If your organization has a 403(b) plan, you are in for some significant changes in the way that you manage it.
A 403(b) plan is a retirement plan, the equivalent of a 401(k) for employees of hospitals, churches, governments and nonprofits, and in the past, sponsors of these plans had limited control over them. Employees could invest their money wherever they wanted with few restrictions, move money around or take it out with limited restrictions, making it difficult for the plan sponsor to get a handle on what the plan’s assets were and where they were located. In addition, filing requirements were minimal limited 5500 reporting to the Department of Labor (DOL).
However, that has all changed. Under new rules passed in 2007 that become effective with the 2009 plan year, the IRS is requiring a lot more accountability from sponsors of 403(b) plans. In addition, some plans must now be audited, requiring a large amount of paperwork and increased expenses, and not all organizations are ready for the change.
“Many plan sponsors are very overwhelmed,” says Kimberly Flett, CPA, QKA, QPA, associate director in retirement plan design and administration at SS&G Financial Services, Inc. “They do not realize how many new requirements are impacting their 403(b) plans. Before, 403(b) plans had very limited reporting to the IRS. Now, the IRS wants sponsors to have a lot more control and accountability.”
Smart Business spoke with Flett about what you can do now to make sure your organization will be in compliance with the new regulations.
How have requirements changed for sponsors of 403(b) plans?
Sponsors are now required to have a written plan document, which is a formal legal document with specific terms meeting IRS and DOL requirements that formalize when participants can make changes to the plan, when and where participants can open accounts, and approved vendors, among other things. Sponsors also must have a summary plan description, a guide to the plan in layman’s terms that is distributed to all employees. Originally, the documents had to be in place by Jan. 1, 2009, but due to an extension, these documents must now be formalized by Dec. 31, 2009.
The plan document and summary plan description are required for every organization with a 403(b) plan. In addition, entities that make employer contributions to employees’ 403(b) plans, with the exception of churches and governments, have to file a Form 5500 with the DOL, the same form that is required for 401(k) plans. Form 5500 requires information such as the value of the plan, how many people are participating, and the money that was withdrawn and deposited into the plan. Filing Form 5500 can be complicated when an organization has never had to file one before and does not have the required information readily available, especially the location of plan assets.
Finally, if you had more than 120 eligible employees at the beginning of the plan year, you are required to have an audit report attached, making the process substantially more expensive.
When should an organization begin the process of creating the documents?
You are not out of luck if you have not started compiling asset information, but it may be complicated. It will be easier for larger organizations with more structured plans and those that have encouraged employees to use a particular vendor for their investments instead of letting them invest wherever they chose.
The first thing a plan sponsor needs to do is contact its accountant, attorney or plan administrator to determine its requirements and seek ERISA counsel. Also contact your adviser who helped you set up the plan. Then, develop a team who will be responsible for gathering the information you need and ensuring you are meeting requirements.
Keep in mind, if you do not work at an affected organization, but sit on the board of a nonprofit, you should be aware of the change and plan for it.
How will the changes affect participants of the 403(b) plans?
Before the imposed regulations, participants had fewer withdrawal restrictions from the plan. Now they cannot make a withdrawal unless there is a distributable event, such as severance of employment. Participants can no longer have life insurance in their plans. If the organization runs into problems with contracts with vendors, participants may have to invest any new money going into the plan with vendors designated by the employer.
In addition, the plan may have more fees now to cover the costs associated with the new regulations. Participants can continue to have Roth accounts in their 403(b) plan.
What are the consequences for an organization that fails to comply with the new rules?
The DOL will start comparing its filings with that of the IRS and flag organizations that they believe to not be in compliance for audit and possibly apply sanctions. If organizations do not comply, the government will catch up with them eventually and will require non-compliant organizations to pay sanctions for all the years they did not file.
Kimberly Flett, CPA, QKA, QPA, is an associate director in retirement plan design and administration at SS&G Financial Services, Inc. (www.SSandG.com). Reach her at KFlett@SSandG.com or (800) 869-1835.