Notes to the Audited Financial Statements
NOTE 1 - DESCRIPTION OF THE PLAN
The following description of the Boston Scientific Corporation (the "Company") 401(k) Retirement Savings Plan, as amended (the Plan), provides only general information. Participants should refer to the Summary Plan Description and the Plan document for a more complete description of the Plan's provisions. Copies of these documents are available from the Employee Benefits Committee (the Committee). Capitalized terms used in this description not otherwise defined herein shall each have the meanings set forth in the Plan.
General
The Plan is a defined contribution plan covering all Eligible Employees who have completed an Hour of Service and have attained 18 years of age. If, as a result of temporary or short-term employment at Boston Scientific, an employee satisfies the minimum service requirement for the Plan, the employee will be considered an Eligible Employee for purposes of the Plan. A Participant is an Employee who satisfies the eligibility requirements of the Plan and contributes to the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), as amended. The Plan year is defined as the calendar year.
The Plan is administered by the Committee, whose members are appointed by the Chief Executive Officer of the Company. Vanguard Fiduciary Trust Company (Vanguard) is a fiduciary and trustee of the Plan and also serves as the recordkeeper of each Plan Participant's account. In May 2015, the Committee appointed Newport Trust (formerly known as Evercore Trust Company, N.A.) as an independent fiduciary and investment manager for the Boston Scientific Corporation (BSC) Company Stock Fund.
Contributions
The Plan satisfies the requirements of a safe harbor plan, in accordance with Internal Revenue Code (IRC) Section 401(k)(12)(B). An Eligible Employee may contribute between 1% and 50% of their Eligible Compensation to the Plan as Elective Deferrals, up to established federal limits indexed annually. Elective Deferrals include pre-tax contributions and Roth (after-tax) contributions. If elected, Roth contributions are combined with all annual pre-tax contributions in determining the maximum amount which a Participant may contribute in Elective Deferrals each year. Participants are not permitted to make contributions on a traditional after-tax basis. Participants age 50 or older by December 31, 2019 are also eligible to contribute additional catch-up contributions, up to established federal limits.
The Plan provides for Automatic Enrollments, whereby an Eligible Employee who completes an Hour of Service with the Company and who would otherwise have been eligible to make Elective Deferrals but did not, is enrolled in the Plan 30 days after the employee satisfies the Plan's eligibility requirements. This feature automatically enrolls each Eligible Employee into the Plan at a default rate of 2% of their Eligible Compensation on a pre-tax basis for the first Plan year. Contributions are allocated to the Qualified Default Investment Alternative (QDIA) fund. Following the first Plan year, the rate of contribution of an Eligible Employee's Compensation under the automatic enrollment increases annually in 1% increments, up to a maximum of 6% in the fifth Plan year in which the Automatic Compensation Reduction Authorization is in effect. Participants receive advance notice of their right to elect out of both of these automatic Plan features and are permitted to stop or change either feature at any time.
Vanguard Target Retirement Trusts Plus represent the QDIA fund for the Plan. In the event contributions are made on behalf of a Participant for whom there are no fund allocations elected, the contributions and any associated matching contribution will be allocated to the applicable Target Retirement Fund that is closest to the year in which the Participant reaches age 65.
The Company matches Elective Deferrals at a rate of 200% for the first 2% of the Participant's Eligible Compensation during the Plan year and 50% of the Elective Deferrals thereafter up to a maximum of 6% of the Participant's Eligible Compensation. The Company has the right under the Plan to discontinue or modify its matching contributions at any time. In addition, the Company's Board of Directors may approve additional discretionary contributions to the Plan. No discretionary contributions were made during 2019.
The Plan invests in common stock of the Company through its Company Stock Fund. The Company Stock Fund may also hold cash or other short-term securities, although these are expected to be a small percentage of the fund. The Plan does not limit the amount a participant can invest in the Company Stock Fund.
Each Participant is entitled to exercise voting rights attributable to the shares allocated to their account and is notified by the Company prior to the time that such rights may be exercised. The trustee votes any allocated shares for which instructions have not been given by a Participant in the same proportion as the shares of Company Stock for which the trustee has received timely Participant directions.
In addition, the trustee votes any unallocated shares in the same proportion as those shares that were allocated, unless the Committee directs the trustee otherwise. Participants have the same voting rights in the event of a tender or exchange offer.
Participant Accounts and Vesting
A Participant can allocate their account among various investment funds. Each Participant's account is credited with the Participant's contribution, the Company's contribution, and an allocation of the earnings and losses for the Participant's particular investment funds. Under current Plan rules, each Participant is fully vested immediately in their contributions and Company contributions.
Notes Receivable from Participants
Subject to certain limitations, a Participant may borrow from their account a minimum of $1,000 and up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. Loan terms range from one to five years in most instances, or up to 10 years if the loan is for the purchase of a primary residence. However, Participants of the defined contribution plans of acquired companies may retain the loan terms granted under their former plans. Loans are secured by the balance in the Participant's account and bear an interest rate of Prime plus 1%. The interest rate is updated monthly and is applied as of the first day of the month in which the loan is confirmed. Principal and interest are repaid ratably through automatic payroll deductions.
Payment of Benefits
Employees and beneficiaries are eligible to receive distributions in the form of installments, partial payments or lump-sum. The Company stock fund may be distributed in-kind, if requested by the Participant. Upon termination, Participant account balances in excess of $5,000 (less any rollover amounts) may continue to be invested in the Plan until the Participant attains the age of 70½. While employed by the Company, a Participant may withdraw all or a portion of their Elective Contributions to the extent necessary to meet a financial hardship, as provided for in the Plan, not to exceed one financial hardship withdrawal per year. Effective January 1, 2019, a Participant is no longer required to have a 401(k) loan prior to requesting a financial hardship withdrawal. Also, taking a Financial Hardship withdrawal no longer requires the automatic suspension of the Participant's Elective Contributions for six months. Financial hardship withdrawals are strictly regulated by the Internal Revenue Service (IRS). Qualified Disaster Relief Withdrawals permit special hardship distributions only (but not loans) for previously approved and any future disaster reliefs granted by the IRS.
Participants may make withdrawals for any reason after attaining age 59½. Disabled Participants, as defined in the Company's group long-term disability contract, are allowed to make withdrawals at any time regardless of age. The Plan also allows withdrawals regardless of age from a Participant's after-tax account for any reason.
Forfeitures
Unallocated and forfeited non-vested accounts totaled $9,353 as of December 31, 2019 and $7,939 as of December 31, 2018. These amounts are used to: (a) restore any amount previously forfeited as required by applicable regulations, (b) pay reasonable expenses of administering the Plan and (c) reduce future employer matching contributions. In 2019, employer contributions were reduced by forfeited non-vested accounts in the amount of $4,329. Unallocated assets resulting from mutual fund court settlements specific to the former Guidant Employee Savings and Stock Ownership Plan (ESSOP), which previously merged into the BSC Plan, are allocated to all remaining former ESSOP participants at least annually. In 2019, the amount reallocated to these participants was $17,332.
Administrative Expenses
Certain of the Plan's administrative expenses, including recordkeeping and trustee fees, are paid by Plan Participants through a quarterly fee of $8.50 charged to each Participant's account. Expenses relating to purchases, sales, or transfers of the Plan's investments are charged to the particular investment fund to which the expenses relate. All other administrative expenses of the Plan are paid by the Company. The quarterly fees charged to participants are used to offset plan expenses. Any unused fees are maintained in an unallocated asset account, which totaled $143,737 as of December 31, 2019 and $89,066 as of December 31, 2018. During 2019, $33,368 of such unallocated funds were used to offset administrative expenses.
Plan Termination
Although it has not expressed any intent 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. In the event of a termination of the Plan, the assets shall be liquidated and distributed in accordance with the provisions of the Plan and as prescribed by ERISA and the regulations pursuant thereto. Upon termination of the Plan, the Participants will become fully vested in any non-vested portion of their accounts.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles. All amounts are reported in whole dollars.
Use of Estimates
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, disclosure of contingent assets and liabilities at the date of the financial statements and accompanying notes and supplemental schedules, and the reported amounts of additions and deductions during the reporting period. Actual results could differ from those estimates.
Payment of Benefits
Benefits are recorded when paid.
Notes Receivable from Participants
Notes receivable from participants represent Participant loans that are recorded at their unpaid principal balance, plus any accrued but unpaid interest. Interest income on notes receivable from participants is recorded when it is earned. Related fees are recorded as administrative expenses and are expensed when they are incurred. No allowance for credit losses has been recorded as of December 31, 2019 or 2018. If a Participant ceases to make loan repayments and the Plan Administrator deems the loan to be a distribution, the loan balance is reduced and a benefit payment is recorded.
Investment Valuation and Income Recognition
The Plan's investments are stated at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). See Note 3 - Fair Value Measurements, for additional information. The Committee is responsible for determining the Plan's investment strategy and analyzing information provided by the investment custodians and issuers that is used to determine the fair value of the Plan's investments.
The Vanguard Retirement Savings Trust III (Stable Value Fund) is a tax-exempt collective trust that invests in fully benefit-responsive investment contracts issued by insurance companies and commercial banks, and similar types of fixed principal investments. This fund is recorded at fair value. See Note 3 - Fair Value Measurements, for additional information.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is accrued when earned. Net appreciation includes the Plan's gains and losses on investments bought, sold and held during the year. Dividend income is recorded on the ex-dividend date. Capital gain distributions are included in dividend income.
NOTE 3 - FAIR VALUE MEASUREMENTS
FASB Accounting Standards Codification Topic 820, Fair Value Measurement, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The category of financial asset and financial liability within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
Level 1 - Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
Level 2 - Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
Level 3 - Inputs to the valuation methodology are unobservable inputs based on management's best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
The following is a description of the valuation methodologies used for assets measured at fair value. The Plan's valuation methodology used to measure the fair value of common stock and mutual funds was derived from quoted market prices, as substantially all of these instruments have active markets. The investments in the Common Collective Trusts, including the Stable Value Fund, are stated at fair value based on the year-end market value of each unit held, using NAV, which is derived from the market value of the underlying net assets.
The Plan's investments measured at fair value consist of the following:
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As of December 31, 2019
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Level 1
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Total
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Mutual funds
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$
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725,406,127
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$
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725,406,127
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Common Collective Trusts
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2,853,911,974
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2,853,911,974
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Stable Value Common Collective Trust
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280,311,410
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280,311,410
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Common stock
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412,856,007
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412,856,007
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Other
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50,084
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50,084
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Total investments at fair value
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$
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4,272,535,602
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$
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4,272,535,602
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As of December 31, 2018
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Level 1
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Total
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Mutual funds
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$
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942,842,474
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$
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942,842,474
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Common Collective Trusts
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1,814,990,136
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1,814,990,136
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Stable Value Common Collective Trust
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258,566,624
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258,566,624
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Common stock
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361,298,408
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361,298,408
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Total investments at fair value
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$
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3,377,697,642
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$
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3,377,697,642
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NOTE 4 - TRANSACTIONS WITH PARTIES-IN-INTEREST
The Plan invests in certain funds managed by an affiliate of Vanguard. As noted in Note 1 - Description of the Plan, Vanguard is a fiduciary and trustee of the Plan and also serves as the recordkeeper to maintain the individual accounts of each Participant. The Plan also invests in the common stock of the Company. Transactions in these investments qualify as parties-in-interest transactions; however, they are exempt from the prohibited transaction rules under ERISA. Fees for legal, accounting, and other services rendered during the year by parties-in-interest were paid by the Company.
NOTE 5 - RISKS AND UNCERTAINTIES
The Plan and its Participants invest in various investment securities. Investment securities are exposed to various risks, such as overall market volatility, interest rate, liquidity 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. In December 2019, the novel strain of coronavirus (SARS-Cov-2), and its disease commonly known as COVID-19 (COVID-19), was reported in China and has since widely impacted the global public health and economic environment. In March 2020, the World Health Organization (WHO) declared COVID-19, including all additional variations and strains thereof, a global pandemic (the pandemic). As a result of the pandemic, there has been a significant impact on the performance of the financial markets. The value of the Plan’s investments have and will fluctuate in response to changing market conditions, the amount of losses, if any, that will be recognized in subsequent periods, cannot be determined.
NOTE 6 - INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service (IRS) dated April 27, 2017, stating that the Plan, as amended and restated, is qualified under Section 401(a) of the Internal Revenue Code (IRC), and, therefore, the related trust is exempt from taxation. Subsequent to this determination by the IRS, the Plan was amended. Once qualified, the Plan is required to operate in conformity with the IRC to maintain its qualified status. The plan administrator believes the Plan is being operated in compliance with the applicable requirements of the IRC and, therefore, believes the Plan, as amended, is qualified and the related trust is tax-exempt.
US GAAP requires plan management to evaluate tax positions taken by the Plan and recognize a tax liability if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. Plan management has analyzed the tax positions taken by the Plan, and has concluded that there are no uncertain positions taken or expected to
be taken. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
NOTE 7 - RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of the net assets available for benefits per the Statement of Net Assets Available for Benefits to the net assets available for benefits on the Form 5500 as of December 31:
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2019
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2018
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Net assets available for benefits
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$
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4,299,847,163
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$
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3,411,452,346
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Deemed distributions
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(404,507)
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(516,870)
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Net assets available for benefits per Form 5500
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$
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4,299,442,656
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$
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3,410,935,476
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The following is a reconciliation of the changes in net assets available for benefits per the Statement of Changes in Net Assets Available for Benefits to the net income on the Form 5500 as of December 31, 2019:
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Net increase/(decrease)
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$
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888,394,817
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Deemed distributions
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112,363
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Net gain/(loss) per the Form 5500
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$
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888,507,180
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NOTE 8 - DELINQUENT PARTICIPANT CONTRIBUTIONS
During 2019, the Company was untimely in remitting certain Participant contributions and loan repayments. Late remittances of Participant contributions and loan repayments constitute a prohibited transaction under ERISA Section 406, regardless of materiality. Delinquent participant contributions and loan repayments totaled $112,863; $33,258 was remitted to the plan in 2019. The remaining balance, along with all related lost earnings and excise tax will be remitted to the Plan during 2020.
NOTE 9 - SUBSEQUENT EVENTS
In March 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. The Company intends to amend certain provisions of the Plan to allow for optional withdrawals from the Plan and suspension of loan repayments under the Plan in accordance with the provisions of the Act.
In April 2020 the Company implemented certain proactive measures to mitigate financial and operational challenges resulting from the pandemic. These include a temporary four-day work week for most employees and reduced employee compensation, including significant cuts in the salaries of the Executive Committee and Board of Directors. These measures did not have an impact on the Company match percentage of Eligible Compensation.
SUPPLEMENTAL SCHEDULES
Boston Scientific Corporation 401(k) Retirement Savings Plan
EIN #04-2695240
Plan #001