Workplace Retirement Accounts: Better Guidance and Information Could Help Plan Participants at Home and Abroad Manage Their Retirement Savings

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.

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.

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.

Saving for retirement through workplace plans can be difficult for U.S.  citizens, whether they are participants in U.S workplace plans or  participants in foreign workplace plans. Regardless of whether the plan  is a U.S. or a foreign workplace retirement plan, participants encounter  challenges that go beyond finding ways to save enough for retirement.  For example, workers can accumulate multiple workplace retirement  accounts as they change jobs over the course of their careers. Former  employers may merge causing the retirement plan to change names and  administrators, making it more difficult for plan participants to locate their  original plan accounts. In the United States, plan participants are  responsible for keeping track of their unclaimed accounts by continuing  to communicate with their previous employers by updating contact details  to receive important information about their accounts. In addition, plan  sponsors also generally have a responsibility to act solely in the interest  of the participants, which includes an obligation to attempt to locate  separated participants in some circumstances. Despite the efforts of plan  participants, plan sponsors, and regulators to manage unclaimed  accounts in the U.S. workplace retirement plan system, accounts can  remain unclaimed for multiple reasons, which may eventually affect the  retirement security of plan participants.

As we previously reported, other countries have made it easier for U.S.  individuals who work abroad and save for retirement through workplace  retirement plans to manage their accounts by providing mechanisms to  track and consolidate them. However, U.S. individuals who participate in  foreign workplace plans face different challenges than their counterparts  in U.S. workplace retirement plans. For example, foreign plans may not  be eligible for preferential tax treatment under U.S. law, and U.S.  participants in those plans may be subject to additional reporting  requirements. As of April 2015, the U.S. Department of State (State)  estimated that 8.7 million U.S. citizens lived abroad, more than the  populations of 39 individual U.S. states. Given the issues facing  participants managing workplace retirement accounts in the United States  and abroad, you asked us to review steps federal agencies might take to  assist them. This report examines key challenges U.S. participants face  1.  with unclaimed workplace retirement accounts in the United States,  2.  complying with U.S. tax reporting requirements on their foreign  workplace retirement savings.

To understand the key challenges U.S. participants face with unclaimed  workplace retirement accounts in the United States, we interviewed  officials from the Department of Labor (DOL), the Pension Benefit  Guaranty Corporation (PBGC), the Internal Revenue Service (IRS), and  record keepers and third-party administrators (TPA) that provide search  and other services to plan sponsors. We also reviewed relevant federal  laws and regulations, as well as guidance and other related documents  from DOL and IRS. We also reviewed reports from the 2013 ERISA  Advisory Council on Missing or Lost Participants.

To understand the challenges faced by U.S. individuals who participate in  foreign workplace retirement plans to comply with U.S. tax reporting  requirements on their foreign workplace retirement savings, we selected  five international case study locations with well-developed workplace  retirement systems to examine. Each of the case study locations have  relatively large populations of U.S. workers and high total amounts of  foreign earned income reported by U.S. taxpayers living in that location.  We deliberately included case study locations with and without a bilateral  tax treaty with the United States, based on Department of the Treasury (Treasury) information. Our case study locations were Australia, Canada,  Hong Kong, Switzerland, and the United Kingdom. For each case study  we reviewed documentation related to the tax treatment of workplace  retirement accounts accumulated in that location by U.S. individuals, such  as tax treaties and Intergovernmental Agreements (IGAs) related to the  Foreign Account Tax Compliance Act (FATCA). We also reviewed  publicly available research and reports about each case study location’s  retirement system, and interviewed relevant stakeholders. For each case  study we interviewed government officials, plan sponsors, and service  providers. Where available, we reviewed relevant data provided to us by  relevant government officials. We did not conduct an independent legal  analysis to verify the information provided about the laws or regulations in  the locations we selected for this study. Instead, we relied on appropriate  secondary sources and interviews with relevant officials to support our  work. We also interviewed IRS and Treasury officials, including those in  the Office of Chief Counsel, the Office of Tax Policy, the Tax Exempt and  Government Entities Division, and the Taxpayer Advocate Service. We  also spoke with organizations representing U.S. expatriates, foreign and  domestic retirement experts, tax advisors, and tax preparers who  specialize in assisting individuals with foreign income and assets when  filing their U.S. tax returns. We also reviewed transcripts of testimonies  the National Taxpayer Advocate gave before Congress pertaining to  international tax issues and FATCA, as well as IRS and Treasury  documentation on foreign workplace retirement plans and reporting  foreign income and assets.

GAO conducted this performance audit from July 2015 to October 2017 in  accordance with generally accepted government auditing standards.  Those standards require that GAO plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. GAO believes  that the evidence obtained provides a reasonable basis for the report’s  findings and conclusions based on the report’s audit objectives.

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

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

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

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

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

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

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

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

Pension Benefit Guaranty Corporation (PBGC)

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

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

Ongoing and Terminated Workplace Retirement Plans

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

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

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

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

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

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

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

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

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

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

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

Reporting Foreign Accounts and Foreign Financial Assets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Guidance Is Unclear Regarding How to Report Foreign Retirement Accounts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are making the following matter for congressional consideration.

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

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

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

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

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

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

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

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

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Labor,  Secretary of the Treasury, Commissioner of Internal Revenue, Director of  the Pension Benefit Guaranty Corporation, Acting Commissioner of the  Social Security Administration, the Secretary of State, and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix VIII.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Appendix IV: Comments from the Department of Labor

Appendix V: Comments from the Internal Revenue Service

Appendix VI: Comments from the Social Security Administration

Appendix VII: Comments from the Pension Benefit Guaranty Corporation

Appendix VIII: GAO Contact and Staff Acknowledgments

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

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