Notes to Financial Statements
Years Ended
December 31, 2018
and
2017
Note 1 - Plan Description
The following description of the 401(k) Plan and the Employee Stock Ownership Plan of CVS Health Corporation (“CVS Health” or the “Company”) and Affiliated Companies (the “Plan” or “Future Fund”) provides only general information. Participants should refer to the Plan documents for a more complete description of the Plan’s provisions.
The Plan was established as of January 1, 1989. The Plan is a defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. The general administration of the Plan and the responsibility for carrying out the provisions of the Plan are maintained by a committee (the “Benefit Plans Committee”) of not less than three persons appointed by the Board of Directors of CVS Health, the sponsor of the Plan. In accordance with the provisions of the Plan, the Benefit Plans Committee has appointed an Administrative Subcommittee (the “Plan Administrator”) and an Investment Subcommittee and delegated certain fiduciary duties and responsibilities to each of the Subcommittees. The Benefit Plans Committee also appointed Conduent HR Services, LLC as the recordkeeper to assist with administering the Plan (the “Recordkeeper”) and the Bank of New York Mellon as the trustee (the “Trustee”). The Recordkeeper maintains participant account records and works with the Trustee to execute transactions such as benefit payments to participants. The Trustee holds the assets of the Plan and executes transactions at the direction of the Plan Administrator.
Employees are eligible to participate in the Plan upon attainment of age 21 and on the earliest of:
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The first payroll of the month following 90 continuous days of service as a full-time employee;
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The first payroll of the month following completion of 12 months of service beginning on the employee’s hire date with at least 1,000 hours worked; or
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The first payroll of the month following completion of at least 1,000 hours of service in the course of one calendar year.
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Employees referred to above are defined as regular employees of the Company other than:
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A nonresident alien receiving no United States (“U.S.”) earned income from the Company;
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A resident of Puerto Rico;
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An individual covered under a collective bargaining agreement (unless the agreement provides for membership);
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A leased employee (as defined in the Internal Revenue Code (the “Code”);
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A temporary employee (as determined by the Company); or
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An independent contractor or consultant (as defined by the Company).
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Participants may direct the Company to contribute to their accounts from 1% to 85%, as a percentage or dollar amount, of the eligible compensation that would otherwise be due to them. Percentages can be elected in multiples of 1%, pursuant to a salary reduction agreement. Each participant’s total elective deferrals for any calendar year may not exceed 85% of eligible compensation or the maximum elective deferral allowed by the Code, whichever is less, as specified in the Plan document. The maximum elective deferral allowed by the Code was $18,500 for
2018
and $18,000 for
2017
.
Plan participants are eligible to receive Company matching contributions on the first payroll following the completion of one year of service with the Company. The Plan provides a match of 100% up to 5% of an employee’s eligible compensation contributed to the Plan. Prior to 2018, match was funded quarterly based on an annual formula with an annual true-up. Beginning in 2018, match was funded based on a per-pay period formula, eliminating the need for an annual true-up. The maximum annual match per participant was $13,750 for
2018
and $13,500 for
2017
.
All employees that are age 50 or over, before December 31 of the calendar year and who contribute the maximum amount to the Plan (as dollar limit or percentage) are permitted to make additional catch-up contributions. Catch-up contributions may be made up to an additional $6,000 for
2018
and
2017
.
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(d)
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Participant’s Account
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Each participant’s account is credited with an allocable share of the participant’s selected Plan investments and any unrealized appreciation or depreciation and interest and dividends of those investments, net of administrative expenses.
Participants are 100% vested in participant and Company matching contributions.
Participants whose account balances have been transferred into the Plan from other defined contribution plans maintain at least the degree of vesting in the account that they had at the time of the transfer. Participants are always fully vested in and have a non-forfeitable right to (1) their accounts upon retirement, death or disability and (2) any elective deferrals described in Note 1(c) and any rollover amounts they make to the Plan.
Upon termination of service by a participant, the Recordkeeper works with the Trustee to pay to the participant his or her benefit under one or more options, such as a single lump sum (including a rollover) or in equal annual installments over a period not to exceed the participant’s expected lifetime.
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(g)
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Administrative Expenses
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Administrative expenses specifically attributable to the Plan and not covered by forfeitures were funded by the Plan for
2018
and
2017
. Recordkeeping and Trustee’s fees were paid by the Plan for
2018
and
2017
.
On a participant’s termination date, any unvested portion of the participant’s account is forfeited at the earlier of distribution or five years from the date of termination. The Plan contains vesting schedules for Company matching contributions which could lead to forfeited matching contributions if a participant does not satisfy the criteria to vest the contributions on the termination date. If a former participant resumes employment and eligibility in the Plan within five years of termination, any amounts previously forfeited are restored to the participant’s account, but remain subject to the vesting provisions of the Plan. Forfeitures during any plan year are applied as follows: (i) to restore amounts previously forfeited by participants but required to be reinstated upon resumption of employment; (ii) to pay administrative expenses of the Plan; or (iii) to the extent allowed by law, to reduce future CVS Health contributions. If forfeitures for any plan year are insufficient to restore the required forfeitures, CVS Health shall contribute the balance required for that purpose.
There were no cash forfeitures restored to participants upon resumption of employment in
2018
or
2017
. The forfeitures for each year were applied to the administrative expenses of the Plan.
Upon enrollment in the Plan, a participant elects to direct contributions or investment balances to the investment fund options offered by and subject to the restrictions under the Plan. Participants may modify investment elections daily thereafter, subject to certain restrictions. The Plan’s investments are composed of guaranteed insurance contracts, securities of CVS Health, marketable mutual funds, security-backed investment contracts, common collective trusts, and separately managed funds (composed of marketable securities). The following is a brief explanation of each fund’s investment objectives:
Aggressive Lifestyle Fund
This fund was appropriate for those who could keep their money invested for at least 10 years or who were willing to accept a higher level of risk. The fund invested in other Future Fund investment options: Small Cap Growth, Small Cap Value, International Equity, International Equity Index, Large Cap Growth, Core Equity, Growth & Income, Diversified Bond, and the Alternative Strategy Fund (Blackrock Global Allocation Collective Fund M). This Lifestyle Fund had the following composite benchmark: Russell 1000 Index, Barclays Capital Aggregate Bond Index, Standard & Poors (“S&P”) 500 Index, Morgan Stanley Capital International (“MSCI”) All Country World Index excluding the United States (“MSCI ACWI EX US”) Index, MSCI ACWI Index, Barclays Global Aggregate, and the Russell 2000 Index.
Conservative Lifestyle Fund
This fund was appropriate for investors who needed access to their money in less than five years or who wanted to minimize their investment risk.
The fund invested in other Future Fund investment options: Small Cap Growth, Small Cap Value, International Equity, International Equity Index, Large Cap Growth, Core Equity, Growth & Income, Inflation-Protected Bond, Diversified Bond, U.S. Bond Index and Stable Value. This Lifestyle Fund had the following composite benchmark: Russell 1000 Index, Barclays Capital Aggregate Bond Index, Barclays Capital US TIPS Index, S&P 500 Index, 3-Year U.S. Treasury Index, Russell 2000 Index, and the MSCI ACWI EX US Index.
Core Equity Fund
The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the Standard & Poor's 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
CVS Health Common Stock Fund
The fund invests in CVS Health common stock to provide participants the possibility of long-term growth through increases in the value of the stock and the reinvestment of its dividends. Contributions to the CVS Health Common Stock Fund are limited to 20% of eligible compensation.
Diversified Bond Fund
This fund seeks a stable rate of return and capital appreciation through investment in high quality bonds and other debt instruments. Co-Managed by Loomis Sayles (45%), Dodge & Cox (45%), and Vanguard (10%) for CVS Health Future Fund participants. Intermediate-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income securities and typically have durations of 3.5 to 6.0 years. These portfolios are less sensitive to interest rates, and therefore less volatile, than portfolios that have longer durations.
Global Equity Fund
The investment seeks long-term growth of capital; future income is a secondary objective. The fund seeks to take advantage of investment opportunities generated by changes in international trade patterns and economic and political relationships by investing in common stocks of companies located around the world. In pursuing its primary investment objective, it invests primarily in common stocks that the investment adviser believes have the potential for growth. In pursuing its secondary objective, the fund invests in common stocks of companies with the potential to pay dividends in the future.
Growth and Income Fund
This fund seeks stocks that reflect value characteristics such as price/earnings and price/book ratios below the market through investment in high dividend yield stocks at discounted valuations. Co-Managed by Columbia Threadneedle (50%), Barrow Hanley (25%), and Mellon Capital (25%) for CVS Health Future Fund participants. Large-value portfolios invest primarily in big U.S. companies that are less expensive or growing more slowly than other large-cap stocks. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).
Inflation-Protected Fund
The investment seeks to provide inflation protection and income consistent with investment in inflation-indexed securities. The fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, its agencies and instrumentalities, and corporations. It may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in the range of 7 to 20 years. At a minimum, all bonds purchased by the fund will be rated investment-grade or, if unrated, will be considered by the advisor to be investment-grade.
International Equity Fund
Co-Managed by Franklin Templeton (30%), American Funds (30%), and Vanguard (40%) for CVS Health Future Fund participants, this fund seeks long-term growth of capital through investment in foreign (non-U.S.) equity securities. It also invests in depository receipts and companies located in emerging market countries.
International Equity Index Fund
The investment seeks to track the performance of the FTSE Developed All Cap ex US Index. The fund employs an indexing investment approach designed to track the performance of the FTSE Developed All Cap ex US Index, a market-capitalization-weighted index that is made up of approximately 3,885 common stocks of large-, mid-, and small-cap companies located in Canada and the major markets of Europe and the Pacific region. The adviser attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Large Cap Growth Fund
This fund seeks stocks that reflect growth characteristics such as sales and earnings growth above the market through investment in positive momentum stocks and that will continue to beat investor expectations. Co-Managed by Columbus Circle (one-third), T. Rowe Price (one-third), and Mellon Capital (one-third) for CVS Health Future Fund participants. Large-growth portfolios invest primarily in big U.S. companies that are projected to grow faster than other large-cap stocks. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields). Most of these portfolios focus on companies in rapidly expanding industries.
Mid Cap Index Fund
The investment seeks to track the performance of a benchmark index that measures the investment return of mid-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Mid Cap Index, a broadly diversified index of stocks of mid-size U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Moderate Lifestyle Fund
This fund was appropriate for investors who could keep their money invested for at least five years.
The fund invested in other Future Fund investment options: Small Cap Growth, Small Cap Value, International Equity, International Equity Index, Large Cap Growth, Core Equity, Growth & Income, Inflation-Protected Bond, Diversified Bond, U.S. Bond Index Fund, and Stable Value Fund. This Lifestyle Fund had the following composite benchmark: Russell 1000 Index, Barclays Capital Aggregate Bond Index, Barclays Capital US TIPS Index, S&P 500 Index, MSCI ACWI EX US Index, Russell 2000 Index, and the 3-Year U.S. Treasury Index.
Small Cap Growth Fund
The investment seeks to provide long-term capital appreciation. The fund invests mainly in the stocks of small and mid-size companies. These companies tend to be unseasoned but are considered by the fund's advisors to have superior growth potential. Also, these companies often provide little or no dividend income. It uses multiple investment advisors.
Small Cap Index Fund
The investment seeks to track the performance of a benchmark index that measures the investment return of small-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Index, a broadly diversified index of stocks of small U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Small Cap Value Fund
The fund seeks long-term growth by investing primarily in stocks of small- to medium-sized companies, which either are believed to offer superior earnings growth or appear to be undervalued. This fund may experience above-average share price volatility. Co-managed by Dimensional Fund Advisors (50%), Sapience Investments (25%), and Vanguard (25%) for CVS Health Future Fund participants. Small-blend portfolios favor U.S. firms at the smaller end of the market-capitalization range. Some aim to own an array of value and growth stocks while others employ a discipline that leads to holdings with valuations and growth rates close to the small-cap averages. Stocks in the bottom 10% of the capitalization of the U.S. equity market are defined as small cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.
Stable Value Fund
The fund’s investment objectives are preservation of principal, consistent returns and a stable credited rate of interest. Managed by Galliard Capital Management, the fund is primarily comprised of highly rated (AA or higher) insurance company and bank investment contracts issued by financial institutions and other eligible stable value investments that seek to provide participants with safety of principal and accrued interest as well as a stable crediting rate. All contract issuers and securities utilized in the portfolio are rated investment grade at time of purchase.
U.S. Bond Index Fund
The investment seeks the performance of Bloomberg Barclays U.S. Aggregate Float Adjusted Index. Bloomberg Barclays U.S. Aggregate Float Adjusted Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States-including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities-all with maturities of more than 1 year. All of its investments will be selected through the sampling process, and at least 80% of its assets will be invested in bonds held in the index.
Socially Responsible Fund
The investment seeks long-term growth of capital by investing primarily in securities of companies that meet the fund's environmental, social and governance (ESG) criteria. The fund invests primarily in common stocks of mid- to large-capitalization companies that meet the fund's quality oriented financial and ESG criteria. It seeks to reduce risk by investing across many different industries. The Portfolio Managers employ a research driven and valuation sensitive approach to stock selection, with a focus on long term sustainability.
Note 2 - Summary of Significant Accounting Policies
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(a)
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Basis of Presentation
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The Plan prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which include the application of accrual accounting.
The value of the investments held at
December 31, 2018
and
2017
are stated at fair value with the exception of the fully benefit responsive investment contracts. Shares of mutual funds are valued at quoted market prices, which represent the net asset values of shares held by the Plan at year-end. CVS Health common stock and common stock owned directly in the Small Cap Value Fund, the Growth and Income Fund, and the Large Cap Growth Fund separately managed funds, are valued based upon quoted market prices.
The Plan invests in fully benefit responsive Guaranteed Investment Contracts (“GICs”) and synthetic GICs, and fully benefit responsive security-backed investment contracts. Synthetic GICs are investment contracts issued by an insurance company or other financial institution, backed by a portfolio of bonds that are owned by the Plan. GICs and security-backed contracts are investment contracts issued by an insurance company backed by a portfolio underlying the contract that is maintained separately from the contract issuer’s general assets. Contract value is the relevant measurement attributable to fully benefit responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. The contract value of the fully benefit responsive investment contracts represents contributions plus earnings, less participant withdrawals and administrative expenses.
Common Collective Trust (“CCT”) funds are valued at the net asset value (“NAV”) and reported by the respective funds at each valuation date.
The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for Benefits.
Distributions of benefits are recorded when paid.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets available for benefits during the reporting period. Actual results could differ from those estimates.
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(e)
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Accrual Basis of Accounting
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The Plan utilizes the accrual basis of accounting.
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(f)
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Purchases and Sales of Securities
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Purchases and sales of securities are made on a trade-date basis. Due to timing of settlements, there may be pending transactions as of the financial statement date that result in a receivable or payable to the Plan.
Dividend and interest income is recorded when earned. Net appreciation and depreciation include the Plan’s
gains and losses on investments bought and sold as well as held during the year.
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(h)
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Notes Receivable from Participants
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Notes receivable from participants represent participant loans that are recorded at their unpaid principal balance plus any accrued but unpaid interest. Notes receivable are collateralized by the participant’s account balance and bear interest at a market rate (Prime + 1%). If a participant ceases to make loan repayments, the outstanding loan balance will be deemed defaulted and result in a taxable event to the participant.
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(i)
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New Accounting Pronouncements Recently Adopted
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In July 2018, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2018-09,
Codification Improvements
. The standard removes the stable value common collective trust from the illustrative example in paragraph ASC 962-325-55-17,
Plan Accounting
, to avoid the interpretation that such an investment would never have a readily determinable fair value and, therefore, would always use the net asset value per share practical expedient. A plan should evaluate whether a readily determinable fair value exists to determine whether those investments may qualify for the practical expedient to measure at net asset value in accordance. The standard is effective for public companies for periods beginning after December 15, 2018. Early adoption is permitted. The Company early adopted the ASU effective January 1, 2018. In connection with the adoption, the Plan has prospectively included certain investments in the fair value hierarchy disclosure that were previously excluded from such disclosure because those investments previously used the net asset value per share practical expedient. These investments meet the criteria of readily determinable fair value.
Note 3 - Fair Value Measurements
The Plan uses the three-level hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy consist of the following:
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Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Plan has the ability to access at the measurement date.
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Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
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Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.
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The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level of input that is significant to the fair value measure in its entirety.
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at
December 31, 2018
and
2017
.
CCT funds:
Valued at the NAV and reported by the respective funds at each valuation date.
GICs:
These contracts meet the fully benefit responsive investment contract criteria and are reported at contract value.
Security-backed investment contracts and synthetic GICs:
These contracts meet the fully benefit responsive investment contract criteria, and the underlying securities, collective funds, and wrapper contracts are reported at contract value.
Mutual funds:
Valued at the NAV of shares held by the Plan at year-end which are reported on an active market.
Common stock:
Valued at the closing price reported on the active market on which the individual securities are traded.
The market value of CVS Health Common Stock was $65.52 and $72.50 per share at
December 31, 2018
and
2017
, respectively. The following tables set forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of
December 31, 2018
and
2017
:
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Investments at December 31, 2018
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Investments at
fair value as
determined by
quoted prices
in active
markets
(Level I)
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Valuation
techniques
based on
observable
market data
(Level II)
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Valuation
techniques
incorporating
information
other than
observable
market data
(Level III)
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Total
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Cash
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$
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4,841
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$
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—
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$
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—
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$
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4,841
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Mutual funds
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3,915,933,398
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—
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—
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3,915,933,398
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Common stock
|
1,842,032,896
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—
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—
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1,842,032,896
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CCT funds
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3,469,851,984
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—
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—
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3,469,851,984
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Total investments at fair value
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$
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9,227,823,119
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$
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—
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$
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—
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9,227,823,119
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GIC's
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5,197,924
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Synthetic GICs
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603,029,028
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Security-backed investment contracts
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223,787,731
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Total investments at contract value
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832,014,683
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Total investments
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$
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10,059,837,802
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Investments at December 31, 2017
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Investments at
fair value as
determined by
quoted prices
in active
markets
(Level I)
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Valuation
techniques
based on
observable
market data
(Level II)
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Valuation
techniques
incorporating
information
other than
observable
market data
(Level III)
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Total
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Cash
|
$
|
63,045
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$
|
—
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$
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—
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$
|
63,045
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Mutual funds
|
4,236,913,763
|
|
|
—
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|
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—
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|
4,236,913,763
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|
Common stock
|
2,079,949,793
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|
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—
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—
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|
2,079,949,793
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Total investments at fair value
|
$
|
6,316,926,601
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|
$
|
—
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$
|
—
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|
6,316,926,601
|
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|
|
|
|
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Cash equivalents
(1)
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201,904,330
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Stable value funds
(2)
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|
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327,041,410
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Bond funds
(3)
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747,715,020
|
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Large cap funds
(3)
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2,298,108,900
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Total common collective trust funds at NAV
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3,574,769,660
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GICs
|
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|
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5,108,525
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Synthetic GICs
|
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374,357,966
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Security-backed investment contracts
|
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409,734,820
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Total investments at contract value
|
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789,201,311
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Total investments
|
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$
|
10,680,897,572
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_____________________________________________
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(1)
|
This category includes common collective trust funds that are designed to seek as high of a level of current income as is consistent with the preservation of capital and the maintenance of liquidity. Participant-directed redemptions and the Plan have no restrictions across the funds.
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(2)
|
This category includes common collective trust funds that are designed to deliver safety and stability by preserving principal and accumulating earnings. Participant-directed redemptions and the Plan have no restrictions across the funds; however, the Plan is required to provide a one-year redemption notice for the Galliard Managed Income Fund and the Putnam Stable Value Fund to liquidate its entire share.
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(3)
|
These categories include common collective trust funds that are designed to track the performance of various indices. Participant-directed redemptions and the Plan have no restrictions across the funds; however, the Plan is required to provide a 60-day redemption notice for the BlackRock Global Allocation Collective Fund to liquidate its entire share.
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Note 4 - Notes Receivable from Participants
Participants may obtain loans from the Plan utilizing funds accumulated in their accounts. The minimum amount that may be borrowed is $1,000. Participants can borrow up to 50% of their vested account balance but not more than $50,000, less their highest outstanding loan balance during the previous twelve months. The loans are repaid to the Plan through after-tax payroll deductions. The term of the loan is selected at the discretion of the participant, but may not exceed five years for a general loan and twenty-five years for a primary residence loan, except that primary residence loans initiated under the former CareSave plan, which transferred into the Plan as of December 31, 2012, were permitted to have a maximum loan repayment period of up to ten years only. Participants may have two loans outstanding at any time, but no more than one primary residence loan. Interest on loans is equal to the Prime Rate as of the prior month-end plus 1%.
Note 5 - Investment Policy
At
December 31, 2018
and
2017
, most of the Plan’s 401(k)-related assets were allocated among the investment options discussed in Note 1(i) based on employees’ elections. The investment options are recommended by an independent investment consultant and approved by the Investment Subcommittee. Notes Receivable repayments and interest earned are allocated to each of the investment funds based upon the participants’ contribution election percentages.
Note 6 - Plan Termination and Related Commitments
Although it has not expressed any intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. If the Company terminates the Plan, all participants in the Plan become fully vested.
Note 7 - Federal Income Taxes
The Plan was amended and restated as of January 1, 2016. The Plan has received a determination letter from the Internal Revenue Service (“IRS”) dated February 16, 2017, stating that the Plan as amended and restated as of January 1, 2016, is qualified under Section 401(a) of the Code and, therefore, the related trust is exempt from taxation. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. Subsequent to this determination by the IRS, the Plan has been further amended. The Plan Administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes the Plan, as amended, is qualified and the related trust is tax exempt.
U.S. GAAP requires plan management to evaluate uncertain tax positions taken by the Plan and recognize a tax liability if the organization has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan Administrator has analyzed the tax positions taken by the Plan and has concluded that, as of
December 31, 2018
, there are no uncertain tax positions taken or expected to be taken. The Plan has recognized no interest related to uncertain tax positions. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
Note 8 - Transactions with Parties-In-Interest
As of
December 31, 2018
and
2017
, certain Plan investments are investment funds managed by the Plan’s Trustee, The Bank of New York Mellon. The Plan also invests in shares of CVS Health’s common stock and records associated dividend income. Although these transactions qualify as party-in-interest transactions, they are exempt from the prohibited transaction rule under ERISA.
Note 9 - Reconciliation of Financial Statements to Form 5500
The following is a reconciliation of the net assets available for benefits per the financial statements to the Form 5500 as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Net assets available for benefits per the financial statements
|
|
$
|
10,287,338,824
|
|
|
$
|
10,923,237,838
|
|
|
Adjustment from contract value to fair value for certain fully benefit responsive
investment contracts
|
|
(11,122,961
|
)
|
|
(1,351,827
|
)
|
|
Net assets available for benefits per the Form 5500
|
|
$
|
10,276,215,863
|
|
|
$
|
10,921,886,011
|
|
The following is a reconciliation of total additions per the financial statements to total income per the Form 5500 for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
2018
|
|
Total additions per the financial statements
|
$
|
226,477,182
|
|
|
Add: Adjustment from contract value to fair value for certain fully benefit responsive investment
contracts as of December 31, 2018
|
(11,122,961
|
)
|
|
Less: Adjustment from contract value to fair value for certain fully benefit responsive investment
contracts as of December 31, 2017
|
1,351,827
|
|
|
Total income per the Form 5500
|
$
|
216,706,048
|
|
Note 10 - Investment Contracts with Insurance Companies
The Plan invests in fully benefit responsive GICs and security-backed investment contracts. The issuer maintains the contributions in a general account. The account is credited with participant contributions plus earnings and charged for
participant withdrawals and administrative expenses. The issuer is contractually obligated to repay the principal and a specified interest rate that is guaranteed to the Plan. The crediting interest rate is fixed at the time the contract is entered into with the issuer and does not reset.
The synthetic guaranteed investment contracts held by the Plan include a wrapper contract that provides a guarantee that the credit rate will not fall below 0%. Cash flow volatility (e.g., timing of benefit payments) as well as asset under-performance can be passed through to the Plan through adjustments to future contract crediting rates. Formulas are provided in the contracts that adjust renewal crediting rates to recognize the difference between the fair value and the book value of the underlying assets. Crediting rates are reviewed monthly for resetting.
The Plan also invests in fully benefit responsive security-backed investment contracts that credit a stated interest rate for a specified period of time. Investment gains and losses are amortized over the expected duration through the calculation of the interest rate applicable to the Plan on a prospective basis. Security-backed investment contracts provide for a variable crediting rate that resets at least quarterly, and the issuer of the wrap contract provides assurance that future adjustments to the crediting rate cannot result in a crediting rate less than 0%. The crediting rate is primarily based on the current yield to maturity of the covered investments, plus or minus amortization of the difference between the market value and contract value of the covered investments over the duration of the covered investments at the time of computation. The crediting rate is most affected by the change in the annual effective yield to maturity of the underlying securities, but is also affected by the difference between the contract value and the market value of the covered investments. This difference is amortized over the duration of the covered investments. Depending on the change in duration from reset period to reset period, the magnitude of the impact to the crediting rate of the contract to market difference is heightened or lessened. The crediting rate can be adjusted periodically and is usually adjusted either monthly or quarterly, but in no event is the crediting rate less than 0%.
The traditional investment contracts held by the Plan are GICs. The contract issuer is contractually obligated to repay the principal and interest at a specified interest rate that is guaranteed to the Plan. The crediting rate is based on a formula established by the contract issuer. The contract cannot be terminated before the scheduled maturity dates.
The Plan’s ability to receive amounts due in accordance with fully benefit responsive investment contracts is dependent on the third-party issuers’ ability to meet their financial obligations. The issuers’ ability to meet their contractual obligations may be affected by future economic and regulatory developments.
Certain events limit the ability of the Plan to transact at contract value with the issuers. Such events may include
(i) amendments to the plan documents (including complete or partial plan termination or merger with another plan), (ii) changes to the Plan’s prohibition on competing investment options or deletion of equity wash provisions, (iii) bankruptcy of the plan sponsor or other plan sponsor events (for example, divestitures or spin-offs of a subsidiary) that cause a significant withdrawal from the Plan, or (iv) the failure of the trust to qualify for exemption from federal income taxes or any required prohibited transaction exemption under ERISA. The Plan Administrator does not believe that the occurrence of any such events that would limit the Plan’s ability to transact at contract value with participants is probable.
The GICs generally do not permit issuers to terminate the agreement prior to the scheduled maturity date; however, the security-backed investment contracts generally impose conditions on both the Plan and the issuer. If an event of default occurs and is not cured, the non-defaulting party may terminate the contract. The following may cause the Plan to be in default: a breach of material obligation under the contract, a material misrepresentation, or a material amendment to the plan agreement. The issuer may be in default if it breaches a material obligation under the investment contract, makes a material misrepresentation, has a decline in its long-term credit rating below a threshold set forth in the contract, or is acquired or reorganized and the successor issuer does not satisfy the investment or credit guidelines applicable to issuers. If, in the event of default of an issuer, the Plan were unable to obtain a replacement investment contract, withdrawing participants may experience losses if the value of the Plan’s assets no longer covered by the contract is below contract value. The Plan may seek to add additional issuers over time to diversify the Plan’s exposure to such risk, but there is no assurance the Plan may be able to do so. The combination of the default of an issuer and an inability to obtain a replacement agreement could render the Plan unable to achieve its objective of maintaining a stable contract value. For GICs and security-backed investment contracts, payments for participant withdrawals would generally be made pro rata, based on the percentage of investments covered by each issuer. Contract termination occurs whenever the contract value or market value of the covered investments reaches zero or upon certain events of default. If the contract terminates due to issuer default (other than a default occurring because of a decline in its rating), the issuer will generally be required to pay to the Plan the excess, if any, of contract value over market value on the date of termination. If a security-backed investment contract terminates due to a decline in the ratings of the issuer, the issuer may be required to pay to the Plan the cost of acquiring a replacement contract (that is, replacement cost) within the meaning of the contract. If the contract terminates when the market value equals zero, the issuer will pay the excess of contract value over
market value to the Plan to the extent necessary for the Plan to satisfy outstanding contract value withdrawal requests. Contract termination also may occur by either party upon election and notice. As GICs and security-backed investment contracts are fully benefit responsive, contract value is the relevant measurement attribute for that portion of the net assets available for benefits attributable to the GICs and security-backed investment contracts. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value. Additionally, the Plan can make deposits or redeem investments in security-backed investment contracts, with the issuer’s consent, for portfolio reallocation as part of the ongoing management of the Plan’s assets. No deposits may be made to a GIC. Except for benefit responsive participant withdrawals, no redemptions may be made to a GIC other than any payments scheduled in the contract before the maturity date.
Note 11 - Subsequent Events
Effective January 1, 2019, there were a number of changes to the Plan:
•
The Plan was renamed the CVS Health Future Fund 401(k) Plan;
•
The Vanguard Group, Inc. assumed recordkeeping responsibilities;
•
Loan repayments can be made directly with the Recordkeeper;
|
|
|
|
•
|
Employees are eligible to participate in the Plan upon the attainment of age 18 and as soon as administratively feasible following 90 days of service as a full-time employee;
|
•
Participants may contribute 1% to 60% of eligible compensation.
Effective January 1, 2019, ten custom Target Date Funds were implemented, with assets from the former Lifestyle Funds (Aggressive, Moderate, and Conservative) mapped to the age-appropriate Target Date Fund for each participant. These funds are invested in other Future Fund investment options. Target Date Funds seek to provide both income and capital appreciation by investing in multiple asset classes, including stocks, bonds, and cash investments.
Effective January 1, 2019, the Vanguard FTSE Social Index Fund replaced the Neuberger Berman Sustainable Equity Fund as the underlying investment in the Socially Responsible Fund.
401(k) PLAN AND THE EMPLOYEE STOCK OWNERSHIP PLAN
OF CVS HEALTH CORPORATION AND AFFILIATED COMPANIES