Since the passage of new 403(b) plan regulations in 2007, plan sponsors have been focused on meeting the compliance deadline. For some, especially those employers not subject to the Employee Retirement Income Security Act (ERISA), that meant a complete revamp of their programs: Internal staff had to be educated and duties reconsidered, vendor relationships had to be reexamined and perhaps changed (including the implementation of information-sharing agreements with some), and a written plan document had to be put in place—all in a remarkably short time.
As Chris Cummings, Senior Vice President, Not-for-Profit Business, Great-West says, “[403(b)] plan sponsors needed to learn in one year’s time what corporate plan sponsors have been perfecting since 1974.”
While the changes were not as great for those 403(b) plans already subject to ERISA’s structures, the new regulations provided even those an opportunity to review and reshape their programs.
So what does a 403(b) plan sponsor need to have a compliant program?
Who’s in Charge?
Bob Architect, Vice President, Compliance and Market Strategy, VALIC, formerly Senior Tax Law Specialist and 403(b) guidance author in the Internal Revenue Service’s Employee Plans Division, says sponsors need to decide formally who will be responsible for running the program and dealing with providers, whether a committee, HR person, or payroll person. They should decide who has the authority and should be charged with the task of making plan decisions and amendments. Architect says he believes many sponsors still do not have this nailed down.
If there is no one internally who can take on the responsibility, Cummings says organizations should look to hire someone who will understand the significance of the plan document and the importance of complying with its terms, as well as plan limits on things like contributions, withdrawals and loans, and, if an ERISA 403(b) plan, the importance of timely reporting to the Department of Labor (DoL).
Bob Lavenberg, Partner with BDO Seidman LLP, and Chair of the American Institute of Certified Public Accountants’ (AICPA) 403(b) Plan Audit Task Force, notes that many sponsors do not have the budget to hire someone internally or to hire outside help, such as a plan adviser. He suggests those sponsors turn to their current 403(b) vendors for help in understanding and complying with the rules. He also cites resources provided online by the DoL and IRS and, for ERISA plans subject to Form 5500 reporting and a plan financial audit, says that sponsors can turn to the AICPA’s Web site, the DoL’s EFAST help line, and the Form 5500 instructions themselves.
Lavenberg notes that many vendors now provide comprehensive services, from a plan document, to plan administration, investment offerings, and Form 5500 filing. When choosing such a vendor, sponsors need to make sure fees are disclosed and reasonable for participants in relation to the services being provided.
Richard Turner, Vice President, Deputy Legal Counsel, VALIC, adds that sponsors should seek service providers with 403(b) experience that have systems in place to operate comfortably within the parameters of the employer’s plan, and can, either themselves or in cooperation with other service providers, offer coordination of loans and hardship withdrawals.
Cummings suggests that, when looking for a service provider, sponsors should turn to someone experienced with not only ERISA, but also processing loans and hardships, and managing funds to comply with an employer’s Investment Policy Statement. He says a bundled approach makes the most sense because it is less costly and could simplify administration.
Will This Be on the Exam?
What will the IRS be looking for when examining a 403(b) plan, and where can plan sponsors turn for help?
Architect says the written plan will be looked at in two areas: form—making sure the document includes the language required and amends provisions to match statutory compliance; and operation—making sure the 403(b) program operates in accordance with plan terms. Service providers can be a big help in ensuring document compliance. While Turner says he certainly hopes that sponsors have legal counsel involved, Architect notes that a prototype program is coming soon from the IRS, and he suggests sponsors work with providers that offer a prototype plan. These service providers will understand that two big issues right now, from an IRS exam viewpoint, are complying with universal availability rules and making sure the document does not violate them in form, syncing the language of any underlying investment contracts with the terms of the plan document.
Cummings is not yet seeing an urgency with plan sponsors on monitoring loans and hardship withdrawals in a multivendor environment, which potentially could lead to problems in a violation of plan terms and of limits set by the IRS. Even if plan sponsors have hired a service provider to coordinate the administration of loans and hardship withdrawals, they should make sure there is a process in place for doing so and that that process is documented, he says.
In addition to the IRS, 403(b) plan sponsors will have to answer to the DoL. The new requirements of a written plan document, and transaction and limit monitoring have created confusion as to who falls under the ERISA safe harbor exempting certain plans from being ERISA-governed. Lavenberg says sponsors can turn to ERISA counsel to confirm whether they still qualify for the safe harbor exemption.
The new regulations also now require ERISA-governed 403(b)s to file a complete Form 5500, and plans with 100 or more participants also must have a financial plan audit performed, making it necessary to hire an independent auditor.
According to Lavenberg, when hiring an auditor, sponsors should make sure the auditor is someone who understands employee benefit plan auditing and the nature, history, and environment of 403(b) plans. The auditor also should be someone the sponsor feels comfortable with, because there may be difficult decisions to make, especially when discussing the audit opinion that the auditor expects to be able to make.
Realizing the lack of oversight and multivendor environment previously traditional in the 403(b) plan market, the DoL provided relief for plans, allowing them to omit data about certain old vendors, and allowed for an audit opinion disclaimer if that is the only reason for the audit not having complete data. Lavenberg says that, if an auditor assumes there is not a lot of work to be done since it will issue that disclaimer opinion, then the sponsor does not want to use that auditor.
Regardless of the help they get from others, the responsibility for compliance ultimately lies with the plan sponsor. “As part of the process of bringing the plan into compliance and keeping it in compliance, [sponsors] have to take their role seriously, including in the process of hiring service providers,” says Lavenberg.