403(b) Plans
Part III – Gathering the data
You need an audit – what you can expect
This ErisaALERT is the third in a series covering issues facing 403(b) plan sponsors. Our first in the series discussed the rules regarding who is subject to an audit as well as tools available to help you select an auditor. Our second ALERT addressed what to expect from your auditor during the audit process and this issue addresses gathering the data the auditor will need.
Learn some of the ground rules
The DOL recently introduced a 403(b) web page which provides links to:
- Field Assistance Bulletin 2007-02 regarding the Department of Labor’s safe harbor regulation at 29 C.F.R. § 2510.3-2(f)?
- Field Assistance Bulletin 2009-02 regarding Form 5500 Reporting by IRC § 403(b) Plans Covered by Title I of ERISA
- Field Assistance Bulletin 2010-01
Subject: Annual Reporting and ERISA Coverage for 403(b) providing 18 Q&A’s concerning the scope of and conditions for transition relief provided by FAB 2009-02. The FAB also responds to questions concerning the scope of the Department’s safe harbor regulation at 29 CFR 2510.3-2(f).
The website also provides others links including government publications, EFAST2 and IRS resources regarding 403(b) plans. Recently, the DOL issued an informative Advisory Opinion 2010-01A regarding an allocated insurance contract.
In addition to all the resources listed above, the AICPA Employee Benefit Plan Audit Quality Center issued 403(b) Retirement Plan Audits – Frequently Asked Questions (FAQs).
Have these resources handy as you prepare for the audit!!
It’s all about documentation – can you prove it?
Do you satisfy the ERISA exemption safe harbor as provided in the DOL regulations (scroll down to section (f)? Can you prove it?
How much discretionary authority do you have? Did you hire a TPA to make discretionary decisions? If yes, you don’t satisfy the safe harbor (Q&A 15 of FAB 2010-01). Make sure you can demonstrate that you meet the safe harbor. Otherwise you are an ERISA plan!
How many participants do you have? Can you prove it?
Audits are required for plans with more than 100 participants at the beginning of the plan year. FAB 2009-02, clarified by Q&A 5 of FAB 2010-01, provides that certain pre-2009 contracts can be excluded for purposes of being treated as plan assets for financial reporting. Participants in those contracts can be excluded from the participant count.
Carefully review the FABs to determine if you satisfy the requirements. Here are some considerations:
- Do you forward loan repayments to your 403(b) contract provider (you must include the contract and count the employees) or does the employee forward loan repayments directly to the 403(b) contract provider (you can exclude the contract and disregard the employees from the count).
- Do you have to approve eligibility for distribution or approve hardship distributions? You must include the contract.
Did you try to gather all the information that the auditor requested? Can you prove it?
Everyone realizes how difficult this first year and probably second year will be. The DOL has indicated that a “good faith” to comply will be satisfactory. How do you demonstrate that you made a “good faith” attempt? Q&A 12 of FAB 2010-01 provides the standard depends on “facts and circumstances” but also provides that “good faith” involves demonstrating:
- Efforts to account for and report on contracts/custodial accounts
- Implementing internal controls to keep and maintain sufficient records on a going forward basis.
Do you know your contract providers? Have you contacted them for any required information? Can you prove it?
Does your plan document and contract clearly define roles and responsibilities? Can you point to the provisions? Is that the way the plan operates? Can you prove it?
How do you know that the contributions you forward to the 403(b) contract provider are actually deposited? Can you prove it?
These questions are the tip of the iceberg; your situation (complete/incomplete records, existence/lack of internal controls, etc.) will impact the number and specificity of the auditor’s questions.
What should you be doing now?
- Work with counsel to determine if you are an ERISA plan subject to an audit; document the decision.
- Begin the conversation with your auditor if you haven’t started; hire an auditor if you need one.
- Plan the audit process.
- Gather information and document what you do especially if you can’t get information.
- Expect that it will take you more time than you anticipated.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-337-7270 and ask for Paul Protos or 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
