larger balances to repay if they lost or changed jobs. Multiple loans: While some plan sponsors noted that their plans limited the number of loans participants can take from their retirement plan, others do not. Some plan sponsors limited participants to between one and three simultaneous loans, and one plan administrator indicated that 92 percent of their plan-sponsor clients allowed no more than two simultaneous loans. Other plan sponsors placed no limit on the number of participant loans or limited loans to one or two per calendar year, in which case a participant could take out a new loan at the start of a calendar year regardless of whether or not outstanding loans had been repaid. Stakeholders described some participants as “serial” borrowers, who take out multiple loans and have less disposable income as a result of ongoing loan payments. One plan administrator stated that repeat borrowing from 401(k) plans was common, and some participants took out new loans to pay off old loans. Other loan restrictions: Allowing no loans or one total outstanding loan can cause participants facing economic shocks to take a hardship withdrawal, resulting in the permanent removal of their savings and subjecting them to income tax liability and, possibly, an additional 10 percent tax for early distributions and a suspension on contributions. Minimum loan amounts: Minimum loan amounts may result in participants borrowing more than they need to cover planned expenses. For example, a participant may have a $500 expense for which they seek a loan, but may have to borrow $1,000 due to plan loan minimums. Stakeholders said that plan participants take plan loans and hardship withdrawals for pressing financial needs. Many plan sponsors we interviewed said they used the IRS safe harbor exclusively as criteria when reviewing a participant’s application for a hardship withdrawal. Stakeholders said the top two reasons participants took hardship withdrawals were to prevent imminent eviction or foreclosure and to cover out-of-pocket medical costs not covered by health insurance. Participants generally took loans to reduce debt, for emergencies, or to purchase a primary residence. Stakeholders also said that participants who experienced economic shocks stemming from job loss made early withdrawals. They said retirement plans often served as a form of insurance for those between jobs or facing a sudden economic shock and participants accessed their retirement accounts because, for many, they were the only source of savings. They cited personal debt, health care costs, and education as significant factors that affected employees across all income levels. Stakeholders said some participants also used their retirement savings to pay for anticipated expenses. Two plan administrators said education expenses were one of the reasons participants took hardship withdrawals. They said that participants accessed their retirement savings to address the cost of higher education, including paying off their own student loan debt or financing the college costs for family members. For example, plan administrators told us that some participants saved with the expectation of taking a hardship withdrawal to pay for college tuition. Other participants utilized hardship withdrawals to purchase a primary residence. IRA owners generally may take withdrawals at any time and IRS does not analyze the limited information it receives on the reasons for IRA withdrawals. IRA owners can withdraw any amount up to their entire account balance at any time. In addition, IRAs have certain exceptions from the additional 10 percent tax for early distributions. For example, IRA withdrawals taken for qualified higher education expenses, certain health insurance premiums, and qualified “first-time” home purchases (up to $10,000) are excepted from the additional 10 percent tax. IRA owners who make an IRA distribution receive a Form1099-R or similar statement from their provider. On the Form 1099-R, IRA providers generally identify whether the withdrawal, among other things, can be categorized as a normal distribution, an early distribution, or a direct distribution to a qualified plan or IRA. For an early distribution, the IRA provider may identify whether a known exception to the additional 10 percent tax applies. For their part, IRA owners are required to report early withdrawals on their income tax returns, as well as the reason for any exception from the additional 10 percent tax for a limited number of items. In written responses to questions, an IRS official indicated that IRS collected data on the exemption reason codes, but did not use them. Some plan sponsors we interviewed had policies in place that may reduce the long-term impact of early withdrawals of retirement savings taken at job separation. Policies suggested by plan sponsors included: Providing a periodic installment distribution option: Although some plan sponsors may require participants wanting a distribution to take their full account balance at job separation, other plan sponsors provided participants with an option of receiving their account balance in periodic installments. For example, one plan sponsor gives separating participants an option to receive periodic installment distributions at intervals determined by the participants. This plan sponsor said separating participants could select distributions on a monthly, quarterly, semi-annual or annual basis. These participants could also elect to stop distributions at any time, preserving the remaining balance in the employer’s plan. The plan sponsor said the plan adopted this option to help separating participants address any current financial needs, while preserving some of the account balance for retirement. Another plan sponsor adopted a similar policy to address the cyclical nature of the employer’s business, which can result in participants being terminated and rehired within one year. Offering partial distributions: One plan sponsor provided separated participants with the option of receiving a one-time, partial distribution. If a participant opted for partial distribution, the plan sponsor issued the distribution for the requested sum and preserved the remainder of the account balance in the plan. The plan sponsor adopted the partial distribution policy to provide separating participants with choices for preserving account balances, while simultaneously providing access to address any immediate financial needs. Providing plan loan repayment options for separated participants: Some plan sponsors allowed former participants to continue making loan repayments after job separation. Loan repayments after job separation reduce the loan default risk and associated tax implications for participants. Some plan sponsors said that separating participants who have the option to continue repaying an outstanding loan balance generally have three options: (1) to continue repaying the outstanding loan, (2) to repay the entire balance of the loan at separation within a set repayment period, or (3) not to repay the loan. Those participants who continue repaying their loans after separation generally have the option to set up automatic debit payments to facilitate the repayment. Those separated participants who do not set up loan repayment terms within established timeframes, or do not make a payment after the loan repayment plan has been established, default on their loan and face the associated tax consequences, including, possibly, an additional 10 percent tax for early distributions. Some plan sponsors we spoke with placed certain limits on participant loan activity, which may reduce the incidence of loan defaults (see fig. 2). Limiting loan amounts to participant contributions: Some plan sponsors said they limited plan loans to participant contributions and any investment earnings from those contributions to reduce early withdrawals of retirement savings. For example, one plan sponsor’s policy limited the amount a participant could borrow from their plan to 50 percent of participant contributions and earnings, compared to 50 percent of the total account balance. Implementing a waiting period after loan repayment before a participant can access a new loan: Some plan sponsors said they had implemented a waiting period between plan loans, in which a participant, having fully paid off the previous loan, was temporarily ineligible to apply for another. Among plan sponsors who implemented a waiting period, the length varied from 21 days to 30 days. Reducing the number of outstanding loans: Some plan sponsors we spoke with limited the number of outstanding plan loans to either one or two loans. One plan sponsor had previously allowed one new loan each calendar year, but subsequently revised plan policy to allow participants to have a total of two outstanding loans. The plan sponsor said the rationale was to balance limiting participant loan behavior with the ability of participants to access their account balance. Some plan sponsors said they had expanded the definition of immediate and heavy financial need beyond the IRS safe harbor to better align with the economic needs of their participants. For example, one plan sponsor approved a hardship withdrawal to help a participant pay expenses related to a divorce settlement. Another plan sponsor developed an expanded list of qualifying hardships, including past-due car, mortgage, or rent payments; and payday loan obligations. Some plan sponsors implemented loan programs outside their plan, contracting with third-party vendors to provide short-term loans to employees. For example, one plan sponsor instituted a loan program that allowed employees to borrow up to $5,000 from a third-party vendor that would be repaid through payroll deduction. This plan sponsor said the loan program featured an 8 to 12 percent interest rate, and approval was not based on a participant’s credit history. The plan sponsor also observed that they had fewer 401(k) loan applications since the third- party loan program was implemented. A second plan sponsor instituted a similar loan program that allowed employees to borrow up to $500 interest free from a third-party vendor. According to this sponsor, to qualify for a loan, an employee must demonstrate financial hardship and have no outstanding plan loans, and is required to attend a financial counseling course if their loans are approved. Some plan sponsors said they have provided workplace-based financial wellness resources for their participants to improve their financial literacy. Some implemented optional financial wellness programs that covered topics such as investment education, how plan loans work, and the importance of saving for emergencies. These plan sponsors told us they offered on-site financial counseling with representatives of the plan administrator to help provide guidance on financial decision-making; however, other plan sponsors said that—despite their investment in participant-specific financial education—participation in these programs was low. Stakeholders suggested strategies that they believed could help mitigate the long-term effects of early withdrawals of retirement savings on IRA owners and plan participants. They noted that any of these proposed strategies, if implemented, could (1) increase the costs of administering IRAs and plans, (2) require changes to federal law or regulations, and (3) involve tradeoffs between providing access to retirement savings and preserving savings for retirement. Stakeholders suggested several strategies that, if implemented, could help reduce early withdrawals from IRAs. These strategies centered on modifying existing rules to reduce early withdrawals from IRAs (and subsequently the amount paid as a result of the additional 10 percent tax for early distributions). Specifically, stakeholders suggested: Raising the age at which the additional 10 percent tax applies: Some stakeholders noted that raising the age at which the additional 10 percent tax for early distributions applies from 59½ to 62 would align it with the earliest age of eligibility to claim Social Security and may encourage individuals to consider a more comprehensive retirement distribution strategy. However, other stakeholders cautioned that it could have drawbacks for employees in certain situations. For example, individuals who lose a job late in their careers could face additional tax consequences for accessing an IRA before reaching the age 62. In addition, one stakeholder said some individuals may shift to a part-time work schedule later in their careers as they transition to retirement and plan on taking IRA withdrawals to compensate for their lower wages. Allowing individuals to roll existing plan loans into an IRA: Some stakeholders said that allowing individuals to include an existing plan loan as part of a rollover into an IRA, although currently not allowed, would likely reduce plan loan defaults by giving individuals a way to continue repaying the loan balance. One stakeholder suggested that rolling an existing plan loan into an IRA could be administratively challenging for IRA providers, but doing so to repay the loan may ultimately preserve retirement savings. Allowing IRA loans: While currently a prohibited transaction that could lead to the cessation of an IRA, some stakeholders suggested that IRA loans could theoretically reduce the amounts being permanently removed from the retirement system through early IRA withdrawals. One stakeholder said an IRA loan would present a good alternative to an early withdrawal from an IRA account because it would give the account holder access to the balance, defer any tax implications, and improve the likelihood the loaned amount would ultimately be repaid. However, another stakeholder said that allowing IRA loans could increase early withdrawals, given the limited oversight of IRAs, as well as additional administrative costs and challenges for IRA providers. Stakeholders suggested several strategies that, if implemented, could reduce the effect of cashouts at job separation from 401(k) plans. Simplifying the rollover process: Stakeholders proposed two modifications to the current rollover process that they believe could make the process more seamless and reduce the incidence of cashouts. First, stakeholders suggested that a third-party entity tasked with facilitating rollovers between employer plans for a separating participant would likely reduce the incidence of cashouts at job separation. Such an entity could automatically route a participant’s account balance from the former plan to a new one. One stakeholder said having a third-party entity facilitate the rollover would eliminate the need for a plan participant to negotiate the process. Such a service, however, would likely come at cost that may likely be passed onto participants. Stakeholders also suggested direct rollovers of account balances between plans could further reduce the incidence of cashouts. One stakeholder, however, cautioned that direct rollovers could have downsides for some participants. For example, participants who prefer to keep their balance in their former employer’s plan but provide no direction to the plan sponsor may inadvertently find their account balance rolled into a new employer’s plan. Restricting cashouts to participant contributions only: Some stakeholders suggested limiting the assets a participant may access at job separation. For example, some stakeholders said that participants should not be allowed to cash out vested plan sponsor contributions, thus preserving those contributions and their earnings for retirement. However, this strategy could result in participants overseeing and monitoring several retirement accounts. Stakeholders suggested several strategies that, if implemented, could limit the adverse effect of hardship withdrawals on retirement savings. Narrowing the IRS safe harbor: Although some plan sponsors are expanding the reasons for a hardship to align with perceived employee needs, some stakeholders said narrowing the IRS safe harbor would likely reduce the incidence of early withdrawals. For example, some stakeholders suggested narrowing the definition of a hardship to exclude the purchase of a primary residence or for postsecondary education costs. In addition, one stakeholder said alternatives exist to finance home purchases (mortgages) and postsecondary education (student loans). Stakeholders noted that eliminating the purchase of a primary residence and postsecondary education costs from the IRS safe harbor would make hardship withdrawals a tool more strictly used to avoid sudden and unforeseen economic shocks. In combination with the two exclusions, one stakeholder suggested consideration be given to either reducing or eliminating the additional 10 percent tax for early distributions that may apply to hardship withdrawals. Replacing hardship withdrawals with hardship loans: Stakeholders said replacing a hardship withdrawal, which permanently removes money from the retirement system, with a no-interest hardship loan, which would be repaid to the account, would reduce early withdrawals. Under this suggestion, if the loan were not repaid within this predetermined time frame, the remaining loan balance could be considered a deemed distribution and treated as income (similar to the way a hardship withdrawal is treated now). Incorporating emergency savings features into 401(k) plans: Stakeholders said incorporating an emergency savings account into the 401(k) plan structure may help participants absorb economic shocks and better prepare for both short-term financial needs and long-term retirement planning. (See fig. 3.) In addition, stakeholders said participants with emergency savings accounts could be better prepared to avoid high interest rate credit options, such as credit cards or payday loans, in the event of an economic shock. Stakeholders had several ideas for implementing emergency savings accounts. For example, one stakeholder suggested that, were it allowed, plan sponsors could revise automatic account features to include automatic contributions to an emergency savings account. Some stakeholders also said emergency savings accounts could be funded with after-tax participant contributions to eliminate the tax implications when withdrawing money from the account. However, another stakeholder said emergency savings contributions could reduce contributions to a 401(k) plan. In the United States, the amount of aggregate savings in retirement accounts continues to grow, with nearly $17 trillion invested in 401(k) plans and IRAs. Early access to retirement savings in these plans may incentivize plan participation, increase participant contributions, and provide participants with a way to address their financial needs. However, billions of dollars continue to leave the retirement system early. Although these withdrawals represent a small percentage of overall assets in these accounts, they can erode or even deplete an individual’s retirement savings, especially if the retirement account represents their sole source of savings. Employers have implemented plan policies that seek to balance the short- term benefits of providing participants early access to their accounts with the long-term need to build retirement savings. However, the way plan sponsors treat outstanding loans after a participant separates from employment has the potential to adversely affect retirement savings. In the event of unexpected job loss or separation, plan loans can leave participants liable for additional taxes. Currently, the incidence and amount of loan offsets in 401(k) plans cannot be determined due to the way DOL collects data from plan sponsors. Additional information on loan offsets would provide insight into how plan loan features might affect long-term retirement savings. Without clear data on the incidence of these loan offsets, which plan sponsors are generally required to include, (but not itemize) on the Form 5500, the overall extent of unrepaid plan loans in 401(k) plans cannot be known. To better identify the incidence and amount of loan offsets in 401(k) plans nationwide, we recommend that the Secretary of Labor direct the Assistant Secretary for EBSA, in coordination with IRS, to revise the Form 5500 to require plan sponsors to report qualified plan loan offsets as a separate line item distinct from other types of distributions. (Recommendation 1) We provided a draft of this product to the Department of Labor, the Department of the Treasury, and the Internal Revenue Service for review and comment. In its written comments, reproduced in appendixes IV and V, respectively, DOL and IRS generally agreed with our findings, but neither agreed nor disagreed with our recommendation. DOL said it would consider our recommendation as part of its overall evaluation of the Form 5500, and IRS said it would work with DOL as it responds to our recommendation. The Department of Treasury provided no formal written comments. In addition, DOL, IRS, Treasury and two third-party subject matter experts provided technical comments, which we incorporated in the report, as appropriate As agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Labor, Secretary of the Treasury, Commissioner of Internal Revenue, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff making key contributions to this report are listed in appendix VI. The objectives of this study were to determine: (1) what are the incidence and amount of retirement savings being withdrawn early; (2) what is known about the factors that might lead individuals to access their retirement savings early; and (3) what strategies or policies, if any, might reduce the incidence and amount of early withdrawals of retirement savings. To examine the incidence and amount of early withdrawals from individual retirement accounts (IRA) and 401(k) plans, we analyzed the most recent nationally representative data available in three relevant federal data sources, focusing our analysis on individuals in their prime working years (ages 25 to 55), when possible. For consistency, we analyzed data from 2013 from each data source because it was the most recent year that data were available for all types of early withdrawals we examined. We adjusted all dollar-value estimates derived from each data source for inflation and reported them in constant 2017 dollars. We determined that the data from these sources were sufficiently reliable for the purposes of our report. First, to examine recent incidence and amount of early withdrawals from IRAs and the associated tax consequences for individuals ages 25 to 55, we analyzed IRS estimates based on tax returns as filed by taxpayers before enforcement activity published by the Internal Revenue Service’s (IRS) Statistics of Income Division for tax year 2013. Specifically, we analyzed the number of taxpayers reporting early withdrawals from their IRAs in 2013 and the aggregate amount of these withdrawals. To provide additional context on the scope of these early withdrawals, we analyzed the age cohort’s total IRA contributions and the end-of-year fair market value of the IRAs, and compared these amounts to the aggregate amount withdrawn. To examine the incidence and amount of taxes paid as a result of the additional 10 percent tax for early distributions, we analyzed estimates on the additional 10 percent tax paid on qualified retirement plans in 2013. Although IRS did not delineate these data by age, we used these data as proxy because IRS assesses the additional 10 percent tax on distributions to taxpayers who have not reached age 59½. Given the delay between a withdrawal date and the date of the tax filing, it is possible that some of the taxes were paid in the year following the withdrawal. We reviewed technical documentation and developed the 95 percent confidence intervals that correspond to these estimates. Second, to examine the incidence and amount of early withdrawals from 401(k) plans, we analyzed data included in the 2014 panel of the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP)—a nationally representative survey of household income, finances, and use of federal social safety net programs—along with retirement account contribution and withdrawal data included in the SIPP’s Social Security Administration (SSA) Supplement on Retirement, Pensions, and Related Content. Specifically, we developed percentage and dollar-value estimates of the incidence and amount of lump sum payments received and hardship withdrawals taken by participants in 401(k) plans in 2013. Because the SIPP is based upon a complex probability sample, we used Balanced Repeated Replication methods with a Fay adjustment to derive all percentage, dollar-total, and dollar-ratio estimates and their 95 percent confidence intervals. To better understand the characteristics of individuals who received a lump sum and/or took a hardship withdrawal in 2013, we analyzed a range of selected individual and household demographic variables and identified characteristics associated with a higher incidence of withdrawals. We applied domain estimation methods to make estimates for these subpopulations. (For a list of variables used and the results of our analysis, please see appendix III.) We attempted to develop a multiple regression model to estimate the unique association between each characteristic and withdrawals, but determined that the SIPP did not measure key variables in enough detail to develop persuasive causal explanations. The sample size of respondents receiving lump sums was too small to precisely estimate the partial correlations of many demographic variables at once. Even with adequate sample sizes, associations between broad demographic variables, such as age and income, likely reflected underlying causes, such as retirement and financial planning strategies, which SIPP did not measure in detail. Third, to examine the incidence and amount of unrepaid plan loans from 401(k) plans, we analyzed the latest filing of annual plan data that plan sponsors reported on the Form 5500 to the Department of Labor (DOL) for the 2013 plan year. We looked at unrepaid plan loans reported by sponsors of large plans (Schedule H) and small plans (Schedule I). For each schedule, we analyzed two variables related to unrepaid plan loans: (1) deemed distributions of participant loans (which captures the amount of loan defaults by active participants) and (2) benefits distributed directly to participants (which includes plan loan offsets for a variety of reasons, including plan loans that remain unpaid after a participant separates from a plan). Because plan sponsors report data in aggregate and do not differentiate by participant age, we calculated and reported the aggregate of loan defaults identified as deemed distributions in both schedules. We could not determine the amount of plan loan offsets based on the way that plan sponsors are required to report them. Specifically, plan sponsors are required to treat unrepaid loans occurring after a participant separates from a plan as reductions or offsets in plan assets, and are required to report them as part of a larger commingled category of offsets that also includes large-dollar items like rollovers of account balances to another qualified plan or IRA. As a result, we were unable to isolate and report the amount of this category of unrepaid plan loans. To identify what is known about the factors that might lead individuals to access their 401(k) plans and IRAs and what strategies or policies might reduce the early withdrawal of retirement savings, we performed a literature search using multiple databases to locate documents regarding early withdrawals of retirement savings published since 2008 and to identify experts for interviews. The search yielded a wide variety of scholarly articles, published articles from various think tank organizations, congressional testimonies, and news reports. We reviewed these studies and identified factors that lead individuals to withdraw retirement savings early, as well as potential strategies or policies that might reduce this behavior. The search also helped us identify additional potential interviewees. To answer our second and third objectives, we visited four metropolitan areas and conducted 51 interviews with a wide range of stakeholders that we identified in the literature. In some cases, to accommodate stakeholder schedules, we conducted phone interviews or accepted written responses. Specifically, we interviewed human resource professionals from 22 private-sector companies (including 4 written responses), representatives from 8 plan administrators, 13 retirement research experts (including 1 written response), representatives from 4 industry associations, representatives from 2 participant advocacy organizations, and representatives from 2 financial technology companies. We conducted in-person interviews at four sites to collect information from three different groups: (1) human resource officials in private-sector companies, (2) top 20 plan administrators or recordkeepers, and (3) retirement research experts. We selected site visit locations in four metropolitan locations that were home to representatives of each group. To select companies for potential interviews, we reached out to a broad sample of Fortune 500 companies that offered a 401(k) plan to employees and varied by geographic location, industry, and number of employees. We selected plan administrators based on Pensions and Investments rankings for assets under management and number of individual accounts. We selected retirement research experts who had published research on early withdrawals from retirement savings, as well as experts that we had interviewed in our prior work. Based on these criteria, we conducted site visits in Boston, Massachusetts; Chicago, Illinois; the San Francisco Bay Area, California; and Seattle, Washington. We held interviews with parties in each category who responded affirmatively to our request. In each interview, we solicited names of additional stakeholders to interview. We also interviewed representatives of organizations, such as financial technology companies, participant advocacy organizations, industry associations, and plan administrators focused on small businesses, whose work we deemed relevant to our study. We developed a common question set for each stakeholder category that we interviewed. We based our interview questions on our literature review, research objectives, and the kind of information we were soliciting from each stakeholder category. In each interview, we asked follow-up questions based on the specific responses provided by interviewees. In our company interviews, we asked how companies administered retirement benefits for employees; company policies and procedures regarding separating employees and the disposition of their retirement accounts; company policies regarding plan loans, hardship withdrawals, and rollovers from other 401(k) plans; and company strategies to reduce early withdrawals from retirement savings. In our interviews with plan administrators, we asked about factors that led individuals to access their retirement savings early, how plan providers interacted with companies and separating employees, available data on loans and hardship withdrawals from client retirement plans, and potential strategies to reduce the incidence and amount of early withdrawals. In our interviews with retirement research experts, financial technology companies, participant advocacy organizations, and industry associations we asked about factors that led individuals to make early withdrawals from their retirement savings and any potential strategies that may reduce the incidence and amount of early withdrawals. In our interviews with plan administrators and retirement research experts, we also provided a supplementary table outlining 37 potential strategies to reduce early withdrawals from retirement savings. We asked interviewees to comment on the strengths and weaknesses of each strategy in terms of its potential to reduce early withdrawals, and gave them opportunity to provide other potential strategies not listed in the tables. We developed the list of strategies based on the results of our literature review. Some interviewees also provided us with additional data and documents to assist our research. For example, some companies and plan administrators we interviewed provided quantitative data on the number of plan participants, the average cashout or rollover amounts, the percentage of participants who took loans or hardship withdrawals from their retirement accounts, and known reasons for these withdrawals. Some research experts also provided us with documentation, including published articles and white papers that supplemented our interviews and literature review. All data collected through these methods are nongeneralizable and reflect the views and experiences of the respondents and not the entire population of their respective constituent groups. To answer our second and third objectives, we analyzed the content of our stakeholder interview responses and corroborated our analysis with information obtained from our literature review and quantitative information provided by our interviewees. To examine what is known about the factors leading individuals to access retirement savings early, we catalogued common factors that stakeholders identified as contributing to early withdrawals from retirement savings. We also collected information on plan rules governing early participant withdrawals of retirement savings. To identify potential strategies or policies that might reduce the incidence and amount of early withdrawals, we analyzed interview responses and catalogued (1) company practices that employers identified as having an effect in reducing early withdrawals and (2) strategies that stakeholders suggested that could achieve a similar outcome. GAO is not endorsing or recommending any strategy in this report, and has not evaluated these strategies for their behavioral or other effects on retirement savings or on tax revenues. Appendix II: Selected Provisions Related to Early Withdrawals from 401(k) Plans and Individual Retirement Accounts (IRAs) Requirements Provides an exception for distributions for qualified higher education expenses and for qualified “first-time” home purchases made before age 59½ from the additional 10 percent tax for early distributions Defines “qualified first-time homebuyer distribution” and “first-time homebuyer,” and prescribes the lifetime dollar limit on such distributions, among other things. Allows eligible individuals to make tax-deductible contributions to individual retirement accounts, subject to limits based, for example, on income and pension coverage. Provides for the loss of exemption for an IRA if the IRA owner engages in a prohibited transaction, which results in the IRA being treated as distributing all of its assets to the IRA owner at the fair market value on the first day of the year in which the transaction occurred. Defines a prohibited transaction to include the lending of money or other extension of credit between a plan and a disqualified person. Requirements Allows eligible individuals to make contributions to a Roth IRA that are not tax- deductible. Distributions from the account can generally be treated as a qualified distribution if a distribution is made on or after the Roth IRA owner reaches age 59½ and the distributions is made after the 5-taxable year period beginning when the account was initially opened. Defines a prohibited transaction to include the lending of money or other extension of credit between a plan and a disqualified person. Appendix III: Estimated Incidence of Certain Early Withdrawals of Retirement Savings 401(k) plans 401(k) plans ($1000 or more) 401(k) plans 401(k) plans ($1000 or more) 401(k) plans 401(k) plans ($1000 or more) Legend: * Sampling error was too large to report an estimate. In addition to the contact named above, Dave Lehrer (Assistant Director); Jonathan S. McMurray (Analyst-in-Charge); Gustavo O. Fernandez; Sean Miskell; Jeff Tessin; and Adam Wendel made key contributions to this report. James Bennett, Holly Dye, Sara Edmondson, Sarah Gilliland, Sheila R. McCoy, Ed Nannenhorn, Katya Rodriguez, MaryLynn Sergent, Linda Siegel, Rachel Stoiko, Frank Todisco, and Sonya Vartivarian also provided support. The Nation’s Fiscal Health: Action Is Needed to Address the Federal Government’s Future. GAO-18-299SP. Washington, D.C.: June 21, 2018. The Nation’s Retirement System: A Comprehensive Re-evaluation is Needed to Better Promote Future Retirement Security. GAO-18-111SP. Washington, D.C.: October 18, 2017. Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets. GAO-17-102. Washington, D.C.: December 8, 2016. 401K Plans: Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings. GAO-17-69. Washington, D.C.: October 21, 2016. Retirement Security: Low Defined Contribution Savings May Pose Challenges. GAO-16-408. Washington, D.C.: May 5, 2016. Retirement Security: Shorter Life Expectancy Reduces Projected Lifetime Benefits for Lower Earners. GAO-16-354. Washington, D.C.: March 25, 2016. Social Security’s Future: Answers to Key Questions. GAO-16-75SP. Washington, D.C.: October 27, 2015. Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage. GAO-15-556. Washington, D.C.: September 10, 2015. Highlights of a Forum: Financial Literacy: The Role of the Workplace. GAO-15-639SP. Washington, D.C.: July 7, 2015. 401(K) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts. GAO-15-73. Washington, D.C.: November 21, 2014. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Retirees. GAO-14-866T. Washington, D.C.: September 10, 2014. Financial Literacy: Overview of Federal Activities, Programs, and Challenges. GAO-14-556T. Washington, D.C.: April 30, 2014. Retirement Security: Trends in Marriage and Work Patterns May Increase Economic Vulnerability for Some Retirees. GAO-14-33. Washington, D.C.: January 15, 2014. 401(K) Plans: Labor and IRS Could Improve the Rollover Process for Participants. GAO-13-30. Washington, D.C.: March 7, 2013. Retirement Security: Women Still Face Challenges. GAO-12-699. Washington, D.C.: July 19, 2012. 401(K) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings. GAO-09-715. Washington, D.C: August 28, 2009.

Question: Write a one-page summary of the report 1.

Answer: Small business size standards are of congressional interest because they have a pivotal role in determining eligibility for Small Business Administration (SBA) assistance as well as federal contracting and, in some instances, tax preferences. Although there is bipartisan agreement that the nation's small businesses play an important role in the American economy, there are differences of opinion concerning how to define them. The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the SBA to establish size standards to ensure that only small businesses receive SBA assistance. The SBA currently uses two types of size standards to determine SBA program eligibility: industry-specific size standards and alternative size standards based on the applicant's maximum tangible net worth and average net income after federal taxes. The SBA's industry-specific size standards determine program eligibility for firms in 1,036 industrial classifications in 23 sub-industry activities described in the 2017 North American Industry Classification System (NAICS). The size standards are based on one of four measures: (1) number of employees, (2) average annual receipts in the previous three (may soon be the previous five) years, (3) average asset size as reported in the firm's four quarterly financial statements for the preceding year, or (4) a combination of number of employees and barrel per day refining capacity. Overall, about 97% of all employer firms qualify as small under the SBA's size standards. These firms represent about 30% of industry receipts. The SBA conducts an analysis of various economic factors, such as each industry's overall competitiveness and the competitiveness of firms within each industry, to determine its size standards. However, in the absence of precise statutory guidance and consensus on how to define small, the SBA's size standards have often been challenged, typically by industry representatives seeking to increase the number of firms eligible for assistance and by Members concerned that the size standards may not adequately target assistance to firms that they consider to be truly small. This report provides a historical examination of the SBA's size standards and assesses competing views concerning how to define a small business. It also discusses P.L. 111-240, the Small Business Jobs Act of 2010, which authorized the SBA to establish an alternative size standard using maximum tangible net worth and average net income after federal taxes for both the 7(a) and 504/CDC loan guaranty programs; established, until the SBA acted, an interim alternative size standard for the 7(a) and 504/CDC programs of not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application; and required the SBA to conduct a detailed review of not less than one-third of the SBA's industry size standards every 18 months beginning on the new law's date of enactment (September 27, 2010) and ensure that each size standard is reviewed at least once every five years. P.L. 112-239, the National Defense Authorization Act for Fiscal Year 2013, which directed the SBA not to limit the number of size standards and to assign the appropriate size standard to each NAICS industrial classification. This provision addressed the SBA's practice of limiting the number of size standards it used and combining size standards within industrial groups as a means to reduce the complexity of its size standards and to provide greater consistency for industrial classifications that have similar economic characteristics. P.L. 114-328, the National Defense Authorization Act for Fiscal Year 2017, which authorizes the SBA to establish different size standards for agricultural enterprises using existing methods and appeal processes. Previously, the small business size standard for agricultural enterprises was set in statute as having annual receipts not in excess of $750,000. P.L. 115-324, the Small Business Runway Extension Act of 2018, which directs federal agencies proposing a size standard (and, based on report language accompanying the act, presumably the SBA as well) to use the average annual gross receipts from at least the previous five years, instead of the previous three years, when seeking SBA approval to establish a size standard based on annual gross receipts. Legislation introduced during recent Congresses (including H.R. 33, the Small Business Regulatory Flexibility Improvements Act of 2017, and its Senate companion bill, S. 584, during the 115th Congress) to authorize the SBA's Office of Chief Counsel for Advocacy to approve or disapprove a size standard requested by a federal agency for purposes other than the Small Business Act or the Small Business Investment Act of 1958. The SBA's Administrator currently has that authority.