What You Need to Do Today If You Maintain A 403(b) Plan

The regulation of 403(b) plans has been very informal in the past. There are numerous new rules which move the regulation of 403(b) plans onto a similar level with 401(k) plans. Most workers today will rely on some type of 403(b) or 401(k) plan for most of their retirement income. Protecting the assets in 403(b) plans is a key reason behind these new regulations.

403(b) plans are pension plans offered only by tax exempt and government organizations. These plans may also be called tax-sheltered annuities (TSAs). The new regulations affect all 403(b) plans except those offered by governments and religious organizations.

The Internal Revenue Service (IRS) recently issued final regulations that affect all 403(b) plans offered by tax-exempt organizations. All of these plans will need to have a written plan document. This requirement applies even to plans over which the employer has no control, such as a salary reduction only plan.

Many 403(b) plans currently have little or no documentation compiled by the plan sponsor (employer). Many plans have relied on vendor documents exclusively to document their plans. The vendors of 403(b) plans are typically mutual funds and insurance companies. Many plans have several vendors, insurance policies or custodial accounts. Plan sponsors must now draft a plan document that outlines all of the vendor contracts, participant's rights under the plan, and administrative responsibilities, including who is responsible for complying with the 403(b) rules.

The IRS governs all pension plans that qualify for shelter from income taxes. The Department of Labor (DOL) also governs most pension plans to regulate fiduciary responsibility, reporting, disclosure, design and operational areas. The rules for 403(b) plans are a combination of rules of the IRS and the DOL. Along with the IRS changes requiring a written plan document for all 403(b) plans of tax-exempt organizations the DOL has increased the reporting requirements of all 403(b) plans which fall under its jurisdiction. The DOL pension plan rules originated with the Employment Retirement Income Security Act of 1974 (ERISA).

The ERISA Title I rules specifically exempt all 403(b) plans that are funded solely through salary reduction agreements that are not established or maintained by an employer. Plans that are exempt from the Title I rules are the plans that do not file Form 5500. This exemption will continue. Even though they are exempt from the DOL rules these plans are still subject to the IRS rules and must adopt a written plan document as discussed above.

All other 403(b) plans are subject to ERISA and should currently be filing a Form 5500. New DOL rules will treat 403(b) plans the same as 401(k) plans, which means that 403(b) plans filing a 5500 will have much more extensive reporting requirements. In addition, plans with over 100 participants will be required to submit audited financial statements with the Form 5500. The definition of a participant is anyone eligible for plan participation even if they decline that participation. The new rules are applicable for years beginning after December 31, 2008. For a calendar year plan the 2009 Form 5500 will be due July 31, 2010 with an extension available until October 15, 2010. If audited financial statements are required they will need to be attached to this Form 5500. The audit of those financial statements will need to include an audit of the December 31, 2008 assets and liabilities of the plan so that an opinion can be given on the 2009 activity of the plan.

So what do you need to do today to investigate your plan's status and future responsibilities? First you need to gather all of the documents related to your 403(b) plan. These documents would include all vendor agreements, contracts, custodial agreements, employee communications (such as personnel policies), and summary plan descriptions. Next you need to summarize the terms, eligibility conditions and administration procedures in the various documents reviewing them particularly for any conflicting terms. At this point you should consider if consolidating existing vendor contracts may be beneficial. Having gone through this exercise you need to consider your options for drafting a plan document. Your vendors may have prototype or master plans available to consider. With or with out such vendor provided plans you need to consider retaining competent legal counsel to advise you on adopting a plan document. If your plan is currently exempt from the Title I ERISA rules you need to discuss with legal counsel if you will continue to be exempt after completing the plan document.

After beginning your steps to adopt a plan document you should also consider the new 5500 filing rules. If you have just one vendor they may be able to prepare the 5500 for you. This vendor is the most logical option since they have most of the information needed to complete the 5500. If your vendor will not prepare the 5500 or if you have multiple vendors you need to consider options such as having your staff prepare the 5500. If you are concerned that you may fall under the audit requirements you need to consider contacting a CPA to learn what the requirements are and what changes you can make now to make the audit easier.

Wegner LLP currently audits over 30 pension benefit plans and prepares many 5500s. We would be happy to discuss your needs. Please call Bruce Mayer, CPA, Partner at (608) 442-1939 or email at bruce.mayer@wegnercpas.com.