Bob Architect, Vice President, Compliance and Market Strategy, VALIC, began by saying the IRS has limited resources for live examinations, so a lot of compliance activity goes on through correspondence, He said it is the wave of the future in regard to compliance.
For example, he pointed out that the Employee Plans Unit has recently started the Higher Education Compliance Questionnaire project, focusing on universal availability rules (see IRS Starts Higher Ed 403(b) Compliance Check).
Architect noted that with the K-12 Compliance Questionnaire project 5,500 letters were sent out. The project was completed in 2009. Only 11 resulted in real examinations because they did not respond, indicating the seriousness of replying, according to Architect. In addition, 1,000 had potential problems, and a followup started in Spring 2011.
With the higher ed effort, first 300 letters were sent out in April. Architect said sponsors can rest assured additional letters will follow.
Architect noted that hot examination issues in this year and the next include timely adoption of a written plan document, no later than December 31, 2009. Architect is advising sponsors to make sure the adoption is memorialized by an authority who has the level of authorization to adopt the plan.
For very first time, beginning 1/1/10, examinations looks at whether a plan is good as to written document form and is operating in accordance with plan terms. Architect noted that these items have never been examined before, even if a plan had a written document.
In February, the IRS issued guidance on 403(b) plan terminations (see IRS Provides Guidance on 403(b) Plan Terminations). Architect said that still to come is an update to the Employee Plans Compliance Resolution System (EPCRS), currently found in Rev. Proc. 2008-50. According to Architect, the update will include some expected defects possible in 403(b) plans and how sponsors can correct them. In addition, the industry is still waiting for the launch of the 403(b) prototype program.Responding to an attendee question, Architect noted that one issue with 457(f) plans is whether a non-compete clause causes a substantial risk of forfeiture subjecting accounts to current taxation. He said a proposed package of regulations was completed nearly two years ago, and it is moving again through the review channel. There could be proposed regulations within the next year, and there is a good chance the IRS will decide non-compete clauses will not cause a substantial risk of forfeiture.
For ERISA Plans
In a recent Webcast held by VALIC, Richard Turner, Vice President and Deputy General Counsel, VALIC, said that from the Department of Labor, 403(b) plan sponsors should pay attention to rules on fee disclosures and Form 5500 reporting.
Turner noted that the increased focus on fee disclosure started with the 2009 Form 5500 Schedule C filing. Upcoming disclosure rules include those from covered service providers to plan fiduciaries and from plan fiduciaries to plan participants, both begin January 2012 for calendar year plans.
Under interim final section 408(b)(2) regulations there are two levels of fee disclosure: when entering into a service agreement and when there are changes to a service agreement. The key point is disclosures are necessary to avoid prohibited transactions, according to Turner.
The scope of disclosures from covered service providers to plan fiduciaries include both direct and indirect fees. Recordkeeping fees are to be separately identified, and if there is not a particular fee allocated to recordkeeping, providers must identify an imputed cost.
Disclosure applies to all products offered in plan, including frozen products, so deselected vendors that still hold some balances are included. Turner said one exception is that if an investment arrangement is investment only (only an issuer of product used in plan), it is not included unless the vendor is providing some level of recordkeeping.
Participant disclosure regulations are finalized, and effective for plan years beginning on or after 11/1/2011; for calendar year plans, effective in January. The rules apply to participant-directed Employee Retirement Security Act (ERISA) defined contribution plans, even those not complying with Section 404(c). There are two types of disclosures required, annual disclosure to all eligible employees, and a quarterly disclosure of fees to participants in the plan.
The scope of disclosure is fees that affect plan participants, along with a description of products or services being offered, features of products, guarantees, and limitations. Turner said it is acceptable for sponsor to collect information from each provider and disseminate all pieces to eligible participants; VALIC is not aware of requirement that they have the same form.
Turner warns that the DoL guidance for exclusions to Form 5500 reporting does not apply to fee disclosures, but he said there is a possibility of additional DoL guidance.
For non-ERISA plans, Turner suggested sponsrs look at what disclosures participants are getting now, i.e. fees in annuity contracts; they may not want to take on this additional task; however, he wouldn’t discourage non-ERISAs from doing this as a best practice.
However, Turner says, when folks take on tasks they’re not required to perform, they can be exposed to additional liability. Plan sponsors should discuss the fee disclosure issue with counsel.Concerning Form 500 filings and plan audits, Turner said there is an expectation that 2010 filings and audits will go more smoothly after doing it once, but audit exceptions may be necessary until old contracts are dissolved.
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