403(b) Outlook: Form 5500 Audit Requirements

September 03, 2008

403b Outlook Archive 403(b) Outlook Archive

What is the rule? For the first time, large section 403(b) plans will be subject to audit by an independent qualified public accountant (collectively, the “auditors”) as part of its annual Form 5500 filing. Large plans are generally those having 100+ participants on the first day of the reporting plan year.

Effective Date: Plan years beginning on or after January 1, 2009.

Background: ERISA requires that the Statement of Net Assets (you may refer to it as the balance sheet) be presented along with a similar statement for the prior year. The statements are said to be “comparative.” The Statement of Changes in Net Assets (think, income statement or profit/loss statement) provides the detail between the value of the plan’s net assets at the beginning and the end of the plan year and is not required to be presented with comparative information. Footnotes to these basic financial statements and the auditors’ opinion round out the components of the annual audit report.

The 2009 opening balance is essentially the sum of the plan’s historical activity. For the auditors to gain comfort (that’s an auditing term describing an auditor’s level of confidence) in the completeness of the opening balance, they will typically look backward. Many section 403(b) plans have been in existence for dozens of years and have amassed large quantities of assets. We expect auditors to seek comfort over a significant portion of a plan’s assets while looking for assurances that a plan generally operated in accordance with its terms, participants were properly included or excluded, distributions occurred for valid reasons and for the proper amount, and all assets are captured. They will also review records supporting these transactions.

What has changed? The Department of Labor (“DOL”) Form 5500 regulations issued in 2007 require section 403(b) plans to meet the same Form 5500 reporting requirements as applicable to section 401(a) plans, including appropriate schedules and attachment of an auditors’ opinion, if filing for a large plan.

What happens if you don’t have your plan audited? If the plan is determined to be a large plan, it will be required to attach an auditors’ report to its annual Form 5500 filing. If the auditors’ report is not attached, the filing may be judged deficient. If this happens, the plan sponsor may be subject to penalties and fines.

Next steps: TIAA-CREF is looking at how we can best assist you in the conduct of your section 403(b) plan’s first year audit and in providing the information that you will need to complete your plan’s Form 5500 filing. In the meantime, you should start thinking about selecting an auditor, the completeness of the plan’s records, accessibility of the records, your former and current internal processes, including internal controls, in support of transactions, as well as the alternative vendors, if any, that the plan has ever used regardless of their current status with the plan.

Read more about Form 5500

Next week’s issue: Section 415(c) aggregation

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