Editor’s note: For purposes of this article, we are going to assume you know the basics. If you don’t, read BLR’s previous news coverage here and here.
Sponsors of 403(b) plans, we really, really hope that by now you know whether or not you need to file Form 5500 for the 2009 plan year and whether or not you need an audit. The 5500 deadline for calendar years plans, July 31, marches closer each day.
Believe us, we feel your pain. For a long time now you may have felt relieved that unlike your counterparts sponsoring 401(k)s or defined benefit plans, you didn’t have to tackle this responsibility.
However, along came new oversight, and now you’ve joined the privileged class who get to enjoy the challenges of the 5500.
Violations Resulted in New Rules
Unfortunately, some of the new rules are complex to implement, says Jennifer Elder, a CPA and manager at Perkins & Co. (www.perkinsaccounting.com), a CPA firm in Portland, Oregon. The rules may be justified, though, no matter how uncomfortable they are.
The U.S. Department of Labor found that since 2002, 78% of plans examined by the Department had violations of one kind or another, Elder says.
“Some of the violations are less severe than others, but there are definitely a lot of things plans are doing wrong,” she explains.
“If regularly audited plans, which are heavily scrutinized, have that many problems, one can only imagine how many things these previously unregulated 403(b) plans are doing wrong.”
Does that make you feel any better? We thought not. But in our effort to help you meet the new requirements, we spoke with Elder about some of the things you should take a close look at as you go down the 5500/audit path for the first time.
Make sure you know the plan’s assets and how to value them. If the assets are held by some of the large vendors, you’re probably fine, but caution about where monies are invested is warranted, Elder says.
“Often, plan investments are in readily identifiable and marketable investments like common stock, bonds, and registered investment companies. However, plans trying to obtain more favorable returns in the recent unpredictable markets have started to invest in less-traditional investments or hard-to-value assets.
“These could include real estate, mortgages, common/collective funds, private equity, hedge funds, and limited partnerships, to name just a few. These hard-to-value investments make it more challenging for the plan sponsor to determine the assets’ fair market value.”
Make sure your vendors have an SAS 70. The SAS 70 is a statement on auditing standards, and most of the larger vendors should be able to provide it. “It is basically a report on the controls the vendor has in place for a stated period,” Elder says.
“As auditors, we get year-end reports from vendors telling us how much the plan has in assets, but how do we know that it’s right, or that distributions to terminated participants were calculated correctly?
The SAS 70 is the documentation, evaluation, and testing of the vendor’s processes and system, so it gives us more reassurance that the transactions are being processed correctly. It provides reassurance to the plan sponsor, too, because if the vendor they choose has an SAS 70, they know things are happening the way they should be.”
Get to know the rules about partial plan terminations. This is an area where you need to rely on your ERISA attorney for guidance. As a very general rule of thumb, the Internal Revenue Service considers a partial plan termination to mean that 20% of your workforce has been laid off or let go.
“The regulation is vague, though,” says Elder. “This economy has been very tough on a lot of companies, and we’re seeing this happen a lot. If your population has decreased by 20%, then you need to understand how your plan is affected.”
Vesting is one area that will be impacted by a partial plan termination, she says. If your plan has a vesting schedule where participants earn a percentage of their account for each year of service, you’ll need to fully vest everyone if your plan has a partial termination.
“It’s a big deal to make sure that the people you laid off are 100% vested,” she says. “Let’s say you pay someone out who is 60% vested. You forfeit the remaining 40% and later find out the plan should have been considered partially terminated, and everyone should have been 100% vested.
“You have to find the person and reissue the payment, and that could be a big mess to correct. And if you’ve used the forfeitures for other reasons, you could have more problems. The effect can really snowball.”
Be aware that you can pay certain expenses from your plan. You are allowed to pay reasonable plan expenses necessary for the operation of the plan using plan funds. These might include general plan administrative fees, recordkeeping service fees and, yes, plan audit and 5500 preparation fees.
If the plan has forfeitures, you can accumulate them in a participant-type account and use them to pay fees. Or, you can use the forfeitures to reduce the employer-matching contribution.
“It all depends on how the plan is designed,” says Elder. “It’s really important to make sure that everything is being done as specified in the plan document.”
Ask yourself: Do I really need an audit? The answer is a clear ‘yes’ if your plan had more than 120 people in it on January 1, 2009 (for a calendar year 2009 plan). If you count between 80 and 120 people in the plan, says Elder, things are a little trickier.
“If you were between 80 and 120 on the first day of the plan year, and you were not required to have an audit in the prior plan year, you can elect to continue filing as a small plan, without an audit. Once you hit 121, you’ll need an audit because you’ll have to file as a large plan.
“If the count drops below 121 in a subsequent year, you’ll still have to audit the plan until the time your count drops below 100.”
Assign oversight responsibility. Choose someone within your organization to be in charge of the audit and filing process. This person does not need to do the audit and prepare the filing, but someone should be the point person.
“Make sure somebody has responsibility for it so all the reporting deadlines happen timely,” Elder advises.
Perhaps the most important advice Elder can offer to new 403(b) 5500 filers is this: Don’t wait. If you haven’t done so already, she recommends bringing all your help together in one room to map out a game plan.
“Coordinate a meeting with all the parties involved: your record keeper, your auditor, your investment manager, your payroll service provider, maybe even your ERISA counsel. Have a meeting of the minds and make sure that everyone knows their responsibility, and make sure that things are starting to take place.
“Get the ball rolling, because it will take a while, once you put in requests for information to your 403(b) vendors. Don’t wait until a month before the deadline.”
1 in 4 Employers Cut Match to DCPs in 2009
A new survey has found that about one in four (26%) employers cut their contribution or eliminated their match to their defined contribution plans (DCPs).
The Retirement Plan Survey, conducted by Grant Thronton LLP, Drinker Biddle & Reath LLP and Plan Sponsor Associates also found that more than half (53%) of employers who cut or eliminated contributions haven’t yet decided whether to return to previous levels in 2010, while another third (33%) aren’t planning to reinstitute the benefits.
Meanwhile, 33% of plan sponsors surveyed reported that their plan participants had decreased their contributions, 56% saw an increase in loan requests, and 34% of plans had increased hardship withdrawals in 2009, according to the survey.