DOL Provides Transition Relief for 403(b) Plans

By Jonathan J. Boyles, Philip J. Castrogiovanni and Todd A. Solomon of McDermott Will & Emery LLP Jul 27, 2009

On July 20, 2009, the U.S. Department of Labor (DOL) published Field Assistance Bulletin No. 2009-02 (FAB 2009-02), which provides guidance and transition relief for sponsors of 403(b) defined contribution retirement plans, which will be required to file a more detailed Form 5500 annual report beginning with the 2009 plan year. While the guidance does not delay the annual reporting requirements, it does allow for reasonable good faith compliance and other transition relief that should assist plan sponsors in meeting their reporting obligations.

In August 2007, the IRS finalized regulations affecting 403(b) plans [see the SHRM Online article 403(b) Plan FinalRegulations: An Overview]. The DOL revised Form 5500 for the 2009 plan year so that the annual reporting requirements applicable to 403(b) plans include additional reporting obligations. Prior to the Form 5500 reporting changes, 403(b) plans were required to report only extremely limited amounts of information, typically limited to the name and address of the plan and plan sponsor; no financial audit was required. Under the revised reporting rules, plans with 100 or more participants (large plans) must submit audited financial statements with their Form 5500 filing, and plans with fewer than 100 participants (small plans) are eligible for a waiver of the audit requirement.

In response to revisions to Form 5500, the DOL received numerous suggestions that the reporting requirements for 403(b) plans be eased. Noting that it generally will reject filings with disclaimer audit opinions, the DOL recognized that issues specific to investment vehicles offered under 403(b) plans might present compliance issues for plan sponsors. It therefore included transition relief for 403(b) plan sponsors under FAB 2009-02.

Conditions for Relief

Generally, FAB 2009-02 requires that 403(b) plan sponsors make a good faith effort to transition their plans to ERISA’s generally applicable annual reporting requirements effective as of Jan. 1, 2009. However, 403(b) plan sponsors can elect not to treat certain annuity contracts and custodial accounts as part of their plan or as plan assets for purposes of the Form 5500 annual reporting requirements, including the audit requirement, if the following conditions are met:

The annuity contract or custodial account was issued to a current or former employee before Jan. 1, 2009.

The employer ceased to have obligations to make contributions (including employee deferrals) and in fact stopped making contributions to the contract or account before Jan. 1, 2009.

The employee can enforce all of his or her rights against the insurer or custodian without the involvement of the employer.

The employee is fully vested in the contract or account at all times.

If an employee or former employee maintains an annuity contract or custodial account that is exempt from the reporting requirements in effect with respect to 403(b) plans, he or she need not be included as a participant in the plan. This could reduce the aggregate number of participants in the plan for purposes of determining whether the plan is a small plan or large plan. However, if the employee has another contract or account that is not exempt, this would provide limited relief to the plan sponsor.

Practically, this relief will be of most assistance to plan sponsors that have numerous and outdated annuity contracts and custodial accounts for which the employer is no longer actively involved. If a plan sponsor fails to meet the requirements outlined above, it must include the annuity contract or custodial account in the plan for purposes of reporting and audit.

Finally, the DOL acknowledges that there may be “instances when full annual reporting compliance by 403(b) plans may not be possible for the 2009 plan year, [but] the guiding principles must be to ensure that appropriate efforts are made to act reasonably, prudently, and in the interest of the plan’s participants and beneficiaries.” However, the DOL does not indicate the standard that would allow plan sponsors to take advantage of this language or what types of full reporting failures may be excluded.

Steps for Plan Sponsors

At this point, sponsors of 403(b) plans should determine whether they are a small plan or a large plan and prepare to file their Annual Report Form 5500 for the 2009 plan year. In doing so, the plan sponsor should identify all annuity contracts and custodial accounts to determine whether the transition relief contained in FAB 2009-02 will be of any assistance.

Specifically, the plan sponsor should determine whether it can exclude certain annuity contracts and custodial accounts from its reporting and audit obligations, and if doing so in any way reduces the number of participants to a level that would simplify the plan sponsor’s reporting obligations.

Although 403(b) plans will not file a Form 5500 under the extended reporting requirements until 2010, obtaining all of the necessary information and complying with the audit requirement will be onerous for most plan sponsors. Plan sponsors should start their preparations now so that they can address any audit contingencies before the filing deadlines.

Jonathan J. Boyles is a partner in the law firm of McDermott Will & Emery LLPbased in the firm's New York office and a member of the firm's employee benefits department. Philip J. Castrogiovanniis a partner in firm's Chicago office and advises clients on matters pertaining to executive compensation, employee benefits and corporate governance. Todd A. Solomon, also a partner in the firm's Chicago office, concentrates primarily on designing, amending, and administering pension plans, profit sharing plans, 401(k) plans, employee stock ownership plans, 403(b) plans, and nonqualified deferred compensation arrangements.

© 2009 McDermott will & Emery LLP. All Rights Reserved.

This article should not be construed as legal advice.​

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