Reporting for nonprofits can be more difficult

PBN Staff

11/07/2009

Rhode Island has a higher percentage of nonprofits and educational institutions than most states, and many of them are facing a year-end deadline to meet extensive new federal tax regulations on their 403(b) retirement plans.
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.
In the past, only ERISA plans were required to have a plan document. Under new IRS and Department of Labor (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, and qualifications for loans, distributions and hardship withdrawals. All 403(b) plans must have a written document in place by Dec. 31.
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 IRS Form 5500, a complicated reporting requirement similar to that of 401(k) plans. In addition, if the plan covers more than 100 participants, it is subject to auditing by an independent CPA firm. The audited financial statement then must be filed with the 5500, which must be filed electronically.
By definition, participants include all those eligible to contribute to the plan even if they are not contributing, and all terminated employees with account balances, which increases the number of plans subject to an audit along with employer involvement with the plan and fees.
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.
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. If this effort is made and documented, certain individual annuity contracts and mutual fund custodial accounts 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 403(b) plans do not need to treat older annuity contracts and custodial accounts as plan assets for reporting purposes, 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 excluded under the guidelines above do not need to be counted as participants for Form 5500 reporting purposes.
Despite this relief, challenges remain. 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.
So, with the end of 2009 quickly approaching, 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. &#8226

John Wilmot (jwilmot@cbiztofias.com) is a managing director/shareholder at CBIZ Tofias and Mayer Hoffman McCann. CBIZ Tofias is a provider of tax/consulting services and operates in association with Mayer Hoffman McCann P.C., an independent CPA firm. The companies have offices in New Bedford, Newport, Providence and Cambridge, Mass.

PBN Branded Content