What is happening with 403(b) Plans for Non-Profits?

August 10, 2009, by Catherine M. Peery, Peery & Associates, Inc. www.ben-e-fit.com

New IRS regulations became effective January 1 st , 2009. These reforms were originally announced in 2007 for implementation in 2008, but a grace period was allowed to give nonprofits some time to adapt to major changes. This is the first time in forty years that any changes at all have been made to 403(b) plans! A. All 403(b) Plans are now required to have a written document signed by December 31, 2009, regardless of plan type (ERISA or non-ERISA). B. Employers have been assigned some new fiduciary duties as plan sponsors. C. ERISA now applies to 403(b) Plans in much the same way it applies to 401(k) plans. This is being dubbed "ERISA-fication".

What does ERISA-fication mean?

These extensive changes require each plan sponsor to decide whether their plan is going to comply with tougher ERISA requirements. (ERISA stands for the Employment Retirement Income Security Act of 1974 and its subsequent amendments.)

Any number of situations can invoke the ERISA statutes, including:

A. Employer contributions,

B. Exclusion of certain employees for particular benefits, or

C. Restricting the investment selection to one vendor.

Your retirement plan administrator can help you determine whether your plan's current design will cause the new ERISA requirements to be enforced.

If your plan must comply with ERISA requirements, you must file a full Form 5500 with the IRS and Dept. of Labor by July 31 st , 2010 for calendar year plans. This is a big deal because it bears little resemblance to the truncated 5500 you are used to signing off on.

The full-blown 5500 process makes serious demands on the Human Resources department of an organization and can require a CPA audit for plans with more than a hundred participants ( which include eligible employees who are not contributing and terminated participants with balances ). Under most conditions, contracts for participants who terminated before Jan. 1 st , 2009 can be safely ignored, but contracts for all active participants and participants who terminated during 2009 must be accounted for. From this point forward, plan sponsors will have to provide a much more complete accounting for all 403(b) contracts held by participants of the plan. [See list below.]

If you do not want to go through this process, you must maintain or establish a "non-ERISA" 403(b) Plan by observing the following constraints:

• No employer contributions can be made,
• Universal availability for 403(b) deferrals is required for everyone except part-timers and students,
• At least two (2) or more investment vendors must be offered.

This may make offering a 403(b) more expensive than a 401(k) for some non-profits, and the boards of those organizations need to know the available options, and the advantages and disadvantages of each plan design, whether they offer one kind of plan or both. Either plan is going to require an official plan document that incorporates new regulations by the end of 2009, so now is a good time to sit down with a pension consultant and figure out which plan will work best for you.

The 5500 Details List for 403(b) Plans

Large plans will be required to include Schedules C and H, which must show:

• beginning market values of assets by classifications: cash, receivables, annuities, mutual funds, participant loans
• earnings by type: realized and unrealized gains, dividends, interest on cash, interest on participant loans
• contributions by type: employer nonelective contributions, employer match, employee 403(b) contributions, employee rollovers into the plan;
• distributions by type: benefits paid, corrective distributions (for example for a failed ACP test), deemed distributions for loans in default
• expenses paid by the plan, and to whom
• ending balances by asset classification
• the name of the auditor and the type of audit
• the auditor will ask for your ACP test, will ask about new controlled group rules for nonprofits, and will ask about your enrollment and payroll procedures

Small plans will be required to include Schedule I , which shows in aggregate the balance of assets held at the beginning of the plan year, contributions by type, earnings, expenses, distributions, and end-of-year balances.

The challenge for large and small ERISA 403(b) plan sponsors will be gaining control of the contracts or individual accounts in their plan. This includes determining who has to be counted as a participant from among both active and terminated employees, and then researching all the transactions that have to be reported for the plan year.

This is where a good third-party administrator comes in handy! For one thing, you don't have to be the one reaching out to talk to terminated employees about their savings...

Peery & Associates, Inc. has approved prototype documents for 403(b) and 401(k) plans, and competitive administration fees. In conjunction with www.403basp.com , we can provide online access for plans with multiple vendors and retirement investment education tools for your participants. You are free to keep your current vendors or choose among Vanguard, Oppenheimer, Schwab, and many others, all within one online platform.

For more information please call or e-mail Catherine Peery.