May 25, 2019
While 403(b) Requirements Have Eased, Nonprofits Face Hurdles

By Kevin Petrosino, CPA and John Wilmot, CPA, MST

November 6, 2009 — Thanks to changes in tax law it is now more complicated than ever for nonprofit and educational organizations to administer 403(b) retirement plans, since new guidelines from the IRS and Department of Labor demand increased employer involvement in the documentation and operation of these plans.

While the Department of Labor (DOL) has stepped in to relax some of the requirements, the responsibility is still on the employer.

First Regulation Revision in Three Decades

A 403(b) retirement plan (also referred to as a Tax Deferred Annuity Plan) is commonly available to employees of nonprofit organizations and educational institutions. There are two types of 403(b) plans: those subject to the Employee Retirement Income Security Act of 1974 (ERISA) and non-ERISA plans. In general, a 403(b) plan is subject to ERISA if there are employer or matching contributions that are currently, or at any time in the past, made on behalf of employees. Non-ERISA plans typically permit only employee contributions.

For the first time in three decades, the IRS has revised the regulations regarding these plans in an effort to make them more like 401(k) plans that are commonly adopted by for-profit organizations.

In the past, only ERISA plans were required to have a plan document. Under new IRS and DOL regulations all 403(b) plans are required to have a formal written retirement plan document. This document details the terms and conditions of the plan, such as: eligibility for participation, qualifications for loans, distributions and hardship withdrawals. All 403(b) plans must have a written document in place by December 31, 2009.

In addition, the new regulations require employers to sign off on loans and distributions. In the past, under a non-ERISA plan, these types of transactions were handled between the plan participant and the contract provider.

While no reporting requirements are imposed on non-ERISA plans, reporting requirements for ERISA plans, effective for the 2009 plan year, have changed dramatically. In the past, employers sponsoring 403(b) plans subject to ERISA filed IRS Form 5500 basically reporting only name and address. Under the new rules, employers sponsoring 403(b) plans subject to ERISA must now complete a much more extensive “Long Form” 5500, a complicated reporting requirement similar to that of 401(k) plans.

Generally, if the plan covers more than 100 participants at the beginning of the plan year, it is subject to audit by an independent CPA firm. The audited financial statements must be filed with the 5500, which must be filed electronically.

By definition, a participant is defined as an employee who has satisfied the age and service requirements of the plan even if they are not contributing, and all terminated employees with account balances still in the plan. This increases the number of plans that will be subject to an audit along with employer involvement with the plan and fees.

If a plan has between 80 and 120 participants (inclusive) as of the beginning of the plan year, it may avoid the audit requirements.

Employers Cry Foul

Due to the more stringent requirements, many organizations, including the American Institute of Certified Public Accountants, and employers asked the DOL to loosen some of its requirements, which it has agreed to do.

According to comments submitted to the DOL, the requirement to execute a full audit of plans with 100 or more participants would be difficult if not impossible to carry out due to challenges related to tracking former employee assets. Many have transferred their assets to outside vendors, which was permitted prior to the new regulations. As a result of these asset transfers, employers no longer have access to the financial information needed to complete much of Form 5500 or even to be able to determine if they have in excess of 100 participants.

Welcome Relief

As a result, the DOL provided some relief to employers sponsoring 403(b) plans who clearly make a good faith effort to comply with ERISA requirements and to collect financial information on plan asset and participant accounts. If this effort is made and documented, certain individual annuity contracts and mutual fund custodial accounts of current and former employees that were entered into before 2009, and for which the employer has no ongoing contribution obligation after 2008 may be excluded from reporting.

Specifically, the new rules say that if despite a good faith effort to obtain the older information, it can’t be identified, then 403(b) plans do not need to treat older annuity contracts and custodial accounts as plan assets for purposes of Form 5500 reporting, provided the following are met: the contract or account was issued to a current or former employee before Jan. 1, 2009; the employer no longer has any obligation to make contributions and ceased making contributions prior to Jan. 1, 2009; there is no involvement by the employer in the old contracts or accounts; and the contract owner is fully vested. Also, current or former employees with only contracts or accounts that are excluded under these guidelines do not need to be counted as participants for Form 5500 reporting purposes, and more importantly for the audit requirement.

Planning for 2009

Despite this relief, challenges facing employers sponsoring 403(b) plans are significant. Employers will have to file Form 5500 and the new regulations have eliminated many of the operational differences between 403(b) and 401(k) plans. The DOL and IRS have agreed that the way to effectively safeguard employee benefits under 403(b) plans is to have their oversight and reporting requirements mirror those of other qualified retirement plans.

As the end of 2009 quickly approaches, employers should immediately make a documented good faith effort to identify all annuity contracts and custodial accounts and determine what needs to be included in their Form 5500 reporting obligation for the 2009 plan year.

If as a result of this effort there are more than 100 current and former plan participants and their plan assets are identified, preparations for an audit of the retirement plan should begin. The audit will verify plan assets and test compliance with various aspects of the retirement plan’s provisions. For example, participant and employer contributions will be tested to see that they are in compliance with the wishes of the employee and the obligation of the employer. In addition, as applicable to the plan, loans, distributions, hardship withdrawals and employee eligibility will be tested for compliance with the terms of the plan.

Comparative Statement of Net Assets

If it is determined that your plan is subject to the new audit requirements, the DOL requires a comparative “balance sheet” or statement of net assets. Therefore employers need to quantify assets in the plan as of December 31, 2008.

Kevin Petrosino and John Wilmot are managing directors at CBIZ Tofias, a national accounting provider with offices in Cambridge and New Bedford. Contact Kevin at or 617-761-0780, and John at or 401-626-3215.

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