Relief for 403(b) Plan Form 5500 Reporting – The Hard Part

September 8, 2009 ( - Just because the Department of Labor (DoL) provided relief to 403(b) sponsors from reporting certain assets when filing Form 5500 doesn't mean they will or should take advantage of it.

The DoL’s Field Assistance Bulletin (FAB) 2009-02 provided 403(b) sponsors relief from Form 5500 reporting of assets in individual contracts where all contractual rights are enforceable by the participant without any involvement by the employer – in other words contracts where participants have total control. The plan fiduciary is charged with making the ultimate decision about whether to exclude any assets from Form 5500 reporting and that is proving for some to be difficult.  

For some 403(b) plan fiduciaries, it may not make sense to exclude any assets from Form 5500 even if their individual contracts meet the conditions of the FAB. These are the plan fiduciaries who have already been exercising Employee Retirement Income Security Act of 1974 (ERISA) duties, such as conducting investment option due diligence, ongoing monitoring, and documentation.  

The FAB is designed to give relief to plans that have no control over or even knowledge of the assets from legacy individual contracts and custodial accounts.   If the fiduciaries already have their arms around the plan assets, it is unlikely they are simply going to exclude them from Form 5500.        

Some plan sponsors may make their decision based on cost. A reality to consider is that hunting down and collecting information from vendors, compiling all the information in financial statements and Form 5500, and then having all of that audited could be expensive.   For some plan sponsors, it may be a simple matter of taking advantage of the FAB relief to keep costs under control.

Vendor Issues

Sponsors may encounter vendors that have not prepared to provide asset information since their contracts meet the conditions for being excluded from reporting. In addition, some 403(b) vendors issuing contracts primarily in non-ERISA markets don’t have systems in place to do appropriate reporting for ERISA plans. Since the decision on what to report lies with the plan sponsor, vendors need to be prepared to supply the Form 5500 information, even if their contracts meet the exemption.

Sponsors should consider that because the FAB does not change the ERISA requirement to have the plan audited, nor the generally accepted auditing standards, auditors will likely be unwilling to issue a clean or unqualified opinion if the Form 5500 excludes plan assets.   The DoL has indicated that an auditor's opinion that is not clean (ie. qualified, adverse or disclaimed) due to exclusion of assets on Form 5500 by virtue of the FAB will not affect the acceptability of the filing; however, many non-profit organizations - particularly those that receive public funding - may view a publicly available audit report that is not clean as unacceptable.

In addition, some organizations view transparency and clean, unqualified audit reports as part their demonstration of sound management and stewardship of the public's trust.   To them, qualified or disclaimed audit reports may simply not be tolerable.

In addition, Statement of Auditing Standard 115 requires reasonable assurance that a system of internal controls is in place to ensure, among other things, integrity in the financial reporting and compliance with applicable laws and regulations. If there are fiduciary internal controls in place for these assets, auditors may be reluctant to ignore them, and would therefore advise clients that assets falling under those internal controls need to be included on the Form 5500 and be subject to audit.

Like everything else in the 403(b) world this year, plan sponsors need to work closely with legal counsel, advisers, or plan providers to carefully weigh all considerations before they arrive at the best decision for their situation.   

Aaron Friedman is the National Practice Leader for non-profit consulting with the Principal Financial Group.   He has been consulting with non-profit organizations for over 15 years and has been in the retirement plan business since 1986.

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