Effective for plan years beginning on or after January 1, 2009, all Internal Revenue Code (Code) Section 403(b) plans that are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), are subject to the same annual reporting requirements that apply to other tax-qualified retirement plans. Currently, sponsors of 403(b) plans are only required to complete a limited number of line items on annual report Form 5500 to satisfy applicable reporting requirements. The enhanced reporting requirements under Form 5500 include the annual audit and auditors certification requirements applicable to other tax-qualified retirement plans. In light of these new reporting requirements, 403(b) plan sponsors should consider the following.
Determine if the Plan Is Subject to the New Reporting Requirements
Under current law, only a plan sponsor that establishes and maintains a 403(b) plan for the benefit of its employees is subject to Title I of ERISA. A plan sponsor that merely acts as a conduit through which an employee’s deferrals are transferred to an outside vendor generally does not maintain a plan in a manner sufficient to subject its plan to Title I of ERISA. In 2007, the U.S. Department of Treasury published new 403(b) regulations that provide that all plan sponsors, including those providing plans that are not subject to Title I, must establish a plan document for their plans. Initial concern focused on whether this plan document requirement would subject non-Title I plans to ERISA. However, in Field Assistance Bulletin 2007-02, the U.S. Department of Labor (DOL) describes how a plan sponsor of a non-Title I plan could meet its documentation requirements without subjecting its plan to Title I ERISA.
Each sponsor of a 403(b) program should first determine whether its current arrangement is subject to Title I of ERISA, then determine whether it must satisfy the new Form 5500 reporting requirements.
Determine if the Plan Is Eligible for the Short Form 5500
Certain plan sponsors can satisfy their reporting obligations by filing the new Form 5500 – SF, Short Form Annual Return/Report of Small Employee Benefit Plan (Short Form 5500 or Form 5500-SF). The short form generally requires less information and does not require the preparation of audited financial statements of the plan. To be eligible for the short form, the plan must cover fewer than 100 participants, be eligible for the small plan audit waiver under DOL Regulation 2520.104-46, hold no employer securities, maintain 100 percent of its assets in investments that have a readily ascertainable fair market value, and not be a multi-employer plan.
Small employers and employers with a plan covering fewer than 100 employees should determine whether they can use the Short Form 5500.
Evaluate Availability of Limited-Scope Audit Reporting
Sponsors of large 403(b) plans (those with 100 or more participants at the beginning of the plan year) must conduct an audit of the plan’s financial statements and include an accountant’s opinion regarding the soundness of the financial operation of the plan. Certain plan sponsors may include a limited-scope audit, which is available under DOL Regulation section 2520.103-8. The accountant that conducts the audit of the plan’s finances may exclude certain information from its review so long as certain conditions are met. Specifically, the auditor may exclude certain information prepared and certified by a bank or other institution, a state or federally regulated insurance carrier, or a 103-12 investment entity.
Sponsors should determine whether the investments offered under their plans satisfy the conditions for the limited-scope audit reporting requirements.
Engage Auditors to Perform Audit Functions
Sponsors of large 403(b) plans that are subject to ERISA Title I should engage an auditor to perform the audit with respect to their financial statements under the 403(b) plan. A plan sponsor that also sponsors another qualified plan can likely obtain these services through the existing auditor relationship.
Because 403(b) plans frequently allow for more than one vendor through which participants can obtain various investments, it is important to ensure that the audit process covers investments through each such vendor. To ease the administrative burden regarding application of the audit function to such arrangements, plan sponsors should also take advantage of plan provisions and changes in the 403(b) regulations that allow for the consolidation and elimination of vendors.
Implement Procedures to Ensure Form 5500 Reporting Compliance
In anticipation of the new reporting and potential audit requirements applicable to 403(b) plans, sponsors of such arrangements should determine whether their current plan administration requirements will allow them to adequately track and report information required on Form 5500. To do so, each such plan sponsor will likely want to review its plan document and administration with the help of professionals experienced with the reporting requirements of employee benefit plans and the nuances of 403(b) plans, and with equally experienced outside counsel to determine whether current and proposed practices adequately comply with required reporting.
Engage Counsel to Conduct a Plan Document Review
In conducting its review and reporting regarding the operation of a tax qualified retirement plan, an auditor will typically prepare a footnote disclosure regarding the tax-qualified status of the plan. In doing so, an auditor will typically request that the plan sponsor engage outside counsel to determine whether the plan document has been maintained in a manner consistent with applicable law, including compliance requirements and non-discrimination testing. Because 403(b) plans are currently ineligible for the determination letter program available through the Internal Revenue Service (IRS), it is particularly important that a thorough review of the plan document and the plan’s administration be conducted.
Each sponsor of a 403(b) plan that is subject to the new Form 5500 reporting requirements should obtain outside assistance regarding the plan document and its administration to the extent necessary to assure that both have been maintained in accordance with applicable law. It is important to note that the recently issued IRS final regulations require all 403(b) plans to have a written plan by January 1, 2009. This plan document requirement also applies to non-ERISA 403(b) arrangements.
If an employer fails to have a timely written plan (i.e., a document which contains basic provisions relating to eligibility, benefits, distribution availability and other limitations, and information relating to the annuity contracts or custodial agreements used by the 403(b) plan), any annuity contract or custodial agreement purchased by the employer will not qualify as a 403(b) plan, and contributions will be fully taxable.