ERISA 403(b) plans must collect the information needed to complete the following schedules, as applicable to the plan:
- Schedule A: Insurance Information –sets out information about insurance and/or annuity policies, including commissions, fees and financial activity.
- Schedule C: Service Provider Information –lists providers that received fees of $5,000 or more paid, either directly or indirectly, from the plan, in connection with services rendered to the plan, or, if paid to a person, that person’s position with respect to the plan during the plan year.
- Schedule D: DFE/Participating Plan Information –is filed if the plan utilizes pooled or collective funds, or if the return is filed for a Direct Filing Entity (DFE).
- Schedule G: Financial Transaction Schedules –discloses loans, fixed income obligations or leases in default, and prohibited transactions. .
- Schedule H: Financial Information –contains an asset, liability and gain/loss statement for large plans and DFEs.
- Schedule R: Retirement Plan Information –reports distribution, funding, amendment and coverage information.
- Schedule SSA –reports amounts owed to terminated vested employees.
- Audited Financial Statement –is a written opinion of an independent qualified public accountant as to the accuracy of the plan’s financial statement.
Plans with fewer than 100 participants continue to have less onerous reporting requirements under certain circumstances: Instead of filing Form 5500, small plans may file Form 5500-SF (Short Form), a two-page form with no attached schedules, if (1) the assets are invested solely in secure assets that are held or issued by regulated financial institutions and have a fair market value that is easily determinable, and (2) the plan meets the audit waiver conditions (see below). If the small plan does not meet these requirements, it may file the regular Form 5500 and supply a less detailed asset statement using a Schedule I in place of Schedule H; it would not be required to file Schedule C; nor would it be required to provide an accountant’s opinion if the audit waiver conditions are met (i.e., if enhanced ERISA bonding and disclosure requirements are met).
Non-ERISA 403(b) plans that meet the criteria under Department of Labor Field Assistance Bulletin 2007-02 continue to be entirely exempt from the ERISA reporting and disclosure requirements.
Sponsors of ERISA 403(b) plans are required for the first time to produce an Audited Financial Statement. Thus, controls should be established to accurately capture the financial information needed for such statement. Sponsors should also be prepared for a full review of all processes associated with the plan assets at each service provider. To mitigate costs of a full review, an auditor may use an SAS 70 Audit Report to assess the controls at a service provider. The SAS 70 review might not, however, be part of any existing administrative agreement with the provider, and plan sponsors may wish to review their existing service agreements in this regard.
ERISA requires plans to report assets at "fair value." The Financial Accounting Standards Board recently issued "FAS 157" which sets out the fair value standard to measure and report plan assets and liabilities. Fair value is defined as "the price that a market participant would expect to receive in the sale of a plan asset or transfer of a plan liability." Thus, if a plan invests in a variety of investment types (e.g., mutual funds, pooled separate accounts, insurance contracts, collective trusts), each investment option may be subject to a different valuation standard. FAS 157 now requires that a plan's financial statement include additional disclosures that categorize plan assets according to the degree to which objective data are available to assess the investments' value. For instance, disclosures for mutual funds or publicly traded stock will be less extensive than disclosures for other investments for which no independent market price may be available.
To ensure compliance with the ERISA plans' enhanced Form 5500 requirements, plan sponsors should consider the following "must do" activities:
- Confirm with your plan adviser that your 403(b) plan arrangement is subject to ERISA.
- Develop a timetable: Plans with plan years that begin on or after January 1, 2009 will have to file using these new rules. The deadline for filing a return is seven months after the close of the plan year. An automatic extension is available for an additional two and a half months; however you must formally request this extension using the Form 5558. (see 2009 ERISA Compliance Calendar for DB/DC/403(b) Plans )
- Collect information: Even though the form is not due until next year, it is critical to set up a system now, either in-house, or with the help of a professional Form 5500 service provider, to collect verifiable financial data beginning January 1, 2009 for calendar year plans. At a minimum, you must determine the trust opening balance, keep participant census data, and track all fees and expenses paid by the plan. A 5500 service provider can help you determine direct and indirect fees, as well as which fees and expenses may be paid by the plan and which fees must be paid by the plan sponsor. ( Note that some information - such as consolidated participant plan loan information -may be hard to collect if several providers are involved. Individual participants and investment providers may need to be contacted to collect the annuity or custodial account documents and information required by Form 5500, especially where individual annuity contracts are used to fund employer contributions. A plan sponsor may allocate the responsibility to collect information among the plan's providers to a third party administrator who is set up, or has a partnership with another provider, to provide "aggregator" services. Unless this responsibility is shifted by legal agreement, the plan sponsor is solely responsible for collecting this information.)
- Determine if you can file Form 5500-SF (Short Form) or whether you must file a full Form 5500 with audited financial statements. In the latter case, you must hire an independent qualified accountant. It is advisable to obtain a list of items that the auditor will review for the 2009 plan year in advance of the audit. The list will function as a baseline to help you understand the financial information that must be collected this year for the 2009 annual report.
- Make sure the plan has secured the required ERISA fidelity bond from a surety or insurance company.
- Become familiar with the Department of Labor's electronic filing and processing system (EFAST2). All 5500 forms must be filed electronically using this system for plan years beginning on or after January 1, 2009. Although the system has not yet been released, the DOL has promised a series of informational Webcasts to explain the new system. Visit www.dol.gov/EBSA for more details on these information releases.
- Pamela Reid, Senior Consultant, Towers Perrin
NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.