Nancy E. Ozuna

403(b) plans have been facing a multitude of new regulations, and plan sponsors are grappling with compliance.  In addition, 403(b) plans covered by the Employee Retirement Income Security Act (ERISA) must begin filing Form 5500s effective with 2009 filings.  This means large 403(b) plans (generally those with 100 or more eligible participants) must also submit audited financial statements with the 2009 Form 5500.

What does this mean to you as a 403(b) plan sponsor?  It is important to act now to ensure you have an adequate understanding of what an audit of your 403(b) plan will entail.  You should review whether the documentation necessary for a firm to provide an audit opinion is available.  Many plans—especially those that are well-established and have had multiple vendors involved—may face challenges with documenting the internal controls surrounding their 403(b) plan.  Those same plans may also struggle to ensure all participant records are obtained and accounted for and to provide all the financial information needed for the audited financial statements.

What’s most important is to determine whether your 403(b) plan will have a 2009 audit requirement.  Generally, you’ll face an audit requirement if you have more than 100 plan participants as of the beginning of the plan year (for calendar-year plans this is January 1, 2009).  Also, the plan sponsor needs to understand who counts as a participant for U.S. Department of Labor (DOL) purposes.  A participant is any employee who is eligible to participate in the plan.  Many plans trip up on this point as they believe an active participant is one who is contributing to the plan, not just those who are eligible to participate.  It also includes former participants who have left employment with the plan sponsor but who have not requested a distribution of their plan assets.

An additional factor to consider is whether your 403(b) plan includes employer contributions as the vast majority of plans that include an employer contribution will be subject to the audit requirement.  There may be some relief for plans that include only employee contributions that are not operated as “ERISA type” plans, but that guidance is still forthcoming.

Determining whether you fall under the “large plan” definition and, thus, need an audit of your 403(b) may sound straightforward, but several factors may affect this determination.  The DOL has what is referred to as an 80/120 rule which states your plan may have up to 120 participants before you trigger the audit requirement.  It is important to count carefully.  If you have fewer than 120 participants but more than 100, you can continue to defer the audit requirement until the first plan year in which you exceed 120.  Thereafter, every year you have more than 100 participants, your 403(b) plan would have to be audited.

The DOL has safe harbor rules for annuities and certain custodial accounts.  You may want to review these to see if any exemptions from the audit requirement apply to your organization.  Also, in July 2009, the DOL issued Field Assistance Bulletin (FAB) 2009-02 to provide some transitional relief for 403(b) plans.  Under FAB 2009-02, individual contracts or custodial accounts that meet all of the following requirements do not have to be reported as plan assets on Form 5500:

• The contract or custodial account was issued to a current or former employee  before January 1, 2009
• The employer ceased to have any obligation to make any contributions (including employee salary reduction contributions) and, in fact, ceased making contributions to the contract or account before 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

Additionally, current or former employees with only contracts or accounts that are excludable from the plan’s Form 5500 under the above transition relief do not need to be counted toward the computation of “100 eligible participants” covered under the plan for  Form 5500 reporting purposes.

These relief provisions are welcome for some employers.  However, they also make it more important for the plan sponsor to have properly counted its number of participants as of the beginning of the plan year.

So what should you do if you’ve determined your 403(b) plan does, in fact, require an audit?  Engage a qualified employee benefit plan auditor immediately to start the process of planning for your first audit.  Finding an auditor who has extensive experience auditing employee benefit plans will be critical to you.  A quality audit not only ensures the financial integrity of the plan, but it also helps the plan administrator fulfill its legal responsibility to file a complete and accurate annual Form 5500.

BKD audits hundreds of employee benefit plans and is a member of the Employee Benefit Plan Audit Quality Center (EBPAQC).  Our membership in the EBPAQC is voluntary and demonstrates our commitment to performing high-quality benefit plan audits.  The organization’s standards, with which we voluntarily comply, provide additional quality control and require BKD to complete continuing professional education requirements in the area of employee benefit plan audits.

Partnering with a qualified audit firm now is important to and can help assist you to determine:

• What information your service providers/vendors can provide in terms of information that will be necessary to complete the audit of the 403(b) plan
• What information you will need for 2008 because certain comparative financial information will be required to be part of the plan’s financial statements in this initial reporting year
• Determine if the plan’s funding mechanism, i.e., employee and/or employer contributions, and operational structure would require an audit
• Whether plan participant records are complete and accurate
• Anticipated elements of the internal control processes, document retention policies and location of certain employee records
• A game plan to ensure the audit will be able to be completed on time and discuss any potential scope limitation early on in the process

Engaging your auditor early in the process can help you have a smooth and successful first year 403(b) plan audit.  Contact your BKD advisor for assistance in getting ready for these new requirements, to help ensure you have a plan to get your 2009 Form 5500 and audit completed or for more information on this or other concerns.