Form 5500 Reporting – A Review

May 10, 2011 ( - Before 2009, Form 5500 reporting for ERISA 403(b) plans was very limited.  Beginning with the 2009 plan year that reporting expanded in several important ways, creating new and sometimes significant challenges for 403(b) plan sponsors, investment and service providers, and independent auditors.

These 403(b) plans are now required to fully complete Form 5500 and related schedules, based upon their plan size, rather than simply completing a few limited sections of the form.  For large plans (generally, 100 or more participants), this also includes completion of the new Schedule C, consisting of detailed information regarding service providers and compensation paid to those service providers (which was new for all plans in 2009), and obtaining an independent audit.  

Among some of the 403(b) plan challenges: 

  • identification of the accounts included in the plan;  
  • identification of the plan starting balance; and 
  • responding to the expanded service provider fee disclosure requirements. 


Identification of the accounts to be included in the ERISA 403(b) plan  

In 2007 the IRS issued guidance — Rev. Proc. 2007-71 – which clarified that certain contracts and accounts (sometimes referred to as “orphan accounts”) could be excluded from the plan, notwithstanding the general requirement in the final 403(b) regulations that every contract or account seeking to be treated as a 403(b) contract or account must be under a plan’s umbrella.    

The DoL issued related guidance in 2007, 2009 and 2010 (FAB 2007-02, FAB 2009-02, FAB 2010-01) to address, among other things, the ability to exclude some of these contracts and accounts for purposes of the Form 5500 and related financial disclosures including the independent audit required for large plans.Although this DoL guidance permits the exclusion of certain contracts/account for purposes of Form 5500 reporting, it did not exclude such contracts/accounts for general plan purposes.  Moreover, the exclusion provided under the DoL guidance only applies if:   

  • the contract or account was issued to a current or former employee before January 1, 2009;  
  • the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009;  
  • all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and  
  • the individual owner of the contract is fully vested in the contract or account. 


In general, fully vested contracts or accounts issued prior to 2009 could only be excluded, for this limited purpose, if no contributions were made (or were required to be made) after 2008, and if the participant could exercise their account rights directly with the provider without involvement/intervention by the employer.  As a result, some contracts or accounts that might be otherwise excludable under IRS Rev. Proc. 2007-71 may not qualify for exclusion under the DoL guidance for ERISA plans.  Both the plan fiduciary and the independent auditor are responsible for confirming compliance with these requirements.    

As noted earlier, apart from the permissive exclusion for purposes of Form 5500, there was no clear authority even before the final 403(b) regulations for excluding frozen ERISA plan accounts with deselected providers from the plan, if those contracts or accounts were not otherwise distributed out of the plan.

One early challenge with respect to Form 5500 reporting for a 403(b) plan beginning in 2009 was with regard to the definition of “the plan” itself.  Discussions about multiple vendors constituting a single plan in the 403(b) regulations led to some confusion about whether an employer could maintain two separate 403(b) plans. The answer, of course, is yes.  Moreover, it is fairly common for both public and private tax exempt employers to sponsor multiple 403(b) plans for a wide variety of reasons.  That is not to say, however, that plans may be maintained separately in every case.  For example, if two or more plans were operated as a single plan (e.g. an employer contribution to the ERISA 403(b) plan is conditioned on employee contributions to the voluntary-only non-ERISA 403(b) plan), then the answers can be quite different.  

Some plan sponsors that previously maintained both a safe harbor voluntary-only non-ERISA 403(b) plan, and an ERISA 403(b) plan, combined the two plans into one because they mistakenly believed they were required to do so.  Still others recognized that they did not have to combine the two plans but elected to do so.  Hopefully, they recognized the perils of making such a plan merger retroactive, recasting previously permissible transactions as potential ERISA violations, and instead made it prospective.  Even then, that still raised questions about the excludability of contracts and accounts under each plan separately prior to the merger.  For example, if the safe harbor voluntary-only non-ERISA plan properly excluded contracts and accounts as permitted in accordance with Rev. Proc. 2007-71, prior to the merger, then there should be no need to pull those properly excluded contracts and accounts into the merged plan, for purposes of the plan generally and for the Form 5500 specifically.  

Identification of the plan starting balance  

For ERISA plans which have been subject to Form 5500 reporting and associated audit requirements since plan inception, the plan’s starting balance poses no challenges – it is zero on the original effective date of the plan.  However, for a 403(b) plan that becomes newly subject to more detailed reporting and audit requirements in a year after the year the plan was established, there has been an important question: how far must the plan and the auditor go back to establish the starting balance for the first reporting year?  The answer may depend upon the comfort level of the plan sponsor and the independent auditor.  At the extreme, the process can be infinitely regressive, resulting in an audit all the way back to the first plan year.  That would be equivalent to making the newly applicable audit requirement retroactive.  Fortunately, many auditors found no intent in the rules to impose such a harsh standard, and some elected to look at only one year prior to the reporting year in order to establish the starting balance.  However, some plans had a different and less favorable experience.  

Expanded fee disclosure  

Beginning with the 2009 plan year, the new Form 5500 Schedule C requires a significant amount of information regarding the various elements of service provider compensation.  The scope and breadth of the required information necessitates significant cooperation and support from investment and service providers.  In that regard, 403(b) is not terribly different from other plan types that require Schedule C reporting.  However, this requirement also affects 403(b) plans in a somewhat unique way.  For example, for a plan sponsor to be sure that they have all of the information they need for the Form 5500 and Schedule C, they must first determine whether they have identified all of the relevant contracts and accounts.  In many 403(b) plans that includes multiple providers, and it can include both active and frozen products with each provider.  In addition, if any accounts are excluded, the plan sponsor must confirm that they are excluding only those that qualify under the DoL guidance.    

Where to from here?  

ERISA 403(b) plans now have a year of the new Form 5500 and related independent audit under the belts.  Whether they face additional challenges for the 2010 reporting year may depend on how well they addressed and resolved the questions last year.  If there were mergers or acquisitions during the 2010 plan year, that could begin the process again.  


Richard Turner serves as Vice President and Deputy General Counsel at VALIC. He was recently appointed to the U.S. Department of Labor ERISA Advisory Council and is a contributing author of the “403(b) Answer Book.”