403(b), A Year Later


By Michael Renzelman

Who would have thought that 403(b) plans would have created such a filing nightmare. These plans were established many years ago to provide the nonprofit industry sector a vehicle to establish a simple tool for its employees to save for their retirement on a pre-tax basis without the nonprofit organization incurring the costs and responsibilities of a 401(k) or other qualified plan that was required to comply with ERISA. What happened over time is that organizations and the related service providers expanded on these “simple” plans, the most common example being adding a company-match component, which created an obligation under ERISA that many organizations were not sophisticated enough to understand or didn’t take the time to understand. As result, the Department of Labor (DOL) decided that it was necessary to “reiterate” the organizations’ obligation under ERISA for certain types of plans, and, in those plans' situations, allow the organizations a timeline to either terminate the plan or initiate the steps necessary to become compliant with ERISA. Those 403(b) plans subject to ERISA were now responsible for filing a Form 5500 beginning with plan years ending on or after December 31, 2009.

In those situations where the plan exceeded 100 eligible participants, a long Form 5500 was required with an annual audit of the plan performed by an independent certified public accounting firm. These audits proved problematic in many situations, because the recordkeeping by both the not-for-profit organization and, in many cases, the plan administrator, did not meet the standards necessary to facilitate an audit. As such, these audits were in many cases expensive and very difficult to complete.

Some statistics compiled by the DOL state that for 2009, a total of 19,200 Forms 5500 were filed for 403(b) plans, with 7,200 being large-plan filers requiring an independent audit and 12,000 being small plans filing a short Form 5500. Of the 7,200 large-plan filers, the DOL noted that on 5,100 of these plans, the organization included the required Schedule H (financial information), meaning that the other 2,100 plans that did not include the Schedule H and were considered deficient. In addition, a number of the plans filed with the Schedule H did not include the organization’s audited financial statements, again creating a deficient filing. For those situations, in which an audit was included, the auditors’ opinion took many forms, from the “clean” unqualified opinion to an adverse “bad” opinion, which in many cases would also result in a deficient filing. The DOL continues to perform additional analysis on filing data.

What was the reaction of the DOL? It sent out 45-day letters to comply to many organizations that submitted what the DOL considered to be a deficient filing. If your organization fell into this category, you should be working with your service providers to rectify the deficient status. If not, you subject your organization to potential fines and penalties.

What we learned during the first year of this process is that many organizations, including service providers, did not understand their obligations. In addition, it seems that the DOL did not understand the significance of the undertaking. Organizations that made and continue to make a “good-faith” effort to comply will probably be alright in the end, and those organizations that are considered delinquent and that did not make that effort could face significant fines and penalties in the future.

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