403 (b) Plans

New Reporting and Audit Requirements

What You Need to Know

By John Shillingsford

   The current economic crisis has placed significant strain on businesses and their owners.  In addition, employee benefit plans and their trustees have also had to contend with these turbulent economic times.  As we know, the market has dropped an estimated 40% plus over the past two years and continues to indicate some level of uncertainty.  The Department of Labor (DOL) continues its enforcement actions and audit quality reviews of employee benefit plans and serves as the Employee Retirement Income Security Act (ERISA) “watch dog”. 

   New for 2009 is the change to the annual reporting requirements for 403 (b) plans.  403 (b) plans are typically tax sheltered annuity programs offered to employees of public schools; employees of certain tax exempt organizations and certain ministers.  Under 403 (b) plans, the sponsor/employer may purchase for an eligible employee an annuity contract or establish a custodial account  invested solely in mutual funds for the sole purpose of providing retirement benefits.  The regulations pertaining to 403 (b) plans were originally written in 1964 and have recently been changed in 2007.  The 2007 final regulations state that a 403 (b) plan must be maintained pursuant to a written defined contribution plan that contains all the terms and conditions for benefits under the plan.  The DOL separately issued revisions to form 5500 and related final regulations generally effective for plan years beginning on or after January 1, 2009.  These changes affect the annual reporting requirements of 403 (b) plans covered by Title I of ERISA.   

   The revised reporting has eliminated the previous limited reporting for 403 (b) plans.  Effective for the 2009 plan years, 403 (b) plans that are considered ”large plans” (generally plans with 100 or more participants) are now required to file annual audited financial statements with their form 5500 pursuant to ERISA section 103(a)(3)(A).  Plans that meet the “small plan” designation are eligible for a waiver of the audit requirement.   Small 403 (b) plans will be able to use a new simplified form 5500-SF (Short Form 5500) given the nature of the investments held by these plans.  

   The historical nature of these plans has raised concerns by plan administrators stating that the employee/participant could engage in actions without the consent or the involvement of the employer or the plan administrator.  These actions could make it extremely costly and in some cases impossible to obtain financial information about pre-2009 annuity contracts or custodial accounts to which the employer is no longer making contributions or forwarding employee salary reduction contributions.  In addition, even if the contracts or custodial accounts are identifiable, the compliance work involved would be extensive and expensive. 

  The  DOL has issued much needed transitional relief for 403 (b) plans and their annual reporting obligations under ERISA.  The DOL acknowledged that administrators will face significant compliance challenges in 2009 which could lead to significant reporting issues for form 5500.   The transition relief for plan administrators is effective for 2009 for 403 (b) plans that make a good faith effort to transition for 2009 to ERISA’s applicable annual reporting requirements.  The relief is limited to the form 5500 annual reporting requirements, including the requirement for large plans to include as part of their annual report the report of an independent qualified public accountant. 

   The administrator of 403 (b) plans do not need to treat annuity contracts and custodial accounts as part of the plans assets for purposes of ERISA’s annual reporting requirements provided that:

1.        the contract or account was issued to a current or former employee prior to January 1, 2009;

2.        the employer has not obligation to make contributions (employer or employee salary reductions) and ceased making contributions before January 1, 2009;

3.        all of the rights and benefits under the contract or account are enforceable against the insure or custodian by the individual owner of the contract or account without any involvement by the employer; and

4.        the individual owner of the contract is fully vested in the contract or account.

   In addition to the above the current or former employees with only contracts or accounts that are excludable under the terms of the above do not need to be counted as participants covered under the plan for form 5500 annual reporting purposes.  The DOL will also not reject the form 5500 due to a “qualified”, “adverse” or “disclaimer” opinion issued by independent qualified public account if the accountant expressly states that the sole reason for such an opinion was due to the pre-2009 contracts or accounts not be covered by the audit or included in the plan’s financial statements.

   The above relief is critical and must be considered in planning for your 403 (b) plan audits for 2009.  Documentation of the planning, pre-2009 contracts and custodial accounts is extremely important to demonstrate the plans compliance with the DOL’s transition provisions as well as the “good faith efforts” to comply requirement.

   For more information, please contact us or visit our website at www.avz.com