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Compensation & Benefits Tax Alert: Department of Labor Issues Transitional Relief for 403(b) Plan Form 5500 Annual Reporting Requirements

On July 20, 2009, The U.S. Department of Labor (“DOL”) release FAB No. 2009-02. This bulletin provides additional guidance and transitional relief from certain Form 5500 filing requirements to benefit plans subject to section 403(b) of the Internal Revenue Code.

Background

In November 2007, the DOL issued  new annual reporting requirements, including revised Form 5500 filing requirements, for all 403(b) plans maintained or established by tax-exempt organizations under Title I of ERISA. Governmental and church 403(b) plans are generally exempt from ERISA requirements. The regulations are effective for plan years beginning on or after January 1, 2009.

Under the new reporting requirements, large 403(b) plans (generally plans with 100 or more participants) are now required to file audited financial statements with their Form 5500. Small 403(b) plans are eligible for a waiver of the audit requirement and should be able to file Form 5500-SF (Short Form Annual Return/Report of Small Employee Benefit Plan), a new simplified form for small plans invested in certain types of assets. However, small plans must report aggregate financial information regarding the plan.

Transitional Relief

Many plan administrators had expressed concern that the historical treatment of 403(b) plans as a collection of individual contracts with respect to which employees could engage in a series of actions without the involvement or consent of a plan administrator or employer could make it costly, and in some cases impossible, to identify and obtain the financial information about certain pre-2009 contracts and custodial accounts to which the employer is no longer making employee contributions or forwarding employee salary reduction contributions.

In response to the concerns, the DOL released the FAB, which provides transitional relief for 403(b) plan administrators that make “good faith efforts” to comply with the new reporting requirements for the 2009 plan year. The relief is limited to the Form 5500 reporting requirements, including the requirement for large plans to include as part of their annual report the audit report of an independent qualified public accountant.

Pre-2009 Contracts

Under the relief, the plan administrator does not need to report certain annuity contracts and custodial accounts as part of the employer’s 403(b) plan or as plan assets, provided that:

• The contract or account was issued to a current or former employee before January 1, 2009;
• The employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact, ceased making contributions to the contract or account before January 1, 2009;
• All of the rights and benefits under the contract or account are legally enforceable against the insurer or custodial by the individual owner of the contract or account without any involvement by the employer; and
• The Individual owner of the contract is fully vested in the contract or account.

In addition, the FAB noted that:

• Current or former employees with only contracts or accounts that are excludable from the plan’s Form 5500 or Form 5500-SF under the relief do not need to be counted as participants covered under the plan for Form 5500 annual reporting purposes.
• DOL will not reject a Form 5500 on the basis of a “qualified”, “adverse,” or disclaimed opinion if the accountant “expressly states that the sole reason for such an opinion was because such pre-2009 contracts were not covered by the audit or included in the plan’s financial statements.”

Delayed Audit Requirement for Plans with 100-120 Participants

The FAB also clarified that plans eligible for the “80-120 rule” would be eligible for a waiver of the audit requirement for the first reporting year. Under the “80-120 rule,” if a plan has between 80 and 120 eligible participants as of the beginning of the plan year, the plan administrator can elect to file the same category of annual report that was filed for the previous years. Therefore, 403(b) plan administrators whose plans have between 100 and 120 eligible participants will be eligible for a waiver of the audit requirement for the first reporting year.

No Specific Reporting Relief for Active Accounts

In the FAB, the DOL acknowledges that 403(b) plans could encounter difficulties in obtaining the financial information for active accounts needed to complete Form 5500. If this situation occurs, the FAB offers no specific reporting relief. In addition, the DOL will reject a plan’s Form 5500 if the plan has received a “qualified”, “adverse,” or disclaimed audit opinion due to incomplete information regarding active accounts or for any other reason except those specifically waived by the DOL.

To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this tax alert is meant to provide general information and should not be acted on without professional advice tailored to your firm's individual needs. Copyright © 2009 Smith & Howard, PC