Council Recommends More Audit Relief for 403(b)s

In addition, according to a report following its review of Employee Benefit Plan Auditing and Financial Reporting Models, the Council said the DoL should waive the audit requirement for 403(b) plans that have plan assets invested entirely in individual custodial contracts or individual annuity contracts. For plans containing those individual type assets and group annuity contracts, the Council said only the group annuity contracts would be subject to the audit requirement, and for plans with only group annuity contracts, the plan would be fully subject to the audit requirement.  

The DoL, the American Institute of Certified Public Accountants (AICPA), and 403(b) plan specialists all confirmed to the Council that there are problems with 403(b) plans and audits, and they relate to the nature of the sponsors, plan structure, and records. They explained that in some plans with older individual contracts, it is very costly to try to compile plan records and, in some cases, it may be impossible. Similarly, audits of such plans can be extremely costly due to the absence of unified plan records.   

Testimony was offered that many of the nonprofit and educational employers lack the resources to engage auditors and meet reporting requirements. Other witnesses asserted that audits serve no purpose in protecting plan participants where they hold individual contracts and where the employer has played no role in supporting the arrangement, other than payroll deduction. Employers add value to 401(k) plans by establishing a plan design, selecting and monitoring providers and investment options prudently, maintaining appropriate records, and providing plan oversight. Where individual contracts are used and the participant selects them as in 403(b) arrangements, there is no such value and imposing an audit requirement is expensive, the witnesses claimed.   

Some witnesses assert that the cost of audits and the audit requirement itself will lead to the termination of many smaller 403(b) plans. The DoL and the Internal Revenue Service (IRS) previously granted some relief to help deal with these issues. Witnesses testified that the relief was inadequate and that there is not adequate time to transition to Employee Retirement Income Security Act (ERISA) requirements. This is characterized as an immediate “crisis” for some plan sponsors because many filings are already due. Plans that cannot meet the requirements are subject to civil penalties and other consequences.  

The DoL issued Field Assistance Bulletin (FAB) 2009-02, Annual Reporting Requirements for 403(b) Plans, and FAB 2010-01, Annual Reporting and ERISA Coverage for 403(b) Plans, to provide enforcement relief for plan administrators “that make good faith efforts to transition for the 2009 plan year to ERISA’s generally applicable annual reporting requirements.” (See DoL Relief on Form 5500 Reporting Requirements for 403(b)s) DOL FAB 2009-02 allows the plan administrator to exclude certain pre-January 1, 2009, annuity contracts and custodial accounts for ERISA reporting purposes.  

The AICPA testified that auditors cannot legally disregard incomplete financial statements because ERISA requires the audit reports to identify whether the financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP). Therefore if the plan administrator elects to exclude some or all of those contracts or accounts meeting the conditions of DoL FAB 2009-02 from the plan’s financial statements or instructs the auditor not to perform procedures on certain or all pre-2009 contracts, or both, the auditor will need to consider the effect of the exclusions on the completeness of the GAAP financial statements of the plan, and consider the issuance of either a qualified opinion or a disclaimer of opinion, both subjecting the Form 5500 to rejection for failing to include an unqualified accountant’s report.