3/1/2010

5500 filings and 403(b) Plans - A Guide Through The Basics of The Filing Requirements

In final rules released in late 2007, the Department of Labor (DOL) eliminated the exemption that 403(b) plans long enjoyed on reporting most financial information for the 5500. This rule goes into effect for the 2009 reporting year and means even more work remains ahead for 403(b) plans this year.

Background

The DOL and the Internal Revenue Service (IRS) have been changing regulations that apply to 403(b) plans in an attempt to make the plans more like 401(k) plans. The IRS also released final regulations in 2007 that required most 403(b) plans to have a written plan by December 31, 2009 (with a limited exception for certain kinds of churches). If plan sponsors found the process of documenting the plan to be onerous, they may not be pleased by the new DOL reporting requirements.

Unlike 401(k) plans, 403(b) plans have traditionally been structured so that participants purchase individual contracts with investment providers (while 401(k) plans utilize a trust). In addition, participants often had the further ability to exchange investments contracts with providers not specifically approved under the plan (participants may still have this ability but the employer must contract with the investment provider to provide eachother with certain information). Because of the individual nature of these contracts and because employees could move contracts without an employer's knowledge, employers may have very little information about these contracts and whether the contracts even exist.

Fortunately, the DOL has provided some relief for 403(b) plan sponsors from the typical 5500 asset reporting requirements. This article will introduce the some of the important 5500 filing issues for 403(b) plans in the context of the recent DOL relief.

In summary, smaller plans will not see a large change in reporting requirements. Large plans will experience a much more onerous filing requirement - made particularly difficult because of how 403(b) plans have typically been operated. We also expect a relatively large number of plans will discover they should have been filing 5500s for several years (if not tens of years) - fixing this and filing delinquent 5500s may be somewhat more difficult given the new electronic filing requirements (that also went into affect for the 2009 reporting year).

In order to understand how broad and potentially costly 5500 filings will be for a 403(b) plan, you should know the answers to a few important questions:

1. Is the Plan Subject to ERISA?

If a plan is not subject to ERISA, it does not need to file a 5500.

There are some general exceptions to ERISA that depend on the status of the employer. 403(b) plans sponsored by churches (as defined in ERISA 3(33)) or governments (as defined in ERISA 3(32), including public school plans) are exempt from ERISA. These employer types may set up any permissible 403(b) arrangement (with or without employer contributions, for example) and the plans will not be subject to ERISA (unless the church specifically opts for ERISA coverage under Code section 410(d))

If an employer is not a church and not a government, then it should be assumed the plan is subject to ERISA unless proven otherwise. It is possible for nonprofits that are not churches and not governments to have a non-ERISA 403(b) plan - although certainly not simple. The most commonly understood requirement to be exempt from ERISA is that the plan have no employer contributions. However, the requirements for ERISA exemption are much more detailed, require a large amount of employer dilligence and cooperation from the 403(b) provider. For more information, see our article ERISA Coverage Of Nonprofit 403(b) Plans. Note that the DOL has provided some new limited guidance on this issue in its recent Field Assistance Bulletin 2010-01 (See Q&As 14 - 18) since the article was written.

If the plan is subject to ERISA, then the next few questions will help determine how onerous the 5500 filing will be.

2. How Many Participants Are In The Plan?

The general rule is that "large" plans with 100 or more participants must file audited financial statements with their 5500s. The statement must be completed by an independent qualified public accountant and can be costly to complete even without problems locating contracts that are likely to exist for typical 403(b) plans.

A small plan is a plan that covered 1) fewer than 100 participants at the beginning of the plan year (1/1/09 for a calendar year plan) or 2) was eligible to file as a small plan for plan year 2008 and did not cover more than 120 participants at the beginning of plan year 2009.

Note that "Participant" is not the same as "Employee." A Participant is: (1) an employee who is eligible to defer into the plan (even if he or she never defers or is not eligible for employer contributions); or (2) a former employee or beneficiary who has assets in the 403(b) plan. Only after a former employee takes a distribution of 100% of his or her vested contracts upon termination, will he or she no longer be a participant.

Field Assistance Bulletins ("FAB") 2009-02 and 2010-01 provide further relief from the general rule that may have a significant impact on whether a plan meets the small plan requirements. The ultimate effect of the rule will likely simply delay the audit requirement into the future. How far into the future will depend on how many new employees the employer will hire and turn-over rates for the employer.

Participants can be excluded from the participant count if all of the following requirements are met for all of their contracts in the plan (FAB 2009-02 lists these as 4 requirements; we have combined requirements that are closely related):

  • The employer ceased to have any obligations to make contributions for the participant as of January 1, 2009 and the account was issued before January 1, 2009.

    Generally this means that a) the employee is a former employee or b) the employer has terminated or frozen the plan so that no new contributions can be made to the plan as of January 1, 2009. FAB 2010-01 clarified that final contributions attributable to 2008 that were not in fact deposited until 2009 would qualify for the relief (Q&A 13).

    Note, however, that FAB 2010-01 also clarified loan repayments forwarded to the contract provider by the employer are considered to be enough of an involvement with the contract to require those participants to be counted (and their accounts to be reported as applicable). If the employer is not involved in loan repayments (employees send repayments directly to the contract provider) and the participants otherwise meet the other requirements, then the participant does not need to be counted.

  • The participant is the individual owner of the investments, the investments are fully vested, and the rights and benefits under the investments are legally enforceable without any involvement by the employer.

    Traditionally, 403(b) plans were set up as individual custodial account/annuity contract plans. More recently, 403(b) plans have been set up with asset platforms consisting of custodial accounts or group annuity contracts where the employer still has some control over the accounts/contracts. You will need to determine and ensure that the plan investments of the participants you are excluding are in fact individual accounts/contracts and that the Participants are fully vested.

    FAB 2010-01 clarified that employers with continuing obligations to provide information to a provider (such as employment status) will not be considered a level of involvement that would prevent this requirement from being met. This duty to exchange information is often required in order to meet Internal Revenue Service rules and regulations.

Even if the above relief does not allow a 403(b) plan to file as a small plan, the relief would still apply to whether assets must be reported on the 5500. If assets meet the above requirements, then they do not need to be reported (although sponsors can still choose to report some or all of this information). Traditional 403(b) plans with individual account/contract arrangements will be the most likely to benefit from the relief in FAB 2009-02 and 2010-01. These types of plans are also most likely to have difficulty locating older plan assets for reporting on the 5500.

3. If the Plan is a small plan, can the plan file a form 5500SF?

Most likely yes. The SF is a "short form" 5500. The plan may file with a 5500SF if it meets all the eligibility conditions listed below:

  • The plan is not a multiemployer plan;
  • The plan did not hold any employer securities at any time during the plan year;
  • At all times during the plan year, the plan was 100% invested in certain secure, easy to value assets (such as mutual fund shares or investment contracts with insurance companies and banks) valued at least annually; and
  • The Plan must be exempt from the requirement to be audited annually by an independent qualified public accountant (the small plan audit waiver that most 403(b) plan will meet and some basic summary annual reporting requirements).

4. Are Prior 5500 Filings Up to Date?

Now is a good time to review whether prior year 5500 filings have been made. We expect many 403(b) plans had to review (or should have reviewed) whether their plan was subject to ERISA when fulfilling the written plan requirements. With new details from the DOL on just what is required to be exempt from ERISA (for non-government and non-church plans), plans may have discovered that they have been operating an ERISA plan for many years and may be out of compliance on prior 5500 filings.

The DOL has a Delinquent Filer Voluntary Compliance Program whereby the DOL provides an opportunity to pay reduced civil penalties for voluntarily complying with the annual reporting requirements. There are detailed instructions, including fees and other information in the DOL's FAQs about the Delinquent Filer Voluntary Compliance Program.

Under the new electronic filing requirements, all of the prior year filings (with a limited exception for 2008 filings until 10/15/10) must be filed electronically (see Q&A 4 of the DOL's EFAST2 FAQs). This means that you must use the 2009 5500 forms for 2009 and prior filings. The date at the top of the form must be changed to reflect the year you are filing under and you must indicate that the filing is a deliquent filing. Schedules normally would have to be completed with prior year's schedule and attached to the filing - but note that 403(b)s generally would not have to file schedules because of the limited reporting required prior to 2009 plan years.

Prior year filings may be electronically filed with ftwilliam.com's 5500 software currently. We are in the process of simplifying procedures for customers with prior year delinquent filings.

If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.

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