403(b) Outlook: Oversight Agencies Publish Final Regulations on Form 5500

Changes include enhanced 403(b) reporting; filing requirements delayed

December 21, 2007

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On Nov. 16, the Department of Labor (DOL), Internal Revenue Service (IRS) and the Pension Benefit Corporation (PBGC) published final regulations (PDF) and revisions to the 2007 Form 5500 Annual Return/Report. The Form 5500 Annual Return/Report is the principal source of information and data available to those agencies concerning the funding, operation and investments of the nation’s pension and welfare benefit plans. These regulations and revised forms are the end result of proposed and additional proposed regulations, issued in July and Dec., 2006, respectively, as well as reporting requirements imposed by the Pension Protection Act of 2006 (PPA).

Key changes are:

  • Increased financial disclosure by tax sheltered 403(b) annuity plans subject to Title I of the Employee Retirement Income Security Act (ERISA) by making the reporting rules for those 403(b) plans on par with 401(k) plans.
  • A new, simplified annual reporting form for small plans with secure, easy to value investments with regulated financial institutions.
  • Incorporating various technical improvements and clarifications to the form and instructions in response to public comments.

Plans and service providers will generally not be required to comply with these changes until the due date for the plan’s 2009 Form 5500, which is 2010.

Analysis

Enhanced Reporting Requirements
The most significant aspect of these regulations and revisions, for TIAA-CREF participating institutions, are the enhanced reporting requirements to which many Code Section 403(b) plans will become subject.

Despite the arguments against enhanced reporting put forth by a number of plan sponsors and insurance and investment companies, the agencies concluded "that subjecting 403(b) plans to the same annual reporting rules that apply to other ERISA covered pension plans is consistent with the purposes of Title I of ERISA and the interests of covered participants and beneficiaries."

The agencies based their conclusion on their belief that the rules governing 403(b) plans have, over time, become indistinct from the rules governing other employer based plans; recent investigations into 403(b) arrangements have revealed a great number of violations which need to be corrected through appropriate oversight, and since the new requirements only apply to 403(b) plans subject to ERISA, such plans are already subject to fiduciary requirements, and possess administrative structures and recordkeeping systems, sufficient to allow for compliance with the new requirements.

It is also recognized that the new reporting requirements will put additional burdens on ERISA covered 403(b) plans and these requirements have been delayed, so that their effective date will mirror the changeover to full electronic filing. No transitional relief has been granted in the new regulations, though the DOL has indicated that it is open to granting such relief, if future developments warrant it.

In addition, the preamble to the regulations offered the agencies’ position that small 403(b) plans (generally fewer than 100 participants) will be exempt from the audit requirements of the new reporting standards, will most likely be eligible to file the proposed Short Form 5500, and that large 403(b) plans may avail themselves of the limited scope audit option available under 29 CFR 2520.103-8.

Filing Requirements Delayed
Another significant aspect, practically speaking, of the final regulations is the deferral of full electronic filing of Form 5500s. Under the final regulation, the form changes and the electronic filing requirements will become operative for all filings with plan years beginning on or after Jan. 1, 2009. This will allow calendar year plans to defer electronic filing until their July 2010 filing date, and, as indicated, will allow ERISA covered 403(b) plans to defer providing full Form 5500 reporting until this date. Short plan year filings and Direct Filing Entity (DFEs) filings for 2009 will be subject to a special transition rule for the 2009 reporting year. Under this rule the plans and DFEs will have the option of using the 2008 forms if their filing is due prior to the date the EFAST2 wholly electronic filing requirement becomes operational on Jan. 1, 2010.

Transition Rules
Also of significance are the transition rules for the additional filing requirements occasioned by the passage of the PPA. It was determined that it would not be practical to create computer-scannable forms for plan years, 2007 and 2008, which would only be useful for the current EFAST system, which is to be phased out with the implementation of EFAST2. A number of transition rules are contained in the regulations, including submission of attachments to the forms which are to be changed as a result of the PPA, or an automatic extension for 2007 filings which would otherwise include forms which might not be available until shortly before the 2008 calendar year.

The PPA also required a simplified reporting procedure for plans with fewer than 25 participants. Such plans, for plan years 2007 and 2008 may continue to file under current applicable rules for small plans, until the implementation of a new Short Form 5500 for the 2009 plan year. In the alternative, such plans may file a Form 5500; Schedule A, if required, completing certain cited lines; Schedule B (2007) or Schedule SB or MB (2008) as required; Schedule I; Schedule R identifying information, and Part II; and Schedule SSA.

Guidance From a Trusted Provider
The final regulation and changes in Form 5500 and its attached schedules are extensive in nature and we are in the process of assessing their impact on the plans that TIAA-CREF serves. In the near future, we will be providing additional guidance to plan administrators in anticipation of the final regulations’ implementation, the move to full electronic filing under EFAST2, and the application of the regulations to 403(b) plans.

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