As § 403(b) plan administrators and plan auditors prepare to file the 2009 Form 5500 - which, for most plans, will be the initial annual report - the Department of Labor issued new guidance to clarify when certain annuity contracts and custodial accounts can be excluded.
Change in Reporting Obligation for § 403(b) Plans
IRC § 403(b) provides a tax-sheltered annuity program for public school employees, employees of certain tax exempt organizations, and certain ministers. Historically, these arrangements were treated as a collection of individual contracts or accounts controlled by the employee without the involvement of the plan administrator. However, this changed for tax years beginning in 2009, when § 403(b) plans - other than those qualifying as "governmental plans" or non-electing "church plans" - became subject to ERISA's general reporting requirements. As a result, plan administrators became obligated to report financial information regarding pre-2009 individual contracts and custodial accounts over which, in many cases, they had little knowledge. The new reporting also obligated § 403(b) plans with 100 or more participants to file audited financial statements, and obligated all § 403(b) plans to report the plan's aggregate financial information.
2009 FAB Relief
Recognizing the difficulties administrators would face in complying with the new reporting requirements the Department of Labor issued Field Assistance Bulletin 2009-02. For purposes of satisfying the reporting requirements, this FAB allows administrators to exclude annuity contracts and custodial accounts as part of the plan or as plan assets if:
The contract or account was issued to a current or former employee before 2009,
The employer ceased to have any obligation to make, and ceased making contributions to the contract or account before 2009: The rights and benefits under the contract or account are all legally enforceable by the individual owner against the insurer or custodian without involvement by the employer, and the individual owner is fully vested in the contract or account.
2010 Further Relief
In response to questions it received regarding the scope of this relief, the Department issued Field Assistance Bulletin 2010-01. Among the main clarifications are:
Involvement by the Employer - Discretion or Approval not Permitted. The new FAB makes clear that, although the relief under FAB 2009-02 would be available where the employer performs the limited function of making information available to the § 403(b) provider (e.g., reports employment status), the relief would not be available if the employer must consent to, or make discretionary decisions regarding enforcement of, the employee's rights under the contract. Prohibited approval would include, for example, where the employer must certify that the employee is eligible for distribution under the IRC, or must approve a hardship distribution or loan. Q&A-1.
Making Contributions - Loan Repayments Count. If an employer forwards employee loan repayments to the provider, the contract or account would not be eligible for the relief. Where the employee forwards the loan repayments directly to the provider, however, the contract or account would be eligible for the relief if the other requirements are satisfied. Q&A-2.
Large & Small Plans - Relief Applies to Both. The relief applies to large and small plans - both for determining what accounts are plan assets for purposes of the audit and for determining the plan assets to be reported on the financial statement. Moreover, it applies in determining the number of plan participants and whether the plan is a "large plan" subject to the audit requirements. Q&A-5.
Qualified Opinions - Department Will Not Reject Filing. The Department will not reject a Form 5500 filing where the plan's independent accountant issues a "qualified," "adverse" or "disclaimed" opinion if the opinion states that the sole reason for the designation is because pre-2009 contracts were not covered by the audit or included in the financial statements. Q&A-6.
Election to Exclude - Auditor's Role. While the administrator is responsible for determining whether the requirements for relief are met, the FAB makes clear that if the independent accountant discovers contracts were incorrectly excluded from the financial statements, the accountant is expected to alert the plan administrator. If the parties cannot agree, the independent accountant is expected to note the issue in the audit report. Q&A-7.
Post 2009 - Relief Applies. The relief under FAB 2009-02 applies to 2009 and later reporting years. Q&A-11.
Pre-2009 Contributions - Includes 2009 Contributions Attributable to 2008. Contributions attributable to 2008, but not deposited until 2009, would not make the account or contract ineligible for the relief. Q&A-13.
The FAB also addresses the regulatory "safe harbor" by which § 403(b) arrangements funded solely through salary reduction contributions are not considered employee pension plans - and, therefore, not subject to the reporting requirement. The safe harbor is set out in Labor Regulation § 2510.3-02(f). It requires (a) employee participation to be voluntary, (b) all rights under the contract to be enforceable only by the employee, (c) the employer to have only limited involvement, and (d) the employer to receive no compensation other than for expenses in handling salary reduction contributions. The FAB clarifies that the employer cannot, consistent with the safe harbor, appoint a third-party administrator to make discretionary decisions, and cannot itself retain discretionary authority to exchange or move funds from the § 403(b) provider. It can, however, select contracts where the provider is responsible for discretionary decisions. The arrangement generally must offer a choice of more than one § 403(b) contractor and more than one investment product.
