Time is running out for nonprofit organizations that sponsor 403(b) plans to adopt a formal defined contribution plan document.
Two years ago, the Internal Revenue Service revised Form 5500, subjecting 403(b) plans to the same audit and reporting requirements as Employee Retirement Income Security Act plans.
A 403(b) plan is a tax-sheltered annuity retirement plan for employees of public schools or certain tax-exempt organizations, and certain ministers.
The formal defined contribution plan document must include eligibility requirements, state rules for employer/employee contributions, be in compliance with IRS limits on contributions, list approved vendors, and must specify when and how much distributions will be.
The deadline for having a plan in place was extended from last year until the end of this year.
“But now it’s down to the last four months to get this done,” said William Mahaffey, partner, Rothgerber, Johnson & Lyons LLP.
Organizations with large 403(b) plans — more than 100 eligible employees, or 120, if circumstances fit the Department of Labor’s 80/120 rule — must be audited and file a Form 5500.
Organizations with fewer than 100 employees who are eligible to participate in a 403(b) plan (not to be confused with the actual number of employees who participate in the plan) may forgo an audit and file an abbreviated Form 5500 as a small group plan, said Timothy J. Sims, senior manager at BKD LLP.
In general, most churches and government entities are exempt from filing requirements.
“Under the new regulations, all employers should be collecting and paying over the money to the plan, conducting discrimination testing, making sure contribution limits are not violated, and ensuring that employees are not taking money out of the plan when they shouldn’t,” Mahaffey said.
And if an employer processes distributions or moves money between plans, they definitely need to file a Form 5500.
“Employers who want to avoid filing Form 5500 should draft a plan which eliminates their having discretion over operation of the plan,” Mahaffey said.
Regardless, of whether they need to file a Form 5500 or not, Mahaffey said that all employers should limit the number of vendors who may provide 403 (b) arrangements, and, by written agreement, employers should require that vendors provide financial information annually about each employee’s account.
Sims said that nonprofits will likely need an attorney when drafting their formal written plans to ensure compliance with ERISA guidelines.
On July 20, the Department of Labor issued a Field Assistance Bulletin 2009-02, which reduces some of the administrative burden and expense during 2009.
Records for certain individual annuity contracts and mutual fund custodial accounts — of current and former employees — that were entered into before 2009, for which the employer has no ongoing contribution obligation, do not need to be included in this year’s report.
In other words, auditors need only collect records (for Form 5500 and audits) for current employees, for which the employer has an ongoing contribution requirement, and for former employees after Jan 1, for which the employer has no ongoing contribution requirement.
“What’s really important is that from now on nonprofits keep records; keep copies of all agreements with custodians; make custodians provide financial accounting at the end of each year for each employee’s account; and make the custodian agree that they will operate in accordance with your organization’s (formal) plan document,” Mahaffey said.
The changes shift the focus of responsibility from employee to employer.
“Employers will have access to the total benefits that are accumulating for their employees,” Mahaffey said, “which gives them a better sense of their employees’ total compensation structure.”
A Department of Labor report showed violations in 78 percent of reviewed 403(b) plans. Most were unintentional, “a matter of negligence,” Sims said.
Nonetheless, the new regulations “will provide a level of comfort to plan participants (employees) that wasn’t there in the past,” he said. “Any deficiencies or weaknesses in the 403(b) plan are reported by the accounting firm — and this information is available to employees.”
The changes also create a safety net for workers. “It’s going to reduce inadvertent violation of rules which could cause employers 403(b) plan arrangements to be disqualified, which causes adverse tax consequences for employees,” Mahaffey said.
Even though they are more expensive to provide, some financial advisers are encouraging their clients to consider switching to a 401(k), Mahaffey said.
“Then they have to file a Form 5500 — but the rules are clear,” he said. “Some employers prefer clarity over ambiguity — even if it’s more expensive — so they use 401(k)s.”