Fed requires audits of large 403 plans

March 14, 2010
| By Pete Daly |
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The economic downturn and revelations of very risky investments have led to closer scrutiny of employee pension plans by the Department of Labor — even including the 403(b) plans in place at many nonprofit and government organizations.

New this year is a federal requirement that organizations with more than 100 members in a 403(b) subject to Title I of the Employee Retirement Income Security Act will have to have an audit of that plan by an independent qualified public accountant, and file the audit report along with 2009 Form 5500 or Form 5500-SF.

“Many of these organizations never had to go through an audit before. They need to have their particular records in order” to be audited, said Kelly Springer, a CPA and partner at Plante & Moran PLLC, where she oversees the firm’s employee benefits audit practice in West Michigan.

The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain nonprofit organizations. Springer said there are an estimated 200 403(b) plans at schools, colleges, universities, hospitals and local governments in Kent County that are subject to the new rule requiring an annual audit.

“There will be an expectation (by the Department of Labor) that the plan sponsor has controls over the plan,” said Springer. “Even if they have outsourced some of those (controls), they have ultimate responsibility and an audit will look to the plan sponsor.”

She said many nonprofit employers with 403(b)s for their employees have “outsourced it and moved on, but in this, they have to have some oversight.”

A lot of small organizations with 403(b)s and fewer than 100 employees won’t be subject to the audit requirement, of course — unless the organization has elected to participate jointly in a multi-employer 403(b).

“If you’re a participant in something like that, then that can carry over” to inclusion in the audit requirement, she said.

The new audit requirement applies to 403(b) plans that were in effect Dec. 31, 2009.

“We’re just starting all those audits now,” said Springer.

The deadline for audits is July 31, but it is possible to get an extension until Oct. 15, according to Springer.

The cost of a 403(b) audit varies depending on the plan, but might range anywhere from $5,000 to $10,000, she said. “But it could be more,” she added. “That’s an additional cost the organizations will have.”

The 403(b) was the last group of retirement plans that did not require an annual audit, according to Springer. She said the Department of Labor wants to make sure that those organizations that sponsor 403(b) plans for their employees are in compliance with all the regulations.

“Say an employer is required to make contributions (to the plan) in a certain timeframe. Maybe your dollars are tighter from a cash flow perspective and you wait an extra day. Well, that’s noncompliance, and you could be subject to penalties for that,” said Springer.

In some preliminary guidance that the Department of Labor has already issued in regard to 403(b) audits, she said, “We are seeing that they are looking at compliance with those regulations much more closely.”

The DOL will look to see that assets of the plan are basically held in a format that is in compliance with the department’s regulations, and that the type of investments are in accord with the plan’s stated investment policies.

If a plan states that employee contributions are to be taken from paychecks on a given day and time, the funds should be invested as soon as possible so that employees don’t lose any earnings. An employer that hangs on to the cash for a week or two could be penalized. If there is an employer match to employee contributions, the DOL will look for proof in the audit that the match is happening as stated.

Other issues involve “general controls,” such as ensuring that all participants are truly employees, and allowed expenses don’t include management junkets being charged to it.

Penalties resulting from audits that reveal non-compliance with federal regulations can add up, based on the size of the plan, and charged at a daily rate, said Springer. She said the DOL uses a matrix to determine penalties levied against an organization.

“I believe the maximum penalty on that is somewhere in the neighborhood of 50 grand for a plan,” she said.

It’s also a time-consuming matter to deal with and will naturally involve legal expenses. “Better to just do it right the first time,” she said.

To prepare for an audit, organizations should make sure their records for all 403(b) participants are in good shape. That means making sure the totals and activities for each account holder are complete, up-to-date and available to the auditor.

Springer said now is a good time for an organization to be reviewing its 403(b) plan, “because it’s not too late to really have a good plan (for the audit) in place.”

That does not mean the organization can go back and change the actual 403(b) plan that was in place as of Dec. 31, “but they can … make sure they are ready to make their audit go as efficiently as possible to help save cost,” said Springer.

She suggested organization management should also be able to document the controls it has over the plan, even if it is outsourced, to demonstrate it is protecting the participants’ assets in its custody.

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