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Thursday, September 22, 2011

Challenges Facing 403b Plans


The implementation of the 403b audit requirement  placed a new focus on compliance, requiring all ERISA –covered plans with 100 or more eligible participants at the beginning of the plan year which file a form 5500 as a large plan to have an annual audit of their financial statements. The implementation of the audit requirement resulted in auditors focusing on areas of plan compliance that had never been tested before. This detail review calls for corrective action to be taken by both plan sponsors and plan administrators. 

One area of focus was the lack of information available to plan sponsors. Some plan participant accounts have been in existence for upwards of 50 years. These plan administrators are now required to identify all participant accounts associated with the plan. However, prior to the issuance of IRS regulations, 403b plans did not typically maintain individual participant account records as annuity contracts; custodial accounts or life insurance policies were owned and maintained by the participant, placing the responsibility of oversight with them. Now, the IRS is requiring that all investments and accounts be included for reporting purposes. This has become a cumbersome and nearly impossible task for some plans.

To alleviate some of the reporting burden, Field Assistance Bulletin 2009-02 was issued, which allowed the plan administrator to omit certain accounts and participants when assessing the plan’s compliance with the audit requirement, assuming the following criteria were met:

  1. Contract or account was issued to a current or former employee before January 1, 2009
  2. The employer ceased to have any obligation to make contributions (including salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009
  3. All of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer
  4. The individual owner of the contract is fully vested in the contract or account

The omission of these accounts, although allowed by the IRS, provided incomplete information to auditors resulting in the issuance of a modified opinion on the financial statements. The Department of Labor provided some transition relief by ensuring filings would not be rejected on the basis of an adverse, qualified or disclaimer of opinion as long as the auditor states the sole purpose of the modified opinion was due to the exclusion of contracts entered into prior to 2009. 

In addition to the omitted accounts, audits of 403b plans revealed other compliance issues, which required plan sponsors to take a close look at the plan.

  • Compliance issues identified included:
  • Late deposit of participant deferrals and loan payments
  • Incorrect application of the plan’s definition of compensation
  • Out of date plan documents
  • Incorrect calculation of employer contributions
  • Failure of participants to meet plan’s eligibility requirements
  • Improper application of vesting percentages

As the regulatory requirements were put into place to provide additional oversight over 403b plans, the compliance issues identified are items that will solicit resolution over the next few years.  These compliance issues were common among plans, thus performing a self-audit of your own plan will help you identify issues prior to audit fieldwork and provide you the opportunity to resolve them.  Working with your plan administrators and auditors can help you develop a plan that complies with all aspects of the Department of Labor and ERISA requirements. Although the addition of the regulatory requirement is cumbersome to plan administrators and sponsors, they were a step in the right direction to ensure that participants are being evaluated equally.

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