What Does the Transition Relief for 403(b) Orphaned Contracts Really Mean?
On July 20, 2009, the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) issued a bulletin for 403(b) plan administrators who make a good faith effort to comply with new Form 5500 annual reporting requirements. Specifically,
Field Assistance Bulletin 2009-02 (FAB 2009-02) provides a limited reprieve to the handling of orphaned contracts beginning with the 2009 plan year. Completing Form 5500 is a new requirement for large plans (more than 100 participants). Large plans are required to file audited financial statements with their Form 5500.
Regardless of this news, plan sponsors are still required to complete their fiduciary duties by reporting all plan assets that are reasonably known under Title 1 of the Employee Retirement Income Security Act (ERISA) in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).
If you know about any plan assets, you have a duty to report them. And remember that the 403(b) plan could be subject to an audit,” says Kelly Davis, benefit services manager with LarsonAllen.
The transition relief details
According to FAB 2009-02, 403(b) plan sponsors do not need to treat annuity contracts and custodial accounts as part of the employer’s plan (or as plan assets) for purposes of ERISA’s annual reporting requirements. However, the following four details must all be present:
- The contract or account was issued to a current or former employee before January 1, 2009.
- The employer stopped having contribution obligations (e.g., employee salary reduction contributions) and stopped making contributions to the account before January 1, 2009.
- All rights and benefits under the contract are legally enforceable against the insurer or custodian by the individual owner of the account without any involvement by the employer.
- The individual owner of the contract is fully vested in the contract or account.
Applicability to current or former employees
Current or former employees with contracts or accounts excludable from Form 5500 under FAB 2009-02 do not need to be counted as participants for annual reporting purposes. Also, according to the bulletin, the DOL will not reject a Form 5500 “… on the basis of a ‘qualified,’ ‘adverse’ or disclaimed opinion if the accountant expressly states that the sole reason for such an opinion was because such pre-2009 contracts were not covered by the audit or included in the plan’s financial statements.” Otherwise, accountants engaged in audits of benefit plans must perform audit procedures in accordance with generally accepted auditing standards and ERISA requirements.
The guiding principle behind the relief
As mentioned previously, the bulletin does not extend or change the requirements of plan sponsors. They are still responsible for performing their fiduciary duties and reporting all plan assets that are known or reasonably known. The transition relief acknowledges there may be instances when full reporting compliance is difficult; however, it states,“… the guiding principle must be to ensure that appropriate efforts are made to act reasonably, prudently, and in the interest of plan participants and beneficiaries.”
Concerns about the cost of compliance
The DOL noted the annual reporting requirements may result in additional costs to the plan, but 403(b) plan sponsors should be able to prepare an acceptable 2009 Form 5500 without undue expense or burden. The bulletin notes lost or destroyed plan records should be reconstructed, and the person(s) responsible for these records may be personally liable for recovery costs (dependent on the facts and circumstances of each case).
Be cautious of misinterpretations
Bulletins are typically not thought of as “issued guidance” to the public. “It’s unclear if the EBSA will issue further guidance so plan sponsors should continue to operate under ERISA and GAAP reporting rules, and be wary of misunderstandings of the relief,” says Davis.
Background
In 2007, the DOL revised annual reporting requirements under ERISA that would, among other things, require nonprofit employers with 403(b) retirement plans to begin complying in 2009 with the same financial reporting rules that apply to other Title 1 pension plans, such as 401(k) plans. This means certain 403(b) plans may now be subject to an audit. Previously, 403(b) plans subject to ERISA had limited reporting requirements. Plans with 100 or more participants generally are now required to file Form 5500 with audited financial statements.
How we can help
LarsonAllen can help you understand your 403(b) compliance responsibilities and determine whether your plan will be subject to an audit. We can also help plan sponsors evaluate regulatory compliance or conduct the independent audit of the 403(b) plan.
For more information, or contact Kelly Davis, ERPA, benefit services manager, at kdavis@larsonallen.com, or 1-888-529-2648.
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