403(b) Plan Audits – New Requirements

Since the enactment of ERISA in 1974, 403(b) plans have not had to comply with the annual 5500 reporting requirements that applied to most other retirement plans. This is because the U.S. Department of Labor issued a limited reporting exemption in 1975 requiring only a 2-page filing listing plan and sponsor name and address, and not much more, for 403(b) plans subject to ERISA. After the Internal Revenue Service issued new regulations under section 403(b) in 2007 (the first guidance from the IRS in this area in over 40 years), the DOL revoked this limited reporting exemption in a notice dated November 16, 2007 for ERISA-covered 403(b) plans.

New Regulatory Requirements

The changes in both DOL and IRS regulations eliminated many, but not all,of the operational and administrative differences between 403(b) plans and other similar retirement plans, such as 401(k) plans. As a result, 403(b) compliance requirements have been brought more in line with those applicable to other types of employee benefit plans. Major changes include:

• Elimination of exemption from annual Form 5500 reporting requirements.
• Written plan document requirement for all 403(b) plans.
• Narrowing of the allowable exclusions from the universal availability requirement.
• Required nondiscrimination compliance testing.
• Availability of after-tax Roth contributions.

Effective for 2009 plan year Form 5500 filings, 403(b) plans covered by ERISA with 100 (or 120, see decision tree on application of the 80-120 rule) or more eligible participants at the beginning of the plan year are required to file Schedule H of Form 5500 and have an annual audit performed.

A 403(b) plan is not covered by Title I of ERISA if it is a governmental plan or a church plan, or qualifies as a "safe harbor" plan. The determination of whether a plan is subject to ERISA is fact intensive and is best made in consultation with an ERISA attorney. The level of employer involvement required to fail the safe harbor test is quite low, and the consequences of an incorrect determination can be devastating (in terms of dollars), so do talk to your attorney and be sure you have it right.

Reference this decision tree for help in determining if your 403(b) plan has a Form 5500 filing requirement.

If your plan has a Form 5500 filing requirement please see plan audit decision tree on 401(k) FAQ Page to determine if an audit is required for your plan.

Department of Labor Guidance Issued

Limited Reporting Relief

The DOL has issued guidance on pre-2009 contracts in two Field Assistance Bulletins, in July 2009 followed by a Q&A in February 2010. The rules are somewhat complex and we would be pleased to discuss this evolving issue in detail with plan sponsors, as the application will depend very much on facts and circumstances. There may be instances where it is appropriate and the plan sponsor chooses to exclude certain pre-2009 contracts from the audit and plan's financial statements. If assets are excludable, then the participant may also be excludable from the census count, if they are not otherwise an active participant in the plan.

The plan sponsor may choose not to report annuity contracts and custodial accounts as plan assets if they meet all of the following four criteria:

• The contract or account was issued to a current or former employee before January 1, 2009.
• The employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and has ceased making contributions to the contract or account prior to January 1, 2009.
• 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.
• The individual owner of the contract is fully vested in the contract or account.

The plan sponsor has an obligation to take reasonable steps to resolve any questions regarding exclusions of such annuity contracts or custodial accounts.

In making the decision to include or exclude assets under the FAB, the plan sponsor should be sure to discuss with the auditors the impact on how their opinion will read. Exclusion will result in a disclaimer opinion that may carry forward for many years,however this will not result in rejection by the DOL. Another consideration is that the use of this type of disclaimer may impact the plan's ability to use the limited scope audit approach in some cases, where excluded assets cannot be quantified.

Audit Challenges and Preparing for a 403(b) Audit

The biggest challenge in performing an initial audit of a 403(b) plan is gaining comfort over the opening balances. These plans often have been around for a long time, have used multiple vendors, have large asset balances, and may not have been record-kept as a plan. For many years, a few players dominated the marketplace, and the nature of the assets and reporting reflected the general position that the relationship was primarily between the participant and the vendor, often cutting the employer/plan sponsor almost entirely out of the loop. Some vendors provided no plan-level reporting to the plan sponsor at all.

Under generally accepted accounting principles ("GAAP"), the auditor must gain comfort over the opening balance sheet of the plan in order to opine on the current year profit & loss statement and the closing balance sheet. In order to do this, the auditor needs to know where the assets are and who the participants are, and audit that information. In some cases, it won't be available. Auditors will be applying judgment when determining how far back they need to look, and what procedures they will apply.

Plan sponsors preparing for their first audit are well-advised to talk early and often to their auditors about the information they will be looking for. They should also prepare a time-line or history of their plan, noting original effective date, vendors used, entities participating and other relevant information. They should look to see what is available for historical reporting from asset custodians and for historical payroll data. They should consider documenting the current control environment and what is known about plan operations in the past. They should become familiar with their plan document, to the extent that they are not already. Sponsors who are well-prepared and communicate well with the auditors will likely find the audit less painful than they expect.

C&B's 403(b) Audit Approach

Since the issuance of the new regulations, Caron & Bletzer has closely watched developments in the 403(b) area. We have issued our first wave of audit opinions on 403(b) plans. We continue to stay abreast of 403(b) changes and Department of Labor (DOL) guidance. We are fully prepared to work with you and share our knowledge to ensure your 403(b) audit is as smooth and efficient as possible.