Caron first tells Webinar attendees not to expect implementation of this requirement to be delayed. Plan sponsors should start now gathering plan information, conducting an auditor search, establishing accounting records and internal controls for financial reporting, and getting their plan document in place. Caron says the audit process will be fairly time consuming in the initial year, but should be a lot easier in subsequent years.
The Department of Labor estimates 7,000 large 403(b) plans will be subject to full Form 5500 reporting and the audit requirements, and probably another 9,000 small plans can file limited Form 5500 reporting (Schedule I of Form 5500) and no audit. The first question Caron answers concerns what to do if your plan flip-flops between small plan status (100 participants or less) and large status (more than 100 participants).
According to Caron, the DoL has indicated it will follow the 80-120 rule, as if the plan had filed in the previous year whatever form it was qualified to file. Under the 80-120 rule a sponsor counts the number of participants at beginning of year, and if there are 120 or less and the plan could have filed as a small plan in previous year, it can file as a small plan in the current year.
If a plan is a new plan and it has over 100 participants at the beginning of the year, it must file as a large plan. If a plan files as a large plan, the participant count must drop below 100 before it can file as a small plan.
Sponsors will need to hire an auditor, and Caron suggests that when looking for an auditor, sponsors should have frank discussions with candidates on first year audit issues, fees that will be charged, the scope of the audit, and the type of opinion that will be given. Auditors need ERISA expertise, not-for-profit experience is not the relative issue, according to Caron. She warns that qualified auditors will book early and limit the number of audits they will do, so sponsors should begin their search now.
Once sponsors know their status and what reporting is required, it is important to understand the differences 403(b) plans have from other qualified plans that are going to make the initial year difficult.
According to Caron, those differences are:
- Funding vehicles: many 403(b) plans have used individual annuity contracts which participants have been able to cash out without the sponsor knowing anything about it, these vehicles have used contract-based accounting, and fully allocated contracts become no longer plan assets;
- Minimal plan sponsor oversight: there may be little or no documentation of plan transactions;
- Multiple vendors: it can be difficult to get all information from all vendors that have served the plan;
- Orphan contracts: Caron explained that the DoL relief allowing the exclusion of orphan contracts only applies to Form 5500 reporting, excluding information and not being able to quantify all that is being excluded doesn't follow generally accepted accounting principles (GAAP) and will lead to a modified auditor opinion, so the DoL said a disclaimer noting this for the audit will be accepted;
- No prior plan accounting: an opening balance must be presented, which will involve aggregating information, splitting annuity contracts which could include assets from multiple employer plans - participant statements may show all monies in one contract, but with multiple employers, proper mapping of contracts will be an issue.
Caron emphasized that the DoL does expect available information to be audited, so sponsors cannot use the DoL relief as a free pass to cut out information they could include. Plan sponsors should document their data collection approach so auditors and the DoL will be comfortable with the audit evidence.
Caron offered approaches that might be used for establishing a beginning balance. According to Caron, auditors may begin by reviewing any existing information from prior years such as reports from vendors on plan contracts and census data. They may use analytics with reference to payroll data, employee data, and market data to build beginning account balances, or roll forward from years back.
A plan sponsor can help by knowing or finding out the history of plan, such as how long it has been in existence, what type of contributions have been in place , what vendors/custodians have been used, and if there is or has been plan level reporting.
Rejection of the plan audit is the plan sponsor's problem, and penalties apply, Caron warned. The audit may need to be performed. In addition, the auditor may be referred to the AICPA, state society or state Board of Accountancy for disciplinary action, she added.
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