The July 2007 release of final Internal Revenue Service (IRS) Treasury Regulations for Internal Revenue Code Section 403(b) plans represented the first revisions to such regulations since 1964. Shortly thereafter, the IRS issued transition relief for plan sponsors, providing exemptions to minimize the administrative and financial burdens of the new plan documentation requirements, particularly with respect to pre-2009 annuity contracts.
Despite this transition guidance and the revision of Form 5500 to include new reporting requirements for 403(b) plans, the Department of Labor (DOL) offered no similar transition relief until recently. As a result, many 403(b) plan sponsors who had already initiated their first steps toward satisfying the new Form 5500 reporting requirements were already encountering challenges in obtaining historical annuity contract information, particularly regarding pre-2009 annuity contracts.
What Type of Transition Relief is Offered?
DOL Field Assistance Bulletin 2009-2 (FAB 2009-2), issued July 30, 2009, details welcome transition relief for plan sponsors grappling with the new Form 5500 annual reporting obligations. Specifically, beginning with the 2009 plan year, the DOL has extended an annual reporting exemption to 403(b) plans that permits the exclusion of all pre-2009 annuity contracts. As a result, a plan sponsor will comply with 403(b) plans reporting requirements so long as all annuity contracts active during the 2009 plan year (and subsequent plan years) are properly reported on the revised Form 5500. By implication, this also means that excluding pre-2009 annuity contracts from the revised Form 5500 reporting requirements will not result in reporting-related compliance failures.
What Conditions Does the DOL Impose on the Transition Relief?
It is important to note that the DOL’s annual reporting exemption is conditional. Further, a plan sponsor must ensure compliance with the following four requirements for each pre-2009 annuity contract it elects to exclude from the reporting requirements for each applicable year:
- Pre-2009 Annuity Contract: Exempted annuity contracts must have been issued to a current or former employee prior to January 1, 2009.
- No Current Employer Contributions: The employer must have ceased any obligation to make contributions (including employee salary reduction contributions) to the annuity contract, and must have ceased making any such contributions to the annuity contract prior to January 1, 2009.
- Participant Control: All rights and benefits under the annuity contract must be legally enforceable against the insurer or custodian by the individual owner of the annuity without any involvement by the employer.
- Fully Vested: The individual owner of the annuity contract must be fully vested.
To the extent that a pre-2009 annuity contract satisfies these four criteria (a Qualifying Pre-2009 Annuity Contract), the plan sponsor is exempted from incorporating information related to such a contract into its Form 5500 for the applicable plan year.
Does Exclusion of Qualifying Pre-2009 Annuity Contracts Result in a Reduced Participant Count?
The exemption for Qualifying Pre-2009 Annuity Contracts offers more than just a reporting exemption. The exemption also permits a plan sponsor to reduce a 403(b) plan’s participant count, given that the number of participants enrolled in the plan decreases with each exempted contract (assuming the participant does not have another annuity contract under the 403(b) plan that is not a Qualifying Pre-2009 Annuity Contract). For 403(b) plans teetering on the line between small and large plan designation (i.e., the “100 participant threshold”), the exemption of pre-2009 annuity contracts provides a potential opportunity to avoid the new requirement that large 403(b) plans provide audited financial statements with their Form 5500 filings. On this point alone, a plan sponsor may save thousands of dollars in annual accounting fees.
Does the DOL Provide Enough Transition Relief?
While providing a welcome exemption for pre-2009 annuity contracts, many practitioners are already questioning whether FAB 2009-2 provides enough transition relief. Although the DOL offers a reporting exemption for many pre-2009 annuity contracts, this does not provide assistance to 403(b) plan sponsors attempting to obtain annuity contract information from vendors needed to fulfill reporting requirements.
Faced with conflicting privacy considerations, many vendors remain reluctant to provide sponsors with annuity contract information. This is because a significant portion of annuity contracts are held in the participant’s name alone, particularly where the participant/contract holder is no longer an employee of the plan sponsor.
403(b) plan sponsors should be finalizing their written plan documents, if they have not done so already, in time for the December 31, 2009 deadline. With respect to the DOL’s new annual reporting requirements, sponsors should begin taking action now on several additional items, including:
- Identify historical and current annuity providers;
- Initiate contact with such providers to identify all participants under the 403(b) plan (current and former employees) and their corresponding annuity contracts, and separating the Qualifying Pre-2009 Annuity Contracts;
- Confirm that current vendor annuity contracts comply with the Employee Retirement Income Security Act of 1974 (ERISA) and 403(b) plan written document requirements;
- Begin other actions necessary to fulfill the new Form 5500 reporting requirements for the 2009 plan year, including drafting vendor information requests and, if necessary, acquiring information required to prepare audited financial statements; and
- Initiate contact with auditors, attorneys and other service providers who may be able to provide assistance with the new compliance and reporting requirements.