Since the reporting requirements for 403(b) plans changed in 2009, our audits have uncovered certain common deficiencies. In this article, we will take a look at these deficiencies, the questions your organization should be asking, and compliance areas you should be aware of.
Make Sure You Know What The Reporting Requirements Are – You need to determine which form should be filed, when you need to file it, and whether your plan requires an audit. For plan years beginning on or after January 1, 2009, 403(b) plans subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA) are required to satisfy additional reporting and auditing requirements. All plans should file an annual Form 5500, Form 5500-SF or 5500-EZ, as applicable, with the Internal Revenue Service (IRS) and may require an audit. The Form 5500 is due on the last day of the seventh month after the plan year ends (July 31st for calendar year plans). There is a 2-½ month extension available (until October 15th for calendar year plans). The audit report is due at the same time and remitted with the Form 5500. Effective January 1, 2010, Form 5500 and Form 5500-SF and any required schedules and attachments must be completed and filed electronically using EFAST. The plan’s forms and reports are available to the public on the Department of Labor’s (DOL) website.
All not-for-profit organizations need to determine if an audit is required. This requirement is often neglected if the number of participants is miscalculated. The general rule is that employee retirement plans with 100 or more eligible participants at the beginning of the plan year are considered large plans, and, therefore, require an audit. An exception to this general rule is provided by DOL Reg. 2520.103-1(c) and (d), which allows plans with between 80-120 participants (inclusive) at the beginning of the current plan year to elect to complete the current year return using the same category that was used in the previous year. If a plan has fewer than 120 participants at the beginning of the plan year and filed as a small plan in the previous year, then it can elect to file as a small plan in the current year, and, therefore, would not require an audit. Conversely, once a plan has over 120 participants at the beginning of the year, an audit is required. Understanding the definition of a participant is one of the first steps in determining whether or not your plan needs an audit, and the next step is quantifying the number of participants at the beginning of the year. There is often a misconception when it comes to the definition of a participant. A participant includes the following:
- Eligible employees as defined in the plan document, even if not actively participating in the plan
- Separated or retired employees who have a balance in the plan
- Deceased employees whose beneficiaries are entitled to receive benefits
Exclusion: For 403(b) plans, there is an exclusion provided for in DOL Field Assistance Bulletin No. 2009-02, Annual Reporting Requirements for 403(b) Plans, which permits certain current and former employees with accounts issued prior to January 1, 2009 to be excluded from the participant count and may exclude their annuity contracts and custodial accounts from the plan’s financial statements.
Is a Written Plan Document Required? – The answer is, yes. The plan sponsor must have adopted a written 403(b) plan document by December 31, 2009. In addition, the plan must be formally amended to comply with the latest applicable tax laws and regulations.
What Other Participant Disclosures Are Required? – The custodian of the plan assets may be sending quarterly statements to plan participants; however there are other documents and disclosures that the organization is responsible for distributing. Here are some additional disclosures that you should be aware of:
- Summary Plan Description – to be distributed within 90 days after a participant joins the plan; for new plans within 120 days after the plan is established
- Summary of Material Modifications (SMM), as applicable – if the plan is materially amended, a SMM is required to be provided within 210 days of the end of the plan year in which the amendment is adopted
- Summary Annual Report – generally provided within 9 months after the plan year end or if the Form 5500 is extended, within 2 months after the close of the extended period
- For plans with participant directed-investments, fees are required to be disclosed under ERISA Section 404(a) regulations, you should consult with your third party administrator as there are multiple requirements and deadlines for fee disclosures
Don’t Be Late! – In many initial plan audits, we have uncovered delinquent participant contributions. As a general rule, employee contributions and loan repayments must be remitted to the plan on the earliest date on which those contributions or repayments can reasonably be segregated from the employer's general assets. For plans with fewer than 100 participants, there is a seven business day safe harbor. There is no safe harbor for plans with 100 or more participants. Failure to remit participant contributions timely is a prohibited transaction that must be reported on the Form 5500 and in the audit report. In addition, the plan sponsor is responsible for calculating and depositing lost earnings to the plan, which are allocated to the participants, and the plan sponsor may also have to pay an excise tax.
Does the Plan Have Adequate Fidelity Bond Coverage? – Generally, every fiduciary of a plan and every person who handles funds or other property of the plan must be bonded. The plan fidelity bond must be at least 10% of the plan assets or $500,000. The Form 5500 includes a disclosure item that asks if the plan is covered by a fidelity bond and, if so, for what amount.
The items noted above are just a few examples of deficiencies found during our audits of 403(b) plans. The DOL and the IRS have established complex rules and regulations for these plans, and as such the organization needs to ensure that the plan is operating in accordance with these rules and regulations. It is essential that nonprofit organizations have designated and educated fiduciaries overseeing their 403(b) plans. If you find that your plan has committed operational errors or compliance failures, the IRS and DOL have correction programs under which the organization may self-correct such issues. If you need further information or have any questions, please contact a member of our Not-For-Profit Services Group or our Pension Administration Services Group (Benefits 21 LLC, a Friedman LLP company).