Electronic Filing of Annual Reports, 41359-41368 [06-6331]

Download as PDF Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations make certain modifications to the proposed regulations. These may be more restrictive than the proposed regulations under certain limited circumstances. Consequently, for plan years beginning after December 31, 1996, but before January 1, 2007, an employer is permitted to determine the excludible employees under a section 401(k) plan or section 401(m) plan using either § 1.410(b)–6(g) in the proposed regulations or these final regulations. Special Analyses It has been determined that this is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Drafting Information The principal authors of these regulations are Linda L. Conway and Michael P. Brewer of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in the development of these regulations. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: I PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by removing the entry for §§ 1.410(b)–2 through 1.410(b)–10 and adding entries in numerical order to read, in part, as follows: rmajette on PROD1PC65 with RULES I Authority: 26 U.S.C. 7805. * * * § 1.410(b)–2 also issued under 26 U.S.C. 410(b)(6). § 1.410(b)–3 also issued under 26 U.S.C. 410(b)(6). § 1.410(b)–4 also issued under 26 U.S.C. 410(b)(6). § 1.410(b)–5 also issued under 26 U.S.C. 410(b)(6). § 1.410(b)–6 also issued under 26 U.S.C. 410(b)(6) and section 664 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107–16, 115 Stat. 38). § 1.410(b)–7 also issued under 26 U.S.C. 410(b)(6). § 1.410(b)–8 also issued under 26 U.S.C. 410(b)(6). VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 § 1.410(b)–9 also issued under 26 U.S.C. 410(b)(6). § 1.410(b)–10 also issued under 26 U.S.C. 410(b)(6).* * * I Par. 2. Section 1.410(b)–0 is amended by: I 1. Revising the entry for 1.410(b)–6(g). I 2. Adding entries for 1.410(b)–6(g)(1), (g)(2), and (g)(3). The revision and additions read as follows: § 1.410(b)–0 * * § 1.410(b)–6 Table of contents. * * Excludable employees. * * * * (g) Employees of certain governmental or tax-exempt entities. (1) Plans covered. (2) Employees of governmental entities. (3) Employees of tax-exempt entities. * * * * * I Par. 3. In § 1.410(b)–6, paragraph (g) is revised to read as follows: Excludable employees. * * * * * (g) Employees of certain governmental or tax-exempt entities—(1) Plans covered. For purposes of testing either a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, an employer may treat as excludable those employees described in paragraphs (g)(2) and (3) of this section. (2) Employees of governmental entities. Employees of governmental entities who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as excludable employees if more than 95 percent of the employees of the employer who are not precluded from being eligible employees by reason of section 401(k)(4)(B)(ii) benefit under the plan for the year. (3) Employees of tax-exempt entities. Employees of an organization described in section 403(b)(1)(A)(i) who are eligible to make salary reduction contributions under section 403(b) may be treated as excludable with respect to a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, if— (i) No employee of an organization described in section 403(b)(1)(A)(i) is eligible to participate in such section 401(k) plan or section 401(m) plan; and (ii) At least 95 percent of the employees who are neither employees of an organization described in section 403(b)(1)(A)(i) nor employees of a PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 governmental entity who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) are eligible to participate in such section 401(k) plan or section 401(m) plan. * * * * * I Par. 4. In § 1.410(b)–10, paragraph (e) is added to read as follows: § 1.410(b)–10 Effective dates and transition rules. * * * § 1.410(b)–6 41359 * * * * (e) Effective date for provisions relating to exclusion of employees of certain tax-exempt entities. The provisions in § 1.410(b)–6(g) apply to plan years beginning after December 31, 1996. For plan years to which § 1.410(b)–6 applies that begin before January 1, 1997, § 1.410(b)–6(g) (as it appeared in the April 1, 2005 edition of 26 CFR part 1) applies. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. Approved: June 30, 2006. Eric Solomon, Acting Deputy Assistant Secretary of the Treasury (Tax Policy). [FR Doc. E6–11545 Filed 7–20–06; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2520 RIN 1210–AB04 Electronic Filing of Annual Reports Employee Benefits Security Administration, Labor. ACTION: Final rule. AGENCY: SUMMARY: This document contains a final rule establishing an electronic filing requirement for certain annual reports required to be filed with the Department of Labor by plan administrators and other entities. The Employee Retirement Income Security Act of 1974, as amended (ERISA), the Internal Revenue Code of 1986, as amended (Code), and the regulations issued thereunder impose certain annual reporting obligations on pension and welfare benefit plans, as well as on certain other entities. These annual reporting obligations generally are satisfied by filing the Form 5500 ‘‘Annual Return/Report of Employee Benefit Plan,’’ including any required schedules and attachments (Form 5500). Currently, the Department of Labor E:\FR\FM\21JYR1.SGM 21JYR1 41360 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations (Department), the Pension Benefit Guaranty Corporation, and the Internal Revenue Service (Agencies) use an automated document processing system—the ERISA Filing Acceptance System (EFAST)—to process the Form 5500 filings. As part of the Department’s efforts to update and streamline the current processing system, the regulation contained in this document requires electronic filing of all annual reports filed with the Secretary of Labor (Secretary) for plan years beginning on or after January 1, 2008, to satisfy annual reporting obligations under Part 1 of Title I of ERISA. This regulation affects employee pension and welfare benefit plans, plan sponsors, administrators, and service providers to plans subject to Title I of ERISA. DATES: This rule is effective September 19, 2006. FOR FURTHER INFORMATION CONTACT: Elizabeth A. Goodman or Yolanda R. Wartenberg, Office of Regulations and Interpretations, Employee Benefits Security Administration, (202) 693– 8523. This is not a toll-free number. SUPPLEMENTARY INFORMATION: rmajette on PROD1PC65 with RULES A. Background Sections 104(a) and 4065 of ERISA, and sections 6058(a) and 6059(a) of the Code, and the regulations issued under those sections impose certain annual reporting and filing obligations on pension and welfare benefit plans, as well as on certain other entities.1 Plan administrators, employers, and others generally satisfy these annual reporting obligations by filing the Form 5500 Annual Return/Report of Employee Benefit Plan, together with any required attachments and schedules (Form 5500). On August 30, 2005, the Department of Labor (Department) published in the Federal Register (70 FR 51541) a proposed rule to implement the Department’s announced intention to move to a wholly electronic filing system for receipt of Form 5500 filings (E-Filing Proposal). The E-Filing Proposal described the current automated document processing system—the ERISA Filing Acceptance System (EFAST)—maintained by the Department to process annual reports. 1 Other filing requirements beyond the scope of this rule may apply to employee benefit plans and to multiple employer welfare arrangements under ERISA or to other benefit arrangements under the Code. For example, Code sec. 6033(a) imposes an additional reporting and filing obligation on organizations exempt from tax under Code sec. 501(a), which may be related to retirement trusts that are qualified under sec. 401(a) of the Code. Code sec. 6047(e) also imposes an additional reporting and filing obligation on pension benefit plans that are employee stock ownership plans (ESOPs). VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 Using the EFAST system, the Department annually receives and processes approximately 1.4 million filings. For the 2002 plan year, these filings translated into approximately 25 million paper pages. The EFAST system, which was developed in 1998 and 1999, relies on a mixture of paper and electronic filing options and computerized processing methods to accept, compile, and monitor the Form 5500 filings. A private contractor performs the EFAST processing under a contract with the Department’s Employee Benefits Security Administration (EBSA). The end of the time-limited contracting cycle and the beginning of another contracting cycle present a significant opportunity for EBSA to evaluate the system and to make changes to take advantage of technological advances. In connection with that process, the Department posted, in March 2004, a request for public comments (Request for Comment) on its Web site relating to updating the current EFAST processing system.2 The Department explained in the EFiling Proposal that it believed that a wholly electronic system will result in, among other things, reduced filer errors and, therefore, reduced correspondence and potential for filer penalties; more timely data for public disclosure and enforcement, thereby enhancing the protections for participants and beneficiaries; and lower annual report processing costs, benefiting taxpayers generally. In order to ensure an orderly and cost-effective migration to an electronic filing system by both the Department and Form 5500 filers, the requirement to file electronically was proposed to be implemented for plan years beginning on or after January 1, 2007. The Department received eighteen comment letters on the E-Filing Proposal from representatives of employers, plans, and plan service providers. The Department also received a comment letter from the Small Business Administration’s Office of Advocacy (SBA). Copies of all the comments are posted on the Department’s Web site at http:// www.dol.gov/ebsa/regs/cmt_mefr.html. Set forth below is a discussion of the comments received on the proposal, including changes made in response to the comments, and an overview of the final regulation. 2 A more detailed description of the EFAST processing system is included in the Request for Comment which may be reviewed at: http:// www.efast.dol.gov/efastrfc.html. PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 B. Discussion of Public Comments Virtually all of the comments received in response to the E-Filing Proposal recognized the value of electronic filing over paper filing, expressed support for increasing the use of electronic filing, and recognized that the Department’s move to a wholly electronic system for receipt and processing of Form 5500 filings reflects a trend also seen in the business community to move toward paperless systems. The majority of comments endorsed the concept of a transition to 100 percent electronic filing and favored the development of a secure Internet Web site on which a filer could file the Form 5500 through direct input of data as an option to hiring a third party preparer or purchasing privately developed software to file the Form 5500. Several commenters, including the SBA, questioned the ability of employers, especially small employers, to make the necessary adjustments to comply with an electronic filing mandate for the 2007 plan year, especially in the absence of information about the technical specifications that will have to be met to use the new e-filing system. Most commenters suggested that the Department postpone the implementation to give filers and service providers enough time to prepare their own systems and staff to use the system. Some suggested that the Department grant a transition year exemption from annual reporting civil penalties for unintentional filing violations caused by lack of familiarity with the new filing process. One commenter asked whether electronic filing would apply for administrators of one-participant plans required to file the Form 5500–EZ to satisfy annual reporting requirements under the Code.3 The E-Filing Proposal specifically invited comments on the need for an exception to accommodate any unanticipated and potentially significant impediments to some filers’ transition to electronic filing. Commenters were encouraged to provide specific examples of such impediments, as well as to address the specific conditions for, and necessary scope of, relief under a hardship exception. In response, several commenters suggested as alternatives that the Department phase in the e-file 3 For purposes of the annual reporting requirements under the Code, certain pension benefit arrangements that cover only sole proprietors or partners (and their spouses), which are not employee benefit plans under Title I of ERISA, are permitted to file the Form 5500–EZ to satisfy filing requirements under the Code. See instructions to the Form 5500–EZ to determine who may currently file the Form 5500–EZ. E:\FR\FM\21JYR1.SGM 21JYR1 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations rmajette on PROD1PC65 with RULES mandate over time and allow filers to test the system on a voluntary basis or through a pilot program. One commenter suggested the Department continue to offer paper filing along with electronic filing and, instead of mandating electronic filing, take steps to encourage electronic filing by making it easier and cheaper to use than paper. 1. Electronic Filing Mandate In developing the proposed regulation, the Department sought to advance two main goals. One was to maximize the speed, efficiency, and accuracy with which annual reports are transmitted, accepted, and processed, thereby enhancing the protection of participants’ rights. The other was to minimize the burden placed on filers. In pursuit of these goals, the Department considered and analyzed several alternatives, taking into account the costs and benefits attendant to each. These included the following: (1) Creating a new processing system that could continue to process both electronic and paper submissions without limitation; (2) continuing the present, primarily paper-based processing system on an interim basis alongside a new, solely electronic processing system; (3) developing a new, primarily electronic processing system with a temporary capacity to process a limited number of paper filings, which would be made available under criteria targeting those filers most likely to desire a longer transition period; and (4) transitioning to a new, solely electronic processing system under a uniformly applicable electronic filing requirement. After having carefully considered the public comments, the Department continues to believe, consistent with the goals of E-government, as recognized by the Government Paperwork Elimination Act 4 and the E-Government Act of 2002,5 that the new processing system designed to replace EFAST must have as its core component a requirement that Form 5500 filings be submitted through electronic means. A mandate of electronic filing of benefit plan information, among other program strategies, will facilitate EBSA’s achievement of its Strategic Goal of ‘‘enhancing pension and health benefits of American workers.’’ EBSA’s strategic goal directly supports the Secretary of Labor’s (Secretary) Strategic Goals of ‘‘protecting workers benefits’’ and of fostering ‘‘a competitive workforce,’’ as well as promoting job flexibility and 4 Title XVII, Pub. L. 105–277, 112 Stat. 2681 (Oct. 21, 1998). 5 Pub. L. 107–347, 116 Stat. 2899 (Dec. 17, 2002). VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 minimizing regulatory burden.6 A cornerstone of EBSA’s enforcement program is the collection, analysis, and disclosure of benefit plan information. A comparison of the relative costs and benefits of the available alternatives supports the move to a wholly electronic filing system. The Department believes that a wholly electronic system will result in, among other things, a reduction in filer errors and a correlative reduction in correspondence and potential for filer penalties; more timely data for public disclosure and enforcement, thereby enhancing the protections for participants and beneficiaries; and lower annual report processing costs, benefiting taxpayers generally. The resulting improvement in the timeliness and accuracy of the information from electronic filing would assist EBSA in its enforcement, oversight, and disclosure roles and ultimately enhance the security of plan benefits.7 Having a phase-in period, pilot program, and providing filers with a voluntary choice whether to file electronically, as suggested by some commenters, would require the Department to continue to maintain a paper filing system. The Department still believes that maintaining any paper filing system, even on a reduced scale and/or for a limited period of time, would be inherently inefficient and unduly costly. It is the Department’s view that any economic benefit that might accrue to some limited class of filers under the alternatives considered would be outweighed by the benefits to participants and beneficiaries at large and to the Department and taxpayers generally of implementing a single, wholly electronic system. The Department accordingly is not prepared to adopt any alternative that would involve continuation of paper filing alternatives to electronic filing. The Department’s conclusions concerning the public comments and alternatives are grounded in the 6 For further information on the Department of Labor’s Strategic Plan and EBSA’s relationship to it, see http://www.dol.gov/_sec/stratplan/main.htm. 7 The Government Accountability Office (GAO) noted in a June, 2005 report on the Form 5500 that the current necessity for handling paper filings under EFAST creates a long processing related delay between receipt of a filing and the availability of its information for any enforcement and oversight purposes even in cases where no filing errors are detected. Private Pensions: Government Actions Could Improve the Timeliness and Content of Form 5500 Pension Information (GAO–05–491) (‘‘GAO Report’’) at 28 and fig. 9 at 32. GAO also noted that, where errors in a filing are detected, additional processing delays of up to 120 more days occur. Electronic filing would eliminate virtually all of that processing delay, improving outcomes for all of the users of the Form 5500 information. PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 41361 Regulatory Impact Analysis presented in the E-Filing Proposal and below. 2. Postponed Implementation of Electronic Filing Requirement As noted above, commenters generally expressed concern about the time line in the proposal calling for the new electronic requirement to be implemented for plan years (or reporting years for non-plan filers) commencing on or after January 1, 2007. Several commenters, including the SBA, questioned the ability of employers, especially small employers, to make the necessary adjustments to comply with an electronic filing mandate for the 2007 plan year and urged that a delay of the implementation of the e-file mandate was needed to give all filers and service providers enough time to train staff, adopt new procedures, and install new software. In light of the concerns raised regarding the timing of the implementation of the system, and in order to ensure an orderly and costeffective migration to an electronic filing system by both the Department and Form 5500 filers, the Department has decided to delay the electronic filing requirement. Under the final regulation, the electronic filing requirement is to become effective for all annual report filings made under Part 1 of Title I of ERISA for plan years (or reporting years for non-plan filings) beginning on or after January 1, 2008. Accordingly, the vast majority of filers will have until at least July 2009 to make any necessary adjustments to accommodate the electronic filing of their annual report.8 This delay also affords service providers, software developers, and the Department adequate time to work through electronic processing issues.9 In addition, the Department, in coordination with the Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC), is taking 8 Annual reports generally are not required to be filed until the end of the 7th month following the end of the plan year. 9 One comment noted that to create a wholly electronic filing environment, the filing system will have to be capable of accepting amended filings for prior years where paper filings were permitted as well as delinquent filings that currently can be filed under the Department’s Delinquent Filer Voluntary Compliance Program by using either the form issued for the prior year or the most current form available at the time the administrator files the late report. As noted above, the Department believes that the new e-file system must be the exclusive means for filing all Form 5500s. Accordingly, delinquent or amended filings for prior plan years for which paper filing options were available will be subject to the electronic filing requirement. The Department will provide instructions prior to the inauguration of the system on how those filings are to be made under the electronic filing system. E:\FR\FM\21JYR1.SGM 21JYR1 rmajette on PROD1PC65 with RULES 41362 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations steps to revise the Form 5500 that should further mitigate any burdens associated with transitioning to a new wholly electronic processing system. Concurrently with the publication of this final rule, the Agencies are separately publishing in today’s Federal Register proposed revisions to the annual reporting forms and proposed amendments to the Department’s implementing regulations that are to be applicable for the 2008 plan year, the reporting year for which the new e-filing system will be implemented. As discussed more fully in the separate Federal Register notices, the Agencies believe the proposed form changes in conjunction with the electronic filing system will substantially reduce plan administrators’ reporting compliance burdens and also greatly enhance the utility and accessibility of reported information to the government, participants and beneficiaries, and others. For example, the Agencies are developing a simplified, two-page form (titled the Form 5500–SF with the ‘‘SF’’ standing for ‘‘Short Form’’) for plans that have fewer than 100 participants and that invest in secure, easily valued assets. The Department estimates that approximately 90 percent of all small plan filers would be able to use the new short form. Also, because of limits on what the IRS can require to be filed electronically,10 the IRS is removing from the Form 5500 the schedules, attachments, and information currently required solely to comply with an IRS reporting obligation (e.g., Schedule E (ESOP Annual Information) and Schedule SSA (Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits)). The IRS has advised the Department that, although there are no mandatory electronic filing requirements for the Form 5500 under the Code or the regulations issued thereunder, to ease the burdens on plans the cover only sole proprietors or partners (and their spouses) that are not subject to Title I of ERISA but file the Form 5500–EZ to satisfy the annual reporting and filing obligations imposed by the Code, the IRS intends to permit certain Form 5500–EZ filers to satisfy the requirement to file the Form 5500– EZ with the IRS by filing the Form 5500–SF electronically through the EFAST processing system. Therefore, under the proposal certain Form 5500– EZ filers will be provided both electronic and paper filing options. The 10 See, e.g., 26 CFR 301.6033–4T (mandating electronic filing of certain corporate income tax returns and returns of organizations required to be filed under Code sec. 6033). VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 electronic option would allow 5500–EZ filers to complete and electronically file with EFAST selected information on the Short Form 5500. Form 5500–EZ filers would also be able to choose instead to file a Form 5500–EZ on paper with the IRS. 3. Waiver of Filing Penalties Two commenters, including the SBA, suggested that the Department consider providing filers, especially small plan filers, with a one time exemption from annual reporting civil penalties for unintentional filing violations due to lack of familiarity with the new filing process. Commenters also expressed concern that design and operational issues may arise during the initial stages of implementing the new electronic filing system that may require filers to refile, revise software, or otherwise incur expenses and delay in adjusting their systems to address glitches in the electronic filing system. The comments expressed the view that a one time exemption from civil penalties would help plan sponsors transitioning to an unfamiliar filing process. Section 502(c)(2) of ERISA provides that the Secretary may assess a civil penalty of up to $1,100 a day from the date of a plan administrator’s failure or refusal to file the annual report required to be filed under ERISA.11 Penalties under section 502(c)(2) are assessed only in those instances where there is a failure or refusal to file any annual report within the prescribed time frames or where, subsequent to notification that a filed report has been rejected and the reasons for which the filing has been rejected, the filer fails or refuses to file a corrected report within the 45-day period prescribed in section 104(a)(5) of ERISA. Section 104(a)(5) specifically contemplates that, where a filing is rejected under section 104(a)(4), the filer will be afforded 45 days from the date of the rejection to submit a revised filing satisfactory to the Secretary. Accordingly, in the case of a report rejected under section 104(a)(4), the administrator can avoid the assessment of any penalty under section 502(c)(2) by making the necessary corrections to the filing within the prescribed time frame. In addition, as reflected in the regulation at § 2560.502c–2, penalties may be waived, in whole or in part, upon the administrator’s showing of mitigating circumstances regarding the 11 In accordance with the requirements of the Federal Civil Penalties Inflation Act of 1990, as amended, the Department’s regulation at 29 CFR 2575.502c–2 increased the maximum civil penalty from $1,000 a day as stated in section 502(c)(2) of ERISA to $1,100 a day for violations occurring after July 29, 1997. PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 degree or willfulness of the noncompliance. The Department recognizes that some plan administrators, plan sponsors, and service providers may encounter technical and logistical problems in taking the steps necessary to transition to a wholly electronic filing system for annually submitting Form 5500 reports. As noted above, the Department believes that further delay of the electronic mandate being adopted in this final rule will provide plans and service providers with adequate time to make necessary adjustments in advance of the implementation of the new filing system. The Agencies also will be conducting outreach activities to help filers successfully make the transition to the wholly electronic filing system. Nonetheless, in assessing civil penalties under section 502(c)(2) of ERISA, the Department will take into account technical and logistical obstacles experienced by plan administrators who acted prudently and in good faith in attempting to timely file a complete annual report during the first year of the wholly electronic filing system. In the Department’s view it would be premature at this point to announce a general exemption from annual reporting civil penalties, but the Department will remain open to reconsidering the issue to the extent developments suggest that an exemption for unintentional filing violations caused by lack of familiarity with the new filing process would facilitate a smoother transition to the new electronic filing system. Although not specifically raised by the commentators, annual reporting penalties assessed under section 502(c)(2) of ERISA are independent from those penalties that may be imposed by the IRS for noncompliance with the annual reporting requirements of the Code. Therefore, penalties under one or both statutes could be assessed or waived in a given situation. In this regard, the Department will be coordinating its annual reporting compliance efforts with those of the IRS. 4. Technical Comments on the E-Filing System In connection with the proposal, the Department reviewed the Request for Comments on the technical design of the new electronic filing system and provided further information regarding the project to assist the public in evaluating the electronic filing proposal; however, the Department noted that the proposed regulation concerned only the mandate of electronic filing. A number of commenters included in their comments recommendations regarding E:\FR\FM\21JYR1.SGM 21JYR1 rmajette on PROD1PC65 with RULES Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations various technical and operational specifications that the commenters thought should be part of the new e-filing system. The majority of commenters favored the development of a secure Internet Web site on which a filer could file the Form 5500 through direct input of data as an additional option to hiring a third party preparer or purchasing privately developed software to file the Form 5500. Four commenters requested that the system be structured to allow direct filing by plan administrators so that small plans would not have to hire a paid preparer to file nor have to use privately developed software at plan expense. Several commenters emphasized the need for an automated way to receive an electronic signature in the form of a Personal Identification Number (PIN) or other signer identification. Other commenters suggested that the Department establish both a transmitter-based and a Webbased filing process. Several commenters suggested that multiple parties be able to submit information electronically for single filing, that plan sponsors be allowed to authorize third party filers as well as accommodate multiple signers, and that the plan’s auditor and actuary be able to access the forms and provide approval as needed, including use of a separate electronic signature. Other commenters suggested that the system allow for the ability to download and import into the electronic Form 5500 filing materials from multiple sites or entities and allow for the use of multiple, privately-developed software formats in a filing. One commenter wanted the system to include adequate safeguards against security vulnerabilities resulting from multiple-party access to information saved to a secured Internet Web site. Another commenter recommended developing a standard encryption method for the report of the independent qualified public accountant. One commenter recommended that the e-filing system be capable of processing extensions, and amended and late filings, as well as filings for different years. The Department reiterates its intention to ensure that the new e-filing system will remedy the existing technical difficulties that underlie the perceived limitations of EFAST’s current electronic filing design and will provide an electronic filing process that will be simpler, easier, and more attractive to filers. For example, as explained in the E-Filing Proposal, the Department anticipates that the new electronic filing system will incorporate the Internet as the sole medium for VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 transmission of all filings, with this Internet-based transmission process superseding all of the other currently available methods of transmitting Form 5500 filings, including use of computer diskette, CD–ROM and magnetic tape. The system is to incorporate immediate validity and accuracy checks that will reduce both the error and rejection rate of filings and will eliminate much of the costly post-filing paper correspondence and related potential penalties. It is intended that the new electronic filing system will provide more than one vehicle for the electronic submission of annual return/reports. It is intended that the new filing system will offer users of approved, privately developed Form 5500 computer software (service providers to plans as well as plan administrators) a secure Internet-based method for transmission of Form 5500 filings created through the use of the software. In making a transition to 100 percent electronic filing, it is contemplated that the new system will continue to provide support to private sector software developers. Indeed, it is expected that third-party software will remain the primary means of producing Form 5500s. It is intended that service providers and software developers that provide value-added services for plan sponsors will be able to incorporate the new system’s method of transmission into their services effectively and efficiently. Software file specifications will be based on improved data exchange technology based on widelyaccepted standards, such as XML. It is also intended that software file specifications will be non-proprietary so that users of different software may freely share information across different platforms. The Department also intends to include in the new system, as a separate filing method, a dedicated, secure Internet Web site through which plan administrators (or other return/ report preparers) will be able to input data and to complete and submit Form 5500 filings on an individual plan-byplan basis. It is anticipated that the Internet Web site will provide the filer with the capability of entering and saving data for an individual filing through multiple sessions, uploading attachments, saving return/reports to a repository, and retrieving, updating, and editing stored filings, as well as creating and submitting amended filing data to EBSA. The Department is aware that some filers may be concerned that the new electronic filing system could require changes in their current practices or their purchase of new software. The Department does not believe that filers PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 41363 are at significant risk of not having electronic access or that filers will be required to purchase new software or make significant changes to their current practices. As an initial matter, this filing is made on behalf of employee benefit plans, not individuals. Moreover, the Department’s confidence that these filers should be able to have electronic access, with relatively little difficulty or additional cost, is based on the following considerations. First, the new system will have two options for electronic filing: (1) By entering data directly on screen (through a Web-based system) and (2) by entering data through third-party software that many preparers may choose to use with an XML data feed. Second, the new system will be platform neutral; in this regard, the Department’s Chief Information Officer will confirm and ensure that the new system will support all major platforms (Windows, Mac, UNIX, Linux, etc.) and browsers (Mozilla, Firefox, Opera, IE, Netscape, etc.). Although it is still not possible at this time to provide full technical details regarding the new electronic filing system as many of the technological aspects of the redesign are still in development, the Department has been and will continue to consider the filing community’s concerns and recommendations regarding various technical and operational specifications in the development of the new electronic filing system. In that regard, the Department notes that many of the commenters’ suggestions were previously submitted in response to the Request for Comment that the Department posted on its Web site relating to updating the current EFAST processing system. C. Overview of the Final Rule The rule adds a new § 2520.104a–2, Electronic Filing of Annual Reports, to subpart E of 29 CFR part 2520 and establishes a requirement for the electronic filing of the Form 5500 for purposes of the annual reporting provisions of Title I of ERISA. The final rule provides that any annual report (including any accompanying schedules or attachments) filed with the Secretary under Part 1 of Title I of ERISA for any plan year beginning on or after January 1, 2008, shall be filed electronically in accordance with the instructions applicable to the report and such other guidance as the Secretary may provide. Because the Form 5500 is also filed by certain non-plan entities, such as common or collective trusts, pooled separate accounts, and entities described in 29 CFR 2520.103–12, which file for the fiscal year ending E:\FR\FM\21JYR1.SGM 21JYR1 rmajette on PROD1PC65 with RULES 41364 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations with or within the plan year for which a plan’s annual report is filed, the final rule makes further reference to the first ‘‘reporting year’’ beginning on or after January 1, 2008, for such entities. The rule is designed to ensure that all annual reports filed under Part 1 of Title I of ERISA, as well as any statements or schedules required to be attached to the report, including those filed by administrators (29 CFR 2520.103–1), group insurance arrangements (29 CFR 2520.103–2), common or collective trusts and pooled separate accounts (29 CFR 2520.103–3, 2520.103–4, and 2520.103–9), and entities described in 29 CFR 2520.103–12, are required to be filed electronically. Following the development of a new electronic filing system, the Department intends to provide specific instructions and guidance concerning methods of electronic filing in the instructions for the Form 5500 and via its Web site. The requirement in the final rule to file the annual report electronically applies only to annual reports filed under Part 1 of Title I of ERISA. For purposes of the annual reporting requirements under section 4065 of Title IV of ERISA, the PBGC has advised the Department that all administrators of plans required to file reports under ERISA section 4065 also are required to file reports for purposes of section 104(a) of ERISA and a plan administrator’s electronic filing of the Form 5500 for purposes of ERISA section 104(a), together with the required attachments and schedules and otherwise in accordance with the instructions to the form, will be treated as satisfying the administrator’s annual reporting obligation under section 4065 of Title IV of ERISA. For purposes of the annual filing and reporting requirements of the Code, the IRS has advised the Department that, although there are no mandatory electronic filing requirements for a Form 5500 under the Code or the regulations issued thereunder, the electronic filing of a Form 5500 by plan administrators, employers, and certain other entities for purposes of ERISA section 104(a), together with the required attachments and schedules and otherwise in accordance with the instructions to the Form, will be treated as satisfying the annual filing and reporting requirements under Code sections 6058(a) and 6059(a). Furthermore, as noted above, the IRS has determined that administrators of certain oneparticipant plans may file the Short Form 5500 electronically through the EFAST processing system to satisfy the requirement to file the Form 5500–EZ with the IRS. Administrators of one- VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 participant plans will continue to have the option of filing the Form 5500–EZ, but if they file the Form 5500–EZ, they must file with the IRS, rather than with EFAST.12 The IRS intends that plan administrators, employers, and certain other entities that are subject to other filing and reporting requirements under Code sections 6033(a), 6047(e), and 6057(b) must continue to satisfy these requirements in accordance with IRS revenue procedures, publications, forms, and instructions. With respect to other annual reporting and filing obligations imposed by the Code but not required under section 104(a) of ERISA, such as are currently satisfied by the filing of the Schedule SSA, the IRS has advised the Department that it is currently exploring how best to make a transition from paper filing to electronic filing in a manner that minimizes the burdens on taxpayers and practitioners. For example, the IRS notes that it has promulgated regulations mandating or permitting electronic filing of certain returns filed by pension and welfare benefit plans. See, e.g., 26 CFR 301.6033–4T (mandating electronic filing of certain corporate income tax returns and returns of organizations required to be filed under Code section 6033); 26 CFR 1.6033–4T (returns required to be filed on magnetic media under 26 CFR 301.6033–4T must be filed in accordance with IRS revenue procedures, publications, forms, or instructions). The rule also makes it clear that the requirement to file annual reports electronically does not affect a person’s record retention or disclosure obligations. In other words, the obligations of persons to retain records for purposes of sections 107 and 209 of ERISA would not be altered by the fact that the annual report would be required to be filed in electronic form. Similarly, a plan administrator’s obligation to make the latest annual report available for examination and to furnish copies upon request, in accordance with sections 104(b)(2) and 104(b)(4) of ERISA, will not be affected by an electronic filing requirement. Conforming changes are being made in order to reflect the electronic filing requirement in 29 CFR 2520.103–1(f) (contents of the annual report), 2520.103–2(c) (contents of the annual 12 Under the voluntary electronic filing option, one participant plan filers filing an amended return for a plan year must file the amended return electronically using the Form 5500–SF if they initially filed the Form 5500–SF electronically for the plan year and must file the amendment with the IRS using the paper Form 5500–EZ if they initially filed for plan year with the IRS on a paper Form 5500–EZ. PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 report for a group insurance arrangement), 2520.103–9(d) (direct filing for bank or insurance carrier trusts and accounts), and 2520.103–12(f) (limited exception and alternative method of compliance for annual reporting of investments in certain entities). D. Regulatory Impact Analysis Summary The Department has considered the costs and benefits of this final regulation, taking into account the public comments submitted in response to the proposed regulation, the changes to the proposal incorporated into this final regulation, and the Department’s process to transition from EFAST to a new electronic filing system. The Department believes that the benefits that will arise from mandatory electronic filing beginning with the 2008 plan year will justify its costs. Those costs, which will fall principally on plans, will consist mainly of a onetime, transition or start-up cost to make the change to electronic filing, generally to be incurred in 2009, which on aggregate is estimated to be $22 million. Benefits to plans, which will include ongoing savings on material and postage and efficiency gains from the early detection and elimination of potential filing errors in the course of electronic filing, are estimated to total $10 million annually beginning in 2009. Over time the ongoing savings attributable to this regulation are expected to outweigh its one-time transition cost. Aggregate savings are estimated to exceed aggregate costs by $24 million over the first five years (discounting future savings at a real rate of 3 percent). As previously stated, additional, substantial, although not quantifiable, benefits are expected to accrue to the government and the public in the forms of substantially reduced processing costs and more timely availability of accurate filing data for use in enforcement and for other purposes of benefit to plans and participants. Executive Order 12866 Statement Under Executive Order 12866, the Department must determine whether a regulatory action is ‘‘significant’’ and therefore subject to the requirements of the Executive Order and subject to review by the Office of Management and Budget (OMB). Under section 3(f) of the Executive Order, a ‘‘significant regulatory action’’ is an action that is likely to result in a rule (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the E:\FR\FM\21JYR1.SGM 21JYR1 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations rmajette on PROD1PC65 with RULES economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as ‘‘economically significant’’); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. OMB has determined that this action is significant under section 3(f)(4) because it raises novel legal or policy issues arising from the President’s priorities. Accordingly, the Department has undertaken and describes below an analysis of the costs and benefits of this regulation. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and are likely to have a significant economic impact on a substantial number of small entities. For purposes of analysis under the RFA, EBSA continues to consider a small entity to be an employee benefit plan with fewer than 100 participants. The basis of this definition is found in section 104(a)(2) of ERISA, which permits the Secretary to prescribe simplified annual reports for pension plans that cover fewer than 100 participants. Under section 104(a)(3) of ERISA, the Secretary may also provide for exemptions or simplified annual reporting and disclosure for welfare benefit plans. Pursuant to the authority of section 104(a)(3), the Department has previously issued at 29 CFR 2520.104– 20, 2520.104–21, 2520.104–41, 2520.104–46, and 2520.104b–10, certain simplified reporting provisions and limited exemptions from reporting and disclosure requirements for small plans, including unfunded or insured welfare plans that cover fewer than 100 participants and satisfy certain other requirements. Further, while some large employers may have small plans, in general small employers maintain most small plans. Thus, EBSA believes that assessing the impact of these rules on small plans is an appropriate substitute for evaluating the effect on small entities. The definition of small entity considered appropriate for this purpose differs, however, from a definition of VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 small business that is based on size standards promulgated by the Small Business Administration (13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et seq.). The Department presented an initial regulatory flexibility analysis at the time this regulation was proposed because the Department believed that the proposed regulation might have a significant economic impact on a substantial number of small entities, as defined under section 603 of the RFA. After reviewing and considering the public comments submitted in response to the proposal and the changes that are incorporated into the final regulation, the Department has prepared a final regulatory flexibility analysis, which is presented in this document as part of a broader economic analysis. Costs and Benefits Under this final regulation, costs to plans will include a one-time transition or start-up cost to make the change to electronic filing, estimated at $22 million. Benefits will include ongoing savings on material and postage and efficiency gains from the early detection and elimination of potential filing errors in the course of electronic filing, estimated to total $10 million annually. Over time the ongoing savings attributable to this regulation are expected to outweigh its one-time transition cost. Aggregate savings are estimated to exceed aggregate costs by $24 million over the first five years (discounting future savings at a real rate of 3 percent). Additional benefits are expected to accrue to the government and the public in the forms of reduced processing costs and more timely availability of accurate filing data. The costs and benefits of this regulation will accrue primarily to 815,000 13 plans that file Form 5500s.14 Non-plan entities that file Form 5500s generally do so in their capacity as service providers to plans and therefore are expected to pass their own costs and benefits from the regulation on to the plans they serve.15 13 The numbers used in this analysis for aggregate plans and for plan subcategories (such as large and small plans; hand-print, machine-print, and electronic filers; and correction correspondence) are derived from Form 5500 data for the 2002 plan year. 14 The economic analysis of the regulation pertains only to those plans that file a Form 5500 to satisfy filing requirements under Title I of ERISA. Because the Form 5500–EZ is filed only to satisfy filing requirements under the Code, data related to Form 5500–EZ filers is not included in this analysis. 15 Economic theory predicts that producers in competitive markets pass costs and savings on to buyers. PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 41365 Transition Costs This regulation will entail some onetime costs, incurred in making the transition to electronic filing. The magnitude of the transition costs will vary across filer groups. As described in the economic analysis for the proposed regulation, the Department believes that filers that previously relied on the handprint method of filing will generally face higher transition costs than other filers. The Department has refined its analysis of filers’ transition costs to take into account commenters’ concerns about the increased risk of initial filing difficulties when the new electronic filing system first begins operations, which is associated with potential higher filing costs. For purposes of this analysis, therefore, the Department has assumed that filers who submit an electronic filing within the first six months of operations of the new processing system, from January 1, 2009, through June 30, 2009 (the early filing period), may experience a higher cost.16 Hand-print Filers. Hand-print filers as a group are likely to face larger transition costs than others.17 These filers by and large currently file government printed forms, filled out by hand or by using a typewriter.18 Like all other filers, they will have the option of preparing and submitting their filings via a government provided Web site. It is likely that many (but not all) of these hand-print filers already have an electronic infrastructure (mainly a personal computer and Internet service) sufficient to support electronic filing. Nonetheless, hand-print filers are likely to incur some expense to learn about the new requirement, and some will incur 16 In order to estimate how many filers within each relevant category would be likely to file within the first six months of the new filing system’s operation, the Department analyzed filing patterns of the relevant types of plans for each calendar year from 2000 to 2002 and averaged the resulting data to produce an estimate for each category. 17 The comments focused on small plans in discussing the potential difficulties that hand-print filers may experience. The Department believes that all hand-print filers, regardless of plan size, may experience larger transition costs than machineprint filers, since the size and complexity of the reports filed by larger hand-print filers may create a burden equivalent to that of the small hand-print filers. Accordingly, these estimates treat all handprint filers the same with regard to transition costs. 18 A very small fraction of all hand-print filers, typically a few percent, file computer-generated forms that are similar to and processed in the same way as government printed forms. These filers might tend to incur smaller transition costs than other hand-print filers. Because of their small numbers and the difficulties in separately identifying them in the data used for this analysis, the Department did not attempt to adjust its estimates to reflect this possible difference. This omission may result in a small overstatement of the aggregate transition cost for hand-print filers. E:\FR\FM\21JYR1.SGM 21JYR1 41366 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations rmajette on PROD1PC65 with RULES additional costs, such as in locating and becoming familiar with Internet access, as well as in establishing a secured filing account. For the 96,000 current hand-print filers, the Department estimates that 11,000 will file their 2008 Form 5500 filing during the early filing period (from January 1, 2009, through June 30, 2009). The filers in that group, whether large or small, are assumed to require on average three hours to transition to electronic filing. The hand-print filers who file their 2008 reports after June 30, 2009, are assumed to require on average one and one-half hours each. The resulting transition cost to electronic filing for all hand-print filers is estimated at a one-time, aggregate of $9 million. This assumes that a professional-level employee, who costs the plans on average $58.80 per hour in wages, benefits, and overhead,19 would perform the work required to make the transition to electronic filing. As discussed in the preamble to the proposed regulation, the Department recognizes that transition costs may vary greatly among hand-print filers and may be larger or smaller than these estimates. For example, some hand-filers may decide to switch to use of a service provider for completing the Form 5500 filing, which might entail greater initial expense; others may experience lower costs because they are highly experienced Internet users already engaged in electronic business activities. Machine-Print Filers. The Department has also revised its estimates for machine-print filers to take into account a potentially higher cost of making the transition during the early filing period. The Department believes that a large proportion of machine-print filers hire service providers to complete their filings. For purposes of these estimates, that proportion is conservatively assumed to be 50 percent. With respect to filings on behalf of machine-print filers by service providers during the early filing period, it is likely that service providers will quickly encounter and resolve any early period filing difficulties, reducing the transition cost per plan. Accordingly, the Department has assumed that, for that class of filings, the transition to electronic will require an average of five minutes per filing; later filings are assumed to require no transition costs. These assumptions, applied to an 19 The total labor cost is derived from wage and compensation data from the Bureau of Labor Statistics’ (BLS) 2004 National Occupational Employment and Wage Estimates from the Occupational Employment Survey and BLS 2004 Employment Cost for Compensation. VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 estimated 58,000 of service-provider filings that are expected to be made during early filing period, add $300,000 to the aggregate transition costs. For machine-print filers who prepare their own filings and file them during the early filing period, the Department has assumed that the transition to the electronic filing system will require on average one hour; for later filers, the Department has assumed a transition time averaging 30 minutes. The Department estimates that 355,000 machine-print filers will transition to electronic filing using their own resources, with 58,000 filing during the early filing period, incurring an estimated aggregate transition cost of $12 million. Based on the above-described calculations, the Department estimates that the total aggregate transition costs for all machine-print filers will be $12 million. Electronic Filers The Department has also revised its estimates to include costs attributable to filers who have previously used the electronic methods of filing available under EFAST in order to account for the possibility that electronic filers who file during the early filing period might have larger transition costs than those who make that transition later. The Department estimates that 500 previous electronic filers will file during the early filing period and that their transition to the new electronic processing system will require five minutes per plan. The Department assumes that later filers in this category will have only negligible transition costs. This results in an estimate of $2,000 in aggregate transition costs attributable to electronic filers. In summary, the total aggregate startup, transition cost to electronic filing under this regulation is estimated at $22 million, incurred primarily in 2009. Ongoing Costs and Benefits Preparation Costs. This regulation pertains to the filing, and not to the preparation, of the Form 5500. It is possible, however, that for some filers mandatory electronic filing will prompt changes in preparation methods. For example, hand-print filers may currently prepare their filings using a government-printed form and a typewriter. Such filers may prepare future filings by entering information into a government Web site. The Department considered the cost of making such transitions in preparation methods to be part of the overall transition cost of the regulation, PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 included in the estimates presented above. With respect to ongoing preparation costs, it is possible that some filers will incur higher costs in connection with new preparation methods prompted by this regulation and enabled by the new electronic filing system than with their current methods, while others will incur lower costs. For example, it is not immediately determinable whether entering information into a Web site will take more or less time than typing it onto a paper form. The Department expects that commercial preparation software will incorporate features that ease preparation, such as integrated access to form instructions and automatic filling of data fields based on entries in other fields or in prior filings. The Department also intends that the new government filing Web site interface will be designed with attention to ease of preparation. As it did not have an immediate basis to quantify the magnitude or costs and savings from possible changes in preparation methods, the Department did not attribute any such costs or savings to the regulation. Filing Cost Savings. Filing costs generally are expected to be reduced by the implementation of this regulation. Savings are foreseen from the elimination of materials and mailing costs and from a reduction in filing errors and subsequent corrections. Electronic transmission will eliminate certain costs otherwise attendant to paper filing, including materials and postage. The Department estimates that by changing to electronic filing, 815,000 plans will benefit from approximately $900,000 in such cost-savings annually, assuming savings of $0.0167 per sheet of paper and $0.57 for postage per filing. In addition, automated checks for errors and omissions upon electronic transmission, together with automated error checks and integrated instructions common to filing preparation software, will ease compliance with reporting requirements. Importantly, these features will reduce the need for subsequent amendments to submitted filings, as well as helping to avoid reporting penalties that might otherwise be assessed for deficient filings. Historically, filers that use a softwarebased system generally have fewer filing errors. In 2002, 6 percent and 16 percent of electronic and machine-print filings, respectively, had filing errors compared to 38 percent of hand-print filings. The filing errors include items such as missing signatures, attestations, schedules, or back-up documents that resulted in an incomplete filing. As a result of filer errors and the need for E:\FR\FM\21JYR1.SGM 21JYR1 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations rmajette on PROD1PC65 with RULES additional information or clarifications about Form 5500 filings for the 2002 plan year, the Department mailed 150,000 letters to filers requesting corrections or additions. This correction process ultimately delays the final submission and requires plans to incur additional costs to address deficiencies. The electronic filing system’s intended error detection capability may largely eliminate the Department’s need to forward correspondence to plans with deficient filings. This enhancement is likely to save time for filers. If the need for correspondence can be eliminated, the aggregate annual cost savings to affected filers could be as high as $9 million, assuming elimination of correspondence with the Department saves an average of one hour of a professional’s time, at an average of $58.80 per hour, plus the value of associated postage and materials. A disproportionate share of this savings, estimated at $2.2 million, would accrue to current hand-print filers (reflecting their historically higher filing error rates), while $6.6 million would accrue to machine-print filers. The Department (and by extension taxpayers) would realize additional savings from this reduced need to correct filing errors. Societal Benefits of E-Filing and EGovernment The Department believes, as previously stated in the preamble to the proposed regulation, that the implementation of a fully electronic processing system for Form 5500 filings will produce substantial additional benefits for both the government and the public through reduced processing costs and more timely availability of accurate filing data. The decrease in erroneous filings and corrective correspondence will produce immediate savings to the Federal Government and therefore to taxpayers, and improvements in the data accuracy and accelerated processing will improve the timeliness and reliability of national statistics on private employee benefit plans. In addition, the Department continues to believe that this regulation will contribute to the Federal Government’s progress in implementing E-government initiatives, taking advantage of the electronic information technologies that are becoming increasingly central to business success in the United States. The proliferation of such technologies, and of expertise and familiarity with using them, is expected to moderate the cost of compliance with this regulation and to increase the importance of its implementation. The Department reviewed current literature on this topic in depth in the preamble to the E-Filing VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 Proposal and continues to rely on those studies and their conclusions in adopting this final regulation. Alternatives Considered As discussed in the preamble to the E-Filing Proposal, before electing to pursue a wholly electronic filing system, the Department considered alternative options for reconfiguring the filing methods for the Form 5500, focusing in particular on the gradual approach advocated generally in the public comments on the Request for Comment, which described technical aspects of the development of the new processing system. The preamble to the proposed regulation described these alternatives and the Department’s reasons for rejecting them in favor of mandated electronic filing. The Department continues to believe that allowing filers to choose whether to file electronically or on paper is undesirable because it would perpetuate the inefficiencies inherent in paper filing, such as avoidable filing errors and associated correspondence and civil penalties, delays in processing filings, and inferior data quality, as well as higher costs for the Federal government (and by extension taxpayers). The Department received several comments on the E-Filing Proposal requesting that the Department reconsider some of the rejected alternatives. Commenters also asked the Department to consider providing small plans a one-year deferral of the electronic filing mandate, a one-year period of relief for filing violations, or a voluntary pilot program during the new system’s first year of operations. These commenters suggested that providing this sort of transition relief would ameliorate public concerns about the burden of transitioning to electronic filing. In response to these comments the Department considered delaying the applicability date of the electronic filing mandate an additional year, until the 2009 year. To evaluate this alternative, the Department assessed the relative costs and benefits of mandating electronic filing beginning with the 2008 or 2009 plan year. In each scenario, the Department assumed that the new processing system would be operational as of January 1, 2009. The Department’s economic analysis supports its decision to require electronic filing beginning with the 2008 plan year. As noted earlier, some commenters anticipate that filers who file during the new electronic filing system’s initial months of operation may incur higher transition costs than those who file later. Delaying the applicability date until plan year 2009 PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 41367 would reduce the proportion of filers exposed to such potential higher costs from a substantial minority to a tiny one. The Department estimates that adopting this alternative might reduce aggregate transition costs by $3 million. However, delaying the applicability date would also prolong for an additional year the estimated $10 million combined annual cost arising from paper filing and associated error correction under EFAST, which electronic filing is expected to eliminate, and so on net would increase aggregate, long-term filer costs by $7 million. It would also delay for a year the anticipated societal benefits of electronic filing. Small Plans This regulation will have an impact on small plans. As for all other plans, costs and benefits for small plans are expected to vary with the plans’ circumstances. Most will likely incur moderate transition costs and subsequently realize moderate ongoing savings. Some, however, may experience larger impacts, including greater transition costs and at least some period of ongoing net cost increases rather than ongoing net savings. For example, some small plans may lack experience with or easy access to the Internet. Such plans may incur larger than typical transition costs to gain access to the Internet (or to enlist a service provider with access) and may find it more time consuming, and therefore more costly, to prepare their filing on a government Web site (or to interact with a service provider) than to prepare their filing using a government printed form that is completed ‘‘by hand’’ and filed on paper through the mails. The Department estimates that 667,000 small plans will incur one-time transition costs of $18 million; this includes $7 million for 72,000 current hand-print filers, $11 million for 587,000 current machine-print filers, and $2,000 for 9,000 current electronic filers. It is further estimated that small plans will realize on-going annual savings from the elimination of materials and postage costs (approximately $715,000) and from the elimination of the need to correct deficient filings ($1.8 million accruing to hand-print filers, $5.6 million to machine-print filers, and $36,000 to electronic filers) for a total of approximately $8 million in annual savings. As with all other plans, over time the aggregate ongoing savings realized by small plans are expected to outweigh their aggregate one-time transition costs. Over five years, savings E:\FR\FM\21JYR1.SGM 21JYR1 41368 Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / Rules and Regulations are estimated to exceed costs by $17 million (discounting future savings at a real rate of 3 percent). The Department believes that impacts may vary among small plans, depending for example on their (or their service providers’) access to and familiarity with associated technologies, and possibly on their size. The Department, however, lacks a basis on which to estimate such variations. benefit plan covered under ERISA. The requirements implemented in this final rule do not alter the fundamental reporting and disclosure requirements of the statute with respect to employee benefit plans, and as such have no implications for the States or the relationship or distribution of power between the national government and the States. Paperwork Reduction Act This final regulation does not introduce, or materially modify, any information collection requirement, but furthers the Department’s goal of automating the submission of the Form 5500. As such, this final rule is not subject to the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) because it does not contain a ‘‘collection of information’’ as defined in 44 U.S.C. 3502(3). List of Subjects in 29 CFR Part 2520 Employee benefit plans, Pensions, Reporting and recordkeeping requirements. I For the reasons set forth in the preamble, the Department amends 29 CFR part 2520 as follows: PART 2520—RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE * * * * (c) Electronic filing. See § 2520.104a– 2 and the instructions for the Form 5500 ‘‘Annual Return/Report of Employee Benefit Plan’’ for electronic filing requirements. The trust or other entity described in § 2520.104–43(b) filing under this section must maintain an original copy, with all required signatures, as part of its records. I I 1. The authority section of part 2520 continues to read as follows: § 2520.103–9 Direct filing for bank or insurance carrier trusts and accounts. Authority: 29 U.S.C. 1021–1025, 1027, 1029–31, 1059, 1134, and 1135; Secretary of Labor’s Order 1–2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2520.101–2 also issued under 29 U.S.C. 1132, 1181–1183, 1181 note, 1185, 1185a–b, 1191, and 1191a–c. Secs. 2520.102– 3, 2520.104b–1, and 2520.104b–3 also issued under 29 U.S.C. 1003, 1181–1183, 1181 note, 1185, 1185a–b, 1191, and 1191a–c. Secs. 2520.104b–1 and 2520.107 also issued under 26 U.S.C. 401 note, 111 Stat. 788. * Congressional Review Act The notice of final rulemaking being issued here is subject to the provisions of the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and will be transmitted to the Congress and the Comptroller General for review. rmajette on PROD1PC65 with RULES Unfunded Mandates Reform Act Pursuant to provisions of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104–4), this rule does not include any Federal mandate that may result in expenditures by State, local, or tribal governments, or the private sector, which may impose an annual burden of $100 million or more. Federalism Statement Executive Order 13132 (August 4, 1999) outlines fundamental principles of federalism, and requires Federal agencies to adhere to specific criteria in the process of their formulation and implementation of policies that have substantial direct effects on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. This final rule does not have federalism implications because it has no substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Section 514 of ERISA provides, with certain exceptions specifically enumerated, that the provisions of Titles I and IV of ERISA supersede any and all laws of the States as they relate to any employee VerDate Aug<31>2005 14:42 Jul 20, 2006 Jkt 208001 I 2. Add § 2520.104a–2 after § 2520.104a–1 to read as follows: § 2520.104a–2 reports. Electronic filing of annual must maintain an original copy, with all required signatures, as part of the plan’s records. 4. Amend § 2520.103–2 by revising paragraph (c) as follows: I § 2520.103–2 Contents of the annual report for a group insurance arrangement. * 5. Amend § 2520.103–9 by revising paragraph (d) as follows: * * * * (d) Electronic filing. See § 2520.104a– 2 and the instructions for the Form 5500 ‘‘Annual Return/Report of Employee Benefit Plan’’ for electronic filing requirements. The bank or insurance company which maintains the common or collective trust or pooled separate account must maintain an original copy, with all required signatures, as part of its records. 6. Amend § 2520.103–12 by revising paragraph (f) as follows: I (a) Any annual report (including any accompanying statements or schedules) filed with the Secretary under part 1 of title I of the Act for any plan year (or reporting year, in the case of common or collective trusts, pooled separate accounts, and similar non-plan entities) beginning on or after January 1, 2008, shall be filed electronically in accordance with the instructions applicable to such report, and such other guidance as the Secretary may provide. (b) Nothing in paragraph (a) of this section is intended to alter or affect the duties of any person to retain records or to disclose information to participants, beneficiaries, or the Secretary. I 3. Amend § 2520.103–1 by revising paragraph (f) as follows: § 2520.103–12 Limited exemption and alternative method of compliance for annual reporting of investments in certain entities. § 2520.103–1 report. BILLING CODE 4510–29–P Contents of the annual * * * * * (f) Electronic filing. See § 2520.104a– 2 and the instructions for the Form 5500 ‘‘Annual Return/Report of Employee Benefit Plan’’ for electronic filing requirements. The entity described in paragraph (c) of this section must maintain an original copy, with all required signatures, as part of its records. Signed at Washington, DC, this 13th day of July 2006. Ann L. Combs, Assistant Secretary, Employee Benefits Security Administration. [FR Doc. 06–6331 Filed 7–20–06; 8:45 am] * * * * * (f) Electronic filing. See § 2520.104a– 2 and the instructions for the Form 5500 ‘‘Annual Return/Report of Employee Benefit Plan’’ for electronic filing requirements. The plan administrator PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 E:\FR\FM\21JYR1.SGM 21JYR1

Agencies

[Federal Register Volume 71, Number 140 (Friday, July 21, 2006)]
[Rules and Regulations]
[Pages 41359-41368]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-6331]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2520

RIN 1210-AB04


Electronic Filing of Annual Reports

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Final rule.

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SUMMARY: This document contains a final rule establishing an electronic 
filing requirement for certain annual reports required to be filed with 
the Department of Labor by plan administrators and other entities. The 
Employee Retirement Income Security Act of 1974, as amended (ERISA), 
the Internal Revenue Code of 1986, as amended (Code), and the 
regulations issued thereunder impose certain annual reporting 
obligations on pension and welfare benefit plans, as well as on certain 
other entities. These annual reporting obligations generally are 
satisfied by filing the Form 5500 ``Annual Return/Report of Employee 
Benefit Plan,'' including any required schedules and attachments (Form 
5500). Currently, the Department of Labor

[[Page 41360]]

(Department), the Pension Benefit Guaranty Corporation, and the 
Internal Revenue Service (Agencies) use an automated document 
processing system--the ERISA Filing Acceptance System (EFAST)--to 
process the Form 5500 filings. As part of the Department's efforts to 
update and streamline the current processing system, the regulation 
contained in this document requires electronic filing of all annual 
reports filed with the Secretary of Labor (Secretary) for plan years 
beginning on or after January 1, 2008, to satisfy annual reporting 
obligations under Part 1 of Title I of ERISA. This regulation affects 
employee pension and welfare benefit plans, plan sponsors, 
administrators, and service providers to plans subject to Title I of 
ERISA.

DATES: This rule is effective September 19, 2006.

FOR FURTHER INFORMATION CONTACT: Elizabeth A. Goodman or Yolanda R. 
Wartenberg, Office of Regulations and Interpretations, Employee 
Benefits Security Administration, (202) 693-8523. This is not a toll-
free number.

SUPPLEMENTARY INFORMATION: 

A. Background

    Sections 104(a) and 4065 of ERISA, and sections 6058(a) and 6059(a) 
of the Code, and the regulations issued under those sections impose 
certain annual reporting and filing obligations on pension and welfare 
benefit plans, as well as on certain other entities.\1\ Plan 
administrators, employers, and others generally satisfy these annual 
reporting obligations by filing the Form 5500 Annual Return/Report of 
Employee Benefit Plan, together with any required attachments and 
schedules (Form 5500). On August 30, 2005, the Department of Labor 
(Department) published in the Federal Register (70 FR 51541) a proposed 
rule to implement the Department's announced intention to move to a 
wholly electronic filing system for receipt of Form 5500 filings (E-
Filing Proposal).
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    \1\ Other filing requirements beyond the scope of this rule may 
apply to employee benefit plans and to multiple employer welfare 
arrangements under ERISA or to other benefit arrangements under the 
Code. For example, Code sec. 6033(a) imposes an additional reporting 
and filing obligation on organizations exempt from tax under Code 
sec. 501(a), which may be related to retirement trusts that are 
qualified under sec. 401(a) of the Code. Code sec. 6047(e) also 
imposes an additional reporting and filing obligation on pension 
benefit plans that are employee stock ownership plans (ESOPs).
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    The E-Filing Proposal described the current automated document 
processing system--the ERISA Filing Acceptance System (EFAST)--
maintained by the Department to process annual reports. Using the EFAST 
system, the Department annually receives and processes approximately 
1.4 million filings. For the 2002 plan year, these filings translated 
into approximately 25 million paper pages. The EFAST system, which was 
developed in 1998 and 1999, relies on a mixture of paper and electronic 
filing options and computerized processing methods to accept, compile, 
and monitor the Form 5500 filings. A private contractor performs the 
EFAST processing under a contract with the Department's Employee 
Benefits Security Administration (EBSA). The end of the time-limited 
contracting cycle and the beginning of another contracting cycle 
present a significant opportunity for EBSA to evaluate the system and 
to make changes to take advantage of technological advances. In 
connection with that process, the Department posted, in March 2004, a 
request for public comments (Request for Comment) on its Web site 
relating to updating the current EFAST processing system.\2\
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    \2\ A more detailed description of the EFAST processing system 
is included in the Request for Comment which may be reviewed at: 
http://www.efast.dol.gov/efastrfc.html.
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    The Department explained in the E-Filing Proposal that it believed 
that a wholly electronic system will result in, among other things, 
reduced filer errors and, therefore, reduced correspondence and 
potential for filer penalties; more timely data for public disclosure 
and enforcement, thereby enhancing the protections for participants and 
beneficiaries; and lower annual report processing costs, benefiting 
taxpayers generally. In order to ensure an orderly and cost-effective 
migration to an electronic filing system by both the Department and 
Form 5500 filers, the requirement to file electronically was proposed 
to be implemented for plan years beginning on or after January 1, 2007.
    The Department received eighteen comment letters on the E-Filing 
Proposal from representatives of employers, plans, and plan service 
providers. The Department also received a comment letter from the Small 
Business Administration's Office of Advocacy (SBA). Copies of all the 
comments are posted on the Department's Web site at http://www.dol.gov/
ebsa/regs/cmt_mefr.html.
    Set forth below is a discussion of the comments received on the 
proposal, including changes made in response to the comments, and an 
overview of the final regulation.

B. Discussion of Public Comments

    Virtually all of the comments received in response to the E-Filing 
Proposal recognized the value of electronic filing over paper filing, 
expressed support for increasing the use of electronic filing, and 
recognized that the Department's move to a wholly electronic system for 
receipt and processing of Form 5500 filings reflects a trend also seen 
in the business community to move toward paperless systems. The 
majority of comments endorsed the concept of a transition to 100 
percent electronic filing and favored the development of a secure 
Internet Web site on which a filer could file the Form 5500 through 
direct input of data as an option to hiring a third party preparer or 
purchasing privately developed software to file the Form 5500. Several 
commenters, including the SBA, questioned the ability of employers, 
especially small employers, to make the necessary adjustments to comply 
with an electronic filing mandate for the 2007 plan year, especially in 
the absence of information about the technical specifications that will 
have to be met to use the new e-filing system. Most commenters 
suggested that the Department postpone the implementation to give 
filers and service providers enough time to prepare their own systems 
and staff to use the system. Some suggested that the Department grant a 
transition year exemption from annual reporting civil penalties for 
unintentional filing violations caused by lack of familiarity with the 
new filing process. One commenter asked whether electronic filing would 
apply for administrators of one-participant plans required to file the 
Form 5500-EZ to satisfy annual reporting requirements under the 
Code.\3\
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    \3\ For purposes of the annual reporting requirements under the 
Code, certain pension benefit arrangements that cover only sole 
proprietors or partners (and their spouses), which are not employee 
benefit plans under Title I of ERISA, are permitted to file the Form 
5500-EZ to satisfy filing requirements under the Code. See 
instructions to the Form 5500-EZ to determine who may currently file 
the Form 5500-EZ.
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    The E-Filing Proposal specifically invited comments on the need for 
an exception to accommodate any unanticipated and potentially 
significant impediments to some filers' transition to electronic 
filing. Commenters were encouraged to provide specific examples of such 
impediments, as well as to address the specific conditions for, and 
necessary scope of, relief under a hardship exception. In response, 
several commenters suggested as alternatives that the Department phase 
in the e-file

[[Page 41361]]

mandate over time and allow filers to test the system on a voluntary 
basis or through a pilot program. One commenter suggested the 
Department continue to offer paper filing along with electronic filing 
and, instead of mandating electronic filing, take steps to encourage 
electronic filing by making it easier and cheaper to use than paper.

1. Electronic Filing Mandate

    In developing the proposed regulation, the Department sought to 
advance two main goals. One was to maximize the speed, efficiency, and 
accuracy with which annual reports are transmitted, accepted, and 
processed, thereby enhancing the protection of participants' rights. 
The other was to minimize the burden placed on filers. In pursuit of 
these goals, the Department considered and analyzed several 
alternatives, taking into account the costs and benefits attendant to 
each. These included the following: (1) Creating a new processing 
system that could continue to process both electronic and paper 
submissions without limitation; (2) continuing the present, primarily 
paper-based processing system on an interim basis alongside a new, 
solely electronic processing system; (3) developing a new, primarily 
electronic processing system with a temporary capacity to process a 
limited number of paper filings, which would be made available under 
criteria targeting those filers most likely to desire a longer 
transition period; and (4) transitioning to a new, solely electronic 
processing system under a uniformly applicable electronic filing 
requirement.
    After having carefully considered the public comments, the 
Department continues to believe, consistent with the goals of E-
government, as recognized by the Government Paperwork Elimination Act 
\4\ and the E-Government Act of 2002,\5\ that the new processing system 
designed to replace EFAST must have as its core component a requirement 
that Form 5500 filings be submitted through electronic means. A mandate 
of electronic filing of benefit plan information, among other program 
strategies, will facilitate EBSA's achievement of its Strategic Goal of 
``enhancing pension and health benefits of American workers.'' EBSA's 
strategic goal directly supports the Secretary of Labor's (Secretary) 
Strategic Goals of ``protecting workers benefits'' and of fostering ``a 
competitive workforce,'' as well as promoting job flexibility and 
minimizing regulatory burden.\6\ A cornerstone of EBSA's enforcement 
program is the collection, analysis, and disclosure of benefit plan 
information.
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    \4\ Title XVII, Pub. L. 105-277, 112 Stat. 2681 (Oct. 21, 1998).
    \5\ Pub. L. 107-347, 116 Stat. 2899 (Dec. 17, 2002).
    \6\ For further information on the Department of Labor's 
Strategic Plan and EBSA's relationship to it, see http://
www.dol.gov/_sec/stratplan/main.htm.
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    A comparison of the relative costs and benefits of the available 
alternatives supports the move to a wholly electronic filing system. 
The Department believes that a wholly electronic system will result in, 
among other things, a reduction in filer errors and a correlative 
reduction in correspondence and potential for filer penalties; more 
timely data for public disclosure and enforcement, thereby enhancing 
the protections for participants and beneficiaries; and lower annual 
report processing costs, benefiting taxpayers generally. The resulting 
improvement in the timeliness and accuracy of the information from 
electronic filing would assist EBSA in its enforcement, oversight, and 
disclosure roles and ultimately enhance the security of plan 
benefits.\7\ Having a phase-in period, pilot program, and providing 
filers with a voluntary choice whether to file electronically, as 
suggested by some commenters, would require the Department to continue 
to maintain a paper filing system. The Department still believes that 
maintaining any paper filing system, even on a reduced scale and/or for 
a limited period of time, would be inherently inefficient and unduly 
costly. It is the Department's view that any economic benefit that 
might accrue to some limited class of filers under the alternatives 
considered would be outweighed by the benefits to participants and 
beneficiaries at large and to the Department and taxpayers generally of 
implementing a single, wholly electronic system. The Department 
accordingly is not prepared to adopt any alternative that would involve 
continuation of paper filing alternatives to electronic filing.
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    \7\ The Government Accountability Office (GAO) noted in a June, 
2005 report on the Form 5500 that the current necessity for handling 
paper filings under EFAST creates a long processing related delay 
between receipt of a filing and the availability of its information 
for any enforcement and oversight purposes even in cases where no 
filing errors are detected. Private Pensions: Government Actions 
Could Improve the Timeliness and Content of Form 5500 Pension 
Information (GAO-05-491) (``GAO Report'') at 28 and fig. 9 at 32. 
GAO also noted that, where errors in a filing are detected, 
additional processing delays of up to 120 more days occur. 
Electronic filing would eliminate virtually all of that processing 
delay, improving outcomes for all of the users of the Form 5500 
information.
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    The Department's conclusions concerning the public comments and 
alternatives are grounded in the Regulatory Impact Analysis presented 
in the E-Filing Proposal and below.

2. Postponed Implementation of Electronic Filing Requirement

    As noted above, commenters generally expressed concern about the 
time line in the proposal calling for the new electronic requirement to 
be implemented for plan years (or reporting years for non-plan filers) 
commencing on or after January 1, 2007. Several commenters, including 
the SBA, questioned the ability of employers, especially small 
employers, to make the necessary adjustments to comply with an 
electronic filing mandate for the 2007 plan year and urged that a delay 
of the implementation of the e-file mandate was needed to give all 
filers and service providers enough time to train staff, adopt new 
procedures, and install new software.
    In light of the concerns raised regarding the timing of the 
implementation of the system, and in order to ensure an orderly and 
cost-effective migration to an electronic filing system by both the 
Department and Form 5500 filers, the Department has decided to delay 
the electronic filing requirement. Under the final regulation, the 
electronic filing requirement is to become effective for all annual 
report filings made under Part 1 of Title I of ERISA for plan years (or 
reporting years for non-plan filings) beginning on or after January 1, 
2008. Accordingly, the vast majority of filers will have until at least 
July 2009 to make any necessary adjustments to accommodate the 
electronic filing of their annual report.\8\ This delay also affords 
service providers, software developers, and the Department adequate 
time to work through electronic processing issues.\9\
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    \8\ Annual reports generally are not required to be filed until 
the end of the 7th month following the end of the plan year.
    \9\ One comment noted that to create a wholly electronic filing 
environment, the filing system will have to be capable of accepting 
amended filings for prior years where paper filings were permitted 
as well as delinquent filings that currently can be filed under the 
Department's Delinquent Filer Voluntary Compliance Program by using 
either the form issued for the prior year or the most current form 
available at the time the administrator files the late report. As 
noted above, the Department believes that the new e-file system must 
be the exclusive means for filing all Form 5500s. Accordingly, 
delinquent or amended filings for prior plan years for which paper 
filing options were available will be subject to the electronic 
filing requirement. The Department will provide instructions prior 
to the inauguration of the system on how those filings are to be 
made under the electronic filing system.
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    In addition, the Department, in coordination with the Internal 
Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC), 
is taking

[[Page 41362]]

steps to revise the Form 5500 that should further mitigate any burdens 
associated with transitioning to a new wholly electronic processing 
system. Concurrently with the publication of this final rule, the 
Agencies are separately publishing in today's Federal Register proposed 
revisions to the annual reporting forms and proposed amendments to the 
Department's implementing regulations that are to be applicable for the 
2008 plan year, the reporting year for which the new e-filing system 
will be implemented. As discussed more fully in the separate Federal 
Register notices, the Agencies believe the proposed form changes in 
conjunction with the electronic filing system will substantially reduce 
plan administrators' reporting compliance burdens and also greatly 
enhance the utility and accessibility of reported information to the 
government, participants and beneficiaries, and others. For example, 
the Agencies are developing a simplified, two-page form (titled the 
Form 5500-SF with the ``SF'' standing for ``Short Form'') for plans 
that have fewer than 100 participants and that invest in secure, easily 
valued assets. The Department estimates that approximately 90 percent 
of all small plan filers would be able to use the new short form. Also, 
because of limits on what the IRS can require to be filed 
electronically,\10\ the IRS is removing from the Form 5500 the 
schedules, attachments, and information currently required solely to 
comply with an IRS reporting obligation (e.g., Schedule E (ESOP Annual 
Information) and Schedule SSA (Annual Registration Statement 
Identifying Separated Participants With Deferred Vested Benefits)). The 
IRS has advised the Department that, although there are no mandatory 
electronic filing requirements for the Form 5500 under the Code or the 
regulations issued thereunder, to ease the burdens on plans the cover 
only sole proprietors or partners (and their spouses) that are not 
subject to Title I of ERISA but file the Form 5500-EZ to satisfy the 
annual reporting and filing obligations imposed by the Code, the IRS 
intends to permit certain Form 5500-EZ filers to satisfy the 
requirement to file the Form 5500-EZ with the IRS by filing the Form 
5500-SF electronically through the EFAST processing system. Therefore, 
under the proposal certain Form 5500-EZ filers will be provided both 
electronic and paper filing options. The electronic option would allow 
5500-EZ filers to complete and electronically file with EFAST selected 
information on the Short Form 5500. Form 5500-EZ filers would also be 
able to choose instead to file a Form 5500-EZ on paper with the IRS.
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    \10\ See, e.g., 26 CFR 301.6033-4T (mandating electronic filing 
of certain corporate income tax returns and returns of organizations 
required to be filed under Code sec. 6033).
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3. Waiver of Filing Penalties

    Two commenters, including the SBA, suggested that the Department 
consider providing filers, especially small plan filers, with a one 
time exemption from annual reporting civil penalties for unintentional 
filing violations due to lack of familiarity with the new filing 
process. Commenters also expressed concern that design and operational 
issues may arise during the initial stages of implementing the new 
electronic filing system that may require filers to refile, revise 
software, or otherwise incur expenses and delay in adjusting their 
systems to address glitches in the electronic filing system. The 
comments expressed the view that a one time exemption from civil 
penalties would help plan sponsors transitioning to an unfamiliar 
filing process.
    Section 502(c)(2) of ERISA provides that the Secretary may assess a 
civil penalty of up to $1,100 a day from the date of a plan 
administrator's failure or refusal to file the annual report required 
to be filed under ERISA.\11\ Penalties under section 502(c)(2) are 
assessed only in those instances where there is a failure or refusal to 
file any annual report within the prescribed time frames or where, 
subsequent to notification that a filed report has been rejected and 
the reasons for which the filing has been rejected, the filer fails or 
refuses to file a corrected report within the 45-day period prescribed 
in section 104(a)(5) of ERISA. Section 104(a)(5) specifically 
contemplates that, where a filing is rejected under section 104(a)(4), 
the filer will be afforded 45 days from the date of the rejection to 
submit a revised filing satisfactory to the Secretary. Accordingly, in 
the case of a report rejected under section 104(a)(4), the 
administrator can avoid the assessment of any penalty under section 
502(c)(2) by making the necessary corrections to the filing within the 
prescribed time frame. In addition, as reflected in the regulation at 
Sec.  2560.502c-2, penalties may be waived, in whole or in part, upon 
the administrator's showing of mitigating circumstances regarding the 
degree or willfulness of the noncompliance.
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    \11\ In accordance with the requirements of the Federal Civil 
Penalties Inflation Act of 1990, as amended, the Department's 
regulation at 29 CFR 2575.502c-2 increased the maximum civil penalty 
from $1,000 a day as stated in section 502(c)(2) of ERISA to $1,100 
a day for violations occurring after July 29, 1997.
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    The Department recognizes that some plan administrators, plan 
sponsors, and service providers may encounter technical and logistical 
problems in taking the steps necessary to transition to a wholly 
electronic filing system for annually submitting Form 5500 reports. As 
noted above, the Department believes that further delay of the 
electronic mandate being adopted in this final rule will provide plans 
and service providers with adequate time to make necessary adjustments 
in advance of the implementation of the new filing system. The Agencies 
also will be conducting outreach activities to help filers successfully 
make the transition to the wholly electronic filing system. 
Nonetheless, in assessing civil penalties under section 502(c)(2) of 
ERISA, the Department will take into account technical and logistical 
obstacles experienced by plan administrators who acted prudently and in 
good faith in attempting to timely file a complete annual report during 
the first year of the wholly electronic filing system. In the 
Department's view it would be premature at this point to announce a 
general exemption from annual reporting civil penalties, but the 
Department will remain open to reconsidering the issue to the extent 
developments suggest that an exemption for unintentional filing 
violations caused by lack of familiarity with the new filing process 
would facilitate a smoother transition to the new electronic filing 
system.
    Although not specifically raised by the commentators, annual 
reporting penalties assessed under section 502(c)(2) of ERISA are 
independent from those penalties that may be imposed by the IRS for 
noncompliance with the annual reporting requirements of the Code. 
Therefore, penalties under one or both statutes could be assessed or 
waived in a given situation. In this regard, the Department will be 
coordinating its annual reporting compliance efforts with those of the 
IRS.

4. Technical Comments on the E-Filing System

    In connection with the proposal, the Department reviewed the 
Request for Comments on the technical design of the new electronic 
filing system and provided further information regarding the project to 
assist the public in evaluating the electronic filing proposal; 
however, the Department noted that the proposed regulation concerned 
only the mandate of electronic filing. A number of commenters included 
in their comments recommendations regarding

[[Page 41363]]

various technical and operational specifications that the commenters 
thought should be part of the new e-filing system.
    The majority of commenters favored the development of a secure 
Internet Web site on which a filer could file the Form 5500 through 
direct input of data as an additional option to hiring a third party 
preparer or purchasing privately developed software to file the Form 
5500. Four commenters requested that the system be structured to allow 
direct filing by plan administrators so that small plans would not have 
to hire a paid preparer to file nor have to use privately developed 
software at plan expense. Several commenters emphasized the need for an 
automated way to receive an electronic signature in the form of a 
Personal Identification Number (PIN) or other signer identification. 
Other commenters suggested that the Department establish both a 
transmitter-based and a Web-based filing process. Several commenters 
suggested that multiple parties be able to submit information 
electronically for single filing, that plan sponsors be allowed to 
authorize third party filers as well as accommodate multiple signers, 
and that the plan's auditor and actuary be able to access the forms and 
provide approval as needed, including use of a separate electronic 
signature. Other commenters suggested that the system allow for the 
ability to download and import into the electronic Form 5500 filing 
materials from multiple sites or entities and allow for the use of 
multiple, privately-developed software formats in a filing. One 
commenter wanted the system to include adequate safeguards against 
security vulnerabilities resulting from multiple-party access to 
information saved to a secured Internet Web site. Another commenter 
recommended developing a standard encryption method for the report of 
the independent qualified public accountant. One commenter recommended 
that the e-filing system be capable of processing extensions, and 
amended and late filings, as well as filings for different years.
    The Department reiterates its intention to ensure that the new e-
filing system will remedy the existing technical difficulties that 
underlie the perceived limitations of EFAST's current electronic filing 
design and will provide an electronic filing process that will be 
simpler, easier, and more attractive to filers. For example, as 
explained in the E-Filing Proposal, the Department anticipates that the 
new electronic filing system will incorporate the Internet as the sole 
medium for transmission of all filings, with this Internet-based 
transmission process superseding all of the other currently available 
methods of transmitting Form 5500 filings, including use of computer 
diskette, CD-ROM and magnetic tape. The system is to incorporate 
immediate validity and accuracy checks that will reduce both the error 
and rejection rate of filings and will eliminate much of the costly 
post-filing paper correspondence and related potential penalties. It is 
intended that the new electronic filing system will provide more than 
one vehicle for the electronic submission of annual return/reports. It 
is intended that the new filing system will offer users of approved, 
privately developed Form 5500 computer software (service providers to 
plans as well as plan administrators) a secure Internet-based method 
for transmission of Form 5500 filings created through the use of the 
software. In making a transition to 100 percent electronic filing, it 
is contemplated that the new system will continue to provide support to 
private sector software developers. Indeed, it is expected that third-
party software will remain the primary means of producing Form 5500s. 
It is intended that service providers and software developers that 
provide value-added services for plan sponsors will be able to 
incorporate the new system's method of transmission into their services 
effectively and efficiently. Software file specifications will be based 
on improved data exchange technology based on widely-accepted 
standards, such as XML. It is also intended that software file 
specifications will be non-proprietary so that users of different 
software may freely share information across different platforms. The 
Department also intends to include in the new system, as a separate 
filing method, a dedicated, secure Internet Web site through which plan 
administrators (or other return/report preparers) will be able to input 
data and to complete and submit Form 5500 filings on an individual 
plan-by-plan basis. It is anticipated that the Internet Web site will 
provide the filer with the capability of entering and saving data for 
an individual filing through multiple sessions, uploading attachments, 
saving return/reports to a repository, and retrieving, updating, and 
editing stored filings, as well as creating and submitting amended 
filing data to EBSA.
    The Department is aware that some filers may be concerned that the 
new electronic filing system could require changes in their current 
practices or their purchase of new software. The Department does not 
believe that filers are at significant risk of not having electronic 
access or that filers will be required to purchase new software or make 
significant changes to their current practices. As an initial matter, 
this filing is made on behalf of employee benefit plans, not 
individuals. Moreover, the Department's confidence that these filers 
should be able to have electronic access, with relatively little 
difficulty or additional cost, is based on the following 
considerations. First, the new system will have two options for 
electronic filing: (1) By entering data directly on screen (through a 
Web-based system) and (2) by entering data through third-party software 
that many preparers may choose to use with an XML data feed. Second, 
the new system will be platform neutral; in this regard, the 
Department's Chief Information Officer will confirm and ensure that the 
new system will support all major platforms (Windows, Mac, UNIX, Linux, 
etc.) and browsers (Mozilla, Firefox, Opera, IE, Netscape, etc.).
    Although it is still not possible at this time to provide full 
technical details regarding the new electronic filing system as many of 
the technological aspects of the redesign are still in development, the 
Department has been and will continue to consider the filing 
community's concerns and recommendations regarding various technical 
and operational specifications in the development of the new electronic 
filing system. In that regard, the Department notes that many of the 
commenters' suggestions were previously submitted in response to the 
Request for Comment that the Department posted on its Web site relating 
to updating the current EFAST processing system.

C. Overview of the Final Rule

    The rule adds a new Sec.  2520.104a-2, Electronic Filing of Annual 
Reports, to subpart E of 29 CFR part 2520 and establishes a requirement 
for the electronic filing of the Form 5500 for purposes of the annual 
reporting provisions of Title I of ERISA. The final rule provides that 
any annual report (including any accompanying schedules or attachments) 
filed with the Secretary under Part 1 of Title I of ERISA for any plan 
year beginning on or after January 1, 2008, shall be filed 
electronically in accordance with the instructions applicable to the 
report and such other guidance as the Secretary may provide. Because 
the Form 5500 is also filed by certain non-plan entities, such as 
common or collective trusts, pooled separate accounts, and entities 
described in 29 CFR 2520.103-12, which file for the fiscal year ending

[[Page 41364]]

with or within the plan year for which a plan's annual report is filed, 
the final rule makes further reference to the first ``reporting year'' 
beginning on or after January 1, 2008, for such entities.
    The rule is designed to ensure that all annual reports filed under 
Part 1 of Title I of ERISA, as well as any statements or schedules 
required to be attached to the report, including those filed by 
administrators (29 CFR 2520.103-1), group insurance arrangements (29 
CFR 2520.103-2), common or collective trusts and pooled separate 
accounts (29 CFR 2520.103-3, 2520.103-4, and 2520.103-9), and entities 
described in 29 CFR 2520.103-12, are required to be filed 
electronically.
    Following the development of a new electronic filing system, the 
Department intends to provide specific instructions and guidance 
concerning methods of electronic filing in the instructions for the 
Form 5500 and via its Web site. The requirement in the final rule to 
file the annual report electronically applies only to annual reports 
filed under Part 1 of Title I of ERISA.
    For purposes of the annual reporting requirements under section 
4065 of Title IV of ERISA, the PBGC has advised the Department that all 
administrators of plans required to file reports under ERISA section 
4065 also are required to file reports for purposes of section 104(a) 
of ERISA and a plan administrator's electronic filing of the Form 5500 
for purposes of ERISA section 104(a), together with the required 
attachments and schedules and otherwise in accordance with the 
instructions to the form, will be treated as satisfying the 
administrator's annual reporting obligation under section 4065 of Title 
IV of ERISA.
    For purposes of the annual filing and reporting requirements of the 
Code, the IRS has advised the Department that, although there are no 
mandatory electronic filing requirements for a Form 5500 under the Code 
or the regulations issued thereunder, the electronic filing of a Form 
5500 by plan administrators, employers, and certain other entities for 
purposes of ERISA section 104(a), together with the required 
attachments and schedules and otherwise in accordance with the 
instructions to the Form, will be treated as satisfying the annual 
filing and reporting requirements under Code sections 6058(a) and 
6059(a). Furthermore, as noted above, the IRS has determined that 
administrators of certain one-participant plans may file the Short Form 
5500 electronically through the EFAST processing system to satisfy the 
requirement to file the Form 5500-EZ with the IRS. Administrators of 
one-participant plans will continue to have the option of filing the 
Form 5500-EZ, but if they file the Form 5500-EZ, they must file with 
the IRS, rather than with EFAST.\12\ The IRS intends that plan 
administrators, employers, and certain other entities that are subject 
to other filing and reporting requirements under Code sections 6033(a), 
6047(e), and 6057(b) must continue to satisfy these requirements in 
accordance with IRS revenue procedures, publications, forms, and 
instructions. With respect to other annual reporting and filing 
obligations imposed by the Code but not required under section 104(a) 
of ERISA, such as are currently satisfied by the filing of the Schedule 
SSA, the IRS has advised the Department that it is currently exploring 
how best to make a transition from paper filing to electronic filing in 
a manner that minimizes the burdens on taxpayers and practitioners. For 
example, the IRS notes that it has promulgated regulations mandating or 
permitting electronic filing of certain returns filed by pension and 
welfare benefit plans. See, e.g., 26 CFR 301.6033-4T (mandating 
electronic filing of certain corporate income tax returns and returns 
of organizations required to be filed under Code section 6033); 26 CFR 
1.6033-4T (returns required to be filed on magnetic media under 26 CFR 
301.6033-4T must be filed in accordance with IRS revenue procedures, 
publications, forms, or instructions).
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    \12\ Under the voluntary electronic filing option, one 
participant plan filers filing an amended return for a plan year 
must file the amended return electronically using the Form 5500-SF 
if they initially filed the Form 5500-SF electronically for the plan 
year and must file the amendment with the IRS using the paper Form 
5500-EZ if they initially filed for plan year with the IRS on a 
paper Form 5500-EZ.
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    The rule also makes it clear that the requirement to file annual 
reports electronically does not affect a person's record retention or 
disclosure obligations. In other words, the obligations of persons to 
retain records for purposes of sections 107 and 209 of ERISA would not 
be altered by the fact that the annual report would be required to be 
filed in electronic form. Similarly, a plan administrator's obligation 
to make the latest annual report available for examination and to 
furnish copies upon request, in accordance with sections 104(b)(2) and 
104(b)(4) of ERISA, will not be affected by an electronic filing 
requirement.
    Conforming changes are being made in order to reflect the 
electronic filing requirement in 29 CFR 2520.103-1(f) (contents of the 
annual report), 2520.103-2(c) (contents of the annual report for a 
group insurance arrangement), 2520.103-9(d) (direct filing for bank or 
insurance carrier trusts and accounts), and 2520.103-12(f) (limited 
exception and alternative method of compliance for annual reporting of 
investments in certain entities).

D. Regulatory Impact Analysis

Summary

    The Department has considered the costs and benefits of this final 
regulation, taking into account the public comments submitted in 
response to the proposed regulation, the changes to the proposal 
incorporated into this final regulation, and the Department's process 
to transition from EFAST to a new electronic filing system. The 
Department believes that the benefits that will arise from mandatory 
electronic filing beginning with the 2008 plan year will justify its 
costs. Those costs, which will fall principally on plans, will consist 
mainly of a one-time, transition or start-up cost to make the change to 
electronic filing, generally to be incurred in 2009, which on aggregate 
is estimated to be $22 million. Benefits to plans, which will include 
ongoing savings on material and postage and efficiency gains from the 
early detection and elimination of potential filing errors in the 
course of electronic filing, are estimated to total $10 million 
annually beginning in 2009. Over time the ongoing savings attributable 
to this regulation are expected to outweigh its one-time transition 
cost. Aggregate savings are estimated to exceed aggregate costs by $24 
million over the first five years (discounting future savings at a real 
rate of 3 percent).
    As previously stated, additional, substantial, although not 
quantifiable, benefits are expected to accrue to the government and the 
public in the forms of substantially reduced processing costs and more 
timely availability of accurate filing data for use in enforcement and 
for other purposes of benefit to plans and participants.

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f) of the Executive 
Order, a ``significant regulatory action'' is an action that is likely 
to result in a rule (1) having an annual effect on the economy of $100 
million or more, or adversely and materially affecting a sector of the

[[Page 41365]]

economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. OMB has 
determined that this action is significant under section 3(f)(4) 
because it raises novel legal or policy issues arising from the 
President's priorities. Accordingly, the Department has undertaken and 
describes below an analysis of the costs and benefits of this 
regulation.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and are likely to 
have a significant economic impact on a substantial number of small 
entities. For purposes of analysis under the RFA, EBSA continues to 
consider a small entity to be an employee benefit plan with fewer than 
100 participants. The basis of this definition is found in section 
104(a)(2) of ERISA, which permits the Secretary to prescribe simplified 
annual reports for pension plans that cover fewer than 100 
participants. Under section 104(a)(3) of ERISA, the Secretary may also 
provide for exemptions or simplified annual reporting and disclosure 
for welfare benefit plans. Pursuant to the authority of section 
104(a)(3), the Department has previously issued at 29 CFR 2520.104-20, 
2520.104-21, 2520.104-41, 2520.104-46, and 2520.104b-10, certain 
simplified reporting provisions and limited exemptions from reporting 
and disclosure requirements for small plans, including unfunded or 
insured welfare plans that cover fewer than 100 participants and 
satisfy certain other requirements. Further, while some large employers 
may have small plans, in general small employers maintain most small 
plans. Thus, EBSA believes that assessing the impact of these rules on 
small plans is an appropriate substitute for evaluating the effect on 
small entities. The definition of small entity considered appropriate 
for this purpose differs, however, from a definition of small business 
that is based on size standards promulgated by the Small Business 
Administration (13 CFR 121.201) pursuant to the Small Business Act (15 
U.S.C. 631 et seq.).
    The Department presented an initial regulatory flexibility analysis 
at the time this regulation was proposed because the Department 
believed that the proposed regulation might have a significant economic 
impact on a substantial number of small entities, as defined under 
section 603 of the RFA. After reviewing and considering the public 
comments submitted in response to the proposal and the changes that are 
incorporated into the final regulation, the Department has prepared a 
final regulatory flexibility analysis, which is presented in this 
document as part of a broader economic analysis.

Costs and Benefits

    Under this final regulation, costs to plans will include a one-time 
transition or start-up cost to make the change to electronic filing, 
estimated at $22 million. Benefits will include ongoing savings on 
material and postage and efficiency gains from the early detection and 
elimination of potential filing errors in the course of electronic 
filing, estimated to total $10 million annually. Over time the ongoing 
savings attributable to this regulation are expected to outweigh its 
one-time transition cost. Aggregate savings are estimated to exceed 
aggregate costs by $24 million over the first five years (discounting 
future savings at a real rate of 3 percent). Additional benefits are 
expected to accrue to the government and the public in the forms of 
reduced processing costs and more timely availability of accurate 
filing data.
    The costs and benefits of this regulation will accrue primarily to 
815,000 \13\ plans that file Form 5500s.\14\ Non-plan entities that 
file Form 5500s generally do so in their capacity as service providers 
to plans and therefore are expected to pass their own costs and 
benefits from the regulation on to the plans they serve.\15\
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    \13\ The numbers used in this analysis for aggregate plans and 
for plan subcategories (such as large and small plans; hand-print, 
machine-print, and electronic filers; and correction correspondence) 
are derived from Form 5500 data for the 2002 plan year.
    \14\ The economic analysis of the regulation pertains only to 
those plans that file a Form 5500 to satisfy filing requirements 
under Title I of ERISA. Because the Form 5500-EZ is filed only to 
satisfy filing requirements under the Code, data related to Form 
5500-EZ filers is not included in this analysis.
    \15\ Economic theory predicts that producers in competitive 
markets pass costs and savings on to buyers.
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Transition Costs

    This regulation will entail some one-time costs, incurred in making 
the transition to electronic filing. The magnitude of the transition 
costs will vary across filer groups. As described in the economic 
analysis for the proposed regulation, the Department believes that 
filers that previously relied on the hand-print method of filing will 
generally face higher transition costs than other filers. The 
Department has refined its analysis of filers' transition costs to take 
into account commenters' concerns about the increased risk of initial 
filing difficulties when the new electronic filing system first begins 
operations, which is associated with potential higher filing costs. For 
purposes of this analysis, therefore, the Department has assumed that 
filers who submit an electronic filing within the first six months of 
operations of the new processing system, from January 1, 2009, through 
June 30, 2009 (the early filing period), may experience a higher 
cost.\16\
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    \16\ In order to estimate how many filers within each relevant 
category would be likely to file within the first six months of the 
new filing system's operation, the Department analyzed filing 
patterns of the relevant types of plans for each calendar year from 
2000 to 2002 and averaged the resulting data to produce an estimate 
for each category.
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    Hand-print Filers. Hand-print filers as a group are likely to face 
larger transition costs than others.\17\ These filers by and large 
currently file government printed forms, filled out by hand or by using 
a typewriter.\18\ Like all other filers, they will have the option of 
preparing and submitting their filings via a government provided Web 
site. It is likely that many (but not all) of these hand-print filers 
already have an electronic infrastructure (mainly a personal computer 
and Internet service) sufficient to support electronic filing. 
Nonetheless, hand-print filers are likely to incur some expense to 
learn about the new requirement, and some will incur

[[Page 41366]]

additional costs, such as in locating and becoming familiar with 
Internet access, as well as in establishing a secured filing account.
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    \17\ The comments focused on small plans in discussing the 
potential difficulties that hand-print filers may experience. The 
Department believes that all hand-print filers, regardless of plan 
size, may experience larger transition costs than machine-print 
filers, since the size and complexity of the reports filed by larger 
hand-print filers may create a burden equivalent to that of the 
small hand-print filers. Accordingly, these estimates treat all 
hand-print filers the same with regard to transition costs.
    \18\ A very small fraction of all hand-print filers, typically a 
few percent, file computer-generated forms that are similar to and 
processed in the same way as government printed forms. These filers 
might tend to incur smaller transition costs than other hand-print 
filers. Because of their small numbers and the difficulties in 
separately identifying them in the data used for this analysis, the 
Department did not attempt to adjust its estimates to reflect this 
possible difference. This omission may result in a small 
overstatement of the aggregate transition cost for hand-print 
filers.
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    For the 96,000 current hand-print filers, the Department estimates 
that 11,000 will file their 2008 Form 5500 filing during the early 
filing period (from January 1, 2009, through June 30, 2009). The filers 
in that group, whether large or small, are assumed to require on 
average three hours to transition to electronic filing. The hand-print 
filers who file their 2008 reports after June 30, 2009, are assumed to 
require on average one and one-half hours each. The resulting 
transition cost to electronic filing for all hand-print filers is 
estimated at a one-time, aggregate of $9 million. This assumes that a 
professional-level employee, who costs the plans on average $58.80 per 
hour in wages, benefits, and overhead,\19\ would perform the work 
required to make the transition to electronic filing. As discussed in 
the preamble to the proposed regulation, the Department recognizes that 
transition costs may vary greatly among hand-print filers and may be 
larger or smaller than these estimates. For example, some hand-filers 
may decide to switch to use of a service provider for completing the 
Form 5500 filing, which might entail greater initial expense; others 
may experience lower costs because they are highly experienced Internet 
users already engaged in electronic business activities.
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    \19\ The total labor cost is derived from wage and compensation 
data from the Bureau of Labor Statistics' (BLS) 2004 National 
Occupational Employment and Wage Estimates from the Occupational 
Employment Survey and BLS 2004 Employment Cost for Compensation.
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    Machine-Print Filers. The Department has also revised its estimates 
for machine-print filers to take into account a potentially higher cost 
of making the transition during the early filing period. The Department 
believes that a large proportion of machine-print filers hire service 
providers to complete their filings. For purposes of these estimates, 
that proportion is conservatively assumed to be 50 percent.
    With respect to filings on behalf of machine-print filers by 
service providers during the early filing period, it is likely that 
service providers will quickly encounter and resolve any early period 
filing difficulties, reducing the transition cost per plan. 
Accordingly, the Department has assumed that, for that class of 
filings, the transition to electronic will require an average of five 
minutes per filing; later filings are assumed to require no transition 
costs. These assumptions, applied to an estimated 58,000 of service-
provider filings that are expected to be made during early filing 
period, add $300,000 to the aggregate transition costs.
    For machine-print filers who prepare their own filings and file 
them during the early filing period, the Department has assumed that 
the transition to the electronic filing system will require on average 
one hour; for later filers, the Department has assumed a transition 
time averaging 30 minutes. The Department estimates that 355,000 
machine-print filers will transition to electronic filing using their 
own resources, with 58,000 filing during the early filing period, 
incurring an estimated aggregate transition cost of $12 million.
    Based on the above-described calculations, the Department estimates 
that the total aggregate transition costs for all machine-print filers 
will be $12 million.

Electronic Filers

    The Department has also revised its estimates to include costs 
attributable to filers who have previously used the electronic methods 
of filing available under EFAST in order to account for the possibility 
that electronic filers who file during the early filing period might 
have larger transition costs than those who make that transition later. 
The Department estimates that 500 previous electronic filers will file 
during the early filing period and that their transition to the new 
electronic processing system will require five minutes per plan. The 
Department assumes that later filers in this category will have only 
negligible transition costs. This results in an estimate of $2,000 in 
aggregate transition costs attributable to electronic filers.
    In summary, the total aggregate start-up, transition cost to 
electronic filing under this regulation is estimated at $22 million, 
incurred primarily in 2009.

Ongoing Costs and Benefits

    Preparation Costs. This regulation pertains to the filing, and not 
to the preparation, of the Form 5500. It is possible, however, that for 
some filers mandatory electronic filing will prompt changes in 
preparation methods. For example, hand-print filers may currently 
prepare their filings using a government-printed form and a typewriter. 
Such filers may prepare future filings by entering information into a 
government Web site. The Department considered the cost of making such 
transitions in preparation methods to be part of the overall transition 
cost of the regulation, included in the estimates presented above.
    With respect to ongoing preparation costs, it is possible that some 
filers will incur higher costs in connection with new preparation 
methods prompted by this regulation and enabled by the new electronic 
filing system than with their current methods, while others will incur 
lower costs. For example, it is not immediately determinable whether 
entering information into a Web site will take more or less time than 
typing it onto a paper form. The Department expects that commercial 
preparation software will incorporate features that ease preparation, 
such as integrated access to form instructions and automatic filling of 
data fields based on entries in other fields or in prior filings. The 
Department also intends that the new government filing Web site 
interface will be designed with attention to ease of preparation. As it 
did not have an immediate basis to quantify the magnitude or costs and 
savings from possible changes in preparation methods, the Department 
did not attribute any such costs or savings to the regulation.
    Filing Cost Savings. Filing costs generally are expected to be 
reduced by the implementation of this regulation. Savings are foreseen 
from the elimination of materials and mailing costs and from a 
reduction in filing errors and subsequent corrections. Electronic 
transmission will eliminate certain costs otherwise attendant to paper 
filing, including materials and postage. The Department estimates that 
by changing to electronic filing, 815,000 plans will benefit from 
approximately $900,000 in such cost-savings annually, assuming savings 
of $0.0167 per sheet of paper and $0.57 for postage per filing.
    In addition, automated checks for errors and omissions upon 
electronic transmission, together with automated error checks and 
integrated instructions common to filing preparation software, will 
ease compliance with reporting requirements. Importantly, these 
features will reduce the need for subsequent amendments to submitted 
filings, as well as helping to avoid reporting penalties that might 
otherwise be assessed for deficient filings.
    Historically, filers that use a software-based system generally 
have fewer filing errors. In 2002, 6 percent and 16 percent of 
electronic and machine-print filings, respectively, had filing errors 
compared to 38 percent of hand-print filings. The filing errors include 
items such as missing signatures, attestations, schedules, or back-up 
documents that resulted in an incomplete filing. As a result of filer 
errors and the need for

[[Page 41367]]

additional information or clarifications about Form 5500 filings for 
the 2002 plan year, the Department mailed 150,000 letters to filers 
requesting corrections or additions. This correction process ultimately 
delays the final submission and requires plans to incur additional 
costs to address deficiencies. The electronic filing system's intended 
error detection capability may largely eliminate the Department's need 
to forward correspondence to plans with deficient filings. This 
enhancement is likely to save time for filers. If the need for 
correspondence can be eliminated, the aggregate annual cost savings to 
affected filers could be as high as $9 million, assuming elimination of 
correspondence with the Department saves an average of one hour of a 
professional's time, at an average of $58.80 per hour, plus the value 
of associated postage and materials. A disproportionate share of this 
savings, estimated at $2.2 million, would accrue to current hand-print 
filers (reflecting their historically higher filing error rates), while 
$6.6 million would accrue to machine-print filers. The Department (and 
by extension taxpayers) would realize additional savings from this 
reduced need to correct filing errors.

Societal Benefits of E-Filing and E-Government

    The Department believes, as previously stated in the preamble to 
the proposed regulation, that the implementation of a fully electronic 
processing system for Form 5500 filings will produce substantial 
additional benefits for both the government and the public through 
reduced processing costs and more timely availability of accurate 
filing data. The decrease in erroneous filings and corrective 
correspondence will produce immediate savings to the Federal Government 
and therefore to taxpayers, and improvements in the data accuracy and 
accelerated processing will improve the timeliness and reliability of 
national statistics on private employee benefit plans.
    In addition, the Department continues to believe that this 
regulation will contribute to the Federal Government's progress in 
implementing E-government initiatives, taking advantage of the 
electronic information technologies that are becoming increasingly 
central to business success in the United States. The proliferation of 
such technologies, and of expertise and familiarity with using them, is 
expected to moderate the cost of compliance with this regulation and to 
increase the importance of its implementation. The Department reviewed 
current literature on this topic in depth in the preamble to the E-
Filing Proposal and continues to rely on those studies and their 
conclusions in adopting this final regulation.

Alternatives Considered

    As discussed in the preamble to the E-Filing Proposal, before 
electing to pursue a wholly electronic filing system, the Department 
considered alternative options for reconfiguring the filing methods for 
the Form 5500, focusing in particular on the gradual approach advocated 
generally in the public comments on the Request for Comment, which 
described technical aspects of the development of the new processing 
system. The preamble to the proposed regulation described these 
alternatives and the Department's reasons for rejecting them in favor 
of mandated electronic filing. The Department continues to believe that 
allowing filers to choose whether to file electronically or on paper is 
undesirable because it would perpetuate the inefficiencies inherent in 
paper filing, such as avoidable filing errors and associated 
correspondence and civil penalties, delays in processing filings, and 
inferior data quality, as well as higher costs for the Federal 
government (and by extension taxpayers).
    The Department received several comments on the E-Filing Proposal 
requesting that the Department reconsider some of the rejected 
alternatives. Commenters also asked the Department to consider 
providing small plans a one-year deferral of the electronic filing 
mandate, a one-year period of relief for filing violations, or a 
voluntary pilot program during the new system's first year of 
operations. These commenters suggested that providing this sort of 
transition relief would ameliorate public concerns about the burden of 
transitioning to electronic filing. In response to these comments the 
Department considered delaying the applicability date of the electronic 
filing mandate an additional year, until the 2009 year. To evaluate 
this alternative, the Department assessed the relative costs and 
benefits of mandating electronic filing beginning with the 2008 or 2009 
plan year. In each scenario, the Department assumed that the new 
processing system would be operational as of January 1, 2009.
    The Department's economic analysis supports its decision to require 
electronic filing beginning with the 2008 plan year. As noted earlier, 
some commenters anticipate that filers who file during the new 
electronic filing system's initial months of operation may incur higher 
transition costs than those who file later. Delaying the applicability 
date until plan year 2009 would reduce the proportion of filers exposed 
to such potential higher costs from a substantial minority to a tiny 
one. The Department estimates that adopting this alternative might 
reduce aggregate transition costs by $3 million. However, delaying the 
applicability date would also prolong for an additional year the 
estimated $10 million combined annual cost arising from paper filing 
and associated error correction under EFAST, which electronic filing is 
expected to eliminate, and so on net would increase aggregate, long-
term filer costs by $7 million. It would also delay for a year the 
anticipated societal benefits of electronic filing.

Small Plans

    This regulation will have an impact on small plans. As for all 
other plans, costs and benefits for small plans are expected to vary 
with the plans' circumstances. Most will likely incur moderate 
transition costs and subsequently realize moderate ongoing savings. 
Some, however, may experience larger impacts, including greater 
transition costs and at least some period of ongoing net cost increases 
rather than ongoing net savings. For example, some small plans may lack 
experience with or easy access to the Internet. Such plans may incur 
l