Business of Benefits : Employee Benefits Lawyer & Attorney : Law Office of Robert J. Toth, Jr. : 403(b) Plans, Annuity & Insurance Law : Business of Benefits Blog

The DOL issued FAB 2009-2 back in July, in response to the concerns of employers and investment providers that in many cases they would not be able to obtain the information necessary related  to a number of "old" 403(b) contracts and accounts for the expanded Form 5500 required for 403(b) plans beginning with the 2009 plan year. Moreover, even in cases where some annual reporting with respect to the contracts would be possible, the DOL recognized that compliance efforts involved in including these contracts in the financial statements would be substantial and expensive.

The FAB  was not uniformly well received initially, many expressing the thought that the relief was illusory at best.  Now that we have had some time for the FAB to settle in, and now that parts of the market are beginning to try to identify past contracts and "classify" what to do with them, the usefulness of the FAB becomes more clear. 

The FAB allowed contracts to be excluded from an audit if they met the following 4 conditions:

1. were issued prior to 1/1/09,
2. all contributions ceased prior to 1/1/09,
3. all rights under the contract are"legally enforceable" against the insurer or custodian by the individual owner "without any involvement of the employer," and
4. the mounts in the contract were fully vested and non-forfeitable.

The real key to making the FAB work for the employer in keeping auditing costs down is in the sensible application of the FAB's 3rd condition.  I would suggest that applying it consists of two parts. First, use a reasonable effort to determine and find contracts that were related to the plan at some time in the past and, secondly, making a reasonable effort to determine whether or not the rights under those contracts are "legally enforceable" by the individual.

Finding contracts

Establish a reasonable (meaning not "perfect") method to use to find what contracts might possibly be part of your plan. Review the employer records to determine (to the best of your ability) which employees made contributions to which vendors over a reasonable period of time (perhaps the ERISA 6 year recordkeping requirement?).  Do the best you can, document it, and convince your CPA that a reasonable effort should do. 

Legally Enforceable 

From a purely legal viewpoint, this should be "easy." Heck, just get a copy of all those contracts issued over the past (6 years?) and read them. Right? Two problems, of course:

• Go ahead. Try finding them. You won't find them. This is in part because insurance companies don't typically keep actual copies of contracts. Instead, they keep records of the application, plus the "form number" they issued to the individual. Which means when you try to ask for a copy, you'll just get an assembled form-assuming the company would give the employer (who doesn't own the contract) a copy anyway.
• Then try reading it. I dare you.  Have you ever tried to read an annuity contract?Trying to determine whether or not rights are solely enforceable by the individual will be a difficult task, and one which an answer to this question may never be readily findable.

There may be a way a reasonable method or two to try to divine this answer.  For current vendors, for example, the task is a simple one (of course, nothing is turning out to be simple nowadays in this world): have your vendors give you a list of all the contracts to which they seek your approval for something like loans or distributions.

For past vendors, this is where the gold mine should be. See if you have heard from any of those past vendors for which you have compiled a list (see "Finding Vendors"). It may well be reasonable to assume that, had you not heard from them on your former or current employees, that those employees rights are being enforced without your involvement.

Tougher questions arise when, under 2007-71, you have excluded contracts from your plan.  Can these contracts be excluded for Title 1 reporting purposes? Vendors have taken a hard line on these contracts, and are submitting all sorts of decisions to employers for approval, even where the employer has advised them those contracts are not part of the plan-and many times these approvals are demanded in spite of contract language NOT requiring employer approval.  

A number of employers have decided that they were subject to ERISA just this year, because of the press of the tax regulations. One needs to consider (after consulting a lawyer or accountant) whether any of the old, past contracts under such circumstances would need to be counted.

Finally, this business really is only the tip of one of those melting Antarctica icebergs. Ultimately, the lawyer, accountant and employer need to sit down and review the employer's situation, and make a case amongst themselves for the most reasonable approach. Remember, the DOL's approach right now is accommodative. It is not trying to bankrupt charities through the crushing cost of unreasonable audit requirements.

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.  

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Retirement plan vendors throughout the industry are engaging in efforts to prepare for the new disclosure requirements for the 2009 Form 5500 schedules, particularly the disclosures related to direct and indirect compensation under Schedule C and the substantial requirements for Schedule A.

I had the pleasure of a couple of informative conversations this week which were very enlightening. First, Tom Horton of Barrett and McNagney (and one of the very best retirement plan lawyers I know) and I were talking about some about the effects the new Schedule C will have on the plan administrator's obligations (I know, I know, we need to get a life!). We spoke of how the Schedule C will be providing data for the fiduciaries to which they never had access in the past related to 12(b)-1 fees, sub-transfer fees and other sorts of revenue sharing.  What do they do with it? Well, it seems that that they would be ill advised to ignore it. Failing to undertake a review of the data once they receive it may well result in a fiduciary failure. But there is yet another twist. The plan administrators may well need to be on the lookout for the data. If they don't receive it, they are under the obligation to report that failure. Failing to report that failure can trigger non-filing penalties for the Form 5500.

If that wasn't depressing enough, Janice Wegesin, author of the Form 5500 Preparer's Manual  and I had a conversation about how the Form 5500 Schedule A applies to individual ERISA 403(b) contracts. The data demands are really pretty incredible. The best example is the requirement under the Schedule to report consolidated information on transfers between the insurance company general account investments and variable investments under those individual contracts. I know of several employers with thousands of such contacts. I'm not sure I want to be anywhere near those 5500's. But like the Schedule C, there is a reporting requirement under Schedule A which requires the plan administrator to report vendors who do not provide that data to the plan. So it means that plan sponsors will need to be looking for this ugly data.

Its going to be an interesting reporting season, I'm afraid.

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 BNA reported on August 20th the concerns of the AICPA's  403(b) Plan Audit Task Force about practitioners "misunderstanding" of the impact of the recently issued DOL FAB 2009-2, where the DOL took steps to alleviate some of the more draconian impacts of the new Form 5500 reporting rules for certain 403(b) plans.

Task force members are reported to say that the relief does not change their duties, as it does not change the DOL regualtions. With this statement, I must strongly but respectfully disagree with my CPA colleagues. For some plans, 2009-2 will make a significant difference in the work that needs to be done.

It is very true that 2009-2 is no panacea. The transition from treating 403(b)s as essentially individual pensions to treating them as fully employer sponsored plans is proving to be more difficult than even the most cynical of us could have imagined.  2009-2 does not change that. There are many unresolved administrative and fiduciary challenges facing 403(b) plan sponsors, and the task force's concern that some employers may read 2009-2 as bringing more than transitional reporting relief is well founded.

I do empathize with the auditors, as they are the focus of much of the new 403(b) rules. They are learning a new "art", as the profession (with a few very notable exceptions) has so little experience in this field. The applicability of both GAAP and auditing standards will be difficult in an environment where the fiduciary does not control many of the assets or contracts, a circumstance which may even cause a need to review how those standards should work in this environment. It is not, after all, the same control environment as a 401(k) plan.

But 2009-2 does truly change what the auditors need to do for a number of plans, and employers need to be aware of this.

Employers need to spend time with their auditors and explore where the auditors should be spending their time, and where 2009-2 may (or may not) be of some use to the plan.  It means that (for some employers) auditors will not need to spend a lot of employer resources chasing down data which cannot be retrieved (for a large number of reasons, ranging from system limitations to privacy laws). Indeed , the FAB requires auditors to advise plan sponsors of any issue which may materially raise the auditing costs to the plan.  Employers should pay attention to this requirement closely, as active involvement in the 403(b) audit may result in significant cost savings.  Because the DOL has said it will accept a "qualified" opinion on a 403(b) plan if it is based on 2009-2, the limited auditing resources of some plan sponsors could be better spent establishing "good faith" rather than tilting at the data "windmill."

One also cannot overlook the 2009-2 value for many smaller employers of not counting many of those old contracts toward the 100 participant audit trigger.  

There are severe limitations on 2009-2, to be sure. But those dealing with auditors do need to understand that it will, in at least some instances, change the extent of the work auditors will need to do.

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