Workplace Retirement Accounts: Better Guidance and Information Could Help Plan Participants at Home and Abroad Manage Their Retirement Savings
Highlights
What GAO Found
Plan participants in the United States face challenges after they change jobs, including not receiving communications from their plan sponsor and being vulnerable to unforeseen tax consequences that can result in a loss of retirement savings. GAO previously reported that when participants leave savings in a plan after separating from a job, the onus is on them to update former employers with their new address and to respond to their former employer's communications. GAO found that although an employer may incur costs searching for separated participants, there are no standard practices for the frequency or method of conducting searches. GAO reported that from 2004 through 2013, over 25 million participants in workplace plans separated from an employer and left at least one retirement account behind, despite efforts of sponsors and regulators to help participants manage their accounts. Department of Labor (DOL) officials told GAO that some sponsors do not search for participants when disclosures are returned as undeliverable. DOL has issued guidance on searching for missing participants for some plans that are terminating, but guidance does not exist on what actions DOL expects ongoing plan sponsors to take to keep track of separated participants. A key element of DOL's mission is to protect the benefits of workers and families. However, without guidance on how to search for separated participants who leave behind retirement accounts, sponsors may choose to do little more than remove unclaimed accounts from the plan when possible, and workers may never recover these savings.
Stakeholders told GAO that U.S. individuals who participate in foreign workplace retirement plans face challenges reporting their retirement savings for tax purposes because of complex federal requirements governing the taxation of foreign retirement accounts and a lack of clear guidance on how to report these savings. For example, stakeholders told GAO it is not always clear to U.S individuals or their tax preparers how foreign workplace retirement plans should be reported to the Internal Revenue Service (IRS) and the process for determining this can be complex, time-consuming, and costly. In the absence of clear guidance on how to correctly report these savings, U.S. individuals who participate in these plans may continue to run the risk of filing incorrect returns. Further, U.S. individuals in foreign retirement plans also face problems transferring retirement savings when they switch jobs. In the United States, transfers of retirement savings from one qualified plan to another are exempt from U.S. tax. However, foreign plans are generally not tax-qualified under the Internal Revenue Code, according to IRS officials, and such transfers could have tax consequences for U.S. individuals participating in foreign retirement plans. Officials from the Department of the Treasury (Treasury) told GAO that a change to the U.S. tax code could improve the tax treatment of transfers between foreign retirement plans that Treasury has already examined. Without action to address this issue, U.S. individuals may not consolidate their foreign retirement accounts or may have to pay higher U.S. taxes on transfers than taxpayers participating in qualified plans in the United States, threatening the ability of U.S. individuals to save for retirement abroad.
Why GAO Did This Study
Saving for retirement can be difficult. However, when participants lose their workplace retirement accounts when they change employers or participate in a workplace retirement plan abroad they can encounter additional challenges in securing adequate retirement savings. GAO was asked to review steps federal agencies might take to assist participants with these challenges.
This report examines key challenges U.S. participants face with: (1) unclaimed retirement accounts in the United States, and (2) complying with U.S. tax reporting requirements on their foreign retirement savings. GAO reviewed relevant federal laws and regulations, and reviewed selected tax treaties. GAO interviewed stakeholders in the United States and in Australia, Canada, Hong Kong, Switzerland, and the United Kingdom—chosen because these locations host relatively large populations of U.S. individuals and have well-developed workplace retirement systems.
Recommendations
GAO recommends Congress consider addressing taxation issues affecting the transfer of retirement assets between plans within the same foreign country. GAO is making seven recommendations, including that DOL issue guidance to help ongoing plan sponsors search for separated participants, and that IRS issue guidance to clarify how U.S. individuals should report foreign retirement savings to the IRS. The agencies generally agreed with GAO's recommendations. IRS disagreed with two of GAO's recommendations.
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Congress should consider legislation modifying the Internal Revenue Code to allow routine account transfers within the same foreign workplace retirement plan or between two foreign workplace retirement plans in the same country to be free from U.S. tax in countries covered by an existing income tax treaty that provides for favorable U.S. tax treatment of foreign workplace retirement plan contributions. | As of March 2024, no legislation has been enacted to address this issue. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Labor | The Secretary of Labor should issue guidance on the obligations under the Employee Retirement Income Security Act of 1974 of sponsors of ongoing plans to prevent, search for, and pay costs associated with locating missing participants. (Recommendation 1) |
Labor agreed with this recommendation. In June 2019, the Department reported that it engaged with a range of stakeholders on issues surrounding missing and unresponsive participants, including representatives of plans, employers, financial services groups, consumer groups, and state unclaimed property funds. Their goal is to help plans locate and pay retirement benefits to missing participants and beneficiaries; they will evaluate constructive guidance to issue. In January 2021, the Department announced guidance for plan fiduciaries to meet their obligations under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) to locate and distribute retirement benefits to missing or nonresponsive participants. The guidance came in three forms: Best Practices for Pension Plans, Compliance Assistance Release (CAR) 2021-01, and Field Assistance Bulletin (FAB) 2021-01. The Best Practices guidance describes practices plan fiduciaries should consider to help reduce missing participant issues and ensure that plan participants receive promised benefits when they reach retirement age. CAR 2021-01 outlines the general investigative approach that will guide the Department under the Terminated Vested Participants Project and facilitate voluntary compliance efforts by plan fiduciaries. FAB 2021-01 authorizes, as a matter of enforcement policy, plan fiduciaries of terminating defined contribution plans to use the PBGC missing participant program for missing or nonresponsive participant's account balances.
|
| Internal Revenue Service | The IRS Commissioner should review taxation issues relating to distributions involving incorrect participant addresses and uncashed benefit checks and clarify for the public the Internal Revenue Code's requirements in these circumstances. (Recommendation 2) |
IRS has worked with Treasury to issue three guidance items that address this recommendation. In August 2019, Revenue Ruling 2019-19 was issued to help clarify that an individual's failure to cash a qualified plan distribution check does not permit the individual to exclude the amount of the distribution from income, and the individual's failure to cash the check does not alter the employer's obligation to withhold income tax under Code section 3405 or to report the distribution under Code section 6047(d). In October 2020, IRS issued two more guidance items - Revenue Ruling 2020-24 and Revenue Procedure 2020-46 - to help clarify the withholding, reporting, and rollover eligibility rules related to a missing individual's qualified retirement plan benefits that are distributed by a plan to a state unclaimed property fund. In early 2021, IRS coordinated with the Department of Labor on their guidance on missing participants. IRS continues to coordinate with DOL and the Pension Benefit Guaranty Corporation on future guidance that may be issued by one or more of the departments. IRS and Treasury are considering additional published guidance on tax issues regarding missing individuals with benefits under qualified retirement plans. In addition, IRS reported that "guidance on missing participants, including guidance on uncashed checks" is listed on Treasury's 2021-2022 Priority Guidance Plan.
|
| Internal Revenue Service | The IRS Commissioner should consider revising the letter forwarding program in a cost-effective manner to again provide information on behalf of plan sponsors on unclaimed retirement accounts to participants. (Recommendation 3) |
IRS disagreed with this recommendation, noting that the IRS address of record for a participant would likely be of no greater value than addresses available through alternatives such as commercial locator services. However, our report does not cite the accuracy of IRS addresses, but rather other benefits that make a program revision worth considering, specifically the likelihood that individuals will open IRS correspondence, and the trust DOL places in the service as way for plan fiduciaries to meet their obligations. IRS also stated that the limited number of IRS staff and resources impact the feasibility of reinstating this program for plan participants. As of July 2024, we continue to believe that expanding the letter forwarding program would be beneficial, and we encourage IRS to consider cost-effective ways to do so.
|
| Internal Revenue Service | The IRS Commissioner should clarify how U.S. individuals are to report their foreign retirement accounts. The clarification could include addressing how these accounts should be designated and how the taxpayer should report contributions, earnings, and distributions made from the account. (Recommendation 4) |
IRS took steps to implement with this recommendation. In March 2021, the IRS issued new guidance - Revenue Procedure 2020-17 - that provides an exemption from certain information reporting requirements of the Internal Revenue Code (IRC) for certain U.S. citizen and resident individuals with respect to their transactions with, and ownership of, certain tax-favored foreign retirement trusts. This revenue procedure exempts taxpayers from reporting under IRC section 6048D, which requires taxpayers to report on assets held in foreign trusts on IRS form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This guidance will help clarify for taxpayers how to report their foreign retirement accounts. In September 2022, IRS confirmed, regarding Revenue Procedure 2020-17, that U.S. individuals with an interest in these foreign trusts may be required under section 6038D to report information about their interests in accounts held by, or through, these trusts on the Form 8938. Furthermore, the intent of the Revenue Procedure relative to section 6038D was to focus on informing taxpayers that participating in foreign retirement accounts may have U.S. income tax consequences. Reporting of retirement accounts under IRC 6038D is already addressed in the regulations under Treas. Reg. ??1.6038D-1(a)(7) and 1.6038D-7(a)(1) and is also addressed in FAQs on its website (Basic Questions and Answers on Form 8938). IRS is developing FAQs for the website that will put taxpayers on notice that having an interest or participating in a foreign account may have U.S. income tax consequences and highlighting some of those consequences, which are ultimately very fact specific. IRS has been working with within and across Chief Counsel divisions to try to accurately convey the information taxpayers would need to consider in their particular circumstances.
|
| Internal Revenue Service | The IRS Commissioner should systematically analyze data reported through Form 8938 filings on foreign retirement accounts owned by U.S. individuals with the goal of developing an evidence-based understanding of how these accounts change over time and what level of risk these accounts pose for tax evasion. To assist with this analysis, IRS should consider revising Form 8938 to more clearly distinguish between retirement accounts and other types of accounts or assets being reported by taxpayers under current reporting requirements. (Recommendation 5) |
IRS disagreed with this recommendation but not on its merits, citing a lack of resources to implement it. Specifically, IRS noted that although the modification to the Form 8938 suggested in this recommendation may seem minor, systemically collecting and analyzing the data would require resources beyond those currently available to IRS. However, our report notes that IRS indicated that they already collect foreign account filing data through the Form 8938 and that the current reporting requirements help the agency to "keep a line of sight" on U.S. individuals' foreign pension arrangements to ensure they properly report on their tax returns when distributions are made. It is unclear how IRS would maintain a line of sight on these foreign retirement accounts without analyzing these data. IRS's Inflation Reduction Act Strategic Operating Plan describes an initiative that could improve use of data related to activities outside of the U.S. but does not discuss foreign retirement accounts. IRS has taken some actions to relieve the burden taxpayers face who own a foreign retirement account. In March 2020, IRS released Rev. Proc. 2020-17, which provides an exemption from the information reporting requirements under section 6048 of the Internal Revenue Code for certain U.S. individuals with respect to ownership of tax-favored foreign retirement trusts. Prior IRS guidance required individuals who have transactions with foreign workplace retirement account trusts to file Form 3520. Rev. Proc. 2020-17 also established procedures for requesting a waiver or refund of Form 3520 filing penalties. Further, in August 2022, IRS issued Notice 2022-36, which provides a complete exemption from the Form 3520 late filing penalties that may otherwise apply for the 2019 and 2020 tax years. We believe that these actions help to decrease the filing burden on U.S. individuals who own foreign retirement accounts. However, we continue to believe analysis of form 8938 data can provide the IRS an understanding of how these accounts change over time and what level of risk they pose for tax evasion. Analysis of the data will also provide assurances to U.S. individuals that the data they are required to report on their foreign retirement accounts will be put to good use by the federal government. Although IRS continues to maintain this recommendation is not a good use of its human resources, we will monitor IRS's actions, particularly those pertaining to requirements and penalties for Form 8938.
|
| Internal Revenue Service | The IRS Commissioner should take steps to improve the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual retirement benefits in the future, for example, by working with the Social Security Administration as necessary. (Recommendation 6) |
IRS agreed with and took steps to address this recommendation. In November 2019, SSA met with the IRS regularly to discuss Form 8955-SSA, which provides the basis for the information shown in the "Potential Private Pension Benefit Information" notice. At that time, IRS agreed to incorporate SSA's suggestion to update Form 8955-SSA to explain that the filer should include the individual pension plan participant's full social security number (SSN) on the form. SSA worked with the IRS to clarify coding instructions for Form 8955-SSA and institute a new edit to its paper processing to ensure accuracy. In addition, as of September 2022, IRS is working with Treasury' on a proposed regulation under Code ?6057 to improve the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual retirement benefits in the future (Plan administrators must complete IRS Form 8955-SSA to satisfy the reporting requirements under Code ?6057). The project, titled "Regulations relating to the Reporting Requirements under ?6057," is a guidance item that is listed on Treasury's 2021-2022 Priority Guidance Plan, with draft regulations undergoing clearance.
|
| Social Security Administration | The Social Security Administration Commissioner should take steps to improve the likelihood that the Notice of Potential Private Pension Benefit Information corresponds to actual retirement benefits in the future, for example, by working with IRS as necessary. (Recommendation 7) |
SSA agreed with this recommendation. In November 2019, SSA stated that the agency is meeting with the IRS regularly to discuss Form 8955-SSA, which provides the basis for the information shown in the "Potential Private Retirement Benefit Information" notice. The IRS agreed to incorporate SSA's suggestion to update Form 8955-SSA to explain that the filer should include the individual pension plan participant's full social security number (SSN) on the form. SSA reported that it is working with the IRS to clarify coding instructions for Form 8955-SSA and institute a new edit to its paper processing to ensure accuracy. As of August 2020, SSA is conducting data exchanges with two large filers who will assist in determining if any changes are required to existing information in its ERISA data base via Form 8955-SSA. Upon receipt of the data exchange information, the large filers will be able to determine if SSA is retaining outdated information and, if the data are stale, will facilitate these large filers sending SSA current information for separated participants.
|