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New IRS 403(b) Regulations Compliance Strategies to Meet the Non-Profit Retirement Plan Requirements

presents

Today's panel features:

Karen Sanchez, Partner and Director, Employee Benefit Plans Group, Sikich, Aurora, Ill.

Jason Newman, Member in Charge, Employee Benefits Plan Audit Group, Kostin Ruffkess & Co., Farmington, Conn.

Jerome Patterson, Partner, Eide Bailly, Minneapolis

Marcia Mueller, Partner, Hinshaw & Culbertson, Rockford, Ill.

Thursday, April 23, 2009

The conference begins at:1 pm Eastern12 pm Central

11 am Mountain10 am Pacific

The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference.

A Live 100-Minute Audio Conference with Interactive Q&A

1

New IRS 403(b) Regulations Teleconference

April 23, 2009

Jerome Patterson, Eide Bailly LLP Jason Newman, Kostin, [email protected] Ruffkess & Co.

[email protected]

Marcia Mueller, Hinshaw & Karen Sanchez, Sikich Culbertson LLP [email protected] [email protected]

mailto:[email protected]



2

CAUTION

The information in this packet is provided for general informational purposes only.

This information is subject to change at any time, without notice.

3

Today’s Program

• Part I, Key Aspects Of Revised 403(b) Regs For 2009 Plan Years (Jerry Patterson and Marcia Mueller)

– A Brief History, slides 4 through 6– The New IRS Regs, slides 7 through 45– Investment Selection And Monitoring Issues, slides 46 through 58

• Part II, Recordkeeping And Recording Issues (Karen Sanchez and Jason Newman)

– General Issues, slides 59 through 65– Form 5500, slides 66 through 68– Audit-Related Issues, slides 69 through 72– Preparation Needs, slides 73 through 88

4

I. Key Aspects Of Revised 403(b) Regs For 2009 Plan Years

A Brief History

5

403(b) Background

• Available to schools, non-profits (including health care firms) since 1958• Originally designed for annuity contracts

– From a licensed insurance company– Annuity, not life insurance

• Limited employer involvement• Purely a payroll function of the employer• Employer merely provided access by the annuity provider to an employee

group• Accounts were marketed by annuity company directly to participants• Employees could select provider based upon contract features

6

403(b) Background (Cont.)

• A salary deferral arrangement only– Participation is completely voluntary– Reduces employee taxable wages– Allows for tax-deferred growth

• Not a true “retirement plan” – Not considered as “established by the employer”

• An inexpensive way for an employer to offer an employee benefit• Very limited IRS oversight of plan operations• Annuity contract functioned as the plan document• Employer provided contribution in some not-for-profit organizations

7

The New IRS Regs

8

Background

• Final 403(b) regulations (including regulations under 414(c))– Issued on July 26, 2007– New regulations include comprehensive guidance relating to 403(b)

plans– Consolidated 43 years of prior guidance– Expressed congressional intent to diminish difference between 403(b)

plans and 401(k) and 457(b) plans

9

Background (Cont.)

• General effective date– Taxable years beginning after Dec. 31, 2008

• Other effective dates apply to certain new requirements, i.e. transfers– Exceptions

• Collective bargaining situations• Church sponsored 403(b)s• Removal of certain permissively excluded groups for universal

availability purposes• Certain governmental 403(b)s

– For limited universal availability exclusions

10

Background (Cont.)

• Numerous topics covered in final regulations

• Focus– Plan document requirement– Universal availability rules and audits– Transfers and exchanges

11

Grandfathered Aspects Of 403(b)

– Annuities: In-service distributions

– Life insurance contracts• Issued prior to 9/24/2007

– Post-Revenue Ruling 90-24 contract exchanges• Prior 90-24 exchanges grandfathered

12

Plan Document

• Deadline for adopting a plan document is the last day of the 2009 taxable year – extended by Notice 2009-3

• In addition to extending the deadline for adopting a plan document: – The IRS indicated that it is not looking for strict documentary

adherence to the regulations, but rather that it will be satisfied with a document which is a good faith effort to comply. During all of 2009, the sponsor must operate the plan using a reasonable interpretation of the regulations

– Before the end of 2009, the sponsor must retroactively correct any operational defects to conform to the written plan document

– There will not be any further extensions

13

Plan Document (Cont.)• Why is the plan document so important?

– Contributions are not excluded from income without a plan document!!!!!

– The annuity contract will no longer qualify as a plan document• The document shifts control of the account from the employee to the plan

sponsor• Must be in writing• Defines plan rules in advance• Contains all significant terms and conditions, eligibility, benefits, etc.

available under the plan• Plan must be non-discriminatory• Plan cannot contribute to a contract unless the contract is identified in the

plan document

14

Plan Document (Cont.)

• Plan can incorporate other documents by reference

• If there is a disagreement between the incorporated document and the core plan, the core plan prevails

• Plan can allocate responsibilities– E.g. vendor or third-party administrator (TPA) will decide on hardship

distributions– Cannot allocate to participant

15

Plan Document RequirementMust contain all material terms and conditions

• Non-forfeitability of benefits• Non-discrimination rules• Non-transferability of contract• Eligibility rules• Entry dates• Contribution limits• Benefits• Distribution rules including rollovers• Limitation on incidental benefits• Approved vendors• Optional plan provisions: Loans, hardship withdrawals, transfers,

etc.• Provisions for plan termination

16

Plan Document Requirement (Cont.)

– Model plan document• For public schools: Revenue Procedure 2007-71

– Only covers pre-tax elective deferrals– Plan language would need to be added to cover employer

and/or Roth contributions– Does not provide for features such as loans, hardship

distributions or transfers• Provides guidance for other sponsors of 403(b) Plans

– Indicates that eligible automatic contribution arrangement (EACA) and qualified automatic enrollment arrangement (QACA) may be included in plan

17


• ERISA 403(b) plans already required to have plan document

• Tax-exempt organizations sponsoring voluntary salary deferral only 403(b) may not already have written document

• Public education institutions and church plans not subject to ERISA may not already have written plan document

• Failure to timely adopt a written plan document in compliance with the regulations will result in taxation of all participant contracts, regardless of when contributed

18


• Adoption of plan document will not cause a non-ERISA plan to be subject to ERISA

• However, employer cannot have responsibility for discretionary determinations in administering plan and still be exempt from ERISA

• Safest route may be to not continue to attempt to maintain ERISA exemption

19


• Plan document controls over terms of annuity contracts or custodial account agreements– Employer must review annuity contracts and custodial agreements

• Ensure they do not conflict with written plan• Comply with final regulations

– Minimum distribution rules – Incidental benefit requirements

– Single plan document will be utilized with multiple vendors

20

Optional Plan Features• Participant loans

– Employee may apply to take a loan against his/her account• Not taxable to employee if repaid in full

– Employer must approve each loan request• Regular and/or principal residence?• For any reason? Or only certain reasons?

• Hardship distributions– Employee may apply for a “hardship” distribution (which is taxable)

• Medical expenses• College expenses• Purchase of a primary residence• To prevent foreclosure

– Employee can’t contribute to the plan for six months

21

Optional Plan Features (Cont.)

• Roth contributions: After-tax– 403(b) contribution limit applies to pre-tax and after-tax contributions

in aggregate– Contribution subject to a five-year clock which starts Jan. 1 of the first

plan year in which a participant makes a contribution

• Plan to plan transfers or exchanges within the plan

• Acceptance of rollovers

• Employer contributions

22

Eligibility• Plan must be offered to all employees – Universal availability• No test based on usage as in 401(k)• Can exclude:

– Those who normally work less than 20 hours a week– Student employees of a college– Non-resident aliens– Employees who are eligible under another retirement plan (e.g. 401(k), 457) of

the same employer• 20-hours-per-week rule

– For the first 12 months after hire, employer reasonable believes employee will not work 1,000 hours

– Subsequent years employee did not work 1,000 hours in the prior year– Look-back calculation continues in future years

• What about collective bargaining employees?– NOT able to be excluded per the regulations– May be a bargaining topic– More guidance expected

23

Eligibility (Cont.)

• Universal availability– Determined at the employer level

• District hospital and community clinic under common control• District hospital allows it employees to contribute to a 403(b) plan;

community clinic does not.• Universal availability is satisfied

• IRS universal availability project– Letter and questionnaire to public schools– Questionnaire used to assess compliance

• If there is a violation, the letter instructs the sponsor on correction method• If the recipient does not respond to the letter, the school potentially will be

subject to examination

24

Universal Availability Rules

• Communication of participant rights– Participant must be given the opportunity to change election at least

once per year– Right to contribute up to all applicable limits– No other rights or benefits may be conditioned on participating in the

403(b) plan

• Keep track of who receives notice to participate

25

New Controlled Group Rules

• Section 414(c) new controlled group rules for tax-exempt entities effective Jan. 1, 2009– Applicable to 403(b) plans

• Impacts:– Non-discrimination rules– Contributions limits– Minimum distributions– 15 years of service catch-up contributions

– Also apply for other purposes:• 401(a) plans• 457(b) plans• Health plans

– Permissive aggregation subject to anti-abuse rule

26

New Controlled Group Rules (Cont.)

• Supersedes Notice 89-23 good faith interpretation rules substituting board control for stock control

• Common control exists if 80% or more of director/trustees are:– Representatives of other employer, or – Directly or indirectly controlled by other employer

27

Contribution Limits

• Employee limit is $16,500 in 2009• Combined employer/employee limit is $49,000

– Special rule for participant in 403(b) and participant in another retirement plan

• Optional catch-up contribution– $5,500 limit for those at least age 50– 15 years of service catch-up limit calculation

• Qualified employee with qualified organization• Optional after-tax (“Roth”) contributions; subject to aggregate contribution

limit with pre-tax contributions

28

Contribution Rules

• Elective deferral ordering– First, as basic deferrals under 402(g)(1) limit = $16,500 in 2009– Second, if participant qualifies, treated as a 15 year of service catch-up

contribution ($3,000, with $15,000 maximum) • Only applies to certain types of employers• Part-time and fulltime employment aggregated to determine years

of service– Third, treated as 50 year old catch-up if participant is 50 years or over

($5,500 in 2009)

29

Contribution Rules (Cont.)

• Post-severance elective deferrals– If plan allows:

• May defer accrued vacation and sick pay• Received by later of

– End of the calendar year in which employment terminated, or– 2½ months following termination of employment

• May not exceed normal limits under 402(g) ($16,500 in 2009) or 415(c) limit

• May not defer severance pay

30


– Post-termination employer contributions• Employer contributions

– Five-year period following end of year in which employee terminates

– $49,000 in 2009– Contributions cease with employee’s death– Tax-exempt entities must satisfy non-discrimination rules

31


• Excess contributions– Excess deferrals may be distributed by April 15 following year in

which excess contribution was made• Avoids double-taxation

– Other types of excess contributions must be segregated in separate account

• Not treated as part of 403(b) for year of excess and following years• Vested amount taxable to participant• If not segregated, participant’s contracts in plan become taxable

32


• Timeliness of remittance of salary deferral contributions– Within period that is no longer than reasonable for proper plan

administration• Regulation contains example specifying that 15 business days

following the end of month in which amounts were withheld from pay (outside limit)

• Department of Labor (“DOL”) has proposed safe harbor of seven business days

33


• ERISA plans already subject to general rule– Earliest date on which such contributions could reasonably be

segregated from the employer’s general assets

• Employer contributions– Subject to Code Section 415 rules

34

Non-Discrimination Rules

• Apply to tax-exempt employers– Coverage rules of Code Section 401(b)– Matching contributions and after tax employee contributions tested

under Code Section 401(m)– Employer contributions allocated based on compensation or service

must not discriminate in favor of highly compensated employees (Code Section 401(a)(4))

35

Non-Discrimination Rules (Cont.)

– Benefits, rights and features also tested under Code Section 401(a)(4)

– Definition of “compensation” must be non-discriminatory

– Same non-discrimination rules that apply to 401(k) plans

– Result of violation of non-discrimination rules is that contracts for all participants become taxable

36

Distributions

• General rule– 403(b) can distribute only on:

• Severance of employment• Specific event

– Passage of time– Disability– Attainment of specific age

• Special rules for custodial accounts and elective deferrals

37

Distributions (Cont.)

• Custodial account can distribute (other than 403(b) deferrals) only upon:– Death– Disability– Attainment of 59½– Severance of employment, includes

• Moving from eligible employer to ineligible employer• Moving to capacity ineligible to participate

– Plan termination

38

Distributions (Cont.)

• Plan can distribute 403(b) deferrals only upon:– Death– Disability– Attain age 59½– Severance of employment– Hardship

• Follows 401(k) hardship rules• Hardship must be approved by plan fiduciary

39

Other Distributions

• Employer must approve all distributions– “In service” distribution

• If offered, employees 59½ and older may withdraw part of their account balance

– Termination distribution

– Age 70½ required minimum distributions (“RMDs”) have been waived for 2009

40

Department Of Labor – Title 1

• Employee and employer contributions– Employer match and/or a pro-rata contribution

• Must comply with ERISA rules– Provide summary of plan features – Eligibility and vesting requirements – Track contributions and earnings separately– Compliance with deposit deadlines – Complete and submit Form 5500 to the IRS– Summary annual report to participants

• Similar to how a 401(k) is operated today

41

Department Of Labor – Title 1 (Cont.)

• Exemption– Deferral (employee contribution) only is generally “not established by

the employer”– No employer contributions– Participation is completely voluntary – Employer contribution introduces Title 1

42


• Deferral only is not considered an employer plan

• Employer’s involvement is limited to: – Letting annuity providers publicize their product– Requesting information– Summarizing and compiling information provided for employees– Collecting deferrals and paying to annuity providers– Maintain records– Selecting annuity providers– Employer receives no direct or indirect consideration

43


• Can a “deferral only” plan be subject to Title 1?– Yes

• DOL safe harbor activities– Adopt plan to address tax matters and coordinate plan operations– Review plan structure and operations– Correct operation failures– Transmit employee information (address, service, compensation)– Transmit doctor’s certificate– Terminate the plan

44


• What takes the employer outside of a safe harbor?– Discretionary determination

• Authorize transfers• Processing distributions• Determining eligibility

– Hardship– Qualified domestic relations order (“QDRO”)– Loan

– Negotiating contracts

45


• Other DOL comments– OK to allocate responsibilities to others

• Describe employer’s limited role– Employer can periodically review documents for consistency and

compliance• Cannot negotiate with providers to change terms or purposes

– Can limit exchanges and transfers – implement IRS regulations

46

Investment Selection And Monitoring Issues

47

Investment Selection And Monitoring

• Employer must select and identify appropriate investments from which employees can choose:– Annuities– Mutual funds– Nothing else!– Not available:

• Certificates of deposit• Stable value funds• Self-directed brokerage accounts

48

Investment Selection And Monitoring (Cont.)• What about socially responsible investments?

– Department of Labor Interpretive Bulletin, October 2008– Sec. 2509.08 - modified to address this topic– “ERISA’s plain text thus establishes a clear rule that in the course of

discharging their duties, fiduciaries may never subordinate the economic interests of the plan to unrelated objectives, and may not select investments on the basis of any factor outside the economic interest of the plan except in very limited circumstances enumerated below”

– The DOL further indicated that it is up to the fiduciaries of plan to demonstrate that if an investment is selected on a basis other than the economic performance, that it is truly equal to other alternatives. One of the examples in the regulation referred to the use of an environmental criterion in selecting investments. The regulation states: “The fiduciaries may apply the investment policy to eliminate a company from consideration only if they appropriately determine that other available investments provide equal or better returns at the same or lower risks, and would play the same role in the plan's portfolio”

49

Investment Selection And Monitoring (Cont.)

• Ensure investments are still appropriate– Review performance to make sure investments are performing

adequately– Add or replace an investment when appropriate– Ensure plan expenses are reasonable

• Educate employees

50

Investment Selection And Monitoring (Cont.)

• Prepare investment policy statement

• Can be short or long

• Defines the employer’s process for selecting, monitoring and replacing investments

• Should not be too rigid or contain steps to which the trustee would not adhere

• Should represent the actual process followed by the trustees

51

Why 403(b)?

• Advantages– No 401(k) test; universal availability instead– Potentially larger catch-up contribution

• Disadvantages– Limited investment firms– Limited investment types and information sharing agreements (“ISAs”)

required– Higher investment expenses (e.g. annuities)– Rules may continue to evolve as employers and firms begin to comply– Related company aggregation rule – Section 415

52

Contract Exchanges

• Contract and custodial account changes

• Requirements:– Permitted by plan document– Account balance immediately after the exchange that is at least equal to

account balance immediately before exchange (no “front-load” investments)

– Distribution restrictions are not less stringent than those imposed on the exchanged investment

53

Transfers And Exchanges

• Restrictions effective Sept. 24, 2007– “90-24” transfers are no longer permitted

• Transfer rules for contracts exchanged after Sept. 24, 2007 and prior to Jan. 1, 2009:– Vendor approved by employer, or– Must have written information-sharing agreement (ISA) in place by

Jan. 1, 2009– Required in order to allow employer to verify that requirements of

Section 403(b) are being met

54

Transfers And Exchanges (Cont.)

• Information-sharing agreements (ISAs)– Include information to allow the plan and the transferee contract to

comply with rules of Section 403(b)• Employment status• Loans• Hardship distributions• Deferrals

55


• Orphaned contracts – Contracts issued after 2004 and before 2009, to which employer no longer allows contributions– No written agreement requirement

• Employer makes a good faith effort to collect information from vendor

• Employer notifies vendor of contact for plan administrator

56


• Runaway contracts: Revenue Ruling 90-24 transfers made after Sept. 24, 2007 to contracts not available under the plan– Same requirements as orphaned contracts

• If contract exchange occurred after Sept. 24, 2007 and no compliance with new rules, all amounts under participant’s contracts taxable

• Transitional relief for orphan or runaway contracts– Allows exchange of non-compliant contract with approved vendor by

July 1, 2009

57

Termination Of 403(b) Plans

• Previously no authority for terminating 403(b) Plan• Regulations permit termination of 403(b) Plan

– After Jan. 1, 2009, plan must contain termination provisions• The IRS has recognized that some investment products do not provide the

employer sufficient legal control to effect a plan termination.• Freezing the plan may be the only option

– A document is still required as well as annual reporting– Information-sharing agreements are required

• May not make contributions to 403(b) for 12 months following termination• May set up 401(k) plan

58

Termination Of 403(b) Plans (Cont.)

• Distributions may be rolled over to IRA or a qualified plan

• Plan may not be merged with or assets transferred to another qualified plan or 457(b) Plan

• May distribute annuity contract

• Distribution must occur as soon as administratively practical after termination

59

II. Recordkeeping And Recording Issues

General Issues

60

Recordkeeping And Reporting Issues

• Determining Form 5500 reporting requirement

– In November 2007, the Labor Department issued a notice eliminating an exemption granted to 403(b) plans from the annual Form 5500 reporting, disclosure and audit requirements under Part 1 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The removal of this exemption subjects ERISA-covered 403(b) plans to the same Form 5500 reporting and audit requirements as 401(k) plans face, effective with their 2009 plan year Form 5500 filings

61

Recordkeeping And Reporting Issues (Cont.)

Exemptions:

• Governmental plans– 403(b) plans sponsored by governmental entities remain exempt from

Form 5500 filing requirements • Section 3(32) of ERISA defines the term “governmental plan” as “a

plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing”

62


Exemptions:

• Church plans

- ERISA Section 4(b)(2) provides that Title I of ERISA does not apply to any church plan as defined in section 3(33) of ERISA. The term “church plan” is defined in Section 3(33) of ERISA, unless the plan made an election under 410(d) of the Internal Revenue Code, in pertinent part, as follows: (A) ... a plan established and maintained (to the extent required in clause (ii) of subparagraph (B)) for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under Section 501 of the Internal Revenue Code of 1986

63


• Exemptions:

– Are the 403(b) annuity contracts or custodial accounts purchased or provided solely through salary reduction agreements or agreements to forego an increase in salary, and do the contracts or accounts meet the required factors in the DOL “safe harbor” rules?

• DOL “safe harbor” rules in 29 C.F.R. § 2510.3-2(f) state that a program for the purchase of annuity contracts or custodial accounts in accordance with provisions set forth in Section 403(b) of the Code, and funded solely through salary reduction agreements or agreements to forego an increase in salary, are not “established or maintained” by an employer under Section 3(2) of the Act, and, therefore, are not employee pension benefit plans subject to Title I, provided that certain factors are present

64


• Exemptions:

• These factors are:

– (1) Participation of employees is completely voluntary– (2) All rights under the annuity contract or custodial account

are enforceable solely by the employee or beneficiary of such employee, or by an authorized representative of such employee or beneficiary

– (3) The involvement of the employer is limited to certain optional specified activities, and

65


• Exemptions:

• (4) The employer receives no direct or indirect consideration or compensation, in cash or otherwise, other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer’s duties pursuant to the salary reduction agreements. In this latter regard, if an employer, or a person acting in the interest of an employer, receives, for example, other consideration from an annuity contractor, the employer could be deemed to have “established or maintained” a plan

If the plan is not subject to ERISA, there is no 5500 filing requirement

66

Form 5500

67

Form 5500

• Due date

– Seven months after plan year end, or can be extended additional 2½ months beyond original due date

– Dec. 31, 2009 year-end due July 31, 2010, or can be extended to Oct. 15, 2010

– June 30, 2010 year-end due Jan. 31, 2011, or can be extended to April 15, 2011

68

Form 5500 Reporting Requirements

• General filing requirements

– LARGE PLANS: ERISA-covered plans with 100 or more eligible (not only those participating) participants generally will be required to file audited financial statements beginning with their 2009 Form 5500 filing as a “large plan”

– SMALL PLANS: ERISA-covered plans with fewer than 100 eligible participants may be able to use a new short Form 5500 as a “small plan”

• In years subsequent to the initial filing year, a plan that covers between 80 and 120 eligible participants at the beginning of the plan year may elect to complete the Form 5500 in the same category (“large plan” or “small plan”) as was filed for the previous year [DOL Reg. 29 CFR 2520.103- 1(d)]

69

Audit-Related Issues

70

Audit Requirements

• General audit requirements

– ERISA-covered plans with 100 or more eligible participants at the beginning of the plan year, and that file the Form 5500 as a large plan, are required to have an annual audit of their financial statements

• General exemptions from audit requirements

– ERISA-covered plans with fewer than 100 eligible participants at the beginning of the plan year, and that file the form as a “small plan,” are generally exempt from the audit requirement. DOL regulations in 29 CFR 2520.104-46 establish conditions for small plans to be exempt from the general audit requirement under Title I of ERISA (refer to http://www.dol.gov/ebsa/faqs/faq_auditwaiver.html#section3)

http://www.dol.gov/ebsa/faqs/faq_auditwaiver.html#section3

71

Audit Requirements (Cont.)

• In addition to being a small plan filing the Schedule I, there are three basic requirements for a small plan to be eligible for the audit waiver:

– 1. As of the last day of the preceding plan year, at least 95% of a small pension plan’s assets must be “qualifying plan assets”; or, if less than 95% are qualifying plan assets, then any person who handles assets of a plan that do not constitute “qualifying plan assets” must be bonded in an amount at least equal to the value of the “non-qualifying plan assets” he or she handles (“qualifying assets” include investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state)

– 2. The plan must include certain information (described below) in the summary annual report (SAR) furnished to participants and beneficiaries, in addition to the information ordinarily required

– 3. In response to a request from any participant or beneficiary, the plan administrator must furnish without charge copies of statements the plan receives from the regulated financial institutions holding or issuing the plan’s “qualifying plan assets,” and evidence of any required fidelity bond

72

Audit Requirements (Cont.)

• In years subsequent to the initial filing year, a plan that files the Form 5500 as a “small plan” pursuant to the 80/120 rule is not required to have an audit of its financial statements [DOL Reg. 29 CFR 2520.104-46]

• Note: The department advised in its Notice of Adoption of Final Forms Revision that 403(b) plans that were eligible to file as a small plan under DOL Reg. 29 CFR 2520.103-1(d) in the previous year, and that have participant counts of fewer than 121 in the beginning of the 2009 plan year, can file as small plans under the new filing rules

73

Preparation Needs

74

Preparing For Reporting Requirements

• Establish responsibility for the plan’s financial reporting function

– Designate an individual at the plan or plan sponsor to be responsible for ensuring that the plan meets its reporting responsibilities. This individual should have knowledge and expertise in financial accounting and reporting and an understanding of GAAP for employee benefit plans. This could be an individual in the sponsor’s financial accounting department

75

Preparing For Reporting Requirements (Cont.)

• Hire a qualified independent auditor for your plan

– Select an auditor that has prior experience with employee benefit plans and can perform a quality audit. A quality audit helps ensure the financial integrity of a plan and protect plan assets. A quality audit also will help the plan administrator carry out its legal responsibility to file a complete and accurate annual return/report for the plan each year

76


– Limited scope audit exemption• If the plan assets are held by qualifying institutions, then you may

elect to have a limited-scope audit performed• A qualifying institution includes trust companies, banks and

insurance companies. It does NOT include mutual fund companies• The exemption allows the auditor to eliminate procedures relative

to investments, including testing the fair value and related investment earnings/losses. This reduces the cost of the audit and is an acceptable opinion according to the DOL. Most plan sponsors elect this exemption if available to them

77


• Communicate with your service provider on the plan’s information needs

– Identify all plan service providers and ask them whether they will be able to provide you with the information that you will need for your plan’s financial statement audit and Form 5500. Your service provider should be able to identify and match all individual participant contracts and account balances to your plan. Make sure the plan has current contracts with its service providers that provide for this information. Also, ask your service provider if they will be making available a “SAS 70” report on the internal controls established to process your plan’s transaction

78


• Determine what 2008 comparative financial information the plan will need

– Even though the new Form 5500 reporting and independent financial statement audit requirements are not effective until the 2009 Form 5500 filing, if your plan meets the requirement to have an independent audit for the plan year ended Dec. 31, 2009, then the plan’s financial statements will also need to include certain comparative financial information as of the 2008 plan year end (i.e. Dec. 31, 2008 for calendar year plans). This comparative year information is required by the DOL to be included in the plan’s financial statements, even in the initial reporting year. Required information includes the current value of plan investments; and the amounts of employer’s contributions owed to the plan, accounts payable and accrued expenses as of the end of the plan year

79


• Make sure plan participant records are complete and accurate

– Plan participants may include former employees for which the plan has no current records. You may need to take steps to find these “missing participants” and determine their account balances, so that they can be properly included in the plan records

– You can use the IRS’ letter-forwarding program (see IRS Policy Statement P-1-187) or Social Security Administration letter-forwarding

80


• Get your plan’s books and records in shape

– Make sure your plan establishes a proper set of financial books and records to support the preparation of the plan’s financial statements

These records should include:

– Contribution and disbursements records– Individual participant account balance records– Investment schedules– A general ledger and trial balance

81


• Get your plan’s books and records in shape (Cont.)

– Identify all participant mutual fund and custodial accounts holding plan assets, including any transfers to another 403(b) account or contract outside the plan

– Determine which insurance annuity contracts should be reported as plan assets on Schedule H of Form 5500 and in the plan’s financial statements (“fully allocated” annuity contracts are not included as plan assets)

– If the plan previously changed service providers, identify any old accounts and contracts that were not transferred to the new service provider (referred to as “orphan contracts”)

82


• Establish proper internal controls over the plan’s financial reporting process

– Establish policies and processes to ensure proper authorization and recordkeeping of plan transactions, including investments, contributions, benefit payments, participant data and administrative expenses. This includes controls at all service providers used by the plan, and ongoing monitoring of those controls. Effective controls reduce the risk of asset loss, and help ensure that plan information is complete and accurate, that financial statements are reliable, and that laws and regulations are met. Your plan auditor is required to communicate to you (and others in your organization charged with governance) about certain deficiencies or weaknesses in internal controls over your plan’s financial reporting

83


• Ensure that the plan has an up-to-date written plan document and an investment policy

– Make sure the plan has a current, written plan document that includes basic provisions relating to eligibility, benefits, distribution availability and other limitations; and information relating to the annuity contracts or custodial agreements used by the plan. The plan should also have a written investment policy describing what types of investments the plan can make and the appropriate authorizations for investment transactions

84


• Ensure that the plan is in compliance with the plan’s tax exemption

– Review the plan’s exempt status and compliance with requisite IRS rules, including salary deferrals, contributions, universal availability and coverage, non-discrimination, compensation testing, controlled group/affiliated service group analysis, minimum required distribution calculations, and transfers to an IRA or other eligible plan

85

Internal Controls

• Ensure internal controls are established and operating effectively for the plan, including:

– Plan investments– Contributions received and related receivables– Benefit payments– Participant data and plan obligations– Administrative expenses

86

How To Prepare For Audit

• Preparing for the audit can be time-consuming, but planning now will demonstrate efficiencies later

– Understand the auditor’s responsibilities– Determine who will be the point of contact with the auditor– Communication with the service providers– Plan documents, amendments, contracts, SAS 70 report, etc.– Personnel files (complete, accurate and tidy)– Electronic vs. paper– Payroll information and remittance support– Documentation of internal controls

87

Issues In First-Year Audits

• Now that you have prepared for the audit, here are some common issues:

– Comparative statements of net assets– Accumulation of financial information to “compile” the prior year and

to get a “baseline” for the current year– Potential for operational defects

88

Additional Resources

– Visit the Department of Labor’s Employee Benefit Security Administration Web site at http://www.dol.gov/ebsa, or contact the DOL’s EFAST Help Line at (866) 463-3278

– AICPA Employee Benefits Audit Quality Center at www. ebpaqc.aicpa.org (Note: Some of the materials in this presentation were prepared from summaries available through the Audit Quality Center)

– Nov. 16, 2007 DOL regulations www.dol.gov/ebsa/regs/fedreg/final/20071116.pdf

– DOL Field Assistance Bulletin No. 2007-02, which addresses how the Treasury/IRS regulations governing 403(b) tax-sheltered annuity programs affect the status of such programs under the DOL’s safe harbor regulation at 29 C.F.R. § 2510.3-2(f). See http://www.dol.gov/ebsa/regs/fab2007-2.html

http://ebpaqc.aicpa.org/UI/ASPX/Login/SendUserToExternalSite.aspx?URL=http://www.dol.gov/ebsa&siteCode=0

http://ebpaqc.aicpa.org/UI/ASPX/Login/SendUserToExternalSite.aspx?URL=http://www.dol.gov/ebsa/regs/fedreg/final/20071116.pdf&siteCode=0

http://ebpaqc.aicpa.org/UI/ASPX/Login/SendUserToExternalSite.aspx?URL=http://www.dol.gov/ebsa/regs/fab2007-2.html&siteCode=0

Revisions to 403(b) regulations:

http://www.irs.gov/pub/irs-tege/td9340.pdf

IRS overview of 403(b) regulation changes:

http://www.irs.gov/retirement/article/0,,id=172431,00.html

http://www.irs.gov/pub/irs-tege/td9340.pdf

http://www.irs.gov/retirement/article/0,,id=172431,00.html

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