New 403(b) Rules Create Challenges for Nonprofits
By Anthony T. Carideo, Jr.

Anthony Carideo 90 x 90
Anthony Carideo
Two years ago, 403(b) retirement plans entered a new era of transparency and accountability that presents operational challenges for nonprofits, which, as plan sponsors, are assuming much greater responsibility for the oversight of these plans.

For years, nonprofit employers were not required to pay much attention to their 403(b) retirement plans or to exercise much oversight of third-party mutual funds or insurance companies managing their employees’ funds, but that changed in 2009 when the Internal Revenue Service and Department of Labor began subjecting plan sponsors to financial reporting, governance, and monitoring rules that are very similar to other employee benefit plans.

Many educational institutions and other qualified nonprofits viewed their 403(b)s not as actual plans but as clusters of individual contracts with different vendors. They were middle men, with their role limited to passing through employee contributions to individual plans.

Most of these plans were not run like typical ERISA employee benefit plans. As a result, for many plan sponsors, complying with their new responsibilities has required new administrative procedures. The challenge has been to modify their internal procedures to accommodate their expanded fiduciary responsibilities under the new regulations.

Auditors of 403(b) plans have seen some of the common problems and challenges that nonprofit employers have encountered and must sort out as they make this transition. Here are four key lessons based on experiences from the first year of new rules:

1. Responsibilities:

Historically, tax-exempt employers engaged several 403(b) vendors, who generally managed all facets of their contracts with employees, with limited involvement by the plan sponsor. Many plan sponsors never tracked the aggregate amount of assets held by the plan which included prior employees.

It is now vital that plan sponsors clearly assign internal departments and personnel to be responsible for:
  • Preparing a combined trial balance of all financial activity of the plan for the fiscal year, including activity that runs both through the current record keepers and for individual contracts held by prior employees;
  • Drafting financial statements;
  • Reconciling third-party records and reports to internal payroll records.

2. Controls:

Plan sponsors are now liable for the operation of their plans. While 403(b) plan administrators will continue to rely on third-party vendors for record keeping and the accounting of investments, plan sponsors have final responsibility for monitoring the record keeper and selecting the current menu of investments. They should be aware that a vendor’s own SAS 70 report only complements the user controls in place at the plan sponsor.

Plans will need to review service-provider activity to determine compliance with plan documents and contracts. Vendor controls can vary widely, and plan administrators should conduct their own oversight to insure that anticipated mechanisms are in place. This oversight of vendor controls should be part of the due diligence regularly exercised by plan administrators.

3. Deposits:

The ways that employee deferrals are deposited and reconciled is critically important and must be carefully monitored by plan administrators. No issue can get a plan into more trouble and cause more prohibited transactions than a sponsor’s failure to monitor and control employee deferrals.

Plans should have detailed contribution schedules (by payroll date) that show employee deferrals or matching contributions and the date were deposited into the plan. The timeliness of depositing employee withholdings is a serious issue in the eyes of the DOL, and plan administrators should ensure that these deposits are being made within a reasonable time, i.e., generally a few business days.

For plans with multiple vendors, plan sponsors need to make sure that deposits are being made into the right participants’ accounts with the appropriate record keeper, they should have procedures in place to reconcile total plan deposits to the payroll records.

4. Preparation:

Preparing for year-end audits can be very time-consuming, especially when plans need to gather information from multiple vendors. Ultimately, the many documents and reports are critical to an expeditious and successful plan audit. The necessary information includes:
  • Year-end reporting packages from third-party administrators and investment statements
  • Copies of investment policy statements
  • List of loans outstanding at the end of the year (if loans are allowed by the plan)
  • Reconciliation of total participant contributions (per the record keeper) to total plan contributions (per the payroll records) at the end of the plan year
  • Contributions receivable detail as of plan year-end
  • Listing of all distributions by type (e.g., hardship, termination, death, normal retirement) made during the plan year. The listing should tie to total distributions per the trust statements.
  • Copy of the year-end compliance testing required by the Internal Revenue Code, including documentation of any action required by the testing results.
In this new era of transparency and accountability plan administrators should seek the advice of their auditors, who can offer significant insight into best practices for administering plans.

Anthony T. Carideo Jr., CPA, is a member of the firm Wolf & Company, P.C., and provides assurance, tax, and business consulting services to tax-exempt organizations. He can be reached at 617- 428-5405 or by email to
May 2011