The U.S. Labor Department should take another look at the independent audit guidelines that apply to nonprofit employers’ 403(b) retirement plans.

The American Society of Pension Professionals and Actuaries (ASPPA), Arlington, Va., and an ASPPA affiliate, the National Tax Sheltered Accounts Association (NTSAA), Arlington, Va., give that recommendation in a written version of testimony presented by Kristi Cook, an ASPPA and NTSAA representative, at a recent 403(b) hearing organized by the federal Advisory Council on Employee Welfare and Pension Benefit Plans.

A 403(b) plan is a type of defined contribution retirement plan sponsored by a school or other nonprofit organization. The Internal Revenue Code included provisions for 403(b) plans starting in 1958 – 16 years before the Employee Retirement Income Security Act of 1974 was enacted and long before for-profit employers began offering 401(k) plans.

Over the years, many 403(b) plans have taken actions in good faith that conflict with new Internal Revenue Service (IRS) regulations and recent U.S. Labor Department guidance, and the sponsors of those plans need help to avoid facing substantial penalties and fines for failing to comply with the newly clarified reporting and disclosure requirements, Cook said

The changes affect matters such as discretionary decisions involving plan investments, the timing of adoption of plan documents, and audit and financial statement issues, Cook said.

The government once exempted 403(b) plans from many of the kinds of reporting requirements that apply to 401(k) plans. In 2009, federal regulators began requiring most 403(b) plans subject to ERISA that are not governmental plans or church plans to start filing Form 5500 benefit plan reports with the Internal Revenue Service (IRS) and the U.S. Labor Department.

The government began requiring affected 403(b) plans with more than 100 participants to file independent audits of their financial statements.

ASPPA and NTSAA members are still getting many calls from 403(b) plan sponsors seeking help with understanding and complying with the Form 5500 reporting and audit requirements, Cook said.

“One of the problems in this area is the lack of communication/education opportunities among peers within the 501(c)(3) organization community and easy access to education on regulatory changes and updates,” Cook said. “Unfortunately in the non-profit sector, there are few trade associations that are available, and those that are available very rarely have educational programs that involve retirement plans.”

ASPPA and the NTSAA are recommending that the Labor Department expand the exemption from the independent audit requirement, possibly by creating a new definition of “active participants” for purposes of applying the exemption.

“If the Labor Department changed this definition for 403(b) plans to ‘eligible employees that make or receive a contribution during the plan year,’ significantly more 403(b) plans would qualify for the small plan exemption than under current rules,” Cook said.

ASPPA and the NTSAA also recommend that a committee of industry experts be established to review and suggest modifications to existing audit guidelines for 403(b) plans.

The groups say the committee should take into consideration:

  • The difference between group, annuities, individual contracts, and individual custodial agreement; and potentially set up different audit requirements for each.
  • The need for clarification that beginning balances as of Jan. 1, 2009, are “absolute” for all purposes.
  • Relief for auditors, so that auditors can modify their procedures and accept data provided as of Jan. 1, 2010.
  • The need for a model “audit checklist” that is specific to 403(b) plans and does not contain qualified plan requirements.
  • The importance of coordination between the Labor Department rules and IRS compliance rules.

ASPPA and the NTSAA asking the Labor Department to provide a safe harbor exemption for 403(b) plan sponsors that previously qualified for the exemption under a Labor Department regulation, Section 2510.3-2(f), but may not qualify for the exemption as a result of recent Labor Department guidance.

The affected employers could include employers that adopted certain 403(b) arrangements after July 26, 2007, such as arrangements granting the employers the authority to make discretionary determinations if the authority was not previously exercised.

Those employers should be permitted to stay within a “limited involvement” safe harbor exemption by taking certain remedial actions within a 12- to 18-month period following the announcement of relief, ASPAA and the NTSAA say.

The remedial actions should require the employer to cease further actions beyond those permitted under the Labor Department regulation and a new accounting standard released in 2010, the groups say.

To qualify for the safe harbor, an employer should also “make a good faith effort” to reform service contracts and 403(b) documentation so that responsibility for discretionary determinations will be identified and allocated, the groups say.

- Additional information was contributed to this article by Allison Bell

Other 403(b) plan coverage from National Underwriter Life & Health: