Notes to Financial Statements
Years Ended December 31, 2021 and 2020
1.Plan Description
The following description of the CVS Health Future Fund 401(k) Plan (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.
(a)Background
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 Corporation (“CVS Health”, and, together with its subsidiaries, the “Company”), 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. Also, the Vanguard Group, Inc. has been appointed as the recordkeeper to assist with administering the Plan (the “Recordkeeper”) and the Bank of New York Mellon has been appointed as the trustee of the Plan (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.
On November 28, 2018, the Company acquired Aetna Inc. On January 1, 2020, the Company merged the Aetna 401(k) Plan into Future Fund. The Aetna 401(k) Plan was a participant-directed defined contribution plan covering eligible employees of Aetna Inc., and its subsidiaries. The merger resulted in a transfer of assets of approximately $9.4 billion into Future Fund effective January 1, 2020.
(b)Eligibility
Employees are eligible to participate in the Plan upon attainment of age 18, with the first payroll following 90 days of service as an employee. Effective January 1, 2022 employees are eligible to participate upon attainment of age 18 and as of the first of the month following their employment date.
Employees referred to above are defined as regular employees of the Company other than:
•A nonresident alien receiving no United States (“U.S.”) earned income from the Company;
•A resident of Puerto Rico;
•An individual covered under a collective bargaining agreement (unless the agreement provides for membership);
•A leased employee (as defined in the Internal Revenue Code (the “Code”);
•A temporary employee (as determined by the Company); or
•An independent contractor or consultant (as defined by the Company).
(c)Contributions
Participants may direct the Company to contribute to their accounts a percentage of the eligible compensation that would otherwise be due to them. Percentages can be elected in multiples of 1%, with a minimum participant contribution percentage of 1%, pursuant to a salary reduction agreement. Each participant’s total elective deferrals for any calendar year may not exceed 75% of eligible compensation for each of 2021 and 2020 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 $19,500 for each of 2021 and 2020. 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 $6,500 for each of 2021 and 2020.
Plan participants making elective deferrals are eligible to receive Company matching contributions with the first payroll following the completion of one year of service with the Company. One year of service is defined as either:
•12 months of service, beginning on the employee's employment date, during which the employee completed at least 1,000 hours of service, or
•1,000 hours of service in the course of any calendar year after the calendar year in which the employee was hired.
The Plan provides a match of 100% up to 5% of an employee’s eligible compensation contributed to the Plan. The maximum annual match per participant was $14,500 for 2021 and $14,250 for 2020.
(d)Participant’s Account
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.
(e)Vesting
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. As of September 2021, all active accounts for participants became fully vested.
(f)Payment of Benefits
Upon termination of service by a participant, the Recordkeeper pays 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.
(g)Administrative Expenses
Administrative expenses specifically attributable to the Plan and not covered by forfeitures were funded by the Plan for 2021 and 2020. Recordkeeping and Trustee’s fees were paid by the Plan for 2021 and 2020.
(h)Forfeitures
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 formerly contained certain vesting schedules for Company matching contributions which could lead to forfeited matching contributions if a participant did not satisfy the criteria to vest the contributions upon the termination date. If a former participant resumed employment and eligibility in the Plan within five years of termination, any amounts previously forfeited were restored to the participant’s account, but remained subject to the vesting provisions of the Plan. Forfeitures during any plan year were 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 Company contributions. If forfeitures for any plan year were insufficient to restore the required reinstated amounts, the Company would have contributed the balance required for that purpose.
There were no cash forfeitures required to be restored to participants upon resumption of employment in 2021 or 2020. The forfeitures for each year were applied to the administrative expenses of the Plan.
(i)Investment Options
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 trading restrictions. The Plan’s investments are composed of guaranteed insurance contracts, common stock of CVS Health, marketable mutual funds, common collective trust (“CCT”) funds, U.S government securities, corporate bonds, other securities and separately managed funds (composed of marketable securities). The following is a brief explanation of each fund’s investment objectives:
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 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. At the time of contribution, participant deferrals into the CVS Health Stock Fund are limited to 20% of eligible compensation.
Diversified Bond Fund
This custom white label fund of funds seeks a stable rate of return and capital appreciation through investment in high quality bonds and other debt instruments. It is co-managed by Loomis Sayles (50%) and Dodge & Cox (50%) for Future Fund colleagues. Intermediate-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues 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.
Emerging Markets Index Fund
The investment seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. The fund employs an indexing investment approach designed to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index, a market-capitalization-weighted index that is made up of approximately 3,500 common stocks of large, mid, and small cap companies located in emerging markets around the world. The fund invests by sampling the index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield.
Global Equity Fund
The investment seeks long-term growth of capital; future income is a secondary objective. The fund normally invests in stocks of companies located around the world to take advantage of investment opportunities generated by changes in international trade patterns and economic and political relationships. 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. Effective February 2, 2021, this fund was removed from the Plan’s investment options.
Growth & 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. It is co-managed by Columbia Threadneedle (50%), Barrow Hanley (25%), and Mellon Capital (25%) for 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). Effective February 2, 2021, this fund was removed from the Plan’s investment options.
International Equity Fund
This custom white label fund of funds 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. Co-managed by First Eagle (30%), American Funds (30%), Vanguard (30%), and Allspring Global Investments (10%) for Future Fund participants. Foreign large blend portfolios invest in a variety of large cap international stocks. Most of these portfolios divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These portfolios primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex-Japan). The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios typically will have less than 20% of assets invested in U.S. stocks. In 2021, Wells Fargo Asset Management commenced operations as Allspring Global Investments.
International Equity Index Fund
The investment seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe, the Pacific Region, and Canada. The fund employs a “passive management” or indexing-investment approach designed to track the performance of the Financial Times Stock Exchange Group Developed All Cap ex US Index, which includes approximately 3,800 common stocks of companies located in Europe, Australia, Asia, and Canada. It attempts to replicate the target index by investing in 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 Core Fund
Effective February 2, 2021, this fund was added to the Plan’s investment options. This custom white label fund of funds seeks long-term capital appreciation in excess of the Russell 1000 Index over a full market cycle primarily through investments in a diverse portfolio of large market capitalization U.S. stocks. The multi-manager approach brings diversification to the fund and helps protect it from single-manager risk. The fund is sub-advised by complementary asset managers that select stocks as follows:
Columbia Threadneedle (25%) – Seeks long-term capital appreciation by investing in a concentrated portfolio of value stocks and invests in underappreciated companies that show accelerating earnings growth that have potential catalysts to drive earnings forward.
T. Rowe Price (25%) – Invests in blue chip companies that are market leaders in their respective industry with strong management teams, solid financial fundamentals, strong earnings growth and increasing operating cash flow within industries where there is a positive outlook.
Barrow Hanley (15%) – The strategy is implemented by constructing portfolios of individual stocks, selected on a bottom-up basis, reflecting all three value characteristics: a price/earnings and price/book below the market and a dividend yield above the market.
MFS (15%) – Seeks to invest in companies where rate and duration of growth is being underestimated by the market over the long-term. The manager integrates rigorous risk management analysis in seeking to ensure that fundamental, bottom-up stock selection drives alpha.
Wellington (20%) – Seeks to maximize risk-adjusted total return and to outperform the S&P 500 Index over a market cycle by investing in companies with improving quality and attractive fundamentals. The manager utilizes a disciplined valuation framework that has the potential to lead to more predictable and consistent excess returns.
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. It is co-managed by Columbus Circle (one-third), T. Rowe Price (one-third), and Mellon Capital (one-third) for Future Fund colleagues. 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. Effective February 2, 2021, this fund was removed from the Plan’s investment options.
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 Center for Research in Security Prices US Mid Cap Index, a broadly diversified index of stocks of midsize U.S. companies. It 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.
Real Asset Index Fund
The fund seeks to offer broad, cost-effective exposure to commodities, global natural resource equities, global infrastructure equities, U.S. commercial real estate securities, and U.S. inflation linked bonds. The fund employs an indexing investment approach designed to track the performance of a custom index, which is made up of: 25% Bloomberg Roll Select Commodity Index, 25% S&P Global Large Midcap Commodity and Resources Index, 15% Dow Jones U.S. Select REIT Index, 25% Bloomberg Barclays U.S. TIPS Index, and 10% S&P Global Infrastructure Index. The allocation across the five broad asset classes seeks to provide a long-term return while targeting a level of risk relative to longer-dated U.S. Treasury Inflation Protected Securities.
Small Cap Growth Fund
The investment seeks to provide long-term capital appreciation. The fund invests mainly in the stocks of small companies. These companies are considered by the fund's advisors to have superior growth potential. Also, these companies often provide little or no dividend income. Effective July 3, 2021, this fund was removed from the Plan’s investment options.
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. It 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 Mid Cap Core Fund
Effective July 3, 2021, this fund was added to the Plan’s investment options. This custom white label fund of funds seeks long-term capital appreciation in excess of the Russell 2500 Index over a full market cycle primarily through investment in a diverse portfolio of small- and mid-size capitalization U.S. stocks. The multi-manager approach brings diversification to the fund and helps protect it from single-manager risk. The fund is sub-advised by complementary asset managers that select stocks as follows:
Sapience Small Cap Value (20%) – The portfolio consists of investments in businesses with market capitalizations between $300 million and $4 billion at initial investment. The strategy is to pursue companies across the value spectrum. The team invests in four types of businesses that are primarily differentiated through their assessment of quality and the nature of the opportunity. Discounted franchises are companies with solid financials and highly durable distinctive competencies. Value with drivers are acceptable businesses that have underperformed from an operational perspective and/or are out of favor. Undervalued growth and undervalued assets are restructurings, turnarounds, and spin-offs.
MFS Mid Cap Value Equity (20%) – The strategy seeks mid-cap companies with attractive valuations and high-quality fundamentals. The managers will also invest in companies that they believe to be undervalued compared to their perceived worth (value companies) and have significant potential for improvement and/or low market expectations. The fund leverages MFS’s bottom-up, global research platform to identify undervalued, high quality companies that generally: have solid balance sheets, resilient business models, scope for improving returns, capital investment discipline, and prospects for beneficial capital deployment (dividends and/or share buybacks).
Snyder Capital Mgt Small/Mid Cap Value (20%) – The objective of the strategy is long-term growth of principal by targeting companies that can appreciate 50% over a 3-year time horizon. This is implemented with an emphasis on downside protection by selecting high-quality companies while avoiding those that are more speculative. These characteristics include differentiated and sustainable products or services, above average free cash flow, below average financial leverage, and a management team with a strong track record of both operational execution and capital allocation. The strategy is implemented by constructing portfolios of
individual stocks, selected on a bottom-up basis, reflecting all three value characteristics: a price/earnings and price/book below the market and a dividend yield above the market.
Baron Discovery Strategy (20%) - The fund invests primarily in small-sized U.S. companies. It invests in a select number of high-growth businesses that tend to be in an early phase of their lifecycles. The strategy seeks long-term investments in companies based on open-ended growth potential, sustainable competitive advantages, exceptional management, and compelling valuations relative to our projections of intrinsic value.
DF Dent Mid Cap Growth (20%) –The strategy seeks a concentrated approach to quality-growth investing. The managers look for companies that can grow their earnings per share over time with strong management teams, a sustainable competitive advantage, and a best-in-class or niche focus. The fund invests in companies with market capitalizations of approximately $1 billion to $58 billion, but generally buys from the lower end of that range to allow for a bigger runway.
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 Future Fund colleagues. These 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. Effective July 3, 2021, this fund was removed from the Plan’s investment options.
Stable Value Fund
The fund’s investment objectives are preservation of principal, consistent returns and a stable credited rate of interest. Managed by Invesco, 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.
Target Date Funds
The Target Date Funds seek to provide both income and capital appreciation by investing in multiple asset classes, including stocks, bonds, and cash investments. Target Date Funds provide a diversified exposure to stocks, bonds, and cash for those investors who have a specific date in mind for retirement. Target Date Funds are custom funds aimed to provide investors with an optimal level of return and risk, based solely on the target date. The Target Date Funds are custom fund of funds and invest in other Future Fund investment options and management adjusts the allocation among asset classes to more conservative mixes as the target date approaches, following a preset glide path. A Target Date Fund is part of a suite of funds offering multiple retirement dates to investors. The Plan’s ten Target Date Funds include a Target Date Retirement Fund as well as Target Date Funds in five-year increments (2020-2060).
U.S. Bond Index Fund
The investment seeks to track the performance of a broad, market-weighted bond index. The fund employs an indexing investment approach designed to track the performance of Bloomberg Barclays U.S. Aggregate Bond Index. It invests by sampling the index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. The fund invests at least 80% of assets in bonds held in the index. It maintains a dollar-weighted average maturity consistent with that of the index, ranging between 5 and 10 years.
Socially Responsible Fund
The investment seeks to track the performance of a benchmark index that measures the investment return of large and mid capitalization stocks and invests primarily in securities of companies that meet the fund's environmental, social and governance criteria. The fund employs a passive management or indexing investment approach designed to track the performance of the S&P 500 Index. The index is composed primarily of large and mid cap stocks that have been screened for certain social and environmental criteria. The fund attempts to replicate the index by investing all, or substantially all, of its assets in the stocks that make up the index.
2. Summary of Significant Accounting Policies
(a)Basis of Presentation
The Plan prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which include the application of accrual accounting.
(b)Investment Valuation
The value of the investments held at December 31, 2021 and 2020 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 Mid Cap Core Fund and the Large Cap Core Fund separately managed funds, are valued based upon quoted market prices.
Corporate bonds are valued at fair value using quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, inputs that are observable for the asset or liability that are not prices (such as interest rates and credit risks), or unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability.
Government securities, U.S. and non-U.S., are valued at fair value using quoted prices for identical assets and liabilities in active markets, quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs that are observable for the asset or liability that are not prices (such as interest rates and credit risks).
The Plan invests in fully benefit responsive synthetic guaranteed investment contracts (“synthetic GICs”) which are investment contracts issued by an insurance company, or other financial institution, backed by a portfolio of bonds that are owned by the Plan. 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.
Refer to Note 3 for further information related to the valuation of investments.
(c)Benefits Paid
Distributions of benefits are recorded when paid. The Plan has made available to participants certain relief under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
(d)Use of Estimates
The preparation of financial statements in conformity with 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.
(e)Accrual Basis of Accounting
The Plan utilizes the accrual basis of accounting.
(f)Investment Income
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.
(g)Purchases and Sales of Securities
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.
(h)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. 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.
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. The three levels of the fair value hierarchy consist of the following:
•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.
•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.
•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.
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, 2021 and 2020.
Mutual funds: Valued at the NAV of shares held by the Plan at year-end which are reported on an active market (level 1).
Common stock: Valued at the closing price reported on the active market on which the individual securities are traded (level 1).
Corporate bonds: Valued at observable quoted prices and inputs (level 2) or investment manager pricing at measurement date (level 3).
U.S. Government securities: Valued at unadjusted closing prices reported on active markets (level 1) or observable quoted prices and inputs (level 2).
Other securities: Valued at observable quoted prices and inputs (level 2).
CCT funds: Valued at the NAV and reported by the respective funds at each valuation date (level 1).
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.
The market value of CVS Health common stock was $103.16 and $68.30 per share at December 31, 2021 and 2020, respectively. The following tables set forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash | $ | 5,942 | | | $ | — | | | $ | — | | | $ | 5,942 | |
| Mutual funds | 8,854,788,000 | | | — | | | — | | | 8,854,788,000 | |
| Common stock | 6,324,137,708 | | | — | | | — | | | 6,324,137,708 | |
| Corporate bonds | — | | | 533,534,162 | | | 30,663,862 | | | 564,198,024 | |
| U.S. government securities | 269,636,544 | | | 393,731,897 | | | — | | | 663,368,441 | |
| Other securities | — | | | 45,847,002 | | | — | | | 45,847,002 | |
| CCT funds | 8,951,440,390 | | | — | | | — | | | 8,951,440,390 | |
| Total investments at fair value | $ | 24,400,008,584 | | | $ | 973,113,061 | | | $ | 30,663,862 | | | 25,403,785,507 | |
| | | | | | | |
| Synthetic GICs | | | | | | | 2,909,717,279 | |
| | | | | | | |
| Total investments at contract value | | | | | | | 2,909,717,279 | |
| | | | | | | |
| Total investments | | | | | | | $ | 28,313,502,786 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash | $ | 165 | | | $ | — | | | $ | — | | | $ | 165 | |
| Mutual funds | 8,766,302,034 | | | — | | | — | | | 8,766,302,034 | |
| Common stock | 2,862,966,978 | | | — | | | — | | | 2,862,966,978 | |
| Corporate bonds | — | | | 531,614,111 | | | 13,768,319 | | | 545,382,430 | |
| U.S. government securities | 236,474,999 | | | 386,525,896 | | | — | | | 623,000,895 | |
| Other securities | — | | | 41,058,186 | | | — | | | 41,058,186 | |
| CCT funds | 8,793,173,189 | | | — | | | — | | | 8,793,173,189 | |
| Total investments at fair value | $ | 20,658,917,365 | | | $ | 959,198,193 | | | $ | 13,768,319 | | | 21,631,883,877 | |
| | | | | | | |
| | | | | | | |
| Synthetic GICs | | | | | | | 2,954,581,257 | |
| | | | | | | |
| Total investments at contract value | | | | | | | 2,954,581,257 | |
| | | | | | | |
| Total investments | | | | | | | $ | 24,586,465,134 | |
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 and direct repayments to the Recordkeeper. 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 merged 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%.
5. Investment Policy
At December 31, 2021 and 2020, the Plan’s 401(k)-related assets were allocated among the investment options discussed in Note 1(i) based on participants’ elections. The investment options are recommended by an independent investment consultant and approved by the Investment Subcommittee. Notes receivable from participants repayments and interest earned are allocated to each of the investment funds based upon the participants’ contribution election percentages.
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.
7. Federal Income Taxes
The Plan received a determination letter from the Internal Revenue Service (“IRS”) dated February 16, 2017, confirming the 2016 amended and restated document was qualified under Section 401(a) of the Code and, therefore, the related trust is exempt from taxation. The Plan has been further amended and restated, most recently as of January 1, 2021, to comply with all laws since the last determination letter in 2017. The IRS no longer allows for interim determination letter request following a restatement. The Plan Administrator believes the Plan, as most recently amended and restated, conforms with, and is being operated in compliance with, the applicable requirements of the Code and, therefore, the Plan, as amended, is qualified and the related trust is tax exempt.
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, 2021, 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; in January 2021 the U.S. Department of Labor completed a routine audit for Plan years 2017 through 2019 and issued a no further action closing letter dated January 14, 2021.
8. Transactions with Parties-In-Interest
As of December 31, 2021 and 2020, 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.
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, 2021 and 2020:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Net assets available for benefits per the financial statements | $ | 28,612,278,646 | | | $ | 24,878,956,942 | |
Adjustment from contract value to fair value for certain fully benefit responsive
investment contracts | 88,132,209 | | | 130,756,873 | |
| Net assets available for benefits per the Form 5500 | $ | 28,700,410,855 | | | $ | 25,009,713,815 | |
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, 2021 and 2020:
| | | | | | | | | | | |
| | 2021 | | 2020 |
| Total additions per the financial statements | $ | 5,620,370,209 | | | $ | 13,907,926,485 | |
| Net change on adjustment from contract value to fair value for certain fully benefit responsive investment contracts | (42,624,664) | | | 123,761,602 | |
| Total income per the Form 5500 | $ | 5,577,745,545 | | | $ | 14,031,688,087 | |
10. Investment Contracts with Insurance Companies
The Plan holds a portfolio of investment contracts which could include synthetic guaranteed investment contracts. These contracts meet the fully benefit‐responsive investment contract criteria and, therefore, are reported at contract value. Contract value is the relevant measure for fully benefit‐responsive investment contracts because this is the amount received by participants when they initiate permitted transactions under the terms of the Plan. Contract value represents contributions made under each contract, plus earnings, less withdrawals.
Synthetic guaranteed investment contracts are issued by insurance companies or other financial institutions, backed by a portfolio of bonds. The bond portfolio may be structured as a fixed income separately managed account or collective fund. The bond portfolio is owned directly by the Plan (synthetic guaranteed investment contract). The issuer guarantees that all qualified participant withdrawals will be at contract value and that the crediting rate applied will not be less than 0%. Crediting rates are typically reset monthly to account for the difference between the contract value and the fair value of the underlying portfolio.
If the Plan defaults in its obligations under the contract (including the issuer's determination that the agreement constitutes a nonexempt prohibited transaction as defined under ERISA), and such default is not corrected within the time permitted by the contract, then the contract may be terminated by the issuer and the Plan will receive the fair value as of the date of termination. Each contract recognizes certain "events of default" which can invalidate the contracts' coverage. Among these are investments outside of the range of instruments which are permitted under the investment guidelines contained in the investment contract, fraudulent or other material misrepresentations made to the issuer, changes of control of the investment adviser not approved by the contract issuer, changes in certain key regulatory requirements, delivery of any communication to plan participants to influence a participant not to invest in the stable value option, termination of the plan or failure of the Plan to be tax qualified.
The contracts also generally provide for withdrawals associated with certain events which are not in the ordinary course of Plan operations. These withdrawals are paid with a market value adjustment applied to the withdrawal as defined in the investment contract. Each contract issuer specifies the events which may trigger a market value adjustment; however, such events may include, but not be limited to, the following:
•The redemption of all or a portion of the interests in the Plan at the direction of the plan sponsor, including partial termination of the plan, withdrawals due to the removal of a specifically identifiable group of employees from coverage under the plan (such as a group layoff or early retirement incentive program), the closing or sale of a subsidiary, employing unit, or affiliate, or the bankruptcy or insolvency of the plan sponsor.
At this time, the occurrence of any such market value adjustment event is not probable.
11. Risks and Uncertainties
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.
The coronavirus disease 2019 (“COVID-19”) pandemic continues to impact the economies of the U.S. and other countries around the world, as well as the values of investment securities. As of June 23, 2022, the impact of COVID-19 on the Plan’s net assets, including with respect to certain COVID-19 related relief that was allowable and offered under the Plan, has not been material. The impact of COVID-19 on companies and the U.S. and global economies continues to evolve and the potential future effects of COVID-19 on the Plan’s net assets are uncertain.