403(b) Plan Update. Scott R. Rain Scott F. Fremer June 19, 2009

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1 403(b) Plan Update Scott R. Rain Scott F. Fremer June 19, 2009

2 403(b) Plan Changes In July 2007, the IRS issued the first comprehensive regulations for 403(b) plans in 43 years. In summary, the new regulations provide the following: Require 403(b) plans to be maintained pursuant to a written defined contribution plan that satisfies 403(b) in both form and operation and contains all the terms and conditions for allocating plan responsibilities among the employer, issuer of contracts and any other party involved in implementing the plan. Plan may include a variety of documents including: Insurance contracts Custodial accounts 2

3 403(b) Plan Changes Provide restricted transfer rules Assets can no longer be managed outside scope of Plan. Cannot transfer w/o sponsor authorization. Plan Sponsor approved list of investments. Information sharing arrangements. Establish a bright-line universal availability test. All employees with a few exceptions. The general effective date is for taxable years beginning after December 31,

4 403(b) Plan Compliance Along with the new plan document changes, the Internal Revenue Service and the Department of Labor are focusing on more compliance issues facing plan sponsors. These issues include the following: Audits of 403(b) Plans Increased Fiduciary Obligations 4

5 Audits of 403(b) Plans November 2007, DOL issued amended regulations which removed the exemption to certain 403(b) plans from the annual Form 5500 reporting, disclosure and audit requirements under ERISA. The new requirements are effective for plan years beginning on or after January 1,

6 Audits of 403(b) Plans Large ERISA-covered plans (generally plans with 100 participants or more) will be required to file audited financial statements beginning with their 2009 Form 5500 filing. Small 403(b) plans (generally plans with fewer than 100 participants) may be eligible to use a new Short Form 5500 filing without audited financial statements 6

7 Audits of 403(b) Plans OBJECTIVE OF AN AUDIT: The primary objective of a plan s financial statements is to provide information that is useful in assessing the plans present and future ability to pay benefits. To accomplish that a plan s financial statements should provide information about: Plan resources and how the stewardship responsibility for those resources has been discharged The results of transactions and events that affect the information about those resources Other factors necessary for users to understand the information provided 7

8 Audits of 403(b) Plans Many plans face significant challenges in establishing plan accounting records and proper controls necessary to obtain an unqualified opinion on the plan s financial statements from an independent auditor. 8

9 Audits of 403(b) Plans Accounting records are critical to an audit of any Employee Benefit Plan and include, but are not limited to the following: Investment asset records Participant records Contribution records Distribution records Individual participants account information Administrative expenses General accounting records Reconciliations 9

10 Audits of 403(b) Plans ANTICIPATED AUDIT OBSTACLES Availability and accumulation of plan information such as: Plan documents Third party service agreements Identification of all participant accounts to be included as plan assets Plan level trust statements for all plan assets Determining beginning account balances (12/31/08 comparative Statement of Net Assets is required under DOL reporting) 10

11 Audits of 403(b) Plans ANTICIPATED AUDIT OBSTACLES Availability of SAS 70 reports Short Form filers (no audit requirement) will still need to report total Plan assets and the number of plan participants 11

12 Audits of 403(b) Plans AUDIT ACTION ITEMS Establish responsibility for the plan s financial reporting function Communicate with your service provider on the plan s financial needs Identify all service providers and ask if they will be able to provide you with the information necessary for the plan s financial statement audit and Form 5500 Identify and match all individual participant contracts and account balances to your plan Indentify if the service provider will have a SAS 70 report on internal controls available Take the necessary steps to find former participants to determine their account balances so that they can be properly included in the plan records 12

13 Audits of 403(b) Plans AUDIT ACTION ITEMS (continued) Establish a proper set of financial records to support the preparation of the plan s financial statements including: Contribution and disbursement records Individual account balance records Investment Schedules Identification of all participant mutual fund and custodial accounts holding plan assets, including any transfers to another 403(b) account or contract outside the plan. Determine which insurance contracts should be reported as plan assets If there was a change in service providers, indentify any old accounts and contracts that were not transferred to the new service provider (referred to as orphan contracts ) 13

14 Audits of 403(b) Plans AUDIT ACTION ITEMS (continued) Establish policies and procedures to ensure proper authorization and recordkeeping of plan transactions including: Investments Contributions Benefit Payments Participant Data Administrative Expenses This includes controls at all service providers used by the plan, and ongoing monitoring of these controls. 14

15 Fiduciary Obligations Adopting a written plan does not subject a plan to ERISA, however, including optional provisions in the plan such as employer contributions, hardships or loans may subject the plan to ERISA A plan can avoid ERISA coverage by identifying the parties who are responsible for administrative functions, including tax compliance The plan should accurately describe the employer s limited role and its delegation of discretionary determinations such as loans or hardship determinations, to the annuity provider or other third party, however, an employer s exercise of discretion concerning plan administration may result in ERISA coverage The employer may limit the number of providers to a number designed to give employees a reasonable choice, however, an employer s negotiation with investment providers or account custodians to change terms of their products would be a form of employer involvement that could subject the plan to ERISA 15

16 Fiduciary Obligations An ERISA plan fiduciary must: Act solely in the interest of plan participants and their beneficiaries for the exclusive purpose of providing plan benefits while defraying reasonable plan expenses; Diversify plan investments to attempt to minimize large losses; and Act prudently using the skill and care that a comparable fiduciary of a comparable plan would use under similar circumstances. 16

17 Fiduciary Obligations In the likely event that your plan is subject to ERISA, as a plan sponsor you should implement: -Plan documents and related administrative services, nondiscrimination testing, and recordkeeping agreements -Notices to employees advising about deferral opportunities -Investment policy statement (including guidelines for selecting, monitoring, and evaluating plan investment options and related fees on a systematic basis -Compliance with IRS plan limits on loans, hardships, distributions, etc. -Written plan procedures for administration of 403(b) plan -Systematic procedures for evaluating and monitoring service providers -Adequate fiduciary liability insurance coverage, ERISA bonding, and indemnification provisions 17

18 Fiduciary Obligations Recommended Fiduciary Protection Measures: Formalized Investment Committee for plan; Written Investment Policy Statement; Full and detailed disclosure of all service provider fees; Professionally constructed and managed investment portfolios as menu options; and Documented Employee Education Program. 18

19 Questions and Comments????? 19

20 Please Contact Us Thank you for your interest in today s presentation. Please feel welcome to contact us with any follow up questions. Scott Fremer, CEBS Scott Rain, JD sfremer@schneiderdowns.com srain@schneiderdowns.com 20