Summary

The Department of Labor (DOL) recently finalized the revisions to the 2009 Form 5500. The revised 5500 requires many previously unaudited 403(b) plans to be audited. Although the audit requirements are not effective until plan years beginning on or after January 1, 2009, this article explains why it is important to start planning for those audits in early 2008.

Background 

Currently, there is no Form 5500 filing requirement, or a limited filing requirement for 403(b) plans—depending on whether a 403(b) plan is subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The filing, if any, for a 403(b) plan does not require an audit or schedules. During the past few years the Internal Revenue Service and Department of Labor have identified problems with 403(b) plans and determined a change was needed. The result is that 403(b) plans subject to ERISA will now be treated the same as any other pension plan for purposes of the annual reporting requirements.

Audit Requirements

Beginning with the 2009 plan year, organizations subject to ERISA will generally be required to have their 403(b) plans’ financial statements audited, if they have more than 100 eligible participants as of the beginning of the plan year.¹ These audited financial statements will be a required attachment to the plan’s Form 5500.

Certain concepts in the above description are worth expanding upon.

• Organizations subject to ERISA—Commercial or not-for-profit organizations are typically subject to ERISA, while governmental or church organizations are not generally subject to ERISA
• Eligible participants—An eligible participant is defined as:
  • Employees participating in the plan
  • Employees who are eligible for the plan but decline participation
  • Former employees/beneficiaries who have a balance remaining in the plan
• Beginning of the year—The determination as to if an audit is required is determined on the first day of the plan year
• Plan year - The 2009 Form 5500 is required for calendar year 2009 plans as well as fiscal year plans that begin in 2009

Potential Challenge Facing 403(b) Plan Sponsors

There are numerous issues 403(b) plan sponsors will need to address. These include obtaining complete and accurate financial information, obtaining the necessary participant record reports and ensuring the plan is properly administered.

Financial Information — Although the first audit is not required until the 2009 plan year, the Form 5500 requires the Statement of Net Assets be fully comparative. Thus, the 2008 financial information will need to be included in the plan’s 2009 audited financial statements.

Historically, many 403(b) plans have not received a statement of net assets and activity statement at the plan level. Most 403(b) plans are often treated more as individual account arrangements than a formal plan. This consolidated plan information needs to be available for 2008 to meet the presentation requirements of ERISA, and for 2009 for the auditors to complete the plan audit. Plan sponsors should contact their 403(b) investment custodian (typically an insurance company) to ensure that an investment statement will be available at the plan level for 2008 and years thereafter.

Participant Records — In addition to plan level information required for the financial statements to comply with ERISA, auditing standards generally accepted in the United States of America require auditors to perform procedures at the participant level. Plan sponsors should contact their record keeper (typically, this entity is the investment custodian/insurance company or a related entity) to ensure records by participant with plan totals showing the activity for the year are available. This could be a significant request, especially if each individual at the sponsoring organization is given his/her own account number and they are not linked together by sponsoring organization.

Plan administration — Previously, sponsors of a 403(b) plan had minimal involvement in the plan, as virtually all plan recordkeeping was outsourced to an insurance company (or similar entity). The plan sponsors typically withhold participant contributions and remit them to the insurance company. If the organization contributed to the plan, the sponsor would also remit its contributions to the insurance company. Now that the plans will be audited, there will be an expectation that the plan sponsor has controls over the plan (even if certain functions are outsourced) and the auditors will need to understand these controls.

Auditing standards require auditors to communicate matters they observe about their clients’ accounting procedures and internal controls formally. Auditors are required to inform clients about any “significant deficiencies” in accounting procedures or internal controls that come to their attention. Significant deficiency is a defined term that includes any flaw creating more than a remote risk of errors in financial statements that could reasonably matter to a user of the statements. Auditors must communicate these matters in writing to all individuals involved in overseeing strategic direction and accountability for operations, in addition to management.

The significant deficiency standard applies to plan audits, and thus, organizations that do not have proper accounting procedures and internal controls in place related to their plan could have significant deficiency letters issued. Typically, when significant deficiency letters are issued, management is called to develop action plans to address the significant deficiencies so that they do not recur.

Early consideration of the significant accounting procedures and internal controls could help make the audit more efficient. Significant areas where the auditors would typically look at the accounting procedures and controls would be the investment, contribution, distribution and financial reporting cycles.

While there is a lot to think about with a potential new 403(b) audit requirements, the Plante & Moran team is ready to assist you with your first plan audit.

Note—Please refer to the 2007 volume three issue of the Not-for-Profit Advisor for important information regarding Final IRS Regulations issued on 403(b) plans. Among other things, these regulations require 403(b) plans to have a written plan in place by January 1, 2009.


¹The Department of Labor is currently considering implementation rules for first year audits, such that if a plan has participant counts that are between 100 and 120, they could delay the first audit until the plan participant counts exceed 120. No decision or guidance is currently available.