Workplace Retirement Accounts: Better Guidance and Information Could Help Plan Participants at Home and Abroad Manage Their Retirement Savings
Released: 2018-03-05T00:00:00

Letter

Background

Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC)

The Employee Retirement Income Security Act of 1974 (ERISA) contains various provisions intended to protect the interests of plan participants and beneficiaries in workplace retirement plans. These protections include requirements related to reporting and disclosure, participation, vesting, and benefit accrual, as well as plan funding. For example, ERISA requires plans to provide plan participants with a summary plan description, including information on their rights under ERISA, periodic benefit statements, and upon request, a copy of the annual report including a financial statement, according to DOL. ERISA sets fiduciary standards that generally require workplace retirement plan funds to be handled prudently and in the sole interest of participants. ERISA also establishes certain requirements related to plan termination. ERISA does not require employers to provide workplace retirement plans, but those that do must comply with applicable requirements and standards.

The Internal Revenue Code (IRC) provides favorable tax treatment for workplace retirement plans that meet certain qualification requirements set out in the IRC. For example, employees are generally not taxed on contributions made on their behalf but instead are taxed on benefits received.

Federal Agencies’ Roles with Respect to U.S. Workplace Retirement Plans Department of Labor’s Employee Benefits Security Administration (EBSA)

Several federal agencies play a role with respect to U.S. workplace retirement plans. Responsibility for enforcing ERISA is shared by DOL, Treasury, and PBGC. Treasury, through IRS, is primarily responsible for enforcing the IRC.

The mission of DOL’s Employee Benefits Security Administration (EBSA) is to assure the security of retirement, health, and other workplace-related benefits of U.S. workers and their families. DOL administers Title I of ERISA, which includes the fiduciary standards and disclosure and reporting requirements. To carry out its responsibilities, EBSA issues regulations in these and other areas, and conducts programs and initiatives to assist and educate workers, plan sponsors, fiduciaries, and service providers on their rights and obligations under ERISA. EBSA also issues guidance and field assistance bulletins to assist plan sponsors and plan fiduciaries with managing retirement plans. For instance, in 2014, EBSA issued Field Assistance Bulletin (FAB) 2014-01 to assist fiduciaries of terminating DC plans in fulfilling their obligations under ERISA to locate missing participants and properly distribute their account balances. EBSA also maintains an outreach program employing approximately 100 benefits advisors throughout the country in 13 field offices. The program offers services to educate U.S. workers, beneficiaries, and plan sponsors about their rights and obligations under federal employee benefit laws, and helps individuals obtain retirement benefits that have been improperly denied.

Internal Revenue Service (IRS)

Under Title II of ERISA and subsequent amendments to the IRC, IRS issues and enforces rules that plans must meet to be qualified for preferential tax treatment. IRS also enforces certain provisions in Title I of ERISA regarding participation, vesting, benefit accrual, and minimum funding. IRS’ mission is to help U.S. taxpayers understand and meet their tax responsibilities and to enforce the law with integrity and fairness. To help achieve its mission, IRS issues tax regulations and other guidance to help taxpayers comply with the IRC. IRS guidance provides detailed and technical explanations of tax laws for professional tax preparers as well as taxpayers. IRS also manages a number of initiatives, programs, and systems to enforce federal tax law and assist taxpayers that are related to our review of unclaimed retirement accounts. For example, to assist taxpayers, IRS adopted a Taxpayer Bill of Rights in 2014 to provide a better understanding of taxpayers’ rights under the IRC. IRS also periodically publishes a strategic plan for a given period that outlines how it will improve service to taxpayers and enforce the law. To help ensure that taxpayers are paying the correct amount of tax due and to identify discrepancies, IRS’ Automated Underreporter Program matches taxpayer income and deductions submitted on information returns by third parties against amounts reported by taxpayers on their individual income tax returns. IRS also assists taxpayers and payors with information about federal tax withholding obligations. To assist taxpayers with foreign accounts, since 2003 IRS has offered an Offshore Voluntary Disclosure Program. This program provides a way for taxpayers with previously undisclosed income and undisclosed offshore accounts that need to be reported to contact IRS and resolve their tax matters.

IRS also assists sponsors that administer qualified retirement plans through a number of systems and programs. For example, IRS offers assistance to plan sponsors through the Employee Plans Compliance Resolution System, which helps sponsors of qualified plans remedy operational and form mistakes made in the course of administering a retirement plan and avoid plan disqualification. IRS also forwards letters to missing individuals on behalf of private individuals or government agencies for a “humane purpose” when there is no other way to relay the information to the individual. Between 1994 and 2012, IRS forwarded letters through a letter forwarding program on behalf of entities that control assets that may be due a taxpayer, such as from sponsors of qualified plans that are attempting to locate missing participants.

Pension Benefit Guaranty Corporation (PBGC)

Title IV of ERISA created PBGC as a U.S. government corporation to provide plan termination insurance for certain DB plans that are unable to pay promised benefits. For example, when a PBGC-insured single- employer DB plan fails, PBGC trustees the plan and pays benefits up to statutory limits. PBGC also oversees the voluntary (“standard”) termination of fully funded PBGC-insured single-employer DB plans to ensure participants will receive the benefits to which they are entitled. As part of the standard termination process, PBGC’s Missing Participants Program connects participants—missing when the plan closes out—to their retirement benefits, in part by maintaining a centralized, online database the public can use to find lost retirement benefits.

Social Security Administration (SSA)

SSA provides retirement benefits to eligible individuals under the federal Social Security Old Age and Survivors’ Insurance program (Social Security). Although SSA does not oversee workplace retirement plans, SSA maintains data that are reported to IRS by plans using Form 8955- SSA on separated participants with vested but undistributed benefits. When individuals claim Social Security benefits, SSA may provide them with a “Potential Private Pension Benefit Information” notice that indicates they may be entitled to a retirement benefit through a past employer.

Ongoing and Terminated Workplace Retirement Plans

DOL reported that in 2014 there were just over 639,000 DC plans and nearly 43,500 DB plans in the United States. These plans were sponsored by individual employers (i.e., private single-employer plans) and provided benefits to nearly 118 million participants. When a qualified plan terminates—whether it is a DB or DC plan—federal law requires plan participants to immediately be 100 percent vested in all accrued benefits (to the extent funded in the case of a DB plan) regardless of the vesting schedule in the plan document, according to IRS. A plan sponsor is required to distribute assets from a terminated plan as soon as administratively feasible, but generally within 1 year after plan termination. For terminated DC plans, such as 401(k) plans, participants generally receive the full amount of their vested account balance upon plan termination, according to IRS.

Transferring Savings of Missing Participants in U.S. Defined Contribution Retirement Plans

When an employee separates from an employer but still has vested savings in a qualified defined contribution retirement plan, the plan can, under certain conditions and without the participant’s consent, transfer accounts out of the plan—commonly referred to as a “forced transfer.” Before the Economic Growth and Tax Relief Reconciliation Act of 2001 was enacted, ongoing DC plans could, in the absence of participant instructions, distribute balances of $5,000 or less by paying them directly to the participant, referred to as a “cash-out.” This law sought to protect participants’ retirement savings by requiring ongoing plans that have a cash-out limit that exceeds $1,000 (up to $5,000), in the absence of participant instructions and subject to certain notice requirements, to transfer balances that exceed $1,000 (up to $5,000) to an individual retirement account (IRA), preserving their tax-preferred status.

Terminating plans are subject to different requirements. Fiduciaries of terminating plans are obligated to search for missing participants, to notify them of the termination and pending distribution of benefits before transferring participants’ unclaimed accounts to an IRA or elsewhere, according to DOL guidance. The guidance further provides that fiduciaries of terminating plans who are unable to locate missing participants may also be permitted to transfer accounts belonging to missing participants, without consent, to a federally-insured bank account or to a state’s unclaimed property fund. This occurs if the plan fiduciary cannot find an IRA provider to accept a direct rollover distribution for a missing participant or otherwise determines not to roll over the distribution to an IRA, for some other compelling reason. For tax reporting purposes, transfers made to a bank or a state unclaimed property fund are generally subject to income taxation, according to the guidance. This contrasts with rollovers to IRAs in which transferred retirement savings remain tax- favored. Plan sponsors are generally required to withhold 20 percent of the account balance on transfers to a bank or state unclaimed property fund and will send the withheld amount to Treasury to be used toward any potential taxes due on the distribution.

Tax Treatment of U.S. and Foreign Workplace Retirement Plans in which U.S. Individuals Participate

In the United States, employee and employer contributions and investment earnings in a qualified retirement plan are generally not taxed as income until the employee receives the benefit. For example, employees participating in a 401(k) plan can generally elect to have their employer contribute a portion of their compensation to their account on a pretax basis. This deferred compensation (commonly referred to as a pre- tax elective contribution by IRS) is not subject to income tax withholding, and employees are not required to report it as wages on their individual U.S. tax returns at the time of the contribution. In addition, employers can provide matching or non-elective contributions to an employee’s 401(k) account; these matching or non-elective contributions are generally tax- deductible by the employer and employees also are not required to report these contributions as wages on their U.S. tax returns or pay income tax on these contributions at the time the contributions are made. Distributions from a qualified DC plan in the United States made to participants, including those who have separated from their employer, may be treated differently for tax purposes, depending on the nature and timing of the distribution. For example, a direct rollover, in which money is transferred directly from one qualified workplace retirement plan or IRA to another eligible retirement plan or IRA, is not taxable at the time of the rollover but should be reported on the participant’s federal tax return. By contrast, a distribution that is not rolled over is generally taxable income in the year in which it is received by the participant, according to IRS.

Foreign workplace retirement plans are generally not tax-qualified under the IRC or covered by ERISA, according to IRS officials and tax experts with whom we spoke. They are, however, generally subject to the regulatory structure in place in the country where the retirement plan exists. Foreign workplace retirement plans that cover U.S. individuals may be subject to certain provisions of the IRC and other federal laws governing reporting and taxation of these retirement assets, as well as any applicable income tax treaties between the United States and the foreign country (see more about these treaties below). The extent to which U.S. individuals are subject to U.S. income tax on the contributions and earnings accruing in their foreign workplace retirement account depends on the specific characteristics of the plan. For example, according to tax experts with whom we spoke, many foreign workplace retirement plans qualify as employees’ trusts, and the taxation of contributions and earnings from these plans are governed by section 402(b) of the IRC. According to IRS, as long as the foreign retirement plan is determined to be an employees’ trust, the U.S. individual must include on their U.S. tax return contributions to the trust if the contributions are not subject to a substantial risk of forfeiture (vested). In addition, IRS officials said contributions that become vested after the year of contribution are taxable in the year of vesting, and earnings are taxable when distributed. Some foreign workplace retirement plans may include investments in a Passive Foreign Investment Company (PFIC), which, according to one tax preparer with whom we spoke, are investments in foreign mutual funds, hedge funds, or other kinds of pooled investments not incorporated in the United States. A U.S. individual who is a shareholder of a PFIC may be subject to annual reporting requirements and a high income tax rate on certain distributions.

U.S. individuals who participate in a foreign workplace retirement plan also may be subject to income tax on any distribution they receive from their plan during the current tax year. Depending on the circumstances, U.S. individuals also may be subject to income tax on certain distributions they have not actually received, such as transfers of assets between or within foreign workplace retirement plans, if they are in “constructive receipt” of (or otherwise have income inclusion with respect to) the funds. In addition, U.S. individuals who pay foreign income taxes on distributions from their foreign workplace retirement plans may be eligible to claim a foreign tax credit on their U.S. tax return.

Income Tax Treaties

U.S. Income Tax Treaties with Other Countries One objective of tax treaties is to provide taxpayers some relief from having to pay taxes in both the United States and a foreign country on the same income—referred to as “double taxation”—without creating opportunities for tax evasion or avoidance. Treaty provisions generally apply to both countries that have signed the treaty. A U.S. resident who receives income from a treaty country may be entitled to certain treaty benefits—credits, deductions, exemptions, or reductions in the rate of tax—on the taxes owed to that foreign country. Similarly, residents of the foreign country may be entitled to treaty benefits on their U.S. taxes on income from U.S. sources. However, with certain exceptions, tax treaties generally do not reduce the U.S. tax liability of U.S. residents.

As of October 2017, the United States had a network of 57 comprehensive income tax treaties covering 66 countries, according to Treasury. U.S. individuals are subject to U.S. income tax on their worldwide income, and this could include contributions and earnings within and distributions from a foreign workplace retirement plan. However, tax treaty provisions may reduce foreign income taxes owed by U.S. individuals who receive income sourced from a treaty country; for example, through the use of credits, deductions, exemptions, or tax rate reductions. (See appendix I for more information on how IRS recommends taxpayers review tax treaties.)

According to IRS and Treasury, almost all U.S. tax treaties also contain what is known as a “saving clause,” which IRS describes as a way to preserve or “save” the right of each country to tax its own residents (and in the case of the United States, its citizens) as if no tax treaty were in effect. As a result, these treaties do not generally reduce the U.S. income tax for U.S. individuals, unless an exception applies. In February 2016, Treasury issued a revised U.S. Model Income Tax Convention (i.e., model treaty), which is the baseline text the agency uses when it negotiates tax treaties. Depending on the outcome of the treaty negotiations, the final treaty with a particular foreign country may or may not include language from the model treaty.

Reporting Foreign Accounts and Foreign Financial Assets

According to IRS, the Foreign Account Tax Compliance Act (FATCA) and IRC section 6038D are important developments in U.S. efforts to combat tax evasion by U.S. individuals holding accounts and other financial assets offshore, which may have implications for U.S. individuals who have foreign retirement accounts. FATCA generally requires foreign financial institutions to provide information to IRS regarding foreign financial accounts held by U.S. taxpayers. IRC section 6038D generally requires U.S. individuals to report to IRS their foreign financial assets that exceed a certain threshold. Beginning in July 2014, U.S. entities were required to withhold 30 percent on certain payments to a foreign financial institution unless the institution has entered into an agreement with IRS regarding FATCA reporting or is in a jurisdiction that is treated as having an Intergovernmental Agreement (IGA) in effect. However, FATCA regulations exempt foreign financial institutions from reporting on retirement accounts that meet certain requirements. Treasury has entered into IGAs with other countries to assist with implementing FATCA that may also provide an exemption for foreign financial institutions reporting of certain retirement accounts. This exemption does not exist under IRC section 6038D, which requires individuals, including U.S. citizens, to report their foreign retirement accounts on IRS Form 8938 if they meet certain regulatory thresholds. For example, unmarried U.S. individuals living abroad must file if the total value of their specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

Estimated Number and Financial Profile of U.S. Citizens Living and Working Abroad

The U.S. Department of State (State) estimates that as of April 2015, 8.7 million U.S. citizens lived abroad. (See appendix II for other estimates.) Income data published by IRS for 2011 suggest that a majority of U.S. taxpayers who earned income from foreign sources likely owed little federal income tax because their reported adjusted gross income was relatively low due to tax credits and exemptions available to taxpayers on foreign-earned income. IRS estimated that in 2011 over 449,000 returns were filed by taxpayers reporting foreign-earned income and just over 445,000 of these returns reported using the foreign-earned income exclusion. We previously reported that for tax year 2011, taxpayers claiming the foreign-earned income exclusion had higher average income ($163,450) than the average Form 1040 filer ($58,706), and about 45 percent of those taxpayers had an adjusted gross income of less than $10,000. These data reflect that some taxpayers were able to exclude all or most of their foreign-earned income in calculating their adjusted gross income. We also reported that taxpayers claiming the foreign- earned income exclusion had lower average U.S. tax rates than all Form 1040 filers.

Participants Face Challenges Managing Unclaimed Retirement Accounts and Agencies Have Not Provided Sufficient Guidance and Information to Assist Them or Plan Sponsors Participants Have Challenges Managing Unclaimed Retirement Accounts

Participants in U.S. workplace retirement plans face challenges managing unclaimed accounts accumulated over the course of their careers. We previously reported that some 401(k) plan participants find it difficult to keep track of their savings, particularly when they change jobs, because of challenges with consolidation, communication, and information. First, we found that individuals who accrue multiple accounts over the course of a career may be unable to consolidate their accounts by rolling over savings from one employer’s plan to the next. Second, maintaining communication with a former employer’s plan can be challenging if companies are restructured and plans are terminated or merged and renamed. Third, key information on lost accounts may be held by different plans, service providers, or government agencies, and participants may not know where to turn for assistance. As one witness testified to the ERISA Advisory Council in 2013, it is not uncommon for former employees to have difficulty locating a previous employer.

Existing reporting and disclosure requirements directed at plan sponsors can provide participants who separate from their employer information about their accounts via multiple disclosures. However, plan sponsors have no automatic way to keep participants’ contact information up to date, nor do they have ways to ensure that separated participants will respond to their communications. Many participants rarely read the notices they receive. We conducted a review of private sector pension plan notices in 2013, and found that participants were interested in information about their individual benefits, which could reasonably include information about a pending distribution of their unclaimed account. Due to the large number of participant notices, we found participants struggled with what they must or should read.

When participant notices are ineffective, accounts can become lost or unclaimed and eventually shrink or disappear entirely, diminishing a source of income in retirement. For example, accounts with a balance of $1,000 or less can be cashed out of a plan without participant consent; account balances can be reduced by tax withholding and early distribution taxes, or conditionally forfeited by the plan sponsor until the participant emerges to make a claim. Accounts with balances under $5,000, and sometimes those with larger balances, can be forcibly transferred to an IRA, where the account balances may decrease over time as the fees outpace low investment returns, as we reported in our prior work. In 13 of the 19 forced-transfer IRA scenarios we considered in 2014, a $1,000 account balance was reduced to zero within 30 years. DOL has also uncovered tens of thousands of participants of retirement age with unclaimed accounts that remained in their plans who were not receiving the retirement income they were due.

DOL Has Not Provided Guidance to Ongoing Plan Sponsors for Locating Missing Participants

Although DOL has provided guidance to plan sponsors of terminated DC plans about locating missing participants and unclaimed accounts, DOL has not provided similar guidance to ongoing plans. DOL officials told us that they are conducting investigations of steps taken by ongoing plans to find missing participants under their authority to oversee compliance with ERISA’s fiduciary requirement that plans be administered for the exclusive purpose of providing benefits. Plan sponsors are required to send notices to participants in a variety of circumstances, such as to obtain direction before making a distribution. However, the communication is not always successful, and may result in a mailing to an out-of-date address.

With the absence of guidance, it is not clear to sponsors of ongoing DC plans how they should satisfy requirements to notify participants when participant addresses are out of date. Undeliverable mail is the main indicator for identifying a participant as missing, according to third-party administrators (TPA), who help manage missing participant issues for plan sponsors. However, DOL officials told us a recent pilot investigation found that some ongoing plans send notices that were returned undeliverable but then fail to follow-up with any search process. In contrast, if participants in a terminated plan do not respond to a notice, plan sponsors need to take certain steps, at a minimum, to locate the participant or a beneficiary. According to our analysis of stakeholder interviews, in some circumstances plan sponsors may be considering a participant to have been “notified,” even when the mail used to notify them was returned undeliverable. Executives at one firm that conducts missing participant searches told us that for an average client, 7 to 10 percent of mail will be returned undeliverable, which means communication was unsuccessful, potentially leaving participants without notification of changes to the plan or potential distributions or transfers.

It also is not clear how ongoing plan sponsors should arrange for paying to obtain updated addresses of participants with unclaimed accounts. Because search costs are not all paid from plan assets, finding missing participants can be an additional business expense for plan sponsors. Once an account is force-transferred out of the plan to an IRA, the account may be charged a $65 annual search fee by the IRA provider, as we reported one provider did in 2014. Plan sponsors are permitted to pay only reasonable plan administration expenses, although they may charge expenses associated with a specific participant to that participant’s account. To reduce costs for its plan sponsor clients, representatives at one TPA told us that it will generally try to cash out accounts in ongoing plans under $1,000 immediately, before an address becomes obsolete.

DOL audit findings also show that ongoing plans have challenges staying in touch with missing participants and paying them their benefits when due. DOL officials told us that in a recent DOL pilot investigation of 50 large DB plans, they found tens of thousands of separated participants who were entitled to benefits but were not receiving them. They told us that between 1 and 7 percent of all participants could be missing and not receiving letters from the plan, depending on the industry. They said their investigations found databases with missing names, addresses, and Social Security Numbers, and data they suspected were unreliable, such as participants named “Jane Doe” or with birth dates listed as “1/1/1900.”

DOL enforces the fiduciary standards of ERISA, which require plan fiduciaries to act solely in the interest of plan participants and their beneficiaries, for the exclusive purpose of providing benefits to them, among other things. After plan termination, plan fiduciaries must distribute all plan assets as soon as administratively feasible, which could create an urgent need for plan sponsors to find participants. DOL officials said that part of their enforcement role is examining how plans are maintaining good records and what plans are doing to find and communicate with participants—officials are aware that additional guidance indicating what is expected of plan fiduciaries would be helpful.

PBGC has recently published a final rule which expands its Missing Participants Program to cover most terminated DC plans, and DOL intends to revisit its guidance within that context. At that time, DOL will have an opportunity to also provide guidance to ongoing DC plan sponsors on their obligations under ERISA to prevent, search for, and pay costs associated with missing participants. By doing so, DOL can provide plan sponsors with better tools to manage unclaimed accounts and help ensure that future DOL investigations do not also uncover ongoing DC plans with substantial numbers of participants not receiving benefits to which they are entitled.

IRS Has Not Issued Guidance Clarifying Tax Withholding Requirements for Cashed-Out Unclaimed Retirement Accounts

Based in part on our discussions with IRS and our review of ERISA Advisory Council documentation, when a plan sponsor cashes out an unclaimed account and sends the money to the participant address it has on file, the address may be obsolete. As a result, the participant may not include the distribution in his or her taxable income for the year because the participant may not have received the payment from the plan sponsor or be aware of the transfer. According to an IRS publication on tax withholding for plan sponsors, a 20 percent income tax withholding generally is mandatory on amounts distributed from the plan that are not rolled over directly into another qualified plan or an IRA. However, our findings that some participants may not actually receive these distributions raise questions about whether withholding should be required in situations when it is reasonable to believe distributions will not be received by the participants.

Misconceptions exist regarding how and when IRS will credit tax withholding toward a taxpayer’s tax liability. For example, two TPAs told us they believed that IRS will credit tax withholding on cashed-out accounts to the tax liabilities of missing participants. One industry representative we interviewed in 2013 told us that he withheld taxes when he could not find a participant because he believed the withholding would cause IRS to make the participant aware of the account. According to DOL bulletins issued in 2004 and 2014, some plan sponsors were using 100 percent withholding—in effect transferring the entire account to IRS— under the assumption that the withheld amounts would be matched and applied to a participant’s tax liabilities. DOL bulletins clarified it was not an appropriate distribution option for plan sponsors. Table 1 shows a variety of approaches to tax withholding. However, according to IRS, none of the tax withholding strategies automatically reduces the tax liability of the account holder. IRS officials told us that the agency does not routinely credit federal tax withholding to a taxpayer’s current federal tax liability unless the taxpayer has made a claim.

Retirement accounts with small balances are most vulnerable to the tax consequences of tax withholding by plan sponsors. We previously reported that in the absence of participant instructions, accounts with a balance of $1,000 or less can be cashed out of the tax-deferred plan environment by plan fiduciaries without the separated participant’s consent. From 2004 to 2013, separated participants left more than 13 million accounts of $1,000 or less in workplace retirement plans with an aggregate value of $1.2 billion, according to SSA.

Withholding taxes on balances of $1,000 or less at the time of distribution may result in participants paying taxes twice on the account. IRS told us that missing participants generally have up to 3 years to become aware of and claim the withheld amounts for them to be credited towards their tax liability. However, missing participants who claim their account after 3 years may again pay federal income tax on the account balance, although IRS officials said they thought such a scenario would be rare. (See fig. 1).

IRS has not issued specific guidance clarifying the withholding requirements that apply to distributions from unclaimed accounts in situations in which the participant may be unlikely to receive the distribution. By reviewing the issue of distributions to participants with unclaimed accounts, including reviewing the IRC in this context, IRS may be able to issue guidance on applicable tax withholding and other tax requirements with respect to such accounts. The Taxpayer Bill of Rights states that taxpayers are entitled to clear explanations of the tax laws in IRS publications and notices, and federal internal control standards require agencies to communicate effectively with external stakeholders to help achieve agency goals. U.S. participants already facing the challenge of finding a small account transferred without their consent may discover, when the account is located, 20 percent of their account eliminated by taxes. Without an IRS review of this issue and subsequent guidance, questions may remain about withholding from distributions in situations where the participant may be missing.

Plan Sponsors Can No Longer Use IRS’ Letter Forwarding Program to Locate Missing Participants

Under IRS’ letter forwarding program, between 1994 and 2012 plan sponsors could ask IRS to use IRS’ most current address on file to forward a letter with information about an account to a missing plan participant. However, in 2012 IRS modified the service and no longer forwards letters on behalf of qualified retirement plan sponsors attempting to locate plan participants. According to the 2013 Report of the ERISA Advisory Council on Locating Missing and Lost Participants, the letter forwarding program was a popular alternative for plan sponsors when email and U.S. mail proved ineffective at contacting separated participants. Executives at one large record keeper told us the letter forwarding program provided very important assistance for locating missing participants, noting that few individuals are going to ignore correspondence from IRS. Although the letter forwarding program never notified the plan sponsor as to whether or not the letter reached the intended recipient, executives at one TPA characterized the program as effective. In addition, they said the fact that it was sponsored by IRS and sanctioned by DOL gave plan fiduciaries confidence that they were acting prudently.

Missing participant search services and their value vary widely today, based on industry representatives we interviewed. For example, representatives of one search firm told us they charged $1.25 for a search. However, an executive at a TPA firm told us another firm charged $35 for a Social Security Number-based search, which reliably connected with participants. PBGC estimates the cost of a commercial locator service to be $40 per search. Industry stakeholders told us that the steps currently required by existing guidance do not provide a straightforward way to send a letter about an unclaimed account to a missing plan participant. They described benefits that only IRS can provide through this service, such as the likelihood recipients will open a letter from IRS and the confidence fiduciaries have using an IRS- sponsored program. We discussed with IRS officials the commensurate fees charged in the private sector for missing participant searches and we discussed the variety of services and associated costs currently available.

According to OMB Circular A-123, agencies and individual federal managers must take systematic and proactive measures to develop and implement appropriate, cost-effective management controls for results- oriented management. IRS has always charged a user fee for the letter forwarding program, and the fee has not changed since 1994. IRS officials told us resource constraints led them to revise the letter forwarding program. While IRS management controls will need to ensure that a program expansion is cost-effective, by reinstating the letter forwarding program for plan participants in a cost-effective manner, IRS can help support the retirement security of separated plan participants and plan sponsor efforts to meet their obligations under the IRC and ERISA.

Information Provided to U.S. Workers on Unclaimed Retirement Accounts Is Often Outdated and Incorrect

Certain information U.S. workers receive on unclaimed workplace retirement accounts based on data reported to IRS by plan sponsors is not reliable because plan sponsors are not updating the data over time as required. SSA maintains data on vested, unpaid retirement benefits left behind in workplace retirement plans by separated participants in its pension benefit record database. The information, including the name of the plan, the value of the benefit, and the contact information of the plan administrator, is reported by plan administrators to IRS, and IRS provides it to SSA. When an individual retires and claims Social Security benefits, SSA sends the individual a Notice of Potential Private Pension Benefit Information. The notice informs the recipient that they may have an unclaimed retirement account from a former employer and suggests that they may want to make an effort to determine whether or not the benefit actually does exist. SSA mails about 90,000 notices to new Social Security claimants each month. Separated participants can often find that no benefit exists, according to DOL and SSA documentation and stakeholders we interviewed. A TPA executive also told us separated participants are not always able to determine what happened to their accounts.

IRS and SSA have a memorandum of understanding (MOU) in place establishing their agreements for collecting and managing these data. In the MOU, IRS and SSA agree to pursue improvements to the reporting process. The MOU states that, where appropriate and consistent with IRS directives, IRS will assess penalties under the IRC on plan sponsors who fail to file Form 8955-SSA according to instructions. The agencies have also agreed to contact and receive information from filers as necessary and appropriate to follow up regarding missing, incomplete, or incorrect information requested on the form.

According to the Form 8955-SSA instructions, plan sponsors are required to report when benefits previously reported are paid, and therefore no longer due, to plan participants. Such updates allow the pension benefit record database at SSA, used to generate the Notice of Potential Private Pension Benefit Information, to reflect the fact that those benefits are no longer due. IRS officials said the data can be inaccurate because plan sponsors are not consistently reporting distributions, resulting in erroneous records of accounts accumulating in the database (see fig. 2).

An executive at one TPA told us that plan sponsors generally remember to put participant names on Form 8955-SSA, but often fail to take the names off after benefits are paid. According to the TPA executive, if there are 1,000 names on the list of separated participants with vested benefits in the plan, 999 will have been paid by the time they receive the notice from SSA. Nonetheless, participants will generally inquire about a benefit when they receive the SSA notice because it is from the government, and they trust the notice and think the money is there, according to one TPA with whom we spoke.

IRS officials told us that enforceable penalties can be imposed on plan sponsors for not including all required information on the form. The IRS website lists four possible actions related to incorrectly filing Form 8955- SSA that are subject to a penalty; however, a failure to report distributions is not on the list. IRS officials said if the agency were to add the failure to report distributions to the list the penalty would likely encourage some sponsors to update the data as required.

IRS officials told us they do not currently know which plans are not reporting distributions. The Notice of Potential Private Pension Benefit Information leaves the responsibility for determining whether a benefit exists up to the participant and the agencies do not ask the participant for the results of their inquiries. SSA includes a note at the bottom of the notice encouraging new retirees to contact DOL with complaints, but the participant is not asked to follow up with IRS or SSA to identify plans associated with inaccurate data. Having this information would help IRS select plans to audit in order to update and improve the quality of data in SSA’s pension benefit record database. SSA could modify the notice participants receive to encourage them to inform IRS if they determine the information on the notice to be erroneous. DOL benefits advisers, who field calls from inquiring individuals after they receive a notice about a potential benefit that no longer exists, also have information on plans that may not be reporting distributions to separated participants on Form 8955-SSA as required. DOL officials told us they would need a formal MOU in place to facilitate such information sharing. Figure 3 illustrates these possible options for identifying plans not reporting distributions as required.

Standards for internal control in the federal government state that agencies should communicate quality information externally so that external parties can help agencies achieve their objectives. Although IRS and SSA have agreed in the MOU to work together to promote efforts to improve internal controls, they are not collaborating to improve the likelihood that the Notice of Potential Private Pension Benefit Information will correspond to an actual benefit in the future. While IRS has authority over implementing and enforcing the Form 8955-SSA reporting requirements, IRS officials do not have access to SSA’s pension benefit record database to update records. IRS officials told us at one point they discussed with SSA a possible project that would allow plan sponsors to update all the records associated with their plan at once. SSA officials told us they could collaborate with IRS to update the data in the pension benefit record database. By working together, IRS and SSA can increase the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual workplace retirement benefits in the future.

Complex Tax Requirements and a Lack of Guidance Can Hinder U.S. Individuals’ Ability to Correctly Report Foreign Retirement Accounts

Stakeholders Told GAO that U.S. Individuals Who Participate in Foreign Workplace Retirement Plans Face Multiple Challenges

U.S. individuals who participate in foreign retirement plans can face a number of challenges with tax reporting requirements on their retirement savings. According to IRS officials and tax preparers with whom we spoke, these challenges are greater for U.S. individuals who live and work abroad full time than for corporate executives on temporary assignment in a foreign country. Individuals sent abroad for limited times by their employer often remain as participants in their employer’s U.S. workplace retirement plan and do not need to participate in a foreign workplace plan. According to IRS officials and tax professionals with whom we spoke, many of these executives may have tax filing assistance made available to them by their company, further reducing their reporting burden. Individuals who work in a foreign country may be forced to participate in a mandatory foreign retirement plan, depending on the country and the rules governing residency, according to officials with whom we spoke in our case study locations. In these instances, according to IRS officials, the individuals have no choice but to comply with U.S. tax reporting rules on their foreign retirement accounts. Those who live abroad long-term due to family or personal ties naturally accumulate foreign assets and savings, such as foreign retirement accounts.

Tax preparers in all five case study locations we reviewed, as well as IRS officials, indicated that preparing a U.S. tax return for a participant in a foreign retirement plan is more complex than preparing a comparable U.S. tax return that does not include foreign assets. We were told that attempting to categorize a foreign retirement account for tax reporting under the IRC can be challenging because such accounts may be reported as one of several different designations that may or may not be eligible for tax-deferral in the United States. This contrasts with U.S. individuals participating in U.S. retirement plans that meet the criteria for tax-qualified status under the IRC, who generally receive a Form W-2 Wage and Tax Statement that automatically deducts retirement account contributions from gross wages. In addition, participating in a foreign retirement plan can initiate a complex set of U.S. reporting requirements on retirement assets, such as participants having to report contributions and earnings or having to file additional forms and schedules for their retirement account, which is typically not required of taxpayers with U.S.- based retirement plans. IRS officials told us that the onus is on U.S. individuals who participate in foreign retirement plans to comply with these complex reporting requirements. As a result, these participants often need to turn to expert tax preparers to prepare their U.S. tax return even if they ultimately do not have to pay taxes.

Statutory changes on reporting foreign assets have further affected U.S. individuals who participate in foreign retirement plans. Stakeholders told us that reporting requirements under the Foreign Account Tax Compliance Act (FATCA) can increase the cost of tax preparation for U.S. individuals who participate in foreign retirement plans. For example, according to IRS guidance, these participants in foreign retirement plans must gather and examine monthly retirement account statements, convert the account balance to U.S. dollars, and determine if the total value of the account at the end of the year or anytime during the year caused the individual’s total asset value to exceed the reporting threshold. If the total assets meet the reporting threshold, the participant must report the value of their retirement account even if they are no longer contributing to the account. In contrast, participants in U.S. plans generally are not required to report the value of their U.S. workplace retirement accounts under FATCA or IRC section 6038D, according to IRS. We were also told of other consequences of FATCA for U.S. individuals abroad, such as a reduction in available financial services, as some banks refuse to do business with U.S. individuals because of FATCA’s reporting requirements.

Lastly, once an individual decides to change jobs in a foreign country, transferring foreign retirement savings can be difficult. For example, in several of the case study locations we reviewed foreign officials and tax preparers told us that plans automatically transfer a retirement account to a different account within the plan or to a location outside the plan when an employee separates from their employer, which can have U.S. tax implications. Stakeholders said that existing U.S. tax law does not provide these participants with tax-deferral if they transfer their foreign retirement savings from one foreign workplace retirement plan to another—a benefit granted to U.S. participants in qualified U.S. retirement plans who make such transfers. This condition may act as a disincentive for U.S. individuals abroad to consolidate foreign retirement accounts and can cause challenges when individuals change jobs or are required by their retirement plan or employer to transfer their account.

IRS Guidance Is Unclear Regarding How to Report Foreign Retirement Accounts

While IRS has issued guidance providing information regarding foreign assets and pensions, IRS officials told us that the guidance is not specific on how foreign workplace retirement plans should be treated under the IRC, nor does it provide guidance for specific countries. One source of guidance is Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, which discusses special tax rules for U.S. citizens and resident aliens who work abroad or who have income earned in foreign countries. Another source of guidance in the International Tax Gap Series describes how foreign pensions and annuity distributions are taxed. While both guidance sources provide taxpayers with some information on how to report foreign assets, neither describes in detail how taxpayers are to determine if their foreign workplace retirement plan is eligible for tax deferred status, or how to account for contributions, earnings, or distributions on their annual U.S. tax return, particularly whether and when contributions and earnings should be taxed as income.

IRS also directs taxpayers to review tax treaties, if applicable, for provisions related to pensions, but IRS officials told us these treaties can vary from country to country and said that they can be difficult for non- experts to understand.

For example, Treasury officials told GAO that the tax treaties for two of the five case study locations we selected have pension clauses and certain provisions that apply to U.S. residents of those countries saving for retirement that afford some tax protection. However, Treasury officials said that two of our other case study locations have treaties that do not provide tax protections for U.S. individuals on their foreign retirement accounts (one of our case study locations does not have an income tax treaty with the United States.) Tax preparers and IRS officials we spoke with indicated that it is difficult for U.S. individuals to know how to correctly apply tax treaty provisions to their foreign workplace retirement savings. In addition, these IRS officials and other retirement experts said a U.S. individual abroad without expertise in the IRC and tax treaties would have difficulty reporting their foreign retirement account correctly. Existing IRS guidance does not alleviate the confusion faced by U.S. individuals who participate in foreign retirement plans. Confusion regarding how to report foreign retirement accounts to IRS on a U.S. tax return or elsewhere is inconsistent with U.S. taxpayers’ rights, as described in the Taxpayer Bill of Rights, to pay no more than the correct amount of tax and to know what they need to do to comply with tax laws. (Government Service and Social Security), pensions and other similar remuneration beneficially derived by a resident of a Contracting State in consideration of past employment shall be taxable only in that State. (Government Service and Social Security), annuities derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State. The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during a specified number of years or for life, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).”

Disagreement exists among the professional tax preparers with whom we spoke about the correct method for reporting foreign retirement accounts on a U.S. tax return. IRS officials told us that U.S. tax law generally does not recognize foreign retirement plans as tax-qualified and IRS does not recognize any retirement accounts outside the United States as having tax-qualified status. IRS officials we spoke to said that only plans meeting the specific requirements of 401(k) or other requirements describing retirement plan qualification may achieve tax-qualified status in the United States. As a result, according to IRS guidance, U.S. individuals participating in foreign workplace retirement plans generally cannot deduct contributions to their account from their income on their U.S. tax return. This is true even if the retirement account is considered a tax- deferred retirement account in the country where the individual works, and even if the account is similar in nature to those found in a U.S.-type retirement plan, such as a 401(k) plan. IRS officials told us that it should generally be unnecessary to file a foreign retirement account as a Passive Foreign Investment Company (PFIC) if the foreign retirement plan is covered by a tax treaty with the United States, but acknowledged that some tax advisors in foreign countries advise their U.S. clients to consider their interest in such plans as an investment in a PFIC. For example, in one of the case study locations we reviewed, a tax preparer said that he advises U.S. individuals who participate in such plans to report their foreign retirement account as a PFIC in their U.S. tax filing, and that contributions and earnings are subject to be taxed at the higher tax rate generally applicable to PFICs. Other tax preparers we spoke to in that location said that this is a matter of some discussion among tax preparers and that they reported retirement plans as an employees’ trust. The National Taxpayer Advocate told us that receiving incorrect tax advice from a foreign tax preparer may not be a sufficient mitigating circumstance to avoid penalties for reporting a foreign retirement account incorrectly on a tax return. While reasonable reliance on a tax professional with respect to the details of a return is generally a mitigating circumstance for errors on a return, according to the National Taxpayer Advocate, tax preparers in other countries are usually not considered qualified preparers by IRS. U.S. taxpayers who file an incorrect tax return can lose money by accruing penalties.

IRS officials told us that individual taxpayers are responsible for understanding their filing requirements and for determining how to correctly file their tax returns, regardless of whether they live in a foreign country or the United States. In its mission to help taxpayers meet their tax responsibilities, IRS could issue guidance concerning how U.S. individuals are to correctly report their foreign retirement assets. The Taxpayer Bill of Rights states that as part of the right to a fair and just tax system, taxpayers have a right to expect that system to consider circumstances that affect their ability to provide timely information. IRS officials told us they had been considering issuing improved guidance in some areas pertaining to the taxation of foreign retirement accounts. However, without clearer specific guidance from IRS describing how to correctly report foreign retirement assets on a U.S. tax return, U.S. individuals who participate in foreign workplace retirement plans continue to run the risk of filing incorrect returns due to confusion over how to properly classify and report their accounts. Clarifying how U.S. individuals who participate in foreign workplace retirement plans should report their retirement assets on their annual U.S. tax return will help ensure these taxpayers can meet their tax reporting obligations.

Complying with Reporting Requirements Can Be Costly for U.S. Individuals Who Participate in Foreign Workplace Retirement Plans

Federal law requires U.S. individuals to report specified foreign financial assets, including any applicable retirement and pension accounts they own, if these assets, in the aggregate, are above the regulatory threshold. Similarly, the Report of Foreign Bank and Financial Accounts (FBAR) requires information with respect to foreign accounts above a certain amount. As a result, U.S. individuals who participate in foreign retirement plans may need to hire tax preparers to prepare returns in compliance with these U.S. laws, and, according to tax preparers with whom we spoke, the cost for having a complete tax return professionally prepared for an individual holding a foreign retirement account ranges from $1,800 to as high as $16,000.

Determining how a foreign retirement account should be reported is time consuming even for experts. Tax preparers must prepare multiple items, including the tax return itself, and additional schedules and forms pertaining to the retirement account, according to the preparers with whom we spoke. For example, Form 3520 may be required if the account is being reported as a foreign trust. In addition to preparing tax forms, one tax preparer we spoke to said that preparers may have to spend time trying to obtain other documents necessary to prepare a U.S. tax return, for example, detailed retirement account statements.

Since the implementation of IRC section 6038D, individuals have increased exposure to penalties, and failure to report a foreign retirement account when required may bring significant financial penalties, even if no taxes were due on the retirement account in question. For example, according to the IRS website, failure to report foreign financial assets on Form 8938 as required may result in a penalty of $10,000 and an additional penalty of up to $50,000 for continued failure to report after IRS sends the individual a notification of failure to report. As a result of this reporting requirement, U.S. individuals who participate in workplace retirement plans abroad may incur substantial costs to correctly file their returns and risk diminishing their retirement security if they fail to correctly report their foreign retirement assets.

Even in cases where the individual owes no U.S. tax, tax preparation can costs thousands of dollars. Three tax preparers and representatives of one investment firm that provides pension advice with whom we spoke noted that even if a U.S. individual who participates in a foreign workplace retirement plan did not ultimately owe any taxes, they are required to report their foreign retirement assets under both FATCA and FBAR. Tax preparers in four of our case study locations as well as in the United States mentioned FATCA’s requirements as an added challenge when reporting foreign retirement accounts on U.S. tax returns. Additionally, one investment industry association representative we interviewed said that FATCA casts a wide net and that many “accidental Americans” and U.S. individuals abroad were challenged to comply with its requirements. Some of the tax preparers we spoke with said many individuals taking steps to come into tax compliance as a result of FATCA may happen to have U.S. citizenship but may never have lived or worked in the United States as adults.

The National Taxpayer Advocate told us that the high cost of tax preparation amounted to an “advanced penalty” for U.S. individuals who live abroad. In a written testimony to Congress in 2015, she stated that FATCA has created unique challenges for U.S. taxpayers abroad and presented evidence in Volume 1 of the Taxpayer Advocate Service Fiscal Year 2016 Objectives Report to Congress that there was little evidence that foreign filers are any more likely to be non-compliant than taxpayers in the general taxpayer population. The National Taxpayer Advocate specifically identified concerns with FATCA as an area of focus in the Fiscal Year 2016 Objectives Report to Congress, and stated that taxpayers’ rights to a fair and just tax system, and to pay no more than the correct amount of tax, are being adversely affected by FATCA.

IRS officials we spoke with indicated they are aware of the difficulties some taxpayers are experiencing with these reporting requirements, but said the agency is required to implement the law. They also said that retirement accounts are usually the primary asset for individuals abroad and that from an individual enforcement perspective, these reporting requirements help to ensure a “line of sight” year over year on participants’ foreign pension arrangements. IRS officials expressed concern that unless U.S. individuals are required to report foreign retirement accounts via Form 8938, they will seek to avoid proper reporting on their tax returns when distributions are made.

IRS officials told us they have had extensive conversations about providing a possible exemption from reporting requirements under IRC section 6038D for certain U.S. individuals in foreign countries. IRS decided the ability to review a taxpayer’s foreign retirement data each year through filing a Form 8938 would allow regulators to evaluate whether contributions, earnings, and distributions were being identified and reported accurately. IRS officials stated that the agency’s goal is to build a database with Form 8938 information on individual taxpayers with foreign assets.

IRS officials told us that, unlike individuals, foreign financial institutions in many countries are exempt from reporting retirement accounts under FATCA. IRS officials said this is because such foreign retirement accounts are typically at low risk for tax evasion and Treasury officials told us that the exemption for foreign financial institutions was provided to reduce burden on such institutions. This sentiment was echoed by foreign government officials and retirement experts abroad, who said a retirement account is generally at low-risk for tax evasion both because governments regulate retirement accounts and individuals attempting to evade taxes through a retirement account would have to wait many years before seeing any benefit. With respect to IRC section 6038D, according to IRS officials and Form 8938 instructions, if a fair market value is not readily available for a foreign workplace DB plan, it does not have to be included in the taxpayer’s calculation of the aggregate foreign assets used to determine whether the taxpayer meets the threshold to file Form 8938. If other foreign financial assets, in the aggregate, exceed the threshold, IRS officials said an individual must list their DB plan on Form 8938, but may list a zero balance if no distributions have been made. Given that IRS does not always require reporting of foreign retirement plans on Form 8938 if the plans cannot be readily valued, providing a broader exemption for other types of workplace plans or for other appropriate circumstances from the calculation of the foreign asset threshold could help ease the reporting burden on U.S. individuals. This would assist those individuals who hold most of their wealth in the form of foreign retirement savings in other types of workplace retirement plans, to avoid potentially high penalties that could diminish their retirement savings.

IRS has not systematically analyzed data from Form 8938 on foreign retirement accounts owned by U.S. individuals. As a result, they may not have evidence showing the effect of these reporting requirements on U.S. individuals who participate in foreign workplace retirement plans, for instance, how many enforcement actions related to retirement accounts resulted from filing Form 8938. Without IRS systematically analyzing Form 8938 data on foreign retirement accounts owned by U.S. individuals, the agency will continue to lack an understanding of how these accounts change over time and if they are definitively low-risk for tax evasion. Understanding the effects of these reporting requirements can provide IRS with information to consider whether IRS could offer individuals some form of exemption from reporting on their foreign retirement accounts. Currently, there is no way for IRS to clearly distinguish different types of accounts being reported on Form 8938. To do so would require the Form 8938 to be revised in order to allow taxpayers to clearly specify that the account being reported is a foreign retirement account or pension. In addition, U.S. individuals participating in foreign workplace retirement plans, many of whom count their retirement savings as their primary financial asset, according to IRS officials, will continue to be caught up in IRS’ enforcement efforts aimed at catching tax evaders. These U.S. individuals may continue to face potentially high tax preparation fees to complete the filing of Form 8938 and may be liable for penalties for failure to report foreign retirement accounts that may pose little or no risk for tax evasion.

Absent Specific Treaty Provisions, Current U.S. Tax Law Does Not Exempt from Taxation Transfers in Foreign Workplace Retirement Plans

IRS officials told us that U.S. individuals who participate in foreign workplace retirement plans may not realize that a routine transfer of their foreign retirement assets within plans or from one plan to another should be reported as a taxable event, resulting in an incorrect filing and/or potential penalties. Changing jobs and transferring, or “rolling over” retirement savings to another qualified retirement plan is generally a tax- protected transaction for participants in U.S.-based retirement plans. However, IRS officials told us that a U.S. individual who participates in a foreign retirement plan may owe U.S. taxes for similar transfers within or between foreign workplace retirement plans. Retirement plans in some countries routinely initiate administrative transfers of a participant’s retirement savings between accounts within the plan, to the employee’s new plan, or to a designated institution outside the plan when the participant separates from their employer, according to officials in several of our case study locations. However, IRS officials told us the IRC does not recognize foreign retirement plans as tax-qualified plans, and because these plans are not able to meet the criteria for qualification, tax-deferred transfers or rollovers may not be possible unless a tax treaty provides otherwise. IRS generally considers routine administrative transfers of retirement assets that occur between or within foreign retirement plans to be distributions to the participant and therefore taxable income.

According to IRS officials with whom we spoke, the transfer of retirement assets within or between plans implies that the participant has some access to and control over their retirement funds. Tax preparers and regulators in three of our case study locations told us that such transfers routinely take place (see appendix III). In these situations, IRS officials told us that deferring taxes on retirement contributions and earnings under IRC section 402(b) pertaining to foreign trusts would no longer be applicable because that section of the IRC does not cover transfers—only contributions and earnings within a given foreign trust. Instead, according to IRS officials, the transfer would generally constitute a “constructive receipt of funds” by the participant and would be reportable and taxable. As a result, a U.S. individual who participates in a foreign retirement plan could owe U.S. tax on the entire amount of their retirement savings when they separate from their employer and their account is transferred to another account within the plan or to a different workplace retirement plan (see fig. 4).

Treasury officials said they have been aware of this issue for some years, having discussed it in multiple negotiations with other countries, and have taken steps to incorporate a solution in U.S. model income tax conventions dating as far back as 1996.Treasury officials told us that the 2016 U.S. Model Income Tax Convention includes a clause that would generally exempt from U.S. income tax such transfers if they qualify as tax-deferred transfers under the laws of the other country. According to Treasury officials, few of the treaties currently in force address this issue and many countries do not have tax treaties with the United States.

2016 U. S. Model Income Tax Convention Language Would Exempt Certain Transfers of Foreign Retirement Assets from Taxation The Department of the Treasury developed the U. S. Model Income Tax Convention to be the starting point for negotiating tax treaties with other countries. Language in an actual treaty results from that negotiation and therefore may not include this language. According to Department of the Treasury officials, few treaties currently contain this language. “2016 United States Model Income Tax Convention, Article 17, Paragraph 2(b) Where a citizen of the United States who is a resident of ______ is a member or beneficiary of, or participant in, a pension fund established in _____, the United States may not tax the income earned by the pension fund as income of the individual unless, and then only to the extent that, it is paid to, or for the benefit of, that individual from the pension fund (and not transferred to another pension fund established in _______ in a transfer that qualifies as a tax-deferred transfer under the laws of _______).”

IRS officials told us that if no treaty exists between the United States and the country where the U.S. individual is participating in a foreign workplace retirement plan, or the treaty does not specify how to treat these transfers, there is generally no form of transfer that will receive U.S. income tax-deferral. In these situations, IRS officials said, there is no way that the plan can structure the transfer to prevent the U.S. individual who is transferring assets within or between foreign plans from receiving a distribution and being subject to tax liability. Even in cases where a tax treaty is in place, the treaty may not provide special treatment for the transfer of retirement assets. This would be the case in at least two of the five case study locations we examined, where despite a tax treaty in place, we were unable to identify any provisions that address these types of transfers. In these cases, according to IRS, the U.S. individual must fall back on the IRC, which does not provide tax-deferral on such transfers. As a result, a U.S. individual who participates in a foreign workplace plan would lose any tax-deferrals on the transfer.

IRS officials and tax preparers told us that the transfer issue can cause tax consequences for holders of foreign retirement assets, but one tax preparer we spoke with noted that U.S. tax laws were not written with foreign retirement plans in mind. As a result, tax preparers said it can be difficult to determine how to report foreign workplace retirement assets under the IRC, making routine administrative transactions costly for U.S. individuals who participate in these plans. They said this is because some or all of the account balance may be subject to tax and retirement account asset growth would be lower due to the loss of tax-deferral. Each time retirement assets are transferred, the transfer may be viewed as a distribution, and new contributions and growth could be subject to tax and a loss of tax-deferral. IRS officials also told us that the potential taxation of transfers between foreign plans may cause some individuals to avoid consolidating foreign retirement accounts.

Renegotiating a tax treaty can be time consuming and, according to Treasury officials, is unlikely to happen based on one issue, such as the transfer of retirement savings abroad. Treasury officials in the Office of Tax Policy said that the agency’s approach to address these transfers would be to evaluate the issue on a treaty-by-treaty basis. However, this approach may not provide relief because there is no guarantee the country negotiating a treaty with the United States will agree to include provisions for transferring retirement savings on a tax-deferred basis. In order to provide more immediate relief, these Treasury officials said Congress could pass legislation that would allow routine account transfers between two foreign workplace retirement plans in the same country to be free from U.S. tax if that country has a tax treaty with the United States. However, they cautioned that such efforts should be focused on foreign retirement plans that have already been examined by Treasury, for example, through the process of negotiating a tax treaty or as defined in FATCA IGAs, in order to avoid creating a tax evasion loophole. For example, foreign workplace retirement plans could be defined as those recognized by an existing tax treaty or other plans as deemed appropriate by Treasury’s Office of Tax Policy. According to Treasury officials, transfers within or between such plans in the same country could be protected from unnecessary taxation by, for example, modifying Section 402(b) or other provisions of the IRC. Officials said that without legislation, U.S. individuals who participate in foreign workplace retirement plans must follow current law, which does not provide tax- deferral for transfers within or between foreign plans, even those that may be eligible for tax-deferred contributions and earnings in the foreign jurisdiction. However, by changing the IRC, Congress can ensure that U.S. individuals who participate in foreign workplace retirement plans can consolidate their accounts in a tax-deferred manner without being taxed on the entire balance when their account is transferred.

Conclusions

Plan participants in the current workplace retirement plan environment can accumulate multiple retirement accounts and possibly lose track of them over their careers. The shift to DC plans and the mobility of the American workforce have led to an increase in the number of workplace retirement accounts, with many workers having multiple accounts over the course of their careers. Yet currently, with millions of small retirement accounts left behind by participants with previous employers, plan sponsors are experiencing challenges locating missing participants. DOL has agreed to evaluate the possibility of convening a taskforce to consider the establishment of a national pension registry, in part to address the difficulty of linking missing participants to their former accounts. However, until this effort brings results or another comprehensive solution to unclaimed accounts emerges, there are a variety of improvements federal agencies may make in the short term to help eliminate the inefficiencies in the current system that may reduce participants’ retirement savings. Since DOL audit findings show that ongoing plans have challenges staying in touch with missing participants, and DOL has provided guidance on missing participants for terminating DC plans, providing such guidance for ongoing DC plans will help ensure that separated participants will receive information about their benefits.

In addition, IRS guidance on tax withholding does not address distributions of small unclaimed accounts sent to nonresponsive participants that are not always received by those participants. Some stakeholders mistakenly believe that IRS automatically credits all taxes withheld from such distributions toward taxes due. Following IRS guidance, plans generally withhold taxes on cash-outs from such accounts that the participant may not receive. By reviewing the issue of distributions made to participants who are unlikely to receive them, IRS has an opportunity to issue guidance clarifying the applicable tax withholding requirements in those situations.

IRS also has the potential to offer a service that delivers letters that participants are likely to open, is trusted by plan fiduciaries, and can help connect missing participants with their benefits. IRS was forwarding fewer than 50 letters at a time for plan sponsors at no charge, but decided to stop forwarding letters about unclaimed accounts in 2012. IRS can consider again helping connect participants with unclaimed accounts using the letter forwarding program. Lastly, IRS and SSA can take steps to address situations in which sponsors fail to update data to reflect payment of retirement accounts, rendering the data unreliable. Under the existing agreement between IRS and SSA with respect to the Form 8955- SSA data, the agencies can take steps to ensure participants have a more reliable source of information on their benefits in the future.

U.S. individuals who work abroad and participate in a foreign workplace retirement plan face challenges with reporting their accounts. Managing such accounts can be costly as individuals use expensive tax preparers for reporting their foreign retirement savings to IRS. These U.S. individuals are required to pay taxes on their worldwide income, but can become caught in a web of complex U.S. tax requirements governing how they report their foreign workplace retirement savings. By providing guidance on how to appropriately report foreign workplace retirement accounts, IRS can help U.S. individuals comply with these requirements and minimize their reporting burden.

IRS can also initiate a systematic analysis of Form 8938 data on foreign retirement accounts owned by U.S. individuals. Such data would help IRS gain a better understanding of how these accounts change over time, and to determine if they pose a low-risk for tax evasion. The outcome of this analysis could allow IRS to consider offering these individuals an exemption from reporting requirements on their foreign retirement accounts, further easing the burden U.S. individuals face reporting their foreign retirement assets. Lastly, transferring accounts between foreign retirement plans can have negative tax consequences that threaten the ability of U.S. individuals abroad to save for retirement. Congress may wish to consider whether it can assist U.S. individuals who participate in foreign workplace retirement plans by permitting these individuals to transfer their retirement savings to a different account within the plan or to another foreign workplace retirement plan on a tax-deferred basis when they change jobs or separate from their foreign employer. Doing so would permit these U.S. individuals in foreign workplace retirement plans to receive the tax-deferred benefits available to other U.S. plan participants who reside in the United States and who participate in qualified retirement plans.

Matter for Congressional Consideration

We are making the following matter for congressional consideration.

Congress should consider legislation modifying the Internal Revenue Code to allow routine account transfers within the same foreign workplace retirement plan or between two foreign workplace retirement plans in the same country to be free from U.S. tax in countries covered by an existing income tax treaty that provides for favorable U.S. tax treatment of foreign workplace retirement plan contributions.

Recommendations

We are making a total of seven recommendations, including one to DOL, five to IRS, and one to SSA. a. The Secretary of Labor should issue guidance on the obligations under ERISA of sponsors of ongoing plans to prevent, search for, and pay costs associated with locating missing participants. (Recommendation 1) b. The IRS Commissioner should review taxation issues relating to distributions involving incorrect participant addresses and uncashed benefit checks and clarify for the public the Internal Revenue Code’s requirements in these circumstances. (Recommendation 2) c. The IRS Commissioner should consider revising the letter forwarding program in a cost-effective manner to again provide information on behalf of plan sponsors on unclaimed retirement accounts to participants. (Recommendation 3) d. The IRS Commissioner should clarify how U.S. individuals are to report their foreign retirement accounts. The clarification could include addressing how these accounts should be designated and how the taxpayer should report contributions, earnings, and distributions made from the account. (Recommendation 4) e. The IRS Commissioner should systematically analyze data reported through Form 8938 filings on foreign retirement accounts owned by U.S. individuals with the goal of developing an evidence-based understanding of how these accounts change over time and what level of risk these accounts pose for tax evasion. To assist with this analysis, IRS should consider revising Form 8938 to more clearly distinguish between retirement accounts and other types of accounts or assets being reported by taxpayers under current reporting requirements. (Recommendation 5) f. The IRS Commissioner should take steps to improve the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual retirement benefits in the future, for example, by working with the Social Security Administration as necessary. (Recommendation 6) g. The Social Security Administration Commissioner should take steps to improve the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual retirement benefits in the future, for example, by working with IRS as necessary. (Recommendation 7)

Agency Comments and Our Evaluation

We provided a draft of this report to the Department of Labor, the Department of the Treasury, the Internal Revenue Service, the Social Security Administration, the Pension Benefit Guaranty Corporation, and the U.S. Department of State. DOL, Treasury and IRS, and PBGC provided technical comments, which we have incorporated where appropriate. DOL, IRS, SSA, and PBGC also provided formal comments, which are reproduced in appendices IV, V, VI, and VII, respectively. State did not have any comments. DOL agreed with our recommendation that additional guidance may be helpful to aid plan sponsors and plan fiduciaries of ongoing plans in meeting their existing fiduciary obligations to search for missing participants and to pay benefits. SSA agreed with our recommendation to take steps to improve the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual retirement benefits in the future, for example, by working with IRS as necessary.

In its written comments, IRS stated that it generally agreed with the report and its findings. IRS specifically cited that the report identifies several challenges for participants to manage their retirement savings, such as updating former employers with address changes to continue receiving information about retirement plan accounts with former employers and responding to former employers regarding retirement plan accounts. IRS also stated that U.S. individuals participating in foreign retirement plans often do not know how to correctly report foreign retirement accounts and associated income due to complex federal requirements and treaty provisions governing the taxation of foreign retirement accounts. This recognition by IRS of the complex federal requirements and treaty provisions governing the taxation of foreign retirement accounts is in line with GAO’s concerns about U.S. individuals with foreign workplace retirement accounts having trouble with routine account transfers within the same foreign workplace retirement plan or between two such plans in the same country. We have asked Congress to consider modifying the Internal Revenue Code to allow routine account transfers within the same foreign workplace retirement plan or between two foreign workplace retirement plans in the same country to be free from U.S. tax in countries covered by an existing income tax treaty that provides for favorable U.S. tax treatment of foreign workplace retirement plan contributions. Congress’ ability to modify the Internal Revenue Code in such a way can help U.S. individuals participating in foreign workplace plans to better save for retirement by allowing them to consolidate accounts in a tax- deferred manner without being taxed on the entire balance when their account is transferred.

IRS agreed with two of our recommendations to improve the management of retirement savings. Specifically, IRS agreed to review taxation issues relating to distributions involving incorrect participant addresses and uncashed benefit checks and to clarify for the public the Internal Revenue Code’s requirements in these circumstances. We believe that IRS’ consideration of this recommendation and any subsequent actions the agency takes to clarify the issue will help to address questions about tax withholding from distributions in situations where the participant may be missing or where a distribution check remains uncashed after a period of time. IRS also agreed to work to improve the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual retirement benefits in the future, and agreed to take steps to ensure that the data reported on Form 8955-SSA are accurate and to advise plan sponsors of any changes to reporting these data. We commend IRS for recognizing the importance of addressing this issue for taxpayers and for its willingness to take steps to ensure the accuracy of data reported by plans in the United States on vested benefits belonging to separated employees.

Lastly, IRS agreed with our recommendation to clarify how U.S. individuals are to report their foreign retirement accounts, which could include how the taxpayer should report contributions, earnings, and distributions made from the account. We encourage IRS to take the necessary steps to dispel any confusion U.S. individuals may have over how to properly classify and report their foreign retirement accounts on a U.S. tax return—such clarification should help ensure that these taxpayers can meet their tax reporting obligations.

IRS disagreed with two of our recommendations, citing the limited number of IRS staff and resources needed for the agency to implement these recommendations. First, IRS disagreed with our recommendation to consider revising the letter forwarding program in a cost-effective manner to again provide information on behalf of U.S. plan sponsors on unclaimed retirement accounts to participants. IRS commented that the IRS address of record for a participant would likely be of no greater value than addresses available through alternatives such as commercial locator services. However, our report does not cite the accuracy of IRS addresses, but rather other benefits that make a program revision worth considering, specifically the likelihood that individuals will open IRS correspondence, and the trust DOL places in the service as way for plan fiduciaries to meet their obligations. IRS also stated that the limited number of IRS staff and resources impact the feasibility of reinstating this program for plan participants. GAO continues to believe that expanding the letter forwarding program would be beneficial, and we encourage IRS to consider cost-effective ways to do so.

IRS also disagreed with our recommendation to analyze data provided through Form 8938 filings on foreign retirement accounts owned by U.S. individuals with the goal of developing an evidence-based understanding of how these accounts change over time and what level of risk these accounts pose for tax evasion. Our recommendation further stated that IRS should consider revising Form 8938 to assist with this analysis. In its comments, IRS did not disagree with this recommendation on its merits; IRS only cited a lack of resources to implement the recommendation. Specifically, IRS noted that although the modification to the Form 8938 suggested in this recommendation may seem minor, systemically collecting and analyzing the data would require resources beyond those currently available to IRS. However, as we describe in the report, IRS indicated to us that they already collect foreign account filing data through the Form 8938 and that the current reporting requirements help the agency to “keep a line of sight” on U.S. individuals’ foreign pension arrangements. IRS told us that without such data being reported, U.S. individuals with foreign retirement accounts may seek to avoid proper reporting on their tax returns when distributions are made. However, without agreeing to take steps to analyze these data reported by taxpayers, the question remains why IRS continues to collect such information—which we show in the report to present a substantial reporting burden on taxpayers—if the agency has no plan to analyze the data in order to make an informed decision about the risk for tax evasion that such accounts present. It is also unclear to us how IRS would maintain a line of sight on foreign retirement accounts belonging to U.S. individuals without analyzing the data reported by taxpayers on such accounts. While we recognize that resource limits can impede an agency from taking on additional work and projects, we continue to believe that when staff and resources become available, IRS should modify the form and conduct a systematic analysis of these data—data that current law requires taxpayers to report—in order to assess the risk of tax evasion that foreign retirement accounts pose. Without such an analysis, IRS will have no basis to reach an evidence-based understanding of how these accounts change over time and what level of risk they pose for tax evasion. Further, as we have shown in the report, this reporting can be costly for U.S. individuals and could potentially lead to a decrease in their retirement savings. Without such an analysis by IRS, U.S. individuals who own foreign retirement accounts will continue to face these substantial reporting burdens without the knowledge that the data they are required to provide will be put to good use by the federal government.

As agreed with your offices, 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, Director of the Pension Benefit Guaranty Corporation, Acting Commissioner of the Social Security Administration, the Secretary of State, 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 who made key contributions to this report are listed in appendix VIII.

Appendix I: IRS Instructions on Reviewing Tax Treaty Provisions Related to Foreign Retirement Accounts

IRS advises U.S. taxpayers to review tax treaty provisions carefully to better understand how to report their foreign income, including the distribution of savings from foreign retirement accounts. IRS specifically advises taxpayers to read the residency article in a tax treaty to find any special rules pertaining to reporting and taxing foreign income, including distributions from foreign workplace retirement plans. When deciding whether a tax treaty applies to a taxpayer, the taxpayer should first identify their tax residency (Article 4 under most treaties). According to IRS, a taxpayer’s residency determines how treaty articles on pensions and annuities will be applied and taxpayers should use the domestic laws of each country to identify residency. If, after applying the domestic law of each country, the taxpayer determines they are a resident of both countries, the tiebreaker rules of the applicable treaty are applied to determine residency based on the country in which the taxpayer has closer personal and economic relations, the country of habitual abode for the taxpayer, or the country in which the taxpayer is a national, according to IRS. If none of the above tiebreaker rules apply, the treaty generally provides that residency will be decided by the competent authorities of each country upon request by the taxpayer. Taxpayers are also advised to read all the protocols of the treaty to see if the residency rules have been amended by a later protocol. As a general rule, according to IRS, the pension/annuity articles of most tax treaties allow the country of residence (as determined by the residency article) to tax the pension distribution or annuity under its domestic laws, unless the tax treaty provides an exception to that rule. According to IRS, some treaties, for example, provide that the country of residence may not tax amounts that would not have been taxable by the other country if the individual was a resident of that country. There also may be special rules for lump-sum distributions. If the taxpayer is a U.S. citizen, IRS guidance provides that they also may need to refer to the “saving clause” (typically found in Article 1) for special rules that allow the United States to tax income in some cases as if the treaty had not entered into force.

Appendix II: Estimated Number of U.S. Citizens Living Abroad

Researchers and federal officials have identified a range of estimates for U.S. citizens living outside the United States. (See fig. 5).

The U.S. Department of State (State) estimates that as of April 2015, 8.7 million U.S. citizens live abroad. Table 2 shows estimates of the number of U.S. citizens living abroad by geographic area that State’s Bureau of Consular Affairs recently released to the Federal Voting Assistance Program.

Appendix III: Efforts to Link Participants to Dormant or Unclaimed Retirement Accounts in Case Study Locations

We gathered the information in this appendix for each case study location by reviewing relevant documentation, publicly available research and reports, and interviewing relevant stakeholders, including government officials, plan sponsors, and service providers. We did not conduct an independent legal analysis to verify the information provided about the laws or regulations in the locations we selected for this study. Instead, we relied on appropriate secondary sources and interviews with relevant officials to support our work. We provided this information to appropriate officials in each case study location for their confirmation.

In the five case study locations we reviewed, participants, including U.S. individuals working in those locations, stay connected to their foreign workplace retirement savings through centralized institutions, direct contact with plans or government agencies, or through public pension registries. The low prevalence of unclaimed retirement accounts that we found in these locations is likely due, in part, to participants using these mechanisms to stay connected to their retirement savings.

Unclaimed Retirement Accounts Are Maintained Within Centralized Institutions or a Participant’s Former Employer’s Plan

In two of the five locations we reviewed, Australia and Switzerland, plans transfer dormant accounts belonging to separated employees to a centralized institution that is actively monitored by regulators. These accounts generally remain within these institutions until claims for benefits are made by the participant. For example, Swiss officials told us that in the event of a change of employment, the pension scheme (i.e., plan) of an insured person (i.e., participant) transfers the accumulated assets on behalf of that person to the pension scheme of the new employer. Vested benefits institutions are used to hold the assets when a person ceases to be subject to occupational benefits (workplace retirement) plans owing to termination of employment, e.g. in connection with a career break or being laid off. In these cases, the pension scheme mandatorily transfers the assets to a vested benefits institution. This procedure ensures that the accumulated assets remain blocked in the pension cycle until the insured person joins a new pension scheme or an insured event occurs (old age, disability, or death). Once the person recommences employment and thus becomes subject to mandatory occupational benefits plans again, the termination benefits must be transferred by the vested benefits institution to the new pension scheme. If the pension scheme member or insured person does not become re-employed, the vested benefits institution keeps the assets until an insured event occurs (retirement, disability, or death). Further, if a separated employee fails to inform their former plan that they have a new employer, the participant’s former plan automatically transfers the account after 6 months and within 2 years to the Substitute Occupational Benefit Institution. This institution is a non- profit entity that the Swiss federal government commissioned in 1985; it works closely with the Swiss federal government to maintain Swiss retirement assets for participants and is charged with certain governmental responsibilities. For retirement assets transferred to the Substitute Occupational Benefit Institution, account balances are not merely preserved until claimed or transferred, but grow according to returns on Switzerland’s central fund investments. Figure 6 describes how accounts of separated employees in Switzerland are transferred to designated locations when they become dormant or unclaimed.

Swiss plans also transfer accounts belonging to separated employees to the employee’s new plan once they receive instruction from the employee. This transfer along with account transfers to the Substitute Occupational Benefit Institution or a vested benefits institution, such as a bank or insurance company, contributes to the low prevalence of lost retirement accounts in Switzerland because participants do not accumulate multiple retirement accounts with different plans when changing jobs throughout their career.

In Australia, plans (also referred to as schemes or super funds) transfer unclaimed super accounts belonging to lost members (e.g., separated employees) to a centralized government institution, the Australian Taxation Office (ATO). These accounts generally remain within the ATO until claims for benefits are made by the member. While their money is being held by the ATO it earns interest at the consumer price index rate.

In three of the five locations GAO reviewed—Canada, Hong Kong, and the UK—the participant’s former employer’s plan maintains dormant accounts until claimed or transferred to a new plan. For example, in Hong Kong, according to its retirement schemes (plan) regulator, the Mandatory Provident Fund Schemes Authority (MPFA), whenever employees, including U.S. individuals working in Hong Kong, change to a new employer, they need to open a new Mandatory Provident Fund (MPF) “contribution account” under the MPF scheme in which the new employer participates to accumulate MPF contributions in respect of the new employment. If an employee who has ceased employment with an employer does not take action to transfer the benefits accrued from the previous employment to the new “contribution account” with their new employer’s scheme (i.e., plan) or a “personal account” in an MPF scheme of the employee’s choice, their former employer’s scheme will automatically transfer their accumulated MPF benefits from the contribution account to a personal account within the original scheme for continuous investment. Government officials told us that MPF schemes keep the benefits of the scheme members (i.e., plan participants) within the scheme until the scheme member returns to make a claim or to issue instructions to transfer benefits in the account to another MPF scheme. The MPFA advises scheme members that failing to consolidate the MPF benefits accumulated from previous employments can result in accumulating multiple MPF accounts that can be difficult to manage—this can result in accounts becoming lost over time. To address this challenge, the MPFA conducts regular publicity programs and publishes pamphlets reminding scheme members that when they change employers they should consolidate the benefits under the previous employment to any existing personal accounts or to the new contribution account under the MPF scheme of their new employer.

In two of the five locations we reviewed—Australia and Switzerland— plans are required to regularly report to regulators on unclaimed accounts, missing participants, and account transfers made for separated employees, including those made on behalf of U.S. individuals. For example, in Australia, plans are required to communicate information on unclaimed accounts to the ATO. Specifically, every 6 months plans are required to identify and report members who meet the definition of “lost” and unclaimed accounts considered “uncontactable or inactive” to the ATO. Further, plans are also required to transfer unclaimed accounts to the ATO when certain unclaimed super money criteria are met. In Switzerland, before the end of January each year, occupational benefits institutions and institutions that manage vested benefits accounts or policies are required to report to the 2nd Pillar Central Office all persons for whom assets were held in December of the previous year.

Plans in two of the locations we reviewed provide separated participants information on account transfers that can help them stay connected to their retirement savings. For example, in Hong Kong, MPF schemes (plans) provide a transfer statement to members once the transfer of benefits to another MPF scheme is completed. The MPF scheme that receives the transfer must, as soon as practicable after receiving the transferred benefits, provide the member written notice confirming the transfer and stating the monetary value of those benefits. In Switzerland plans must regularly contact their participants and if unable to do so, must inform the 2nd Pillar Central Office, who will try to reestablish contact between the plan and their participants.

Unclaimed Retirement Accounts Are Accessed Through Contact with Government Agencies or Through Public Pension Registries

Participants in three of the five locations we reviewed can access information on their retirement accounts by contacting a government agency. According to government and retirement plan officials in Australia, participants can access their retirement account details by logging onto the myGov platform, which is a secure way to access government online services. Participants, including U.S. individuals, who have registered online via myGov and have their personal accounts linked to ATO online services can view their retirement accounts online and can claim their money at any time. For those that choose not to register for myGov, they can use the Departing Australia Superannuation Payment online service to claim their super funds once they have departed Australia and their visa has ceased to be in effect. In Hong Kong, MPFA officials told us that scheme members seeking information on their personal accounts or on unclaimed retirement benefits with any MPF scheme (plan) can approach MPFA to request a search of the Personal Accounts Register or Unclaimed Benefits Register, respectively. The MPFA’s website includes instructions for initiating these inquiries. In Switzerland, government officials told us that participants, including U.S. individuals, can directly contact the 2nd Pillar Central Office, which can locate all the institutions holding vested benefits on the participant’s behalf.

In two of the five case study locations, Australia and the UK, participants can access information on their retirement accounts by using pension registries or other government supported services. For example, in the UK, the government provides all participants, including U.S. individuals with a UK retirement account, access to the Pension Tracing Service to help them locate their lost retirement accounts. The UK government has also established other organizations and services to help participants locate their lost retirement accounts. The Pensions Advisory Service is an independent organization that is funded by the UK government. Officials told us that the service was implemented because retirement accounts and pensions in the UK had become excessively complicated. The service sometimes receives questions from participants living abroad, such as in the United States, or from U.S. individuals living in the UK. Service officials told us that it is particularly challenging for these foreign participants to know how to repatriate their retirement benefits and to locate missing retirement accounts. Government officials told us that the UK government is committed to ensuring that members of the public can access good-quality, free-to-client, impartial financial guidance and debt advice which is currently provided by three different organizations. These officials said that a bill was introduced in June 2017 that would set up a new single financial guidance body to provide guidance and information on all matters relating to occupational and personal pensions. Officials said they expect that this single financial guidance body to go live no earlier than October 2018.

The UK government is also currently developing a new pension online tool, the Pensions Dashboard. The dashboard is being developed as a joint project between the UK government and the country’s retirement industry; 17 of the UK’s largest pension firms developed a prototype demonstrating that the technology for the dashboard works. The goal of the dashboard is to allow participants to log into one portal to locate all of their pension data, including information on the value and the location of different retirement savings accumulated throughout their career. Currently, a UK ID verification system is available to UK residents to review their tax bills and other financial information online, and officials are considering permitting participants to use this system with proper credentials to access the dashboard. In time, UK government officials said that the dashboard may replace the UK’s Pension Tracing Service, but not for many years. Other officials added that they are uncertain whether the dashboard will include all plans. One concern is that many lost accounts may be with old defined benefit plans or small defined contribution plans that do not have online systems that can be integrated into the dashboard. As a result, some of the plans most likely to have lost participants may also be the least likely to participate in the dashboard.

Appendix IV: Comments from the Department of Labor

Appendix V: Comments from the Internal Revenue Service

Appendix VI: Comments from the Social Security Administration

Appendix VII: Comments from the Pension Benefit Guaranty Corporation

Appendix VIII: GAO Contact and Staff Acknowledgments

GAO Contact

Charles Jeszeck, (202) 512-7215 or jeszeckc@gao.gov.

Staff Acknowledgments

In addition to the contact named above, Tamara Cross (Assistant Director), Ted Burik (Analyst-in-Charge), Ted Leslie, and Jessica Rider made key contributions to this report. Also contributing to this report were Susan Aschoff, James Bennett, Amy Bowser, Sherwin Chapman, Sarah Cornetto, Brian James, Kristy Kennedy, Jonathan McMurray, Sheila McCoy, Jennifer Lutzy McDonald, Dan Meyer, Mimi Nguyen, Amrita Sen, Deborah Signer, Andrew Stephens, Walter Vance, Kathleen Van Gelder, Adam Wendel, and Seyda Wentworth.