Department of Labor Provides Form 5500 Transition Relief for 403(b) Plans with Respect to Pre-2009 Contracts

Todd Solomon
August 31, 2009 — 1,950 views  
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On July 20, 2009, the U.S. Department of Labor (DOL) published Field Assistance Bulletin No. 2009-02 (FAB 2009-02), which provides guidance and transition relief for sponsors of 403(b) plans that will be required to file a more detailed Form 5500 annual report beginning with the 2009 plan year.  While the guidance does not delay the annual reporting requirements, it does allow for reasonable good faith compliance and other transition relief that should assist plan sponsors in meeting their reporting obligations.

In 2007, the Internal Revenue Service finalized regulations affecting 403(b) plans.  For a summary of the final 403(b)regulations, see the McDermott Will & Emery On the Subject "Final 403(b) Regulations Offer Planning Opportunities and Some Surprises for Plan Sponsors." [LINK TO http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/2fc107bf-b6c9-46cc-b00a-51bf453befcb.cfm].  The DOL also revised Form 5500 for the 2009 plan year so that the annual reporting requirements applicable to 403(b) plans include additional reporting obligations.  Prior to the Form 5500 reporting changes, 403(b) plans were only required to report extremely limited amounts of information, typically limited to the name and address of the plan and plan sponsor, and no financial audit was required.  Under the revised reporting rules, plans with 100 or more participants (large plans) must submit audited financial statements with their Form 5500 filing, and plans with fewer than 100 participants (small plans) are eligible for a waiver of the audit requirement.  For more information regarding the new reporting requirements, see the McDermott Will & Emery On the Subject "403(b) Plan Sponsors Subject to New Reporting and Audit Requirements." [LINK TO http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/855b5f15-f84f-4c8c-8b04-69779cafe501.cfm]

In response to revisions to Form 5500, the DOL received numerous suggestions that the reporting requirements for 403(b) plans be eased.  Noting that it generally will reject filings with disclaimer audit opinions, the DOL recognized that issues specific to investment vehicles offered under 403(b) plans may present compliance issues for plan sponsors.  It therefore included transition relief for 403(b) plan sponsors under FAB 2009-02.

Generally, FAB 2009-02 requires that 403(b) plan sponsors make a good faith effort to transition their plans to ERISA's generally applicable annual reporting requirements effective as of January 1, 2009.  However, 403(b) plan sponsors can elect not to treat certain annuity contracts and custodial accounts as part of their plan or as plan assets for purposes of the Form 5500 annual reporting requirements, including the audit requirement, if the following conditions are met:

  • The annuity contract or custodial account was issued to a current or former employee before January 1, 2009.
  • The employer ceased to have obligations to make contributions (including employee deferrals) and in fact stopped making contributions to the contract or account before January 1, 2009.
  • The employee can enforce all of his or her rights against the insurer or custodian without the involvement of the employer.
  • The employee is fully vested in the contract or account at all times.

If an employee or former employee maintains an annuity contract or custodial account that is exempt from the reporting requirements in effect with respect to 403(b) plans, he or she need not be included as a participant in the plan.  This could reduce the aggregate number of participants in the plan for purposes of determining whether the plan is a small plan or large plan.  However, if the employee has another contract or account that is not exempt, this would provide limited relief to the plan sponsor.

Practically, this relief will be of most assistance to plan sponsors that have numerous and outdated annuity contracts and custodial accounts for which the employer is no longer actively involved.  If a plan sponsor fails to meet the requirements outlined above, it must include the annuity contract or custodial account in the plan for purposes of reporting and audit.

Finally, the DOL acknowledges that there may be "instances when full annual reporting compliance by 403(b) plans may not be possible for the 2009 plan year, [but] the guiding principles must be to ensure that appropriate efforts are made to act reasonably, prudently, and in the interest of the plan's participant's[LS1]  and beneficiaries."  However, the DOL does not indicate the standard that would allow plan sponsors to take advantage of this language or what types of full reporting failures may be excluded.

At this point, sponsors of 403(b) plans should determine whether they are a small plan or a large plan and prepare to file their Annual Report Form 5500 for the 2009 plan year.  In doing so, the plan sponsor should identify all annuity contracts and custodial accounts to determine whether the transition relief contained in FAB 2009-02 will be of any assistance.  Specifically, the plan sponsor should determine whether it can exclude certain annuity contracts and custodial accounts from its reporting and audit obligations, and if doing so in any way reduces the number of participants to a level that would simplify the plan sponsor's reporting obligations. 

Although 403(b) plans will not file a Form 5500 under the extended reporting requirements until next year, obtaining all of the necessary information and complying with the audit requirement will be onerous for most plan sponsors.  Plan sponsors should start their preparations now so that they may address any audit contingencies before the filing deadlines. 


 [LS1]Can you please verify that the quote is "participant's" and not "participants"?

Todd Solomon

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Todd A. Solomon is a partner in the law firm of McDermott Will & Emery LLP based in the Firmís Chicago office. As a member of the Employee Benefits Department, Toddís practice is concentrated primarily on designing, amending, and administering pension plans, profit sharing plans, 401(k) plans, employee stock ownership plans, 403(b) plans, and nonqualified deferred compensation arrangements. He also counsels privately and publicly-held corporations and tax-exempt entities regarding fiduciary issues under ERISA, employee benefits issues involved in corporate transactions, executive compensation matters, and the implementation of benefit programs for domestic partners of employees. A portion of his practice consists of advising clients on fiduciary and plan investment matters. Todd has experience counseling plan fiduciaries with respect to investment policies, alternative investments (e.g., hedge funds, limited partnerships, real estate), prohibited transaction issues, investment management agreements, and payment of expenses from plan assets.