If your nonprofit offers a 403(b) retirement plan to its employees, you need to be aware of new regulations that go into effect for plan years beginning on or after Jan. 1, 2009. These changes, based on revisions made by the U.S. Department of Labor to the 2009 Form 5500 and final regulations issued by the U.S. Internal Revenue Service, expand reporting requirements and require the financial statements of many previously unaudited 403(b) plans to be audited.
Do they apply to you?
Like the 401(k) plans offered by for-profit companies, 403(b) plans allow participants to contribute money to a retirement investment account on a pretax basis and the earnings to accrue tax-deferred. 403(b) plans, however, have not always been subjected to the same scrutiny and oversight as their 401(k) counterparts. These latest revisions by the Labor Department and the IRS aim to change that.
Whether your organization needs to adhere to the new reporting and financial statement audit requirements depends on two factors:
• If you are subject to Title 1 of the Employment Retirement Income Security Act (ERISA). If your nonprofit establishes and maintains its plan, you likely are subject to ERISA and, therefore, the new rules, with some exceptions.
• The number of plan participants you have at the beginning of the plan year. If you meet the ERISA standard and have at least 100 eligible participants, you are subject to the expanded reporting requirements. If your organization meets the ERISA standard but has fewer than 100 eligible participants at the beginning of the plan year, you can use the new Form 5500-SF (or short form), which requires less information and skips the financial statement audit requirement. Keep in mind that the term “eligible participants” include employees actively participating in the plan, those that are eligible but decline to participate, and former employees or their beneficiaries who have an account balance remaining in the plan.
What is different?
If your organization is required to file the new Form 5500 and have its financial statements audited, be ready to provide information you have not in the past and to come into compliance with standards outside the scope of previous reporting. The Statement of Net Assets, for example, asks you to provide information not only for 2009 (the first reporting year) but also for 2008, so the two periods can be compared.
Across the country there are an estimated 7,000 plans that will be subject to the financial-statement audit requirement for the first time, and getting an early start on planning for the audit will be a key contributor for success. Auditors following the new guidelines will review plan documents, of course, but they will also want to see records for individual participants as well as the entire plan. In addition, the audit will cover not only the 2009 financial information, but will include the 2008 amounts in order for the plan to comply with the requirement to publish comparative financial statements. In the past there was no need to accumulate plan-level information, so preparing for these first-time plan audits may require significant time and effort. Plan sponsors should talk with investment custodians now to ensure individual participant records, net asset and activity statements for the current and previous years, and other information will be available when needed.
Documenting the plan’s significant accounting procedures and related internal controls before the auditors begin their work will help make the audit process more efficient. The significant procedural areas that auditors will typically study include the investment, contribution, distribution and financial reporting cycles.
Under the new regulations, 403(b) plans must now be operated pursuant to a written document which contains all the terms and conditions for eligibility, benefits and administration of the plan. In addition, employers must provide substantive annual notice to eligible participants stating they have the opportunity to make or change their level of contribution to the plan.
403 (b) plans will now need to satisfy certain nondiscrimination requirements related to contributions, benefits and participant coverage. These rules are designed to ensure that the plan does not unfairly benefit management or other highly compensated employees. The regulations also provide new rules for the timely transfer of contributions from the sponsor to the investment custodian. Under the new rules, contributions must be transferred to the investment custodian as soon as they can be identified and segregated from the employer’s general assets. While the regulations provide an example of a transfer being made within 15 days following the month of deferral, the example is not a safe-harbor and each employer must make its own determination as to when contributions should be transferred to the plan.
Plan sponsors are also imposed with new tracking burdens to ensure that they are monitoring the levels of employee contributions and taking corrective actions if excess deferrals are noted.
If your nonprofit is subject to the new 403(b) plan reporting and audit requirements, it’s important to start preparing now. Work with your plan custodian and independent auditor so that you’re armed with the information you need, when you need it. •
Jim Wilkinson is a shareholder of Braver PC, a financial services firm with offices in Rhode Island and Massachusetts.
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