(b)lines Ask the Experts – Is Auditing More Lenient for Inactive Contracts?

June 18, 2013 (PLANSPONSOR (b)lines) – An attendee at the recent PLANSPONSOR National Conference asked: “Upon audit, are the investigators more lenient toward inactive 403(b) contracts to which contributions are no longer made?”

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:

It depends on when the contracts were discontinued. If the contributions ceased prior to 1/1/2009, certain contracts may be disregarded for IRS purposes  as well as for  Department of Labor (DOL) reporting and disclosure purposes (see “When a 403b Plan’s Exclusive Relationship with One Vendor Really Isn’t” and “DOL Relief on Form 5500 Reporting Requirements for 403(b)s”). However, Employee Retirement Income Security Act (ERISA) provisions unrelated to reporting and disclosure remain applicable (and auditable).

For contracts discontinued on 1/1/2009 or later, there is no evidence that the Internal Revenue Service (IRS) or DOL will be more lenient, despite the fact it may be difficult, or impossible, to obtain the data necessary to administer such contracts in accordance with the Internal Revenue Code and ERISA. Also, it is often equally difficult to terminate such contracts if they are noncompliant, since employers often have limited, or even nonexistent, rights, with respect to such contracts.

So what is a plan sponsor to do? Plan sponsors should make every effort to reach out to such vendors to obtain the proper information (including an information sharing agreement from the vendor) to comply with the Code and ERISA, and thoroughly document any noncompliance by the vendor(s) in question. If such noncompliance leads to plan failures, plan sponsors should work with benefits counsel to correct such failures under the various voluntary correction programs (EPCRS, VCFP, etc.) before the auditors come calling.

Good luck with those inactive contracts!


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.